UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 
For the fiscal year ended December 31, 2006 Commission File No. 1-5273-1
   

STERLING BANCORP
(Exact name of Registrant as specified in its charter)

 

New York
(State or other jurisdiction of
incorporation or organization)
650 Fifth Avenue, New York, N.Y.
(Address of principal executive offices)

13-2565216
(I.R.S. Employer Identification No.)

10019-6108
(Zip Code)

   

(212) 757-3300
(Registrant’s telephone number, including area code)

 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
  TITLE OF EACH CLASS NAME OF EACH EXCHANGE
    ON WHICH REGISTERED
 
 

Common Shares, $1 par value per share,
    and attached Preferred Stock Purchase Rights
Cumulative Trust Preferred
    Securities 8.375% (Liquidation Amount
    $10 per Preferred Security) of Sterling
    Bancorp Trust I and Guarantee of Sterling
    Bancorp with respect thereto


    New York Stock Exchange




    New York Stock Exchange

 
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o   Accelerated Filer x   Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x

On June 30, 2006, the aggregate market value of the common equity held by non-affiliates of the Registrant was $330,858,216.

The Registrant has one class of common stock, of which 18,656,053 shares were outstanding at March 5, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of Sterling Bancorp’s definitive 2007 Proxy Statement to be filed pursuant to Regulation 14A are incorporated by reference in Part III.




T A B L E  O F  C O N T E N T S

    Page
  PART I  
Item 1. BUSINESS 1
Item 1A. RISK FACTORS 10
Item 1B. UNRESOLVED STAFF COMMENTS 16
Item 2. PROPERTIES 16
Item 3. LEGAL PROCEEDINGS 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
     
  PART II  
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 37
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  
  ACCOUNTING AND FINANCIAL DISCLOSURE 80
Item 9A. CONTROLS AND PROCEDURES 80
Item 9B. OTHER INFORMATION 83
     
  PART III  
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 84
Item 11. EXECUTIVE COMPENSATION 84
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
84
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
84
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 84
     
  PART IV  
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 85
SIGNATURES 87
Exhibits Submitted in a Separate Volume.  

 



P A R T  I
 

ITEM 1. BUSINESS

The disclosures set forth in this item are qualified by Item 1A. Risk Factors on pages 10-16 and the section captioned “FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS” on page 20 and other cautionary statements set forth elsewhere in this report.

Sterling Bancorp (the “parent company” or the “Registrant”) is a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended (the “BHCA”), which was organized in 1966. Sterling Bancorp and its subsidiaries derive substantially all of their revenue and income from providing banking and related financial services and products to customers primarily in New York, New Jersey and Connecticut (“the New York metropolitan area”). Throughout this report, the terms the “Company” or “Sterling” refer to Sterling Bancorp and its subsidiaries. The Company has operations in New York, New Jersey, Virginia and North Carolina and conducts business throughout the United States.

The parent company owns, directly or indirectly, all of the outstanding shares of Sterling National Bank (the “bank”), its principal subsidiary, and all of the outstanding shares of Sterling Banking Corporation and Sterling Real Estate Abstract Holding Company, Inc. (the “finance subsidiaries”) and Sterling Bancorp Trust I (the “trust”). Sterling National Mortgage Company, Inc. (“SNMC”), Sterling National Servicing, Inc. (“SNS-Virginia”), Sterling Factors Corporation (“Factors”), Sterling Trade Services, Inc. (“Trade Services”), Sterling Resource Funding Corp. (“Resource Funding”) and Sterling Holding Company of Virginia, Inc. are wholly-owned subsidiaries of the bank. Trade Services owns all of the outstanding common shares of Sterling National Asia Limited, Hong Kong. Sterling Holding Company of Virginia, Inc. owns all of the outstanding common shares of Sterling Real Estate Holding Company, Inc. Sterling Real Estate Abstract Holding Company, Inc., which commenced operations as of January 16, 2003, owns 51% of the outstanding common shares of SBC Abstract Company, LLC, which commenced operations as of January 17, 2004.

In September 2006, the business conducted by Sterling Financial Services Company, Inc. (“Sterling Financial”) was sold (see Note 2 beginning on page 49). The results of operations of Sterling Financial have been reported as a discontinued operation and all prior period amounts have been restated as appropriate.

Segment information appears in Note 22 of the Company’s consolidated financial statements.

GOVERNMENT MONETARY POLICY

The Company is affected by the credit policies of monetary authorities, including the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). An important objective of the Federal Reserve System is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate, reserve requirements on member bank deposits, and funds availability regulations. The monetary policies of the Federal Reserve Board have in the past had a significant effect on operations of financial institutions, including the bank, and will continue to do so in the future. Changing conditions in the national economy and in the money markets make it difficult to predict future changes in interest rates, deposit levels, loan demand or their effects on the business and earnings of the Company. Foreign activities of the Company are not considered to be material.

BUSINESS OPERATIONS

The Bank

Sterling National Bank was organized in 1929 under the National Bank Act and commenced operations in New York City. The bank maintains twelve offices in New York, nine offices in New York City (six branches and an international banking facility in Manhattan and three branches in Queens), two branches in Nassau County, one in Great Neck and another in Woodbury, New York and one branch in Yonkers, New York. The executive office is located at 650 Fifth Avenue, New York, New York.

The bank provides a broad range of banking and financial products and services, including business and consumer lending, asset-based financing, factoring/accounts receivable management services, equipment leasing, commercial and residential mortgage lending and brokerage, deposit services, international trade financing, trust and estate administration, investment management and investment services. Business lending, depository and related financial services are furnished to a wide range of customers in diverse industries, including commercial, industrial and financial companies, and government and non-profit entities.

For the year ended December 31, 2006, the bank’s average earning assets represented approximately 100% of the Company’s average earning assets. Loans represented 61.5% and investment securities represented 38.1% of the bank’s average earning assets in 2006.

Commercial Lending, Asset-Based Financing and Factoring/Accounts Receivable Management. The bank provides loans to small and medium-sized businesses. The businesses are


PAGE 1



diversified across industries, and the loans generally range in size from $250,000 to $15 million. Business loans can be tailored to meet customers’ specific long- and short-term needs, and include secured and unsecured lines of credit, business installment loans, business lines of credit, and debtor-in-possession financing. Our loans are often collateralized by assets, such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other assets.

Through its factoring subsidiary (“Factors”), the bank provides accounts receivable management services. The purchase of a client’s accounts receivable is traditionally known as “factoring” and results in payment by the client of a nonrefundable factoring fee, which is generally a percentage of the factored receivables or sales volume and is designed to compensate for the bookkeeping and collection services provided by Factors and, if applicable, its credit review of the client’s customer and assumption of customer credit risk. When Factors “factors” (i.e., purchases) an account receivable from a client, it records the receivable as an asset (included in “Loans held in portfolio, net of unearned discounts”), records a liability for the funds due to the client (included in “Accrued expenses and other liabilities”) and credits to noninterest income the nonrefundable factoring fee (included in “Factoring income”). Factors also may advance funds to its client prior to the collection of receivables, charging interest on such advances (in addition to any factoring fees) and normally satisfying such advances by the collection of receivables. The accounts receivable factored are primarily for clients engaged in the apparel and textile industries.

Through a subsidiary, Sterling Resource Funding Corp., which was acquired on April 1, 2006, the bank provides financing and human resource business process outsourcing support services, exclusively for the temporary staffing industry. For over 25 years and throughout the United States, Resource Funding has provided full back-office, computer, tax and accounting services, as well as financing, to independently-owned staffing companies. The average contract term is 18 months for approximately 225 owners of staffing companies.

As of December 31, 2006, the outstanding loan balance (net of unearned discounts) for commercial and industrial lending was $622.1 million, representing approximately 54.3% of the bank’s total loan portfolio.

There are no industry concentrations in the commercial and industrial loan portfolio that exceed 10% of gross loans. Approximately 72% of the bank’s loans are to borrowers located in the New York metropolitan area. The bank has no foreign loans.

Equipment Leasing. The bank offers equipment leasing ser­vices in the New York metropolitan area and across the United States through direct leasing programs, third party sources and vendor programs. The bank finances small and medium-sized equipment leases with an average term of 24 to 30 months. At December 31, 2006, the outstanding loan balance (net of unearned discounts) for equipment leases was $207.8 million, and equipment leases comprised approximately 18.1% of the bank’s total loan portfolio.

Residential and Commercial Mortgages. The bank’s real estate loan portfolio consists of real estate loans on one-to-four family residential properties and commercial properties. The residential mortgage banking and brokerage business is conducted through offices located principally in New York and North Carolina. Residential mortgage loans are originated primarily in the NY metropolitan area, Virginia and other mid-Atlantic states, almost all of these for resale. Com­mercial real estate financing is offered on income-producing investor properties and owner-occupied properties, professional co-ops and condos. At December 31, 2006, the outstanding loan balance for real estate mortgage loans was $246.6 million, representing approximately 21.5% of the bank’s total loans outstanding.

Deposit Services. The bank attracts deposits from customers located primarily in the New York metropolitan area, offering a broad array of deposit products, including checking accounts, money market accounts, NOW accounts, savings accounts, rent security accounts, retirement accounts, and certificates of deposit. The bank’s deposit services include account management and information, disbursement, reconciliation, collection and concentration, ACH and others designed for specific business purposes. The deposits of the bank are insured to the extent permitted by law pursuant to the Federal Deposit Insurance Act, as amended.

International Trade Finance. Through its international division, international banking facility and Hong Kong trade services subsidiary, the bank offers financial services to its customers and correspondents in the world’s major financial centers. These services consist of financing import and export transactions, issuing of letters of credit, processing documentary collections and creating banker’s acceptances. In addition, active bank account relationships are maintained with leading foreign banking institutions in major financial centers.

Trust Services. The bank’s trust department provides a variety of fiduciary, investment management, custody and advisory and corporate agency services to individuals and corporations. The bank acts as trustee for pension, profit-sharing, 401(k) and other employee benefit plans and personal trusts


PAGE 2



and estates. For corporations, the bank acts as trustee, transfer agent, registrar and in other corporate agency capacities.

The composition of income from the continuing operations of the bank and its subsidiaries for the three most recent fiscal years was as follows:

 
Years Ended December 31,   2006     2005     2004  

 
Interest and fees on loans   58 %   51 %   45 %
Interest and dividends on investment securities   20     23     27  
Other   22     26     28  
 
 
                                           100 %   100 %   100 %
 
 
 

At December 31, 2006, the bank and its subsidiaries had 535 employees, consisting of 206 officers and 329 supervisory and clerical employees. The bank considers its relations with its employees to be satisfactory.

COMPETITION

There is intense competition in all areas in which the Company conducts its business. As a result of the deregulation of the financial services industry under the Gramm-Leach-Bliley Act of 1999, 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.

SUPERVISION AND REGULATION

General

The banking industry is highly regulated. Statutory and regulatory controls are designed primarily for the protection of depositors and the banking system, and not for the purpose of protecting the shareholders of the parent company. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the bank. It is intended only to briefly summarize some material provisions. Sterling Bancorp is a bank holding company and a financial holding company under the BHCA and is subject to supervision, examination and reporting requirements of the Federal Reserve Board. Sterling Bancorp is also under the jurisdiction of the Securities and Exchange Commission and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Sterling Bancorp is listed on the New York Stock Exchange (NYSE) under the trading symbol “STL” and is subject to the rules of the NYSE for listed companies.

As a national bank, the bank is principally subject to the supervision, examination and reporting requirements of the Office of the Comptroller of the Currency (the “OCC”), as well as the Federal Deposit Insurance Corporation (the “FDIC”). Insured banks, including the bank, are subject to extensive regulation of many aspects of their business. These regulations, among other things, relate to: (a) the nature and amount of loans that may be made by the bank and the rates of interest that may be charged; (b) types and amounts of other investments; (c) branching; (d) permissible activities; (e) reserve requirements; and (f) dealings with officers, directors and affiliates.

Sterling Banking Corporation is subject to supervision and regulation by the Banking Department of the State of New York.

Bank Holding Company Regulation

The BHCA requires the prior approval of the Federal Reserve Board for the acquisition by a bank holding company of more than 5% of the voting stock or substantially all of the assets of any bank or bank holding company. Also, under the BHCA, bank holding companies are prohibited, with certain exceptions, from engaging in, or from acquiring more than 5% of the voting stock of any company engaging in, activities other than (1) banking or managing or controlling banks, (2) furnishing services to or performing services for their subsidiaries, or (3) activities that the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

As discussed below under “Financial Holding Company Regu­lation,” the Gramm-Leach-Bliley Act of 1999 amended the BHCA to permit a broader range of activities for bank holding companies that qualify as “financial holding companies.”

Financial Holding Company Regulation
The Gramm-Leach-Bliley Act:

allows bank holding companies, the depository institution subsidiaries of which meet management, capital and the Community Reinvestment Act (the “CRA”) standards, to engage in a substantially broader range of nonbanking financial activities than was previously permissible, including (a) insurance underwriting and agency, (b) making merchant banking investments in commercial companies, (c) securities underwriting, dealing and market making, and (d) sponsoring mutual funds and investment companies;
 
allows insurers and other financial services companies to acquire banks; and
 
establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

PAGE 3



In order for a bank holding company to engage in the broader range of activities that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository subsidiaries must be and remain well capitalized and well managed and have received at least a satisfactory CRA rating, and (2) it must file a declaration with the Federal Reserve Board that it elects to be a “financial holding company.”

Requirements and standards to remain “well capitalized” are discussed below. To maintain financial holding company status, the bank must have at least a “satisfactory” rating under the CRA. Under the CRA, during examinations of the bank, the OCC is required to assess the bank’s record of meeting the credit needs of the communities serviced by the bank, including low- and moderate-income communities. Banks are given one of four ratings under the CRA: “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The bank received a rating of outstanding on the most recent exam completed by the OCC.

Pursuant to an election made under the Gramm-Leach-Bliley Act, the parent company has been designated as a financial holding company. As a financial holding company, Sterling Bancorp may conduct, or acquire a company (other than a U.S. depository institution or foreign bank) engaged in, activities that are “financial in nature,” as well as additional activi­ties that the Federal Reserve Board determines (in the case of incidental activities, in conjunction with the Department of the Treasury) are incidental or complementary to financial activities, without the prior approval of the Federal Reserve Board. Under the Gramm-Leach-Bliley Act, activities that are financial in nature include insurance, securities underwriting and dealing, merchant banking, and sponsoring mutual funds and investment companies. Under the merchant banking authority added by the Gramm-Leach-Bliley Act, financial holding companies may invest in companies that engage in activities that are not otherwise permissible “financial” activities, subject to certain limitations, including that the financial holding company makes the investment with the intention of limiting the investment duration and does not manage the company on a day-to-day basis.

Generally, financial holding companies must continue to meet all the requirements for financial holding company status in order to maintain the ability to undertake new activities or acquisitions that are financial in nature and the ability to continue those activities that are not generally permissible for bank holding companies. If the parent company ceases to so qualify it would be required to obtain the prior approval of the Federal Reserve Board to engage in non-banking activities or to acquire more than 5% of the voting stock of any company that is engaged in non-banking activities. With certain exceptions, the Federal Reserve Board can only provide prior approval to applications involving activities that it had previously determined, by regulation or order, are so closely related to banking as to be properly incident thereto. Such activities are more limited than the range of activities that are deemed “financial in nature.”

Payment of Dividends and Transactions with Affiliates

The parent company depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the bank. Such sources have been adequate to meet the parent company’s cash requirements throughout its history.

Various legal restrictions limit the extent to which the bank can fund the parent company and its nonbank subsidiaries. All national banks are limited in the payment of dividends without the approval of the OCC to an amount not to exceed the net profits (as defined) for that year-to-date combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing restrictions, and, without adversely affecting its “well capitalized” status, as of December 31, 2006, the bank could pay dividends of approximately $10 million to the parent company, without obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future periods.

Under the Federal Deposit Insurance Corporation Improve­ment Act of 1991 (“FDICIA”), a depository institution, such as the bank, may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends by the parent company and the bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital.

Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Such transactions between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms only as favorable to the bank as transactions with non-affiliates.

Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things,


PAGE 4



extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital.

Banks are subject to prohibitions on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Capital Adequacy and Prompt Corrective Action

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Federal Reserve Board, the OCC and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the guidelines, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in tiers, depending on type:

 
Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, less goodwill, most intangible assets and certain other assets.
 
Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.
   

Sterling Bancorp, like other bank holding companies, currently is required to maintain Tier 1 capital and “total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit). Sterling National Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively.

Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for financial holding companies and national banks that have the highest supervisory rating. All other financial holding companies and national banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%. The Federal Reserve Board has not advised Sterling Bancorp, and the OCC has not advised Sterling National Bank, of any specific minimum leverage ratio applicable to it.

The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.

Under the regulations adopted by the federal regulatory authorities, a bank will be: (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total


PAGE 5



risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than that indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2006, the bank was “well capitalized,” based on the ratios and guidelines described above. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such a capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the “BIS”). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In 2004, the BIS published a new capital accord to replace its 1988 capital accord, with an update in November 2005 (“BIS II”). BIS II provides two approaches for setting capital standards for credit risk—an internal ratings-based approach tailored to individual institutions’ circumstances (which for many asset classes is itself broken into a “foundation” approach and an “advanced or A-IRB” approach, the availability of which is subject to additional restrictions) and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. BIS II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures.

The U.S. banking and thrift agencies are developing revisions to their existing capital adequacy regulations and standards based on BIS II. In September 2006, the agencies issued a notice of proposed rulemaking setting forth a definitive proposal for implementing BIS II in the United States that would apply only to internationally active banking organizations—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more—but that other U.S. banking organizations could elect but would not be required to apply. In December 2006, the agencies issued a notice of proposed rulemaking describing proposed amendments to their existing risk-based capital guidelines to make them more risk-sensitive, generally following aspects of the standardized approach of BIS II. These latter proposed amendments, often referred to as “BIS I-A,” would apply to banking organizations that are not internationally active banking organizations subject to the A-IRB approach and do not “opt in” to that approach.

The comment periods for both notices of proposed rulemakings expire on March 26, 2007. The agencies have indicated their intention to have the A-IRB provisions for internationally active U.S. banking organizations first become effective in March 2009 and that those provisions and the BIS I-A provisions for others will be implemented on similar timeframes.

The Company is not an internationally active banking organization and has not made a determination as to whether it would opt to apply the A-IRB provisions applicable to internationally active U.S. banking organizations once they become effective.


PAGE 6



Support of the Bank

The Federal Reserve Board has stated that a bank holding company should serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board may require the parent company to stand ready to use its resources to provide adequate capital funds to its banking subsidiaries during periods of financial stress or adversity. This support may be required at times by the Federal Reserve Board even though not expressly required by regulation. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits to certain other indebtedness of such subsidiary banks. The BHCA provides that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. Further­more, under the National Bank Act, if the capital stock of the bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the parent company. If the assessment is not paid within three months, the OCC could order a sale of the capital stock of the bank held by the parent company to make good the deficiency.

FDIC Insurance

Under the FDIC’s risk-related insurance assessment system, insured depository institutions are required to pay annual assessments to the FDIC the amount of which depends on statutory factors, including the amount of insured deposits, capital ratios, and supervisory ratings. In November of 2006, the FDIC promulgated final regulations pursuant to the Federal Deposit Insurance Reform Act of 2005. Under the final regulations, a bank is assigned to one of four risk categories based on a combination of capital and supervisory evaluations.

The three capital categories are well capitalized, adequately capitalized, and undercapitalized. These three categories are substantially the same as the prompt corrective action cate­gories previously described, with the undercapitalized category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. A bank’s capital and supervisory subgroup is confidential and may not be disclosed.

Because of favorable loss experience and a healthy reserve ratio in the Bank Insurance Fund maintained by the FDIC, well capitalized and well managed banks, including the bank, have in recent years paid no premiums for FDIC insurance. However, under the final regulations, assessment rates for 2007 will range from 5 basis points per $100 of deposits for banks in Risk Category I to 43 basis points for banks assigned to Risk Category IV. Assessments may be offset by a one-time credit based on the bank’s (or its successor’s) year- end 1996 assessment base. The credit may be used to offset up to 100% of 2007 assessments and up to 90% of assessments in each of 2008, 2009 and 2010. Any increase in insurance assessments could have an adverse impact on the earnings of insured institutions, including the bank.

In addition, the bank is required to make payments for the servicing of obligations of the Financing Corporation (“FICO”) issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. The FICO annual assessment rate for the first quarter of 2007 is 1.22 cents per $100 of deposits.

Under the Federal Deposit Insurance Act (the “FDIA”), insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

In addition, the FDIA provides that a depository institution insured by the FDIC can be held liable by the FDIC for any loss incurred or reasonably expected to be incurred in connection with the default of a commonly controlled FDIC-insured depository institution or in connection with any assistance provided by the FDIC to a commonly controlled institution “in danger of default” (as defined in the FDIA).

In its resolution of the problems of an insured depository institution in default or in danger of default, the FDIC is generally required to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to the deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000) or creditors other than depositors.

Depositor Preference

The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Liability of Commonly Controlled Institutions

FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same holding company.


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Community Reinvestment Act

The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new activity permitted by the BHCA, or to acquire any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed transaction.

Financial Privacy

In accordance with the Gramm-Leach-Bliley Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the Gramm-Leach-Bliley Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Anti-Money Laundering Initiatives and the USA Patriot Act

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued a number of implementing regulations which apply to various requirements of the USA Patriot Act to financial institutions such as the Company. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including the imposition of enforcement actions and civil monetary penalties.

Office of Foreign Assets Control Regulation

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”), take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Legislative Initiatives

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.

Safety and Soundness Standards

Federal banking agencies promulgate safety and soundness standards relating to, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees, and benefits. With respect to internal controls, information systems and internal audit systems, the standards describe the functions that adequate internal controls and information systems must be able to perform, including:


PAGE 8



(i) monitoring adherence to prescribed policies; (ii) effective risk management; (iii) timely and accurate financial, operations, and regulatory reporting; (iv) safeguarding and managing assets; and (v) compliance with applicable laws and regulations. The standards also include requirements that: (i) those performing internal audits be qualified and independent; (ii) internal controls and information systems be tested and reviewed; (iii) corrective actions be adequately documented; and (iv) results of an audit be made available for review of management actions.

SELECTED CONSOLIDATED STATISTICAL INFORMATION

I.   Distribution of Assets, Liabilities and Shareholders’
      Equity; Interest Rates and Interest Differential

The information appears on pages 30 and 31 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

II.   Investment Portfolio

A summary of the Company’s investment securities by type with related carrying values at the end of each of the three most recent fiscal years appears on page 25 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Information regarding book values and range of maturities by type of security and weighted average yields for totals of each category is presented in Note 5 beginning on page 51 of the Company’s consolidated financial statements.

III.  Loan Portfolio

A table setting forth the composition of the Company’s loan portfolio, net of unearned discounts, at the end of each of the five most recent fiscal years appears on page 26 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

A table setting forth the maturities and sensitivity to changes in interest rates of the Company’s commercial and industrial loans at December 31, 2006 appears on page 26 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

It is the policy of the Company to consider all customer requests for extensions of original maturity dates (rollovers), whether in whole or in part, as though each was an application for a new loan subject to standard approval criteria, including credit evaluation. Additional information appears under “Loan Portfolio” on page 26 in Management’s Discussion and Analysis of Financial Condition and Results of Operations, under “Loans” in Note 1 and in Note 6 of the Company’s consolidated financial statements.

A table setting forth the aggregate amount of domestic non-accrual, past due and restructured loans of the Company at the end of each of the five most recent fiscal years appears on page 27 in Management’s Discussion and Analysis of Financial Condition and Results of Operations; there were no foreign loans accounted for on a nonaccrual basis, and there were no troubled debt restructurings for any types of loans. Loans contractually past due 90 days or more as to principal or interest and still accruing are loans that are both well-secured or guaranteed by financially responsible third parties and are in the process of collection.

IV.   Summary of Loan Loss Experience

The information appears in Note 7 of the Company’s consolidated financial statements and beginning on page 27 under “Asset Quality” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. A table setting forth certain information with respect to the Company’s loan loss experience for each of the five most recent fiscal years appears on page 28 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company considers its allowance for loan losses to be adequate based upon the size and risk characteristics of the outstanding loan portfolio at December 31, 2006. Net losses within the loan portfolio are not, however, statistically predictable and are subject to various external factors that are beyond the control of the Company. Consequently, changes in conditions in the next twelve months could result in future provisions for loan losses varying from the level taken in 2006.

A table presenting the Company’s allocation of the allowance at the end of each of the five most recent fiscal years appears on page 29 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. This allocation is based on estimates by management that may vary based on management’s evaluation of the risk characteristics of the loan portfolio. The amount allocated to a particular loan category may not necessarily be indicative of actual future charge-offs in that loan category.

V.   Deposits

Average deposits and average rates paid for each of the three most recent years are presented on page 30 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Outstanding time certificates of deposit issued from domestic and foreign offices and interest expense on domestic and foreign deposits are presented in Note 8 of the Company’s consolidated financial statements.

The table providing selected information with respect to the Company’s deposits for each of the three most recent fiscal years appears on page 29 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.


PAGE 9



Interest expense for the three most recent fiscal years is presented in Note 8 of the Company’s consolidated financial statements.

VI.   Return on Assets and Equity

The Company’s returns on average total assets and average shareholders’ equity, dividend payout ratio and average shareholders’ equity to average total assets for each of the five most recent years is presented in “Selected Financial Data” on page 19.

VII.   Short-Term Borrowings

Balance and rate data for significant categories of the Company’s Short-Term Borrowings for each of the three most recent years is presented in Note 9 of the Company’s consolidated financial statements.

INFORMATION AVAILABLE ON OUR WEB SITE

Our Internet address is www.sterlingbancorp.com and the investor relations section of our web site is located at
www.sterlingbancorp.com/ir/investor.cfm. We make available free of charge, on or through the investor relations section of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Also posted on our web site, and available in print upon request of any shareholder to our Investor Relations Department, are the Charters for our Board of Directors’ Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee, our Corporate Governance Guidelines, our Method for Interested Persons to Communicate with Non-Management Directors and a Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time period required by the Securities and Exchange Commission and the New York Stock Exchange, we will post on our web site any amendment to the Code of Business Conduct and Ethics and any waiver applicable to our senior financial officers, as defined in the Code, or our executive officers or directors. In addition, information concerning purchases and sales of our equity securities by our executive officers and directors is posted on our web site.

ITEM 1A. RISK FACTORS

An investment in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial, may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.

RISKS RELATED TO THE COMPANY’S BUSINESS

The Company Is Subject to Interest Rate Risk

The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

Although management believes it has implemented effective asset and liability management strategies, including the use of derivatives as hedging instruments, to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect


PAGE 10



on the Company’s financial condition and results of operations. For further discussion related to the Company’s management of interest rate risk, see “ASSET/LIABILITY MANAGEMENT” beginning on page 32 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company Is Subject to Lending Risk

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those throughout the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company.

As of December 31, 2006, approximately 65% of the Company’s loan portfolio consisted of commercial and industrial, construction and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because the Company’s loan portfolio contains a significant number of commercial and industrial, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non- performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations. For further discussion related to commercial and industrial, construction and commercial real estate loans, see “Loan Portfolio” on page 26 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company’s Allowance for Loan Losses
May Be Insufficient

The Company maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside the Company’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the Company will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company’s financial condition and results of operations. For further discussion related to the Company’s process for determining the appropriate level of the allowance for loan losses, see “Asset Quality” beginning on page 27 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company May Not Be Able to Meet the Cash Flow
Requirements of Its Depositors and Borrowers or Meet Its
Operating Cash Needs to Fund Corporate Expansion and
Other Activities

Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by the board of directors. The overall liquidity position of the bank and the parent company are regularly monitored to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Funding sources include Federal funds purchased, securities sold under repurchase agreements and non-core deposits. The bank is a member of the Federal Home Loan Bank of New York, which provides funding through advances to members that are collateralized with mortgage-related assets. We maintain a portfolio of securities that can be used as a secondary source of liquidity. The bank also can borrow through the Federal Reserve Bank’s discount window.

If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of


PAGE 11



operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see “Liquidity Risk” beginning on page 33 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Sterling Bancorp Relies on Dividends from Its Subsidiaries

Sterling Bancorp is a separate and distinct legal entity from its subsidiaries. It receives dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the parent company’s common stock and interest and principal on its debt. Various federal and/or state laws and regulations limit the amount of dividends that Sterling National Bank and certain non-bank subsidiaries may pay to the parent company. Also, Sterling Bancorp’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event Sterling National Bank is unable to pay dividends to Sterling Bancorp, Sterling Bancorp may not be able to service debt, pay obligations or pay dividends on the Company’s common stock. The inability to receive dividends from Sterling National Bank could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Supervision and Regulation” on pages 3–9 and Note 14 of the Company’s consolidated financial statements.

The Company Is Subject to Environmental Liability Risk
Associated with Lending Activities

A portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. Future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s Profitability Depends Significantly on
Local and Overall Economic Conditions

The Company’s success depends significantly on the economic conditions of the communities it serves and the general economic conditions of the United States. The Company has operations in New York City and the New York metropolitan area, as well as Virginia and other mid-Atlantic territories, and conducts business throughout the United States. The economic conditions in these areas and throughout the United States have a significant impact on the demand for the Company’s products and services as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, acts of God or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company’s financial condition and results of operations.

Severe Weather, Natural Disasters or Other Acts of God,
Acts of War or Terrorism and Other External Events Could
Significantly Impact the Company’s Business

Severe weather, natural disasters or other acts of God, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

The Company Operates in a Highly Competitive Industry
and Market Area

The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets the Company operates. Additionally, various out-of-state banks have entered the market areas in which the Company currently operates. The Company also faces competition from many other types of financial institutions, including, without limitation, savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service,


PAGE 12



including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company does.

The Company’s ability to compete successfully depends on a number of factors, including, among other things:

 
The ability to develop, maintain and build upon customer relationships based on top quality service, high ethical standards and safe, sound assets.
   
The ability to expand the Company’s market position.
   
The scope, relevance and pricing of products and services offered to meet customer needs and demands.
   
The rate at which the Company introduces new products and services relative to its competitors.
   
Customer satisfaction with the Company’s level of service.
   
Industry and general economic trends.
  

Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

The Company Is Subject to Extensive Government
Regulation and Supervision

The Company, primarily through the parent company and the bank and certain non-bank subsidiaries, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See “Supervision and Regulation” on pages 3–9.

The Company’s Controls and Procedures May Fail or
Be Circumvented

The Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company May Be Subject to a Higher Effective Tax
Rate if Sterling Real Estate Holding Company, Inc. Fails to
Qualify as a Real Estate Investment Trust (“REIT”)

Sterling Real Estate Holding Company Inc. (“SREHC”) operates as a REIT for federal income tax purposes. SREHC was established to acquire, hold and manage mortgage assets and other authorized investments to generate net income for distribution to its shareholders.

For an entity to qualify as a REIT, it must satisfy the following six asset tests under the Internal Revenue Code each quarter: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At December 31, 2006, SREHC met all six quarterly asset tests.

Also, a REIT must satisfy the following two gross income tests each year: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test plus dividends, interest,


PAGE 13



and gains from the sale of securities. In addition, a REIT must distribute at least 90% of its taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. For 2006, SREHC had met the two annual income tests and the distribution test.

If SREHC fails to meet any of the required provisions and, therefore, does not qualify to be a REIT, our effective tax rate would increase.

New Lines of Business or New Products and Services May
Subject the Company to Additional Risks

The Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to manage these risks successfully in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition.

Potential Acquisitions May Disrupt the Company’s
Business and Dilute Shareholder Value

The Company seeks merger or acquisition partners that are compatible and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:

 
Potential exposure to unknown or contingent liabilities of the target company.
 
Exposure to potential asset quality issues of the target company.
 
Difficulty and expense of integrating the operations and personnel of the target company.
 
Potential disruption to the Company’s business.
 
Potential diversion of the Company’s management time and attention.
 
The possible loss of key employees and customers of the target company.
 
Difficulty in estimating the value of the target company.
 
Potential changes in banking or tax laws or regulations that may affect the target company.
  

The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on the Company’s financial condition and results of operations.

The Company May Not Be Able to Attract and Retain
Skilled People

The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense, and the Company may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The Company has employment agreements with two of its senior officers.

The Company’s Information Systems May Experience an
Interruption or Breach in Security

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the


PAGE 14



Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s reputation, financial condition and results of operations.

The Company Continually Encounters Technological Change

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The Company’s future success depends, in part, upon its ability to address the needs of the customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to implement effectively new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to keep pace successfully with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

The Company Is Subject to Claims and Litigation Pertaining
to Fiduciary Responsibility

From time to time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Company’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services as well as impact customer demand for those products and services. Any fiduciary liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

RISKS ASSOCIATED WITH THE COMPANY’S
COMMON STOCK

The Company’s Stock Price Can Be Volatile

Stock price volatility may make it more difficult to resell the Company’s common stock when desired and at an attractive price. The Company’s stock price can fluctuate significantly in response to a variety of factors, including, among other factors:

 
Actual or anticipated variations in quarterly results of operations.
 
Recommendations by securities analysts.
 
Operating and stock price performance of other companies that investors deem comparable to the Company.
 
News reports relating to trends, concerns and other issues in the financial services industry.
 
Perceptions in the marketplace regarding the Company and/or its competitors.
 
New technology used, or services offered, by competitors.
 
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors.
 
Failure to integrate acquisitions or realize anticipated bene­fits from acquisitions.
 
Changes in government regulation.
 
Geopolitical conditions such as acts or threats of terrorism or military conflicts.
  

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results.

The Trading Volume in the Company’s Common
Stock Is Less Than That of Other Larger Financial
Services Companies

Although the Company’s common stock is listed for trading on the New York Stock Exchange (NYSE), the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause the Company’s stock price to fall.

An Investment in the Company’s Common Stock Is Not an
Insured Deposit

The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation (FDIC), any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you may lose some or all of your investment.


PAGE 15



The Company’s Certificate of Incorporation, By-Laws and
Shareholders Rights Plan as Well as Certain Banking Laws
May Have an Anti-Takeover Effect

Provisions of the Company’s certificate of incorporation and by-laws, federal banking laws, including regulatory approval requirements, and the Company’s stock purchase rights plan could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the Company’s shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company’s common stock.

RISKS ASSOCIATED WITH THE COMPANY’S INDUSTRY

The Earnings of Financial Services Companies Are
Significantly Affected by General Business and
Economic Conditions

The Company’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which the Company operates, all of which are beyond the Company’s control. A deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the Company’s products and services, among other things, any of which could have a material adverse impact on the Company’s financial condition and results of operations.

Financial Services Companies Depend on the Accuracy
and Completeness of Information About Customers and
Counterparties

In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Consumers May Decide Not to Use Banks to Complete
Their Financial Transactions

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and related income generated from those deposits. The loss of these revenue streams and these lower-cost deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The principal offices of the Company occupy one floor at 650 Fifth Avenue, New York, N.Y., consisting of approximately 14,400 square feet. The lease for these premises expires April 30, 2016. Rental commitments to the expiration date approximate $8,238,000.

The bank also maintains operating leases for nine branch offices, the International Banking Facility, an Operations Center, and additional office space in New York City, Nassau, Suffolk and Westchester counties (New York), in Charlotte (North Carolina) and in Richmond (Virginia) with an aggregate of approximately 143,000 square feet. The aggregate office rental commitments for these premises approximates $17,860,000. The leases have expiration dates ranging from 2007 through 2018 with varying renewal options. The bank owns free and clear (not subject to a mortgage) a building in which it maintains a branch located in Forest Hills, Queens.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business there are various legal proceedings pending against the Company. Management, after consulting with counsel, is of the opinion that there should be no material liability with respect to such proceedings, and accordingly no provision has been made in the Company’s consolidated financial statements.


PAGE 16



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report.

EXECUTIVE OFFICERS OF THE REGISTRANT

This information is included pursuant to Instruction 3 to Item 401(b) of SEC Regulation S-K:

 
Name of Executive
  Title   Age
  Held Executive
Office Since
 

 
Louis J. Cappelli   Chairman of the Board and Chief Executive Officer, Director   76   1967  
John C. Millman   President, Director   64   1986  
John W. Tietjen   Executive Vice President and Chief Financial Officer   62   1989  
Howard M. Applebaum   Senior Vice President   48   2002  
Eliot S. Robinson   Executive Vice President of Sterling National Bank   64   1998  
 

All executive officers who are employees of the parent company are elected annually by the Board of Directors and serve at the pleasure of the Board. The executive officer who is not an employee of the parent company is elected annually by, and serves at the pleasure of, the board of directors of the bank. There are no arrangements or understandings between any of the foregoing executive officers and any other person or persons pursuant to which he was selected as an executive officer.

On March 14, 2007, the Compensation Committee of the Board of Directors extended the terms of the Company’s Employment Agreements with Mr. Cappelli and Mr. Millman to December 31, 2011 and December 31, 2009, respectively.


The Company’s 2006 Domestic Company Section 303A Annual CEO Certification was filed (without qualifications) with the NYSE. The certifications under Section 302 of the Sarbanes-Oxley Act are filed as exhibits to this annual report on Form 10-K.

 
P A R T  I I
 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The parent company’s common stock is traded on the New York Stock Exchange under the symbol STL. Information regarding the quarterly prices of the common stock is presented in Note 25 on page 77. Information regarding the average common shares outstanding and dividends per common share is presented in the Consolidated Statements of Income on page 39. Information regarding legal restrictions on the ability of the bank to pay dividends is presented in Note 14 on page 62. Although such restrictions do not apply to the payment of dividends by the parent company to its shareholders, such dividends may be limited by other factors, such as the requirement to maintain adequate capital under the risk-based capital regulations described in Note 21 beginning on page 71. As of March 5, 2007, there were 1,522 shareholders of record of our common shares.

During the fiscal years ended December 31, 2005 and 2006, the following dividends were declared on our common shares on the dates indicated: February 17, 2005: $.18; May 5, 2005: $.18; August 18, 2005: $.18; and November 17, 2005: $.19; February 23, 2006: $.19; May 2, 2006: $.19; August 17, 2006: $.19; and November 16, 2006: $.19. The foregoing amounts of dividends per share reflect the effect of a 5% stock dividend paid on December 12, 2005.

Under its share repurchase program, the Company buys back common shares from time to time. The following table discloses all of the Company’s repurchases of its common shares during the fourth quarter of 2006.

  
  Issuer Purchases of Equity Securities
 
 
 
Period Total Number of Shares Purchased
  Average
Price Paid
Per Share
  Total Number of Shares
Purchased as Part of
Publicly Announced Plans or
Programs
  Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs
 

 
October 1-31, 2006     $         240,319  
November 1-30, 2006               240,319  
December 1-31, 2006   107,356     18.77     107,356     132,963  
 
       
       
Total   107,356           107,356        
 
       
       

PAGE 17


 

The Board of Directors initially authorized the repurchase of common shares in 1997 and since then has approved increases in the number of common shares that the Company is authorized to repurchase. The latest increase was announced on February 15, 2007, when the Board of Directors increased the Company’s authority to repurchase common shares by an additional 800,000 shares. This increased the Company’s authority to repurchase shares to approximately 933,000 common shares.

For information regarding securities authorized for issuance under the Company’s equity compensation plan, see Item 12 on page 82.

The following line graph compares for the fiscal years ended December 31, 2002, 2003, 2004, 2005 and 2006 (a) the yearly cumulative total shareholder return (i.e., the change in share price plus the cumulative amount of dividends, assuming dividend reinvestment, divided by the initial share price, expressed as a percentage) on Sterling’s common shares, with (b) the cumulative total return of the Standard & Poor’s 500 Stock Index, and with (c) the cumulative total return on the KBM 50 Index (a market-capitalization weighted bank-stock index):

 
 

 
                                                         12/01   12/02   12/03   12/04   12/05   12/06  

 
Sterling Bancorp   100.00     110.90     154.46     188.86     143.43     148.98  
S&P 500   100.00     77.90     100.24     111.15     116.61     135.03  
KBW 50   100.00     92.95     124.59     137.11     138.72     165.63  
 

ITEM 6. SELECTED FINANCIAL DATA

The information appears on page 19. All such information should be read in conjunction with the consolidated financial statements and notes thereto.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information appears on pages 20–36 and supplementary quarterly data appears in Note 25 of the Company’s consolidated financial statements. All such information should be read in conjunction with the consolidated financial statements and the notes thereto.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information appears on pages 32–34 under the caption “ASSET/LIABILITY MANAGEMENT.” All such information should be read in conjunction with the consolidated financial statements and notes thereto.


PAGE 18



Sterling Bancorp
S E L E C T E D   F I N A N C I A L   D A T A [1]

 
(dollars in thousands except per share data) 2006   2005   2004   2003   2002  

 
SUMMARY OF OPERATIONS                              
Total interest income—continuing operations $ 116,586   $ 101,888   $ 86,228   $ 80,251   $ 82,641  
Total interest expense—continuing operations   42,021     26,463     18,351     16,115     17,421  
Net interest income—continuing operations   74,565     75,425     67,877     64,136     65,220  
Provision for loan losses—continuing operations   4,503     5,214     6,139     5,412     8,823  
Net securities (losses)/gains—continuing operations   (443 )   337     1,256     551     996  
Noninterest income—continuing operations, excluding net 
    securities (losses)/gains
  34,101     33,679     32,683     30,946     27,241  
Noninterest expenses—continuing operations   77,355     67,654     61,929     56,182     53,295  
Income before taxes—continuing operations   26,365     36,573     33,748     34,039     31,339  
Provision for income taxes—continuing operations   5,367     13,110     11,074     12,605     10,995  
Income from continuing operations   20,998     23,463     22,674     21,434     20,344  
(Loss)/income from discontinued operations, net of tax   (603 )   564     1,930     2,469     1,497  
Loss on sale of discontinued operations, net of tax   (9,635 )                
Net income   10,760     24,027     24,604     23,903     21,841  
Income from continuing operations
    Per average common share—basic
  1.12     1.22     1.19     1.13     1.07  
                                               —diluted   1.09     1.19     1.13     1.08     1.02  
Net income                              
    Per average common share—basic   0.57     1.25     1.29     1.26     1.15  
                                               —diluted   0.56     1.22     1.23     1.20     1.09  
Dividends per common share   0.76     0.73     0.63     0.54     0.44  
                               
YEAR END BALANCE SHEETS                              
Investment securities   569,324     715,299     680,220     683,118     588,774  
Loans held for sale   33,320     40,977     37,059     40,556     54,685  
Loans held in portfolio, net of unearned discounts   1,112,602     1,012,057     906,762     772,919     683,052  
Other assets—discontinued operations   1,663     116,250     114,596     127,053     107,541  
Total assets, including discontinued operations   1,885,957     2,056,042     1,871,112     1,759,824     1,563,165  
Noninterest-bearing deposits   546,443     510,884     511,307     474,092     401,568  
Interest-bearing deposits   975,587     937,442     832,544     737,649     645,540  
Long-term debt   45,774     85,774     135,774     135,774     140,774  
Shareholders’ equity   132,263     147,587     148,704     143,262     129,220  
                               
AVERAGE BALANCE SHEETS                              
Investment securities   647,602     713,629     689,569     593,005     589,390  
Loans held for sale   40,992     53,948     46,395     71,779     37,459  
Loans held in portfolio, net of unearned discounts   1,002,688     890,085     778,272     673,412     600,475  
Total assets, including discontinued operations   1,944,776     1,931,101     1,777,720     1,587,623     1,466,922  
Noninterest-bearing deposits   439,064     452,632     415,664     370,554     315,757  
Interest-bearing deposits   951,333     936,665     830,950     683,748     672,296  
Long-term debt   59,938     106,514     135,774     139,870     140,153  
Shareholders’ equity   143,178     149,836     142,536     134,150     126,274  
                               
RATIOS                              
Return on average total assets   1.13 %   1.29 %   1.36 %   1.45 %   1.50 %
Return on average tangible shareholders’ equity[2]   17.43     18.23     18.68     18.97     19.35  
Return on average shareholders’ equity   14.67     15.66     15.91     15.98     16.11  
Dividend payout ratio   67.70     59.82     53.39     47.17     37.22  
Average shareholders’ equity to average total assets   7.70     8.23     8.56     9.09     9.28  
Net interest margin (tax-equivalent basis)   4.64     4.76     4.63     4.83     5.31  
Loans/assets, year end[3]   60.81     54.29     53.73     49.82     50.68  
Net charge-offs/loans, year end[4]   0.43     0.41     0.43     0.41     1.28  
Nonperforming loans/loans, year end[3]   0.51     0.37     0.23     0.37     0.21  
Allowance/loans, year end[4]   1.46     1.52     1.59     1.65     1.56  

[1]   All data presented is from continuing operations unless indicated otherwise.
[2]   Average tangible shareholders’ equity is average shareholders’ equity less average goodwill.
[3]   In this calculation, the term “loans” means loans held for sale and loans held in portfolio.
[4]   In this calculation, the term “loans” means loans held in portfolio.

PAGE 19



Sterling Bancorp
M A N A G E M E N T ’ S   D I S C U S S I O N   A N D   A N A L Y S I S   O F
F I N A N C I A L   C O N D I T I O N   A N D   R E S U L T S   O F   O P E R A T I O N S

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 (the “bank”). Throughout this discussion and analysis, the term the “Company” refers to Sterling Bancorp and its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and selected financial data contained elsewhere in this annual report. Certain reclassifications have been made to prior years’ financial data to conform to current financial statement presentations.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements contained or incorporated by reference in this annual report on Form 10-K, including but not limited to, statements concerning future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses and plans and objectives for future operations, and other statements regarding matters that are not historical facts, are “forward-looking statements” as defined in the Securities Exchange Act of 1934. These statements are not historical facts but instead are subject to numerous assumptions, risks and uncertainties, and represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Any forward-looking statements we may make speak only as of the date on which such statements are made. Our actual results and financial position may differ materially from the anticipated results and financial condition indicated in or implied by these forward-looking statements.

Factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: inflation, interest rates, market and monetary fluctuations; geopolitical developments including acts of war and terrorism and their impact on economic conditions; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; changes, particularly declines, in general economic conditions and in the local economies in which the Company operates; the financial condition of the Company’s borrowers; competitive pressures on loan and deposit pricing and demand; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); changes in accounting principles, policies and guidelines; and the success of the Company at managing the risks involved in the foregoing, as well as the risks and uncertainties described in Item 1A. Risk Factors on pages 10–16 and other risks and uncertainties described from time to time in press releases and other public filings. The foregoing list of important factors is not exclusive, and we will not update any forward-looking statement, whether written or oral, that may be made from time to time.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amount of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. The most significant accounting policies followed by the Company are presented in Note 1 begin­ning on page 44. The accounting for factoring transactions also is discussed under “Business Operations—The Bank—Commercial Lending, Asset-Based Financing and Factoring/Accounts Receivable Management” on pages 1 and 2.

The Company has identified its policies on the allowance for loan losses and income tax liabilities to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and could be subject to revision as new information becomes available. Additional information on these policies can be found in Note 1 to the consolidated financial statements.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The methodology used to determine the allowance for loan losses is outlined in Note 1 to the consolidated financial statements and a discussion of the


PAGE 20



factors driving changes in the amount of the allowance for loan losses is included under the caption “Asset Quality” beginning on page 27.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Additional discussion on the accounting for income taxes is presented in Notes 1 and 18 of the Company’s consolidated financial statements.

OVERVIEW

The Company provides a broad range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, factoring/accounts receivable management services, deposit services, trade financing, equipment leasing, deposit services, trust and estate administration, and investment management services. The Company has operations in the metropolitan New York area, New Jersey, Virginia and North Carolina, and conducts business throughout the United States. The general state of the U.S. economy and, in particular, economic and market conditions in the metropolitan New York 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 and 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.

As of April 3, 2006, Sterling Resource Funding Corp., a subsidiary of the bank, completed the acquisition of the business and certain assets of PL Services, L.P.

In September 2006, the Company sold the business conducted by Sterling Financial Services (“Sterling Financial”). In accordance with U.S. generally accepted accounting principles, the assets, liabilities and earnings/loss of the business conducted by Sterling Financial have been shown separately as discontinued operations in the consolidated balance sheets and consolidated statements of income for all periods presented.

For purposes of the following discussion, except for the section entitled “Discontinued Operations,” average balances, average rates, income and expenses associated with Sterling Financial have been excluded from continuing operations and reported separately for all periods presented.

The interest expense allocated to discontinued operations was based on the actual average balances, interest expenses and average rate on each category of interest-bearing liabilities, with the average rate applied to the aggregate average loan balances to determine the funding cost. Interest expense allocated to the funding supporting the Sterling Financial net loans for these periods was assigned based on the average net loan balances proportionately funded by all interest-bearing liabilities at an average rate equal to the cost of each applied to its average balance for the period. The “Rate/Volume Analysis” was prepared on the same basis, as was the Average Balance Sheets.

In 2006, the bank’s average earning assets represented approximately 100% of the Company’s average earning assets. Loans represented 61.5% and investment securities represented 38.1% of the bank’s average earning assets in 2006.

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.


PAGE 21



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.

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 Analysis shown on page 31. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown on page 30.

COMPARISON OF THE YEARS 2006 AND 2005

The Company reported income from continuing operations, after income taxes, for the year ended December 31, 2006 of $21.0 million, representing $1.09 per share, calculated on a diluted basis, compared to $23.5 million, or $1.19 per share, calculated on a diluted basis, for the year 2005. This decrease reflected higher interest and noninterest expenses and lower noninterest income, which were partially offset by an increase in interest income coupled with decreases in the provision for loan losses and the provision for income taxes.

Net Interest Income

Net interest income, on a tax-equivalent basis, was $75.3 million for 2006 compared to $76.1 million for 2005. Net interest income was positively impacted by higher average loan balances at higher average yields and negatively impacted by lower average investment securities outstandings and higher rates paid on interest-bearing deposits and borrowed funds coupled with higher balances for interest-bearing deposits and borrowed funds. The net interest margin, on a tax-equivalent basis, was 4.64% for 2006 compared to 4.76% for 2005. The net interest margin was impacted by the flattening of the yield curve, the higher interest rate environment in 2006, the lower level of noninterest-bearing demand deposits and the effect of higher average loan balances. The flattening yield curve and more competitive pricing practices in the Company’s markets have caused the costs of deposits and borrowings to increase faster than the yield on earning assets.

Total interest income, on a tax-equivalent basis, aggregated $117.3 million for 2006, up from $102.6 million for 2005. The tax-equivalent yield on interest-earning assets was 7.23% for 2006 compared to 6.41% for 2005.

Interest earned on the loan portfolio amounted to $86.9 million for 2006, up $17.1 million from the year ago period. Average loan balances amounted to $1,043.7 million, an increase of $99.7 million from an average of $944.0 million in the prior year. The increase in average loans (across virtually all segments of the Company’s loan portfolio), primarily due to the acquisition of Sterling Resource Funding Corp. coupled with the Company’s other business development activities and the ongoing consolidation of banks in the Company’s marketing area, accounted for $7.9 million of the $17.1 million increase in interest earned on loans. The increase in the yield on the loan portfolio to 8.97% for 2006 from 7.99% for 2005 was primarily attributable to the mix (including the acquisition of Sterling Resource Funding Corp.) of average outstanding balances among the components of the loan portfolio and the higher interest rate environment in 2006.

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $30.1 million for 2006 from $32.4 million in the prior year. Average outstandings decreased to $647.6 million (38.1% of average earning assets for 2006) from $713.6 million (42.7% of average earning assets) in the prior year. The average life of the securities portfolio was approximately 4.7 years at December 31, 2006 compared to 4.4 years at December 31, 2005.

Total interest expense increased to $42.0 million for 2006 from $26.5 million for 2005, primarily due to higher rates paid for interest-bearing deposits and for borrowed funds and higher average balances for interest-bearing deposits and borrowed funds.

Interest expense on deposits increased to $29.0 million for 2006 from $18.1 million for 2005 primarily due to an increase in the cost of those funds. The average rate paid on interest-bearing deposits was 3.05% which was 111 basis points higher than the prior year. The increase in average cost of deposits


PAGE 22



reflects the higher interest rate environment during 2006. Average interest-bearing deposit balances increased to $951.3 million for 2006 from $936.7 million for 2005.

Interest expense on borrowings increased to $15.5 million for 2006 from $11.0 million for 2005 primarily due to the higher interest rate environment during 2006. The average rate paid on borrowed funds was 4.94% which was 135 basis points higher than the prior year. The increase in average cost of borrowings reflects the higher interest rate environment during 2006. Average borrowed funds balances increased to $315.1 million for 2006 from $305.4 million in 2005.

Provision for Loan Losses

Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” below), the provision for loan losses for 2006 decreased to $4.5 million from $5.2 million for the prior year. Factors affecting the level of provision included the growth in the loan portfolios, changes in general economic conditions and the amount of nonaccrual loans.

Noninterest Income

Noninterest income decreased to $33.7 million for 2006 from $34.0 million in 2005, primarily due to lower revenues from mortgage banking activities and bank owned life insurance coupled with higher losses from sales of available for sale securities. The decrease in mortgage banking income was principally due to lower volume of loans sold and the continued yield compression in the secondary market for loans which is impacting the entire industry. Partially offsetting these decreases was increased revenues from customer related service charges and fees primarily due to revenues attributable to the acquisition of Sterling Resource Funding Corp.

Noninterest Expenses

Noninterest expenses increased to $77.4 million for 2006 from $67.7 million in 2005. The increase was primarily due to higher salaries, employee benefits, equipment and occupancy costs related to investments in the Sterling franchise, including the new branches and the acquisition of Sterling Resource Funding Corp. Also contributing to higher employee benefits expense were increases in pension costs. During the third quarter of 2005, noninterest expenses were reduced by $1.0 million due to the reversal of litigation costs originally charged to noninterest expenses in 2001.

Provision for Income Taxes

The provision for income taxes for 2006 decreased by $7.7 million from 2005. The decrease was primarily due to: (1) a $3.7 million recapture (during the first quarter of 2006) of reserves for state and local taxes, net of federal tax effect, as a result of the resolution of certain state tax issues, (2) a $0.6 million recapture (during the third quarter of 2006) of state and local taxes, net of federal tax effect, as a result of the closure of certain tax years for local tax purposes and (3) the lower level of pre-tax income.

Discontinued Operations

In September 2006, the Company sold the business conducted by Sterling Financial. In accordance with U.S. generally accepted accounting prin­ciples, income after taxes from discontinued operations and the loss on disposal of discontinued operations, net of tax, are reported in the Consolidated Statements of Income after net income from continuing operations for all periods presented.

The loss from discontinued operations was $0.6 million for 2006, representing $0.04 per share, compared to income of $0.6 million, or $0.03 per share, for 2005. The decrease was due to lower net interest income and a higher provision for loan losses for 2006 compared to 2005.

The net after-tax loss on the disposal of discontinued operations was $9.6 million, or $0.50 per share.

Income taxes were calculated at the Company’s overall marginal tax rate of 45.14%. In addition, state and local taxes included the effect of the elimination of REIT benefits recognized in prior 2006 periods and the impact of required minimum state and local tax liabilities.

COMPARISON OF THE YEARS 2005 AND 2004

The Company reported income from continuing operations, after income taxes, for the year ended December 31, 2005 of $23.5 million, representing $1.19 per share, calculated on a diluted basis, compared to $22.7 million, or $1.13 per share, calculated on a diluted basis, for the year 2004. Net income benefitted from growth in net interest income, a lower provision for loan losses and higher noninterest income which were partially offset by increases in noninterest expenses and in the provision for income taxes.

Net Interest Income

Net interest income, on a tax-equivalent basis, increased to $76.1 million for 2005 from $68.7 million for 2004, due to higher average earning assets outstanding coupled with higher average yield on loans partially offset by higher balances for interest-bearing deposits coupled with higher rates paid on interest-bearing deposit balances and borrowed funds. The


PAGE 23



net interest margin, on a tax-equivalent basis, was 4.76% for 2005, compared to 4.63% for 2004. Net interest margin was affected by the higher interest rate environment in 2005 and by increases in average investment securities, loan outstandings and noninterest-bearing deposits, substantially offset by the impact of higher average interest-bearing deposits.

Total interest income, on a tax-equivalent basis, aggregated $102.6 million for 2005, up from $87.1 million for 2004. The tax-equivalent yield on interest-earning assets was 6.41% for 2005 compared to 5.97% for 2004.

Interest earned on the loan portfolio amounted to $69.8 million for 2005, up $15.6 million from 2004. Average loan balances amounted to $944.0 million, an increase of $119.3 million from an average of $824.7 million in the prior year. The increase in average loans (across virtually all segments of the Company’s loan portfolio), primarily due to the Company’s business development activities and the ongoing consolidation of banks in the Company’s marketing area, accounted for $8.7 million of the $15.6 million increase in interest earned on loans. The increase in the yield on the domestic loan portfolio to 7.99% for 2005 from 7.18% for 2004 was primarily attributable to the mix of average outstanding balances among the components of the loan portfolio and the higher interest rate environment in 2005.

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $32.4 million for 2005 from $32.7 million in the prior year. The decrease in yields on most of the securities portfolio reflects the impact of the continued flattening of the yield curve. Average outstandings increased to $713.6 million (42.7% of average earning assets for 2005) from $689.6 million (45.1% of average earning assets) in the prior year. The average life of the securities portfolio was approximately 4.4 years at December 31, 2005, compared to 4.0 years at December 31, 2004, reflecting the impact of purchases.

Total interest expense increased to $26.5 million for 2005 from $18.4 million for 2004, primarily due to higher rates paid for interest-bearing deposits and for borrowed funds and higher average balances for interest-bearing deposits.

Interest expense on deposits increased to $18.1 million for 2005 from $11.2 million for 2004, primarily due to the higher interest rate environment in 2005, coupled with an increase in average balances, primarily for time deposits. The average rate paid on interest-bearing deposits was 1.94%, which was 60 basis points higher than the prior year. Average interest-bearing deposit balances increased to $936.7 million for the year 2005 from $831.0 million for 2004, primarily as a result of the Company’s branching initiatives and other business development activities.

Interest expense on borrowings increased to $11.0 million for 2005 from $8.4 million for 2004, primarily due to the higher interest rate environment during 2005. The average rate paid on borrowed funds was 3.59%, which was 80 basis points higher than the prior year.

Provision for Loan Losses

Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” below), the provision for loan losses for 2005 was $5.2 million compared to $6.1 million for 2004. Factors affecting the level of provision for loan losses included growth in the loan portfolios, changes in loan mix, general economic conditions and the amount of nonaccrual loans.

Noninterest Income

Noninterest income was $34.0 million for 2005, compared to $33.9 million for 2004. Noninterest income benefitted from higher revenues from mortgage banking activities and bank owned life insurance. Those increases were partially offset by lower gains on sales of securities and customer related service charges and fees.

Noninterest Expenses

Noninterest expenses increased $5.7 million for 2005 compared to 2004. The increase was primarily due to higher salaries and professional fees related to compliance efforts and investments in the Sterling franchise, including the new branches, with higher expenses related to salaries, employee benefits, occupancy, equipment and marketing and advertising costs. These increases were partially offset by a reversal during the third quarter of 2005 of $1.0 million of litigation settlement costs originally charged to noninterest expenses in 2001. The increase in other expenses was principally due to increases in appraisal fees, credit reports, mortgage taxes, insurance and interest on potential tax liability.

Provision for Income Taxes

The provision for income taxes for 2005 increased by $2.0 million from 2004. The higher provision for taxes for 2005 was due in part to higher income before income taxes for that year. In addition, based on management’s in-depth reviews of required tax reserves, including consultations with various outside professionals, these reserves were reduced through the provision for the fourth quarter of 2005 by approximately $1.1 million, whereas, in view of the resolution of certain state tax issues for tax years 1999-2001, these reserves were reduced through the provision for the second quarter of 2004 by approximately $1.5 million.


PAGE 24



BALANCE SHEET ANALYSIS

Securities

The Company’s securities portfolios are composed principally of U.S. government and U.S. government corporation and agency guaranteed mortgage-backed securities, along with other debt and equity securities. At December 31, 2006, the Company’s portfolio of securities totaled $569.3 million, of which U.S. government corporation and agency guaranteed mortgage-backed securities and collateralized mortgage obli­gations having an average life of approximately 4.8 years amounted to $516.8 million. The Company has the intent and ability to hold to maturity securities classified as “held to maturity.” 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 $0.6 million and $9.9 million, respectively. Securities classified as “available for sale” may be sold in the future, prior to maturity. These securities are carried at market value. Net aggregate unrealized gains or losses on these securities are included in a valuation allowance account and are shown net of taxes, as a component of shareholders’ equity. “Avail­able for sale” securities included gross unrealized gains of $0.4 million and gross unrealized losses of $4.1 million. Given the generally high credit quality of the portfolio, management expects to realize all of its investment upon the maturity of such instruments, and thus believes that any market value impairment is temporary.

Information regarding book values and range of maturities by type of security and weighted average yields for totals of each category is presented in Note 5 beginning on page 51.

The following table sets forth the composition of the Company’s investment securities by type, with related carrying values at the end of each of the three most recent fiscal years:

 
December 31, 2006   2005   2004  

  Balances   % of
Total
  Balances   % of
Total
  Balances   % of
Total
 
 
 
  (dollars in thousands)  
U.S. Treasury securities $     % $     % $ 2,492     0.37 %
Obligations of U.S. government corporations and government
    sponsored enterprises
                                   
      Mortgage-backed securities                                    
      CMOs (Federal National Mortgage Association)   21,159     3.72     22,871     3.20     35,255     5.18  
      CMOs (Federal Home Loan Mortgage Corporation)   44,444     7.81     48,687     6.80     68,882     10.13  
      Federal National Mortgage Association   251,615     44.19     299,372     41.85     194,469     28.59  
      Federal Home Loan Mortgage Corporation   184,667     32.44     215,528     30.13     236,796     34.82  
      Government National Mortgage Association   14,922     2.62     19,645     2.74     38,191     5.61  
 
 
  Total mortgage-backed securities   516,807     90.78     606,103     84.72     573,593     84.33  
      Federal Home Loan Bank   9,992     1.76     39,689     5.55     34,846     5.12  
      Federal Farm Credit Bank   15,000     2.63     29,795     4.17     29,902     4.40  
 
 
  Total obligations of U.S. government corporations and
           government sponsored enterprises
  541,799     95.17     675,587     94.44     638,341     93.85  
Obligations of state and political subdivisions   21,601     3.79     31,307     4.38     27,471     4.04  
Trust preferred securities   1,248     0.22             3,023     0.44  
Federal Reserve Bank stock   1,131     0.19     1,131     0.16     1,131     0.16  
Federal Home Loan Bank stock   2,719     0.48     5,950     0.83     6,188     0.91  
Other securities   326     0.06     324     0.05     324     0.05  
Debt securities issued by foreign governments   500     0.09     1,000     0.14     1,250     0.18  
 
 
  Total $ 569,324     100.00 % $ 715,299     100.00 % $ 680,220     100.00 %
 
 

PAGE 25



Loan Portfolio

A management objective is to maintain the quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of and the designation of lending limits for each borrower. The portfolio strategies include seeking industry and loan size diversification in order to minimize credit exposure and the origination of loans in markets with which the Company is familiar.

The Company’s commercial and industrial loan portfolio represents approximately 54% of all loans. Loans in this category are typically made to individuals, small and medium-sized businesses and range between $250,000 and $15 million. The Company’s leasing portfolio, which consists of finance leases for various types of business equipment, represents approximately 18% of all loans. The leasing and commercial and industrial loan portfolios are included in corporate lending for segment reporting purposes as presented in Note 22 beginning on page 72. The Company’s real estate loan portfolio, which represents approximately 22% of all loans, is secured by mortgages on real property located principally in the states of New York, New Jersey, Virginia and North Carolina. Sources of repayment are from the borrower’s operating profits, cash flows and liquidation of pledged collateral. Based on underwriting standards, loans and leases may be secured whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory, and real property. The collateral securing any loan or lease may depend on the type of loan and may vary in value based on market conditions.

The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 49), sets forth the composition of the Company’s loans held for sale and loans held in portfolio, net of unearned discounts, at the end of each of the five most recent fiscal years:

 
December 31,
2006   2005   2004   2003   2002  

 
  Balances   % of
Total
  Balances   % of
Total
  Balances   % of
Total
  Balances   % of
Total
  Balances   % of
Total
 
 
 
  (dollars in thousands)
 
Domestic                                                  
  Commercial
  and industrial
$ 622,148   54.29 % $ 515,615   48.96 % $ 479,743   50.83 % $ 436,200   53.62 % $ 392,135   53.15 %
  Lease
  financing
  207,771   18.13     190,391   18.08     162,961   17.27     148,737   18.29     128,749   17.45  
  Real estate—
  residential
  mortgage
  153,376   13.39     188,723   17.92     149,387   15.83     107,766   13.25     110,484   14.98  
  Real estate—
  commercial
  mortgage
  93,215   8.13     110,871   10.53     113,933   12.07     94,145   11.57     74,928   10.16  
  Real
  estate—
  construction
  30,031   2.62     2,309   0.22     2,320   0.24     2,368   0.29     2,400   0.32  
  Installment—
  individuals
  12,381   1.08     13,125   1.25     15,477   1.64     14,259   1.75     9,041   1.23  
  Loans to
  depository
  institutions
  27,000   2.36     32,000   3.04     20,000   2.12     10,000   1.23     20,000   2.71  
 
 
Total $ 1,145,922   100.00 % $ 1,053,034   100.00 % $ 943,821   100.00 % $ 813,475   100.00 % $ 737,737   100.00 %
 
 
 
The following table sets forth the maturities of the Company’s commercial and industrial loans, as of December 31, 2006:
 
  Due One
Year
or Less
  Due One
to Five
Years
  Due After
Five
Years
  Total
Gross
Loans
 

 
  (in thousands)  
Commercial and industrial $ 501,173   $ 104,555   $ 16,749   $ 622,477  
 
 
 
All loans due after one year have predetermined interest rates.

PAGE 26



Asset Quality

Intrinsic to the lending process is the possibility of loss. In times of economic slowdown, the risk of loss inherent in the Company’s portfolio of loans may increase. While management endeavors to minimize this risk, it recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio which in turn depend on current and expected economic conditions, the financial condition of borrowers, the realization of collateral, and the credit management process.

The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 49), sets forth the amount of domestic nonaccrual and past due loans of the Company at the end of each of the five most recent fiscal years; there were no foreign loans accounted for on a nonaccrual basis, and there were no troubled debt restructurings for any types of loans. Loans contractually past due 90 days or more as to principal or interest and still accruing are loans that are both well-secured or guaranteed by financially responsible third parties and are in the process of collection.

 
December 31,   2006   2005   2004   2003   2002  

 
    (dollars in thousands)  
Gross loans   $ 1,177,705   $ 1,081,701   $ 967,184   $ 833,675   $ 755,553  
   
 
Nonaccrual loans                                
    Commercial and industrial   $ 1,490   $ 611   $ 67   $ 1,695   $ 156  
    Lease financing     2,933     2,109     1,304     783     275  
    Real estate—residential mortgage     1,011     740     704     489     949  
    Installment—individuals     427     397     72     49     155  
   
 
    Total nonaccrual loans     5,861     3,857     2,147     3,016     1,535  
Past due 90 days or more (other than
    the above)
    989     821     1,672     127     286  
   
 
Total   $ 6,850   $ 4,678   $ 3,819   $ 3,143   $ 1,821  
   
 
Interest income that would have been
    earned on nonaccrual loans outstanding
  $ 545   $ 294   $ 185   $ 146   $ 123  
   
 
Applicable interest income actually realized
    on nonaccrual loans outstanding
  $ 335   $ 95   $ 92   $ 93   $ 71  
   
 
Nonaccrual and past due loans as a
    percentage of total gross loans
    0.58 %   0.43 %   0.39 %   0.38 %   0.24 %
   
 
       

Management views the allowance for loan losses as a critical accounting policy due to its subjectivity. The allowance for loan losses is maintained through the provision for loan losses, which is a charge to operating earnings. The adequacy of the provision and the resulting allowance for loan losses is determined by a management evaluation process of the loan portfolio, including identification and review of individual problem situations that may affect the borrower’s ability to repay, review of overall portfolio quality through an analysis of current charge-offs, delinquency and nonperforming loan data, estimates of the value of any underlying collateral, an assessment of current and expected economic conditions and changes in the size and character of the loan portfolio. Other data utilized by management in determining the adequacy of the allowance for loan losses includes, but is not limited to, the results of regulatory reviews, the amount of, trend of and/or borrower characteristics on loans that are identified as requiring special attention as part of the credit review process, and peer group comparisons. The impact of this other data might result in an allowance which will be greater than that indicated by the evaluation process previously described. The allowance reflects management’s evaluation both of loans presenting identified loss potential and of the risk inherent in various components of the portfolio, including loans identified as impaired as required by SFAS No. 114.

Thus, an increase in the size of the portfolio or in any of its components could necessitate an increase in the allowance even though there may not be a decline in credit quality or an increase in potential problem loans. A significant change in any of the evaluation factors described above could result in future additions to the allowance. At December 31, 2006, the ratio of the allowance to loans held in portfolio, net of unearned discounts, was 1.46% and the allowance was $16.3 million. At such date,


PAGE 27



the Company’s nonaccrual loans amounted to $5.9 million; $0.6 million of such loans was judged to be impaired within the scope of SFAS No. 114. Based on the foregoing, as well as management’s judgment as to the current risks inherent in loans held in port­folio, the Company’s allowance for loan losses was deemed adequate as of December 31, 2006. Net losses within loans held in portfolio are not statistically predictable and changes in conditions in the next twelve months could result in future provisions for loan losses varying from the level taken in 2006. Potential problem loans, which are loans that are currently performing under present loan repayment terms but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of the borrowers to continue to comply with the present repayment terms, aggregated $-0- million and $0.3 million at December 31, 2006 and 2005, respectively.

The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 49), sets forth certain information with respect to the Company’s loan loss experience for each of the five most recent fiscal years:

 
Years Ended December 31,   2006   2005   2004   2003   2002  

 
    (dollars in thousands)  
Average loans held in portfolio, net of
    unearned discounts, during year
  $ 1,002,688   $ 890,085   $ 778,272   $ 673,412   $ 600,475  
   
 
Allowance for loan losses:                                
    Balance at beginning of year   $ 15,369   $ 14,437   $ 12,730   $ 10,644   $ 10,814  
   
 
Charge-offs:                                
    Commercial and industrial     1,298     815     2,336     2,066     7,938  
    Lease financing     4,618     3,732     2,446     1,155     930  
    Real estate—residential mortgage     24     13     8     547     856  
    Installment             9     38     58  
   
 
        Total charge-offs     5,940     4,560     4,799     3,806     9,782  
   
 
Recoveries:                                
    Commercial and industrial     818     258     800     552     871  
    Lease financing     310     76     44     25     69  
    Real estate—residential mortgage                     16  
    Installment     38     39     43     61     69  
   
 
        Total recoveries     1,166     373     887     638     1,025  
   
 
Subtract:                                
    Net charge-offs     4,774     4,187     3,912     3,168     8,757  
   
 
Provision for loan losses     4,503     5,214     6,139     5,412     8,823  
   
 
Add allowance from acquisition     1,845                  
   
 

Less loss on transfers to other real
    estate owned

    655     95     520     158     236  
   
 
Balance at end of year   $ 16,288   $ 15,369   $ 14,437   $ 12,730   $ 10,644  
   
 
Ratio of net charge-offs to average
    loans held in portfolio, net of
    unearned discounts, during year
    0.48 %   0.47 %   0.50 %   0.47 %   1.46 %
   
 

PAGE 28



The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 49), presents the Company’s allocation of the allowance for loan losses. This allocation is based on estimates by management and may vary from year to year based on management’s evaluation of the risk characteristics of the loan portfolio. The amount allocated to a particular loan category of the Company’s loans held in portfolio may not necessarily be indicative of actual future charge-offs in a loan category.
 
December 31,   2006   2005   2004   2003   2002  

 
    Amount   % of
Loans
  Amount   % of
Loans
  Amount   % of
Loans
  Amount   % of
Loans
  Amount   % of
Loans
 
   
 
    (dollars in thousands)  
Domestic                                                    
   Commercial and industrial   $ 7,615   1.15 % $ 8,277   1.61 % $ 7,745   1.61 % $ 6,908   1.58 % $ 5,072   1.29 %
   Loans to depository institutions     135   0.50     112   0.35     120   0.60     80   0.80     150   0.75  
   Lease financing     6,356   2.66     4,636   2.43     4,073   2.50     2,686   1.80     1,961   1.52  
   Real estate—residential mortgage     1,468   1.23     1,437   0.76     1,412   0.94     1,228   1.13     1,241   1.12  
   Real estate—commercial mortgage     501   0.50     509   0.45     772   0.67     1,082   1.14     759   1.01  
   Real estate—construction     150   0.50     10   0.43     15   0.65     24   1.01     23   0.96  
   Installment—individuals           110   0.45     100   0.64     14   0.10     10   0.11  
   Unallocated     63       278       200       708       1,428    
   
     
     
     
     
     
      Total   $ 16,288   1.46 % $ 15,369   1.52 % $ 14,437   1.59 % $ 12,730   1.65 % $ 10,644   1.56 %
   
 
 

Deposits

A significant source of funds are customer deposits, consisting of demand (noninterest-bearing), NOW, savings, money market and time deposits (principally certificates of deposit).

The following table provides certain information with respect to the Company’s deposits at the end of each of the three most recent fiscal years:

 
December 31,   2006   2005   2004  

 
    Balances   % of
Total
  Balances   % of
Total
  Balances   % of
Total
 
   
 
    (dollars in thousands)  
Domestic                                      
    Demand   $ 546,443     35.9 % $ 510,884     35.3 % $ 511,307     38.0 %
    NOW     233,990     15.4     208,217     14.4     136,616     10.2  
    Savings     19,007     1.3     25,296     1.7     28,168     2.1  
    Money Market     194,604     12.8     202,660     14.0     192,483     14.3  
    Time deposits by remaining maturity
        Within 3 months
    203,038     13.3     252,383     17.4     163,408     12.2  
        After 3 months but within 1 year     243,806     16.0     173,301     12.0     162,198     12.1  
        After 1 year but within 2 years     78,808     5.2     67,897     4.7     137,074     10.2  
        After 2 years but within 3 years     1,035     0.1     4,269     0.3     7,755     0.6  
        After 3 years but within 4 years     337         144         1,449     0.1  
        After 4 years but within 5 years     353         233         336      
        After 5 years     35         20         50      
   
 
            Total domestic deposits     1,521,456     100.0     1,445,304     99.8     1,340,844     99.8  
   
 
Foreign                                      
    Time deposits by remaining maturity
        Within 3 months
    395         1,645     0.1     1,645     0.1  
        After 3 months but within 1 year     179         1,377     0.1     1,362     0.1  
   
 
          Total foreign deposits     574         3,022     0.2     3,007     0.2  
   
 
          Total deposits   $ 1,522,030     100.0 % $ 1,448,326     100.0 % $ 1,343,851     100.0 %
   
 
 
Fluctuations of balances in total or among categories at any date can occur based on the Company’s mix of assets and liabilities, as well as on customers’ balance sheet strategies. Historically, however, average balances for deposits have been relatively stable. Information regarding these average balances for the three most recent fiscal years is presented on page 30.

PAGE 29



Sterling Bancorp
C O N S O L I D A T E D   A V E R A G E   B A L A N C E   S H E E T S   A N D
A N A L Y S I S   O F   N E T   I N T E R E S T   E A R N I N G S [1]

 
Years Ended December 31,   2006   2005   2004  

 
    Average
Balance
  Interest   Average
Rate
  Average
Balance
  Interest   Average
Rate
  Average
Balance
  Interest   Average
Rate
 
   
 
    (dollars in thousands)  
ASSETS                                                  
Interest-bearing deposits with other banks   $ 2,624   $ 103   4.48 % $ 3,040   $ 65   1.96 % $ 3,120   $ 19   0.70 %
Investment securities                                                  
  Available for sale     146,820     6,841   4.66     192,354     8,438   4.39     266,823     11,729   4.36  
  Held to maturity     473,608     21,496   4.54     495,187     22,181   4.48     392,869     18,829   4.79  
  Tax-exempt[2]     27,174     1,760   6.47     26,088     1,816   6.96     29,877     2,135   7.14  
Federal funds sold     4,041     195   4.84     10,986     309   2.81     10,943     133   1.21  
Loans, net of unearned discounts[3]                                                  
  Domestic     1,043,680     86,882   8.97     944,033     69,787   7.99     824,667     54,209   7.18  
   
     
     
     
      TOTAL INTEREST-
      EARNING ASSETS
    1,697,947     117,277   7.23 %   1,671,688     102,596   6.41 %   1,528,299     87,054   5.97 %
     
         
 
       
 
     
 
 
Cash and due from banks     64,598               62,162               58,331            
Allowance for loan losses     (16,741 )             (15,730 )             (13,878 )          
Goodwill     22,714               21,158               21,158            
Other     90,812               81,126               70,910            
   
           
           
           
Total assets—continuing operations     1,859,330               1,820,404               1,664,820            
Assets—discontinued operations     85,446               110,697               112,900            
   
           
           
           
      TOTAL ASSETS   $ 1,944,776             $ 1,931,101             $ 1,777,720            
   
           
           
           
LIABILITIES AND
SHAREHOLDERS’
EQUITY
                                                 
     
Interest-bearing deposits                                                  
  Domestic
    Savings   $ 23,050     101   0.44 % $ 28,150     113   0.40 % $ 31,203     120   0.38 %
    NOW     197,587     3,787   1.92     160,944     1,576   0.98     134,096     622   0.46  
    Money market     213,530     4,696   2.20     227,520     2,456   1.08     213,331     1,280   0.60  
    Time     514,452     20,399   3.97     517,038     13,957   2.70     449,319     9,118   2.03  
  Foreign    
    Time     2,714     28   1.03     3,013     33   1.09     3,001     33   1.09  
   
     
     
     
    Total interest-bearing deposits     951,333     29,011   3.05     936,665     18,135   1.94     830,950     11,173   1.34  
   
     
     
     
Borrowings                                                  
  Securities sold under agreements to
    repurchase—customers
    86,418     3,501   4.05     85,365     1,907   2.23     84,559     1,020   1.21  
     
  Securities sold under agreements to
    repurchase—dealers
    74,057     3,739   5.05     52,199     1,794   3.44     29,601     399   1.35  
  Federal funds purchased     15,133     769   5.08     17,992     647   3.60     9,946     146   1.47  
  Commercial paper     44,539     2,020   4.53     37,302     973   2.61     30,069     364   1.21  
  Short-term borrowings—FHLB     34,444     1,796   5.21     5,277     203   3.84     11,986     234   1.95  
  Short-term borrowings—other     613     30   4.96     744     25   3.35     643     9   1.40  
  Long-term borrowings—FHLB     34,164     1,569   4.59     80,740     3,331   4.13     110,000     4,145   3.77  
  Long-term borrowings—subordinated
     debentures
    25,774     2,094   8.38     25,774     2,094   8.38     25,774     2,094   8.38  
   
     
     
     
  Total borrowings     315,142     15,518   4.94     305,393     10,974   3.59     302,578     8,411   2.79  
   
     
     
     
  Interest-bearing liabilities allocated to
    discontinued operations
    (78,054 )   (2,508 ) 3.17     (99,317 )   (2,646 ) 2.63     (103,042 )   (1,233 ) 1.20  
   
     
     
     
      Total Interest-Bearing Liabilities     1,188,421     42,021   3.54 %   1,142,741     26,463   2.32 %   1,030,486     18,351   1.73 %
             
           
         
 
Noninterest-bearing demand deposits     439,064             452,632             415,664          
     
     
     
         
     
Total including noninterest-bearing
  demand deposits
    1,627,485     42,021   2.74 %   1,595,373     26,463   1.83 %   1,446,150     18,351   1.26 %
         
 
       
 
     
 
 
Other liabilities     95,302               85,994               84,977            
Liabilities—discontinued operations     78,811               99,898               104,057            
   
         
         
         
      Total Liabilities     1,801,598               1,781,265               1,635,184            
Shareholders’ equity     143,178               149,836               142,536            
   
         
         
         
      TOTAL LIABILITIES AND
             SHAREHOLDERS’ EQUITY
  $ 1,944,776             $ 1,931,101             $ 1,777,720            
   
         
         
         
Net interest income/spread           75,256   3.69 %         76,133   4.09 %         68,703   4.24 %
               
             
             
 
Net yield on interest-earning assets               4.64 %             4.76 %             4.63 %
               
             
             
 
Less: Tax-equivalent adjustment           691               708               826      
         
           
         
     
Net interest income         $ 74,565             $ 75,425             $ 67,877      
         
           
         
     
 
[1]
The average balances of assets, liabilities and shareholders’ equity are computed on the basis of daily averages. Average rates are presented on a tax-equivalent basis. Certain reclassifications have been made to prior period amounts to conform to current presentation.
 
[2]
Interest on tax-exempt securities included herein is presented on a tax-equivalent basis.
 
[3]
Includes loans held for sale and loans held in portfolio. Nonaccrual loans are included in amounts outstanding and income has been included to the extent earned.

PAGE 30



Sterling Bancorp
C O N S O L I D A T E D   R A T E / V O L U M E   A N A L Y S I S [1]

 
Increase (Decrease) from Years Ended, December 31, 2005 to
December 31, 2006
  December 31, 2004 to
December 31, 2005
 

 
Volume   Rate   Total[2]
  Volume   Rate   Total[2]
 
 
 
  (in thousands)  
INTEREST INCOME                                    
Interest-bearing deposits with other banks $ (11 ) $ 49   $ 38   $ (1 ) $ 47   $ 46  
 
 
Investment securities                                    
  Available for sale   (2,092 )   495     (1,597 )   (3,369 )   78     (3,291 )
  Held to maturity   (978 )   293     (685 )   4,625     (1,273 )   3,352  
  Tax-exempt   3     (59 )   (56 )   (268 )   (51 )   (319 )
 
 
    Total   (3,067 )   729     (2,338 )   988     (1,246 )   (258 )
 
 
Federal funds sold   (261 )   147     (114 )   1     175     176  
 
 
Loans, net of unearned discounts[3]
  Domestic
  7,907     9,188     17,095     8,692     6,886     15,578  
 
 
    TOTAL INTEREST INCOME $ 4,568   $ 10,113   $ 14,681   $ 9,680   $ 5,862   $ 15,542  
 
 
INTEREST EXPENSE                                    
Interest-bearing deposits                                    
  Domestic                                    
    Savings $ (22 ) $ 10   $ (12 ) $ (13 ) $ 6   $ (7 )
    NOW   424     1,787     2,211     143     811     954  
    Money market   (160 )   2,400     2,240     88     1,088     1,176  
    Time   (71 )   6,513     6,442     1,502     3,337     4,839  
  Foreign                                    
    Time   (3 )   (2 )   (5 )            
 
 
    Total interest-bearing deposits   168     10,708     10,876     1,720     5,242     6,962  
 
 
Borrowings                                    
  Securities sold under agreements to
    repurchase—customers
  23     1,571     1,594     7     880     887  
  Securities sold under agreements to
    repurchase—dealers
  919     1,026     1,945     460     935     1,395  
  Federal funds purchased   (114 )   236     122     179     322     501  
  Commercial paper   219     828     1,047     105     504     609  
  Short-term borrowings—FHLB   1,497     96     1,593     (178 )   147     (31 )
  Short-term borrowings—other   (5 )   10     5     6     10     16  
  Long-term borrowings—FHLB   (2,099 )   337     (1,762 )   (1,426 )   612     (814 )
  Long-term borrowings—subordinated
    debentures
                       
 
 
    Total borrowings   440     4,104     4,544     (847 )   3,410     2,563  
 
 
Interest-bearing liabilities allocated
 to discontinued operations
  618     (480 )   138     48     (1,461 )   (1,413 )
 
 
TOTAL INTEREST EXPENSE $ 1,226   $ 14,332   $ 15,558   $ 921   $ 7,191   $ 8,112  
 
 
NET INTEREST INCOME $ 3,342   $ (4,219 ) $ (877 ) $ 8,759   $ (1,329 ) $ 7,430  
 
 
 
[1]
Amounts are presented on a tax-equivalent basis.
 
 
[2]
The change in interest income and interest expense due to both rate and volume has been allocated to change due to rate and the change due to volume in proportion to the relationship of the absolute dollar amounts of the changes in each. The effect of the extra day in 2004 has been included in the change in volume.
 
 
[3]
Nonaccrual loans have been included in the amounts outstanding and income has been included to the extent earned.

PAGE 31



ASSET/LIABILITY MANAGEMENT

The Company’s primary earnings source is its net interest income; therefore, the Company devotes significant time and has invested in resources to assist in the management of interest rate risk and asset quality. The Company’s net interest income is affected by changes in market interest rates, and by the level and composition of interest-earning assets and interest-bearing liabilities. The Company’s objectives in its asset/liability management are to utilize its capital effectively, to provide adequate liquidity and to enhance net interest income, without taking undue risks or subjecting the Company unduly to interest rate fluctuations.

The Company takes a coordinated approach to the management of its liquidity, capital and interest rate risk. This risk management process is governed by policies and limits established by senior management which are reviewed and approved by the Asset/Liability Committee. This committee, which is comprised of members of senior management, meets to review, among other things, economic conditions, interest rates, yield curve, cash flow projections, expected customer actions, liq­uidity levels, capital ratios and repricing characteristics of assets, liabilities and financial instruments.

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates, foreign exchange rates and equity prices. The Company’s principal market risk exposure is interest rate risk, with no material impact on earnings from changes in foreign exchange rates or equity prices.

Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The Company monitors the interest rate sensitivity of its balance sheet positions by examining its near-term sensitivity and its longer-term gap position. In its management of interest rate risk, the Company utilizes several financial and statistical tools including traditional gap analysis and sophisticated income simulation models.

A traditional gap analysis is prepared based on the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities for selected time bands. The mismatch between repricings or maturities within a time band is commonly referred to as the “gap” for that period. A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite result on the net interest margin. However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and other factors that could have an impact on interest rate sensitivity or net interest income. The Company utilizes the gap analysis to complement its income simulations modeling, primarily focusing on the longer-term structure of the balance sheet.

The Company’s balance sheet structure is primarily short-term in nature with a substantial portion of assets and liabilities repricing or maturing within one year. The Company’s gap analysis at December 31, 2006, presented on page 36, indicates that net interest income would decrease during periods of rising interest rates and increase during periods of falling interest rates, but, as mentioned above, gap analysis may not be an accurate predictor of net interest income.

As part of its interest rate risk strategy, the Company may use financial instrument derivatives to hedge the interest rate sensitivity of assets. The Company has written policy guidelines, approved by the Board of Directors, governing the use of financial instruments, including approved counterparties, risk limits and appropriate internal control procedures. The credit risk of derivatives arises principally from the potential for a counterparty to fail to meet its obligation to settle a contract on a timely basis.

During the third quarter of 2005, the Company entered into two interest rate floor agreements with notional amounts of $50,000,000 each and maturities of September 14, 2007 and September 14, 2008, respectively. Interest rate floor contracts require the counterparty to pay the Company at specified future dates the amount, if any, by which the specified interest (prime rate) falls below the fixed floor rates, applied to the notional amounts. The Company utilizes the financial instruments to adjust its interest rate risk position without exposing itself to principal risk and funding requirements. These financial instruments are being used as part of the Company’s interest rate risk management and not for trading purposes. At December 31, 2006, all counterparties have investment grade credit ratings from the major rating agencies. Each counterparty is specifically approved for applicable credit exposure.

The interest rate floor contracts require the Company to pay a fee for the right to receive a fixed interest payment. The Company paid up-front premiums of $141,250. At December 31, 2006, there were no amounts receivable under these contracts. There were no amounts received during either 2006 or 2005.

The interest rate floor agreements were not designated as hedges for accounting purposes and therefore changes in the fair values of the instruments are required to be recognized as income or expense in the Company’s financial statements. At


PAGE 32



December 31, 2006, the aggregate fair value of the interest rate floors was $2,668; $25,362 was charged to “Other expenses.”

The Company utilizes income simulation models to complement its traditional gap analysis. While the Asset/Liability Committee routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The income simulation models measure the Company’s net interest income volatility or sensitivity to interest rate changes utilizing statistical techniques that allow the Company to consider various factors which impact net interest income. These factors include actual maturities, estimated cash flows, repricing characteristics, deposits growth/retention and, most importantly, the relative sensitivity of the Company’s assets and liabilities to changes in market interest rates. This relative sensitivity is important to consider as the Company’s core deposit base has not been subject to the same degree of interest rate sensitivity as its assets. The core deposit costs are internally managed and tend to exhibit less sensitivity to changes in interest rates than the Company’s adjustable rate assets whose yields are based on external indices and generally change in concert with market interest rates.

The Company’s interest rate sensitivity is determined by identifying the probable impact of changes in market interest rates on the yields on the Company’s assets and the rates that would be paid on its liabilities. This modeling technique involves a degree of estimation based on certain assumptions that management believes to be reasonable. Utilizing this process, management projects the impact of changes in interest rates on net interest margin. The Company has established certain policy limits for the potential volatility of its net interest margin assuming certain levels of changes in market interest rates with the objective of maintaining a stable net interest margin under various probable rate scenarios. Man­agement generally has maintained a risk position well within the policy limits. As of December 31, 2006, the model indicated the impact of a 200 basis point parallel and pro rata rise in rates over 12 months would approximate a 2.7% ($2.3 million) increase in net interest income, while the impact of a 200 basis point decline in rates over the same period would approximate a 6.8% ($5.7 million) decline from an unchanged rate environment.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other variables. Furthermore, the sensitivity analysis does not reflect actions that the Asset/Liability Committee might take in responding to or anticipating changes in interest rates.

The shape of the yield curve can cause downward pressure on net interest income. In general, if and to the extent that the yield curve is flatter (i.e., the differences between interest rates for different maturities are relatively smaller) than previously anticipated, then the yield on the Company’s interest-earning assets and its cash flows will tend to be lower. Management believes that a relatively flat yield curve could continue to adversely affect the Company’s results in 2007.

Liquidity Risk

Liquidity is the ability to meet cash needs arising from changes in various categories of assets and liabilities. Liquidity is constantly monitored and managed at both the parent company and the bank levels. Liquid assets consist of cash and due from banks, interest-bearing deposits in banks and Federal funds sold and securities available for sale. Primary funding sources include core deposits, capital markets funds and other money market sources. Core deposits include domestic noninterest-bearing and interest-bearing retail deposits, which historically have been relatively stable. The parent company and the bank believe that they have significant unused borrowing capacity. Contingency plans exist which we believe could be implemented on a timely basis to mitigate the impact of any dramatic change in market conditions.

The parent company depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the bank. Such sources have been adequate to meet the parent company’s cash requirements throughout its history.

Various legal restrictions limit the extent to which the bank can supply funds to the parent company and its nonbank subsidiaries. All national banks are limited in the payment of dividends without the approval of the Comptroller of the Currency to an amount not to exceed the net profits, as defined, for the year to date combined with its retained net profits for the preceding two calendar years.


PAGE 33



At December 31, 2006, the parent company’s short-term debt, consisting principally of commercial paper used to finance ongoing current business activities, was approximately $27.6 million. The parent company had cash, interest-bearing deposits with banks and other current assets aggregating $46.4 million. The parent company also has back-up credit lines with banks of $24.0 million. Since 1979, the parent company has had no need to use available back-up lines of credit.

The following table sets forth information regarding the Company’s obligations and commitments to make future payments under contracts as of December 31, 2006:

 
  Payments Due by Period  
 
 
Contractual
Obligations
Total   Less than 1
Year
  1–3
Years
  4–5
Years
  After 5
Years
 

 
  (in thousands)  
Long-Term Debt[1] $ 45,774   $   $   $ 20,000   $ 25,774  
Operating Leases   26,098     4,120     7,762     4,986     9,230  
 
 
Total Contractual Cash Obligations $ 71,872   $ 4,120   $ 7,762   $ 24,986   $ 35,004  
 
 
 

[1] Based on contractual maturity date.

The following table sets forth information regarding the Company’s obligations under other commercial commitments as of December 31, 2006:

 
  Amount of Commitment Expiration Per Period  
 
 
Other Commercial
Commitments
Total   Less than 1
Year
  1–3
Years
  4–5
Years
  After 5
Years
 

 
  (in thousands)  
Residential Loans $ 14,635   $ 14,635   $   $   $  
Commercial Loans   61,549     28,027     32,739     783      
 
 
Total Loan Commitments   76,184     42,662     32,739     783      
Standby Letters of Credit   37,852     24,782     13,070          
Other Commercial Commitments   17,312     17,276             36  
 
 
Total Commercial Commitments $ 131,348   $ 84,720   $ 45,809   $ 783   $ 36  
 
 
 

While past performance is no guarantee of the future, management believes that the parent company’s funding sources (including div­idends from all its subsidiaries) and the bank’s funding sources will be adequate to meet their liquidity requirements in the future.

CAPITAL

The Company and the bank are subject to risk-based capital regulations which quantitatively measure capital against risk-weighted assets, including certain off-balance sheet items. These regulations define the elements of the Tier 1 and Tier 2 components of Total Capital and establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for capital adequacy purposes. Sup­plementing these regulations is a leverage requirement. This requirement establishes a minimum leverage ratio (at least 3% or 4%, depending upon an institution’s regulatory status), which is calculated by dividing Tier 1 capital by adjusted quarterly average assets (after deducting goodwill). Information regarding the Company’s and the bank’s risk-based capital at December 31, 2006 and December 31, 2005 is presented in Note 21 beginning on page 71. In addition, the bank is subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) which imposes a number of mandatory supervisory measures. Among other matters, FDICIA established five cap­ital categories ranging from “well capitalized” to “critically undercapitalized.” Such classifications are used by regulatory agencies to determine a bank’s deposit insurance premium, approval of applications authorizing institutions to increase their asset size or otherwise expand business activities or acquire other institutions. Under FDICIA, a “well capitalized” bank must maintain minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and 10%, respectively. The Federal Reserve Board applies comparable tests for holding companies such as the Company. At December 31, 2006, the Company and the bank exceeded the requirements for “well capitalized” institutions.


PAGE 34



IMPACT OF INFLATION AND CHANGING PRICES

The Company’s financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP presently requires the Company to measure financial position and operating results primarily in terms of historical dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things, as further discussed under the caption “RISKS RELATED TO THE COMPANY’S BUSINESS” beginning on page 10 and under the caption “ASSET/LIABILITY MANAGEMENT” beginning on page 32.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See “New Accounting Standards and Interpretations” in Note 1 of the Company’s consolidated financial statements for information regarding recently issued accounting pronouncements and their expected impact on the Company’s consolidated financial statements.


PAGE 35



Sterling Bancorp
C O N S O L I D A T E D   I N T E R E S T   R A T E   S E N S I T I V I T Y

To mitigate the vulnerability of earnings to changes in interest rates, the Company manages the repricing characteristics of assets and liabilities in an attempt to control net interest rate sensitivity. Management attempts to confine significant rate sensitivity gaps predominantly to repricing intervals of a year or less, so that adjustments can be made quickly. Assets and liabilities with prede­termined repricing dates are classified based on the earliest repricing period. Based on the interest rate sensitivity analysis shown below, the Company’s net interest income would decrease during periods of rising interest rates and increase during periods of falling interest rates. Amounts are presented in thousands.

 
  Repricing Date  
 
 
  3 Months
or Less
  More than
3 Months
to 1 Year
  More than
1 Year to
5 Years
  Over
5 Years
  Nonrate
Sensitive
  Total  

 
ASSETS                                    
    Interest-bearing deposits with
          other banks
$ 1,261   $   $   $   $   $ 1,261  
    Federal funds sold   20,000                     20,000  
    Investment securities   5,860     19,855     91,266     448,167     4,176     569,324  
    Loans, net of unearned discounts:                                    
       Commercial and industrial   461,941     39,232     104,555     16,749     (329 )   622,148  
       Equipment lease financing   1,075     7,731     218,562     11,858     (31,455 )   207,771  
       Real estate—residential mortgage   32,250     9,209     88,099     23,818         153,376  
       Real estate—commercial mortgage   8,120     7,728     63,451     13,916         93,215  
       Real estate—construction           30,031             30,031  
       Installment—individuals   12,381                     12,381  
       Loans to depository institutions   27,000                     27,000  
    Noninterest-earning assets and
          allowance for loan losses
                  149,450     149,450  
 
 
             Total Assets   569,888     83,755     595,964     514,508     121,842     1,885,957  

LIABILITIES AND SHAREHOLDERS’ EQUITY                                    
    Interest-bearing deposits                                    
       Savings           19,007             19,007  
       NOW           233,990             233,990  
       Money market   154,069         40,535             194,604  
       Time—domestic   203,038     243,806     80,533     35         527,412  
                —foreign   395     179                 574  
    Securities sold under agreements
       to repurchase—customers
  50,803     2,000                 52,803  
    Securities sold under agreements
       to repurchase—dealers
                       
    Commercial paper   27,562                     27,562  
    Short-term borrowings—other   3,412                     3,412  
    Long-term borrowings—FHLB           20,000             20,000  
    Long-term borrowings—subordinated debentures                   25,774     25,774  
    Noninterest-bearing liabilities and
       shareholders’ equity
                  780,819     780,819  

             Total Liabilities and
                Shareholders’ Equity
  439,279     245,985     394,065     35     806,593     1,885,957  

Net Interest Rate Sensitivity Gap $ 130,609   $ (162,230 ) $ 201,899   $ 514,473   $ (684,751 ) $  

Cumulative Gap at December 31, 2006 $ 130,609   $ (31,621 ) $ 170,278   $ 684,751   $   $  

Cumulative Gap at December 31, 2005 $ 37,715   $ (51,516 ) $ 82,734   $ 628,269   $   $  

Cumulative Gap at December 31, 2004 $ 250,603   $ 160,810   $ 187,606   $ 663,246   $   $  


PAGE 36



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company’s consolidated financial statements as of December 31, 2006 and 2005 and for each of the years in the three-year period ended December 31, 2006, and the statements of condition of Sterling National Bank as of December 31, 2006 and 2005, notes thereto and the Report of Independent Registered Public Accounting Firm thereon appear on pages 38–79.


PAGE 37



Sterling Bancorp
C O N S O L I D A T E D   B A L A N C E   S H E E T S

 
December 31, 2006   2005  

 
ASSETS            
Cash and due from banks $ 50,058,593   $ 68,562,037  
Interest-bearing deposits with other banks   1,261,187     1,212,227  
Federal funds sold   20,000,000      
Securities available for sale (at estimated fair value;
   pledged: $90,583,854 in 2006 and $111,233,053 in 2005)
  148,420,887     201,259,112  
Securities held to maturity (pledged: $199,997,912 in 2006 and $301,246,338
   in 2005) (estimated fair value: $411,650,690 in 2006 and $504,514,084 in
   2005)
  420,903,430     514,039,476  
 
 
       Total investment securities   569,324,317     715,298,588  
 
 
Loans held for sale   33,319,789     40,977,538  
             
Loans held in portfolio, net of unearned discounts   1,112,601,620     1,012,056,935  
Less allowance for loan losses   16,287,974     15,369,096  
 
 
       Loans, net   1,096,313,646     996,687,839  
 
 
Customers’ liability under acceptances   98,399     589,667  
Goodwill   22,862,051     21,158,440  
Premises and equipment, net   11,323,649     10,855,715  
Other real estate   2,242,419     859,541  
Accrued interest receivable   5,844,868     6,116,107  
Bank owned life insurance   27,949,160     26,964,575  
Other assets   43,696,511     50,509,981  
 
 
       Total assets from continuing operations   1,884,294,589     1,939,792,255  
Assets—discontinued operations   1,662,697     116,250,231  
 
 
  $ 1,885,957,286   $ 2,056,042,486  
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY            
Noninterest-bearing deposits $ 546,442,704   $ 510,883,966  
Interest-bearing deposits   975,587,719     937,442,174  
 
 
       Total deposits   1,522,030,423     1,448,326,140  
 
 
Securities sold under agreements to repurchase—customers   52,802,796     61,067,073  
Securities sold under agreements to repurchase—dealers       88,729,000  
Federal funds purchased       55,000,000  
Commercial paper   27,561,567     38,191,016  
Short-term borrowings—FHLB       35,000,000  
Short-term borrowings—other   3,411,630     3,851,246  
Long-term borrowings—FHLB   20,000,000     60,000,000  
Long-term borrowings—subordinated debentures   25,774,000     25,774,000  
 
 
       Total borrowings   129,549,993     367,612,335  
 
 
Acceptances outstanding   98,399     589,667  
Accrued expenses and other liabilities   101,679,342     91,450,130  
Liabilities—discontinued operations   336,358     476,654  
 
 
       Total liabilities   1,753,694,515     1,908,454,926  
 
 
Shareholders’ Equity            
   Common stock, $1 par value. Authorized 50,000,000 shares;
     issued 21,177,084 and 21,066,916 shares, respectively
  21,177,084     21,066,916  
   Capital surplus   167,960,063     166,313,566  
   Retained earnings   16,693,987     20,739,352  
   Accumulated other comprehensive loss   (11,842,908 )   (5,229,620 )
 
 
    193,988,226     202,890,214  
Common stock in treasury at cost, 2,572,368 and 2,231,442 shares,
   respectively
  (61,725,455 )   (55,280,647 )
Unearned compensation       (22,007 )
 
 
       Total shareholders’ equity   132,262,771     147,587,560  
 
 
  $ 1,885,957,286   $ 2,056,042,486  
 
 
 
See Notes to Consolidated Financial Statements.

PAGE 38



Sterling Bancorp
C O N S O L I D A T E D   S T A T E M E N T S   O F   I N C O M E

 
Years Ended December 31, 2006   2005   2004  

 
INTEREST INCOME                  
   Loans $ 86,881,731   $ 69,787,586   $ 54,208,873  
   Investment securities                  
     Available for sale   7,909,605     9,546,211     13,038,461  
     Held to maturity   21,496,064     22,180,396     18,828,800  
   Federal funds sold   195,656     308,766     132,405  
   Deposits with other banks   103,064     65,109     19,235  
 
 
         Total interest income   116,586,120     101,888,068     86,227,774  
 
 
INTEREST EXPENSE                  
   Deposits   29,011,428     18,134,850     11,173,017  
   Securities sold under agreements to repurchase—customers   3,501,526     1,907,335     1,020,157  
   Securities sold under agreements to repurchase—dealers   3,739,286     1,793,838     398,415  
   Federal funds purchased   768,751     647,027     146,109  
   Commercial paper   2,019,638     973,200     363,918  
   Short-term borrowings—FHLB   1,796,247     202,837     234,333  
   Short-term borrowings—other   30,391     24,887     9,159  
   Long-term borrowings—FHLB   1,568,529     3,331,619     4,145,000  
   Long-term borrowings—subordinated debentures   2,093,750     2,093,750     2,093,750  
 
 
         Total interest expense   44,529,546     29,109,343     19,583,858  
  Interest expense allocated to discontinued operations   (2,508,092 )   (2,646,062 )   (1,232,952 )
 
 
         Net interest income   74,564,666     75,424,787     67,876,868  
Provision for loan losses   4,502,596     5,214,000     6,139,000  
 
 
         Net interest income after provision for loan losses   70,062,070     70,210,787     61,737,868  
 
 
NONINTEREST INCOME                  
   Customer related service charges and fees   22,347,796     14,649,264     14,967,856  
   Mortgage banking income   9,695,762     16,433,355     15,300,971  
   Trust fees   591,422     642,906     697,560  
   Bank owned life insurance income   984,585     1,401,588     1,225,628  
   Securities (losses)/gains   (443,117 )   337,457     1,256,370  
   Other income   481,881     551,828     490,465  
 
 
         Total noninterest income   33,658,329     34,016,398     33,938,850  
 
 
NONINTEREST EXPENSES                  
   Salaries   34,766,694     29,646,637     27,698,610  
   Employee benefits   10,357,738     9,600,901     8,593,459  
 
 
         Total personnel expense   45,124,432     39,247,538     36,292,069  
   Occupancy and equipment expenses, net   9,898,630     8,633,292     7,913,190  
   Advertising and marketing   3,855,415     3,769,435     3,233,274  
   Professional fees   6,453,717     5,643,944     5,402,126  
   Communications   1,823,257     1,472,756     1,357,524  
   Other expenses   10,199,415     8,887,564     7,730,335  
 
 
         Total noninterest expenses   77,354,866     67,654,529     61,928,518  
 
 
Income from continuing operations before income taxes   26,365,533     36,572,656     33,748,200  
Provision for income taxes   5,366,808     13,109,947     11,073,874  
 
 
Income from continuing operations   20,998,725     23,462,709     22,674,326  
(Loss)/income from discontinued operations, net of tax   (603,753 )   564,116     1,929,747  
Loss on sale of discontinued operations, net of tax   (9,634,911 )        
 
 
Net income $ 10,760,061   $ 24,026,825   $ 24,604,073  
 
 
Average number of common shares outstanding                  
   Basic   18,734,610     19,164,498     19,146,561  
   Diluted   19,265,093     19,763,352     20,035,494  
Income from continuing operations, per average common share                  
   Basic $ 1.12   $ 1.22   $ 1.19  
   Diluted   1.09     1.19     1.13  
Net income, per average common share                  
   Basic   0.57     1.25     1.29  
   Diluted   0.56     1.22     1.23  
Dividends per common share   0.76     0.73     0.63  
 
See Notes to Consolidated Financial Statements.

PAGE 39



Sterling Bancorp
C O N S O L I D A T E D   S T A T E M E N T S   OF
C O M P R E H E N S I V E   I N C O M E

 
Years Ended December 31, 2006   2005   2004  

 
Net income $ 10,760,061   $ 24,026,825   $ 24,604,073  
Other comprehensive loss, net of tax:                  
   Unrealized (losses) gains on securities:                  
     Unrealized holding losses arising during the year   (56,219 )   (2,645,319 )   (886,698 )
     Reclassification adjustment for gains included in net income   243,094     (181,582 )   (679,696 )
   Minimum pension liability adjustment   (5,467,424 )   (481,659 )   777,137  
 
 
   Other comprehensive loss   (5,280,549 )   (3,308,560 )   (789,257 )
 
 
Comprehensive income $ 5,479,512   $ 20,718,265   $ 23,814,816  
 
 
 
See Notes to Consolidated Financial Statements.

PAGE 40



Sterling Bancorp
C O N S O L I D A T E D   S T A T E M E N T S   O F
C H A N G E S   I N   S H A R E H O L D E R S’   E Q U I T Y

 
Years Ended December 31, 2006   2005   2004  

 
PREFERRED STOCK                  
   Balance at beginning of year $   $   $ 2,244,320  
   Conversions of Series B and D shares           (2,244,320 )
 
 
   Balance at end of year $   $   $  
 
 
COMMON STOCK                  
   Balance at beginning of year $ 21,066,916   $ 20,785,515   $ 20,180,958  
   Conversions of preferred shares into common shares           428,304  
   Common shares issued under stock incentive plan   110,168     281,401     176,253  
 
 
   Balance at end of year $ 21,177,084   $ 21,066,916   $ 20,785,515  
 
 
CAPITAL SURPLUS                  
   Balance at beginning of year $ 166,313,566   $ 144,405,751   $ 140,274,838  
   Conversions of preferred shares into common shares           1,816,016  
   Common shares issued under stock incentive plan and
     related tax benefits
  1,646,497     4,016,084     2,340,933  
   Common shares issued in connection with stock dividend       17,891,731      
   Stock split—cash paid in lieu           (26,036 )
 
 
   Balance at end of year $ 167,960,063   $ 166,313,566   $ 144,405,751  
 
 
RETAINED EARNINGS                  
   Balance at beginning of year as originally reported $ 20,739,352   $ 28,664,568   $ 16,166,517  
   SAB 108 cumulative effect adjustment, net of tax   (589,329 )        
 
 
   Balance at beginning of year as adjusted 20,150,023     28,664,568     16,166,517  
   Net income   10,760,061     24,026,825     24,604,073  
   Cash dividends paid—common shares   (14,216,097 )   (14,035,197 )   (12,106,022 )
   Common shares issued in connection with stock dividend       (17,891,731 )    
   Stock dividend—cash in lieu       (25,113 )    
 
 
   Balance at end of year $ 16,693,987   $ 20,739,352   $ 28,664,568  
 
 
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME                  
   Balance at beginning of year $ (5,229,620 ) $ (1,921,060 ) $ (1,131,803 )
 
 
   Unrealized holding (losses)/gains arising during the period:                  
     Before tax   (102,477 )   (5,038,117 )   (1,638,997 )
     Tax effect   46,258     2,392,798     752,299  
 
 
     Net of tax   (56,219 )   (2,645,319 )   (886,698 )
 
 
   Reclassification adjustment for losses/(gains) included in
          net income:
                 
     Before tax   443,117     (337,457 )   (1,256,370 )
     Tax effect   (200,023 )   155,875     576,674  
 
 
     Net of tax   243,094     (181,582 )   (679,696 )
 
 
   Minimum pension liability adjustment:                  
     Before tax   (9,966,140 )   (827,867 )   1,436,482  
     Tax effect   4,498,716     346,208     (659,345 )
 
 
     Net of tax   (5,467,424 )   (481,659 )   777,137  
 
 
   Adjustment to initially apply SFAS No. 158:                  
     Before tax   (2,429,345 )        
     Tax effect   1,096,606          
 
 
     Net of tax   (1,332,739 )        
 
 
   Balance at end of year $ (11,842,908 ) $ (5,229,620 ) $ (1,921,060 )
 
 
TREASURY STOCK                  
   Balance at beginning of year $ (55,280,647 ) $ (42,939,969 ) $ (33,577,847 )
   Purchase of common shares   (5,831,017 )   (10,507,293 )   (8,310,004 )
   Surrender of shares issued under incentive compensation plan   (613,791 )   (1,833,385 )   (1,052,118 )
 
 
   Balance at end of year $ (61,725,455 ) $ (55,280,647 ) $ (42,939,969 )
 
 
UNEARNED COMPENSATION                  
   Balance at beginning of year $ (22,007 ) $ (291,212 ) $ (894,976 )
   Amortization of unearned compensation   22,007     269,205     603,764  
 
 
   Balance at end of year $   $ (22,007 ) $ (291,212 )
 
 
TOTAL SHAREHOLDERS’ EQUITY                  
   Balance at beginning of year as adjusted $ 146,998,231   $ 148,703,593   $ 143,262,007  
   Net changes during the year   (14,735,460 )   (1,116,033 )   5,441,586  
 
 
   Balance at end of year $ 132,262,771   $ 147,587,560   $ 148,703,593  
 
 
 
See Notes to Consolidated Financial Statements.

PAGE 41



Sterling Bancorp
C O N S O L I D A T E D   S T A T E M E N T S   O F   C A S H   F L O W S

 
Years Ended December 31, 2006   2005   2004  

 
OPERATING ACTIVITIES                  
   Net income $ 10,760,061   $ 24,026,825   $ 24,604,073  
   Loss/(income) from discontinued operations included below
     in operating cash flows from discontinued operations
  10,238,664     (564,116 )   (1,929,747 )
 
 
   Income from continuing operations   20,998,725     23,462,709     22,674,326  
   Adjustments to reconcile income from continuing operations
     to net cash provided by (used in) operating activities:
                 
       Provision for loan losses   4,502,596     5,214,000     6,139,000  
       Depreciation and amortization of premises and equipment   2,338,288     1,993,079     1,822,889  
       Securities losses (gains)   443,117     (337,457 )   (1,256,370 )
       Income from bank owned life insurance   (984,585 )   (1,401,588 )   (1,225,628 )
       Deferred income tax benefit   (1,682,949 )   (2,899,592 )   (729,908 )
       Proceeds from sale of loans   598,245,030     699,784,956     538,781,509  
       Gains on sales of loans, net   (9,695,762 )   (16,433,355 )   (15,300,971 )
       Originations of loans held for sale   (580,891,519 )   (687,270,466 )   (519,982,831 )
       Amortization of unearned compensation   22,007     269,205     603,764  
       Amortization of premiums on investment securities   557,943     969,000     1,456,202  
       Accretion of discounts on investment securities   (450,087 )   (613,712 )   (568,608 )
       Decrease (Increase) in accrued interest receivable   271,239     (511,326 )   (535,358 )
       (Decrease) Increase in accrued expenses and other
         liabilities
  (1,764,144 )   1,120,618     13,237,814  
       Decrease (Increase) in other assets   10,323,069     (10,419,232 )   (5,281,776 )
       Other, net   (6,828,742 )   (3,218,157 )   (490,871 )
 
 
         Net cash provided by operating activities   35,404,226     9,708,682     39,343,183  
 
 
INVESTING ACTIVITIES                  
   Purchase of premises and equipment   (2,244,447 )   (2,203,597 )   (3,271,643 )
   Net (increase) decrease in interest-bearing deposits with
     other banks
  (48,960 )   116,876     327,235  
   Increase in Federal funds sold   (20,000,000 )        
   Net increase in loans held in portfolio   (42,183,630 )   (109,482,572 )   (138,274,367 )
   (Increase) Decrease in other real estate   (1,382,878 )   (92,921 )   63,236  
   Purchase of bank owned life insurance           (4,000,000 )
   Proceeds from sales of securities—available for sale   25,371,314     3,213,055     94,314,559  
   Proceeds from sales of securities—held to maturity       5,452,162      
   Proceeds from prepayments, redemptions or
     maturities of securities—held to maturity
  93,192,390     106,710,878     131,720,726  
   Purchases of securities—held to maturity   (115,870 )   (179,939,152 )   (208,471,931 )
   Proceeds from prepayments, redemptions or
     maturities—available for sale
  43,352,904     68,110,833     123,946,777  
   Purchases of securities—available for sale   (15,992,356 )   (43,026,829 )   (141,857,433 )
   Cash paid in acquisition   (44,901,402 )        
 
 
         Net cash provided by (used in) investing activities   35,047,065     (151,141,267 )   (145,502,841 )
 
 
FINANCING ACTIVITIES                  
   Net increase (decrease) in noninterest-bearing deposits   25,491,272     (423,052 )   37,215,128  
   Net increase in interest-bearing deposits   38,145,544     104,898,077     94,895,167  
   (Decrease) increase in Federal funds purchased   (55,000,000 )   22,500,000     22,500,000  
   Net (decrease) increase in securities sold under agreements
     to repurchase
  (96,993,277 )   59,979,903     (4,002,636 )
   Net (decrease) increase in commercial paper and other
     short-term borrowings
  (46,069,065 )   48,533,849     (57,162,001 )
   Decrease in long-term borrowings   (40,000,000 )   (50,000,000 )    
   Purchase of treasury shares   (5,831,017 )   (10,507,293 )   (8,310,004 )
   Proceeds from exercise of stock options   1,338,013     2,701,565     4,334,474  
   Cash dividends paid on common shares   (14,216,097 )   (14,035,197 )   (12,106,022 )
   Cash paid in lieu of fractional shares in connection with
     stock dividend/split
      (25,113 )   (26,036 )
 
 
         Net cash (used in) provided by financing activities   (193,134,627 )   163,622,739     77,338,070  
 
 
CASH FLOW FROM DISCONTINUED OPERATIONS                  
   Operating cash flows   (10,013,867 )   4,558,869     5,284,268  
   Investing cash flows   114,193,759     (6,172,078 )   7,853,865  
   Financing cash flows            
 
 
         Total   104,179,892     (1,613,209 )   13,138,133  
 
 
Net (decrease) increase in cash and due from banks   (18,503,444 )   20,576,945     (15,683,455 )
Cash and due from banks—beginning of year   68,562,037     47,985,092     63,668,547  
 
 
Cash and due from banks—end of year $ 50,058,593   $ 68,562,037   $ 47,985,092  
 
 
Supplemental disclosure of cash flow information:                  
   Interest paid $ 41,822,000   $ 27,904,950   $ 19,199,800  
   Income taxes paid   8,267,452     15,600,100     11,554,100  
 
See Notes to Consolidated Financial Statements.

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Sterling National Bank
C O N S O L I D A T E D   S T A T E M E N T S   O F   C O N D I T I O N

 
December 31, 2006   2005  

 
ASSETS            
Cash and due from banks $ 50,007,363   $ 68,477,057  
Interest-bearing deposits with other banks   1,261,187     1,212,227  
Federal funds sold   20,000,000      
             
Securities available for sale (at estimated fair value;
   pledged: $90,583,854 in 2006 and $111,233,053 in 2005)
  148,354,838     201,195,458  
Securities held to maturity (pledged: $199,997,912 in 2006 and
   $301,246,338 in 2005) (estimated fair value: $411,650,691 in 2006
   and $504,514,084 in 2005)
  420,903,430     514,039,476  
 
 
       Total investment securities   569,258,268     715,234,934  
 
 
Loans held for sale   33,319,789     40,977,538  
             
Loans held in portfolio, net of unearned discounts   1,107,801,370     1,012,056,935  
Less allowance for loan losses   16,287,974     15,369,096  
 
 
       Loans, net   1,091,513,396     996,687,839  
 
 
Customers’ liability under acceptances   98,399     589,667  
Goodwill   1,703,611      
Premises and equipment, net   11,289,534     10,855,714  
Other real estate   2,242,419     859,541  
Accrued interest receivable   5,843,461     6,114,700  
Bank owned life insurance   27,949,160     26,964,575  
Other assets   36,928,928     45,943,860  
 
 
       Total assets from continuing operations   1,851,415,515     1,913,917,652  
Assets—discontinued operations       49,217,684  
 
 
  $ 1,851,415,515   $ 1,963,135,336  
 
 
LIABILITIES AND SHAREHOLDER’S EQUITY            
Noninterest-bearing deposits $ 569,431,020   $ 523,639,218  
Interest-bearing deposits   1,006,178,406     938,244,008  
 
 
       Total deposits   1,575,609,426     1,461,883,226  
Securities sold under agreements to repurchase—customers   52,802,796     61,067,073  
Securities sold under agreements to repurchase—dealers       88,729,000  
Federal funds purchased       55,000,000  
Short-term borrowings—FHLB       35,000,000  
Short-term borrowings—other   3,411,630     3,851,246  
Acceptances outstanding   98,399     589,667  
Accrued expenses and other liabilities   83,168,726     79,004,952  
Long-term borrowings—FHLB   20,000,000     60,000,000  
Liabilities—discontinued operations   251,460     81,366  
 
 
       Total liabilities   1,735,342,437     1,845,206,530  
 
 
Commitments and contingent liabilities            
Shareholder’s Equity            
   Common stock, $50 par value            
     Authorized and issued, 358,526 shares   17,926,300     17,926,300  
   Surplus   19,762,560     19,762,560  
   Undivided profits   86,834,185     82,221,089  
   Accumulated other comprehensive loss:            
     Net unrealized loss on securities available for sale, net of tax   (1,795,713 )   (1,981,143 )
     Minimum pension liability   (5,321,515 )   —   
     Adjustment to initially apply SFAS No. 158   (1,332,739 )   —   
 
 
       Total shareholder’s equity   116,073,078     117,928,806  
 
 
  $ 1,851,415,515   $ 1,963,135,336  
 
 
 
See Notes to Consolidated Financial Statements.

PAGE 43



Sterling Bancorp
N O T E S  T O   C O N S O L I D A T E D   F I N A N C I A L   S T A T E M E N T S
 

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Sterling Bancorp (the “parent company”) is a financial holding company, pursuant to an election made under the Gramm-Leach-Bliley Act of 1999. Throughout the notes, the term the “Company” refers to Sterling Bancorp and its subsidiaries. The Company provides a full range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, factoring/accounts receivable management services, trade financing, leasing, deposit services, trust and estate administration and investment management services. The Company has operations principally in New York and conducts business throughout the United States.

The following summarizes the significant accounting policies of the Company.

Basis of Presentation

The consolidated financial statements include the accounts of the parent company and its subsidiaries, principally Sterling National Bank (the “bank”), after elimination of intercompany transactions.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected l osses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly-owned subsidiary, Sterling Bancorp Trust I, is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Company’s consolidated financial statements.

General Accounting Policies

The Company follows U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in accordance with U.S. GAAP requires management to make assumptions and estimates which impact the amounts reported in those statements and are, by their nature, subject to change in the future as additional information becomes available or as circumstances vary. Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current presentation.

New Accounting Standards and Interpretations

In February 2007, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS No. 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be a pplied to the entire instrument and not to only a portion of the instrument.

SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of the fiscal year, has not yet issued financial statements for any interim period of such year, and also elects to apply the provisions of SFAS No. 157. The Company is currently analyzing the potential effects of SFAS No. 159 on its financial statements.

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and requires expanded disclosures regarding fair value measurements. SFAS No. 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company’s financial statements.


PAGE 44



In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-5, Accounting for Purchases of Life Insurance—Determining the Amount that Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (“EITF Issue No. 06-5”). FASB Technical Bulletin No. 85-4 requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. Since the issuance of FASB Technical Bulletin No. 85-4, there has been diversity in practice in the calculation of the amount that could be realized under insurance contracts. EITF Issue No. 06-5, which is effective January 1, 2007, provides that any additional amounts (e.g., claims stabilization reserves and deferred acquisition cost taxes) included in the contractual terms of the insurance policy other than the cash surrender value should be considered in determining the amount that could be realized in accordance with FASB Technical Bulletin No. 85-4. The adoption of EITF Issue No. 06-5 is not expected to have a material impact on the Company’s results of operations or financial condition.

In September 2006, the EITF reached a consensus on Issue No. 06-4, Accounting for Deferred Compensation and Post­retirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements (“EITF Issue No. 06-4”). EITF Issue No. 06-4 is effective for fiscal years beginning after December 31, 2007. Under the provisions of EITF Issue No. 06-4, an employer should recognize a liability for future benefits for endorsement split-dollar life insurance agreements that are within the scope of this EITF Issue. EITF Issue No. 06-4 permits adoption through a cumulative adjustment to retained earnings on the adoption date, which for the Company will be January 1, 2008. The Company owns life insurance policies subject to endorsement split-dollar life insurance agreements and is currently evaluating the effect of adoption on its results of operations and financial condition.

In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48, (“FIN 48”), Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. FIN 48 is effective for the Company on January 1, 2007 and is not expected to have a significant impact on the Company’s consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS No. 156”). This statement amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires companies to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. The statement permits a company to choose either the amortized cost method or fair value measurement method for each class of separately recognized servicing assets or servicing liabilities. This statement is effective for the Company on January 1, 2007, and is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140 (“SFAS No. 155”). SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). SFAS No. 155: (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006, which for the Company is January 1, 2007, and is not expected to have a material impact on the Company’s consolidated financial statements.


PAGE 45



Adoption of Staff Accounting Bulletin No. 108

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides additional guidance for the quantitative assessment of the materiality of uncorrected misstatements in current and prior years. The assessment for materiality should be based on the amount of the error relative to both the current year income statement and balance sheet. For misstatements originating in prior years that are deemed material to the current year financial statements, SAB 108 permits recording the effect of adopting this guidance as a cumulative effect adjustment to retained earnings. During the fourth quarter of 2006, the Company adopted SAB 108. See Note 26 for additional disclosures regarding SAB 108.

Investment Securities

Securities are designated at the time of acquisition as available for sale or held to maturity. Securities that the Company will hold for indefinite periods of time and that might be sold in the future as part of efforts to manage interest rate risk or in response to changes in interest rates, changes in prepayment risk, changes in market conditions or changes in economic factors are classified as available for sale and carried at estimated market values. Net aggregate unrealized gains or losses are included in a valuation allowance account and are reported, net of taxes, as a component of shareholders’ equity. Securities that the Company has the positive intent and ability to hold to maturity are designated as held to maturity and are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts over the period to maturity. Interest income includes the amortization of purchase premiums and accretion of purchase discounts. Gains and losses realized on sales of securities are determined on the specific identification method and are reported in noninterest income as net securities gains.

Included in investment securities available for sale is the bank’s investment in Federal Home Loan Bank of New York (“FHLB”) stock and is carried at par value, which reasonably approximates its fair value. The bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets or FHLB advances. Stock redemptions are at the discretion of the FHLB.

Securities pledged as collateral are reported separately in the consolidated balance sheets if the secured party has the right by contract or custom to sell or repledge the collateral. Securities are pledged by the Company to secure trust and public deposits, securities sold under agreements to repurchase, advances from the FHLB and for other purposes required or permitted by law.

A periodic review is conducted by management to determine if the decline in the fair value of any security appears to be other-than-temporary. Factors considered in determining whether the decline is other-than-temporary include, but are not limited to: the length of time and the extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. If the decline is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is reported in noninterest income.

Loans

Loans (including factored accounts receivable), other than those held for sale, are reported at their principal amount outstanding, net of unearned discounts and unamortized nonrefundable fees and direct costs associated with their origination or acquisition. Interest earned on loans without discounts is credited to income based on loan principal amounts outstanding at appropriate interest rates. Material origination and other nonrefundable fees net of direct costs and discounts on loans (excluding factored accounts receivable) are credited to income over the terms of the loans using a method that results in an approximately constant effective yield. Nonrefundable fees on the purchase of accounts receivable are credited to “Factoring income” at the time of purchase, which, based on our analysis, does not produce results that are materially different from the results under the amortization method specified in SFAS No. 91.

Mortgage loans held for sale, including deferred fees and costs, are reported at the lower of cost or market value as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis, and are included under the caption “Loans held for sale” in the Consolidated Balance Sheets. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to income. Mortgage loans are sold, including servicing rights, without recourse. Gains or losses resulting from sales of mortgage loans, net of unamortized deferred fees and costs, are recognized when the proceeds are received from investors and are included under the caption “Mortgage banking income” in the Consolidated Statements of Income. In connection with its mortgage banking activities, the Company had commitments to fund loans held for sale and commitments to sell loans which are considered derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The fair


PAGE 46



values of these free-standing derivative instruments were immaterial at December 31, 2006 and 2005.

Nonaccrual loans are those on which the accrual of interest has ceased. Loans, including loans that are individually identified as being impaired under SFAS No. 114, are generally placed on nonaccrual status immediately if, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days or more and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Interest income is recognized on nonaccrual loans only to the extent received in cash. How­ever, where there is doubt regarding the ultimate collectibility of the loan principal, cash receipts, whether designated as principal or interest, are thereafter applied to reduce the carrying value of the loan. Loans are restored to accrual status only when interest and principal payments are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses, which is available for losses incurred in the loan portfolio, is increased by a provision charged to expense and decreased by charge-offs, net of recoveries.

Under the provisions of SFAS No. 114 and SFAS No. 118, individually identified impaired loans are measured based on the present value of payments expected to be received, using the historical effective loan rate as the discount rate. Alternatively, measurement may also be based on observable market prices; or, for loans that are solely dependent on the collateral for repayment, measurement may be based on the fair value of the collateral. Loans that are to be foreclosed are measured based on the fair value of the collateral. If the recorded investment in the impaired loan exceeds fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

The adequacy of the allowance for loan losses is reviewed regularly by management. The allowance for loan losses is maintained through the provision for loan losses, which is a charge to expense. The adequacy of the provision and the resulting allowance for loan losses is determined by management’s continuing review of the loan portfolio, including identification and review of individual problem situations that may affect the borrower’s ability to repay, review of overall portfolio quality through an analysis of current charge-offs, delinquency and nonperforming loan data, estimates of the value of any underlying collateral, review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and character of the loan portfolio. The allowance reflects management’s evaluation both of loans presenting identified loss potential and of the risk inherent in various components of the po rtfolio, including loans identified as impaired as required by SFAS No. 114. Thus, an increase in the size of the portfolio or in any of its components could necessitate an increase in the allowance even though there may not be a decline in credit quality or an increase in potential problem loans. A significant change in any of the evaluation factors described above could result in future additions to the allowance.

Goodwill

Goodwill reflected in the consolidated balance sheets arose from the parent company’s acquisition of the bank (in 1968) and the acquisition of Sterling Resource Funding Corp (in 2006), under the purchase method of accounting. Goodwill is assigned to the Corporate lending unit for segment reporting purposes. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). Under the provisions of SFAS No. 142, goodwill is deemed to have an indefinite useful life and the Company is required to complete an annual assessment by segment for any impairment of goodwill, which would be treated as an expense in the income statement. There was no impairment expense recorded in 2006, 2005 or 2004.

Goodwill is tested for impairment using a two-step approach that involves the identification of “reporting units” and the estimation of their respective fair values. An impairment loss would be recognized as a charge to expense for any excess of the goodwill carrying amount over implied fair value.

Premises and Equipment

Premises and equipment, excluding land, are stated at cost less accumulated depreciation or amortization as applicable. Land is reported at cost. Depreciation is computed on a straight-line basis and is charged to noninterest expense over the estimated useful lives of the related assets. Useful lives are 7 years for furniture fixtures and equipment, between 3 and 7 years for ATM’s, computer hardware and software and 10 years for building improvements. Amortization of leasehold improvements is charged to noninterest expense over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Maintenance, repairs and minor improvements are charged to noninterest expenses as incurred.

Bank Owned Life Insurance

The bank invested in Bank Owned Life Insurance (“BOLI”) policies to fund certain future employee benefit costs. The cash surrender value, net of surrender charges, of the BOLI


PAGE 47



policies is recorded in the consolidated balance sheets under the caption “Bank owned life insurance.” Changes in the cash surrender value, net of surrender charges, are recorded in the Consolidated Statements of Income under the caption “Bank owned life insurance income.”

Repurchase Agreements

The Company sells certain securities under agreements to repurchase. The agreements are treated as collateralized financing transactions and the obligations to repurchase securities sold are reflected as a liability in the accompanying consolidated balance sheets. The carrying value of the securities underlying the agreements remains reflected as an asset.

Derivative Financial Instruments

The Company’s hedging policies permit the use of various derivative financial instruments to manage interest rate risk or to hedge specified assets and liabilities. All derivatives are recorded at fair value on the Company’s balance sheet. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. The Company considers a hedge to be highly effective if the change in fair value of the derivative hedging instrument is within 80% to 120% of the opposite change in the fair value of the derivative and the hedged item attributable to the hedged risk. If derivative instruments are designated as hedges of fair values, and such hedges are highly effective, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to ca sh flow hedges are recorded in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, the Company formally assesses whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, the Company will discontinue hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into current earnings and the derivative instrument is reclassified to a trading position recorded at fair value. Changes in the fair value of derivative financial instruments not designated as hedges for accounting purposes are reflected in income or expense at measurement dates. At December 31, 2006, the Company was a party to interest rate floor contracts, which are being used as part of the Company’s interest rate risk program and not for hedge purposes, with a notional amount of $100,000,000 and a fair value of $2,668.

The Company may be required to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Deferred income tax expense (benefit) is determined by recognizing deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of deferred tax assets is assessed and a valuation allowance provided for that portion of the assets for which it is more likely than not that it will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates and will be adjusted for the effects of future changes in tax laws or rates, if any.

For income tax purposes, the parent company files: a consolidated Federal income tax return; combined New York City and New York State income tax returns; and separate state income tax returns for its out-of-state subsidiaries. The parent company, under tax sharing agreements, either pays or collects on account of current income taxes to or from its subsidiaries.

Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks.

Stock Incentive Plan

At December 31, 2006, the Company had a stock-based employee compensation plan, which is described more fully in Note 15. Prior to January 1, 2006, the Company accounted for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations. All options granted under the plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant and, therefore, no option related stock-based employee compensation cost was reflected in net income for the years ended December 31, 2005 and 2004. Stock-based employee compensation cost related to restricted stock is included in compensation expense as discussed more fully in Note 15.


PAGE 48



In accordance with SFAS No. 123, Account­ing for Stock-Based Compensation (“SFAS No. 123”), the following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to the stock-based employee compensation plans.

 
Years Ended December 31, 2005   2004  

 
Income from continuing operations $ 23,462,709   $ 22,674,326  
Deduct: Total stock-based employee compensation expense determined
   under fair value based method for all awards, net of related tax effects
  (1,134,612 )   (236,349 )
 
 
   
Pro forma, income from continuing operations   22,328,097     22,437,977  
Income from discontinued operations, net of tax   564,116     1,929,747  
 
 
Pro forma, net income $ 22,892,213   $ 24,367,724  
 
 
Income from continuing operations per average common share:        
   Basic—as reported $ 1.22   $ 1.19  
   Basic—pro forma   1.17     1.18  
   Diluted—as reported   1.19     1.13  
   Diluted—pro forma   1.13     1.12  
   
Net income per average common share:        
   Basic—as reported   1.25     1.29  
   Basic—pro forma   1.19     1.27  
   Diluted—as reported   1.22     1.23  
   Diluted—pro forma   1.16     1.22  
 

Employee stock options generally expire ten years from the date of grant and become non-forfeitable one year from date of grant, although if necessary to qualify to the maximum extent possible as incentive stock options, these options become exercisable in annual installments. Director nonqualified stock options generally expire five years from the date of grant and become non-forfeitable and become exercisable in four annual installments starting one year from date of grant. Subsequent to the adoption of SFAS No. 123R, stock-based compensation is recognized over the period from date of grant to the date on which the options become non-forfeitable.

As of January 1, 2006, the Company adopted SFAS No. 123R which eliminated the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement for awards expected to be vested based on their fair values on the measurement date, which is generally the date of the grant. The Company transitioned to fair value based accounting for stock-based compensation using a modified version of prospective application (“modified prospective application”). Under modified prospective application, as it is applicable to the Company, SFAS No. 123R applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. SFAS No. 123R requires pro forma disclosures which are presented above, of net income and earnings per share for all periods prior to the adoption of the fair value accounting method for stock-based employee compensation.

Earnings Per Average Common Share

Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

NOTE 2.

ACQUISITION AND DISPOSITION

As of April 1, 2006, Sterling Resource Funding Corp., a subsidiary of the bank, completed the acquisition of the business and certain assets ($64.1 million) and liabilities ($21.0 million) of PL Services, L.P., a provider of credit and accounts receivable management services to the staffing industry, in an all cash transaction. A general allowance for loan losses in the amount of $1.8 million was carried over. Goodwill recognized in this transaction amounted to $1.7 million and was assigned to the Corporate Lending unit for segment reporting purposes. This acquisition, when considered under relevant disclosure guidance, does not require the presentation of separate pro forma financial information.

The Company’s goodwill was $22,862,051 and $21,158,440 as of December 31, 2006 and 2005, respectively. The increase of $1,703,611 during 2006 was the result of the Sterling Resource Funding acquisition discussed above.

In September 2006, the Company sold for cash the business conducted by Sterling Financial Services (“Sterling Financial”), which included a loan portfolio of approximately $132 million.


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The interest expense allocated to discontinued operations was based on the actual average balances, interest expenses and average rate on each category of interest-bearing liabilities, with the average rate applied to the aggregate average loan balances to determine the funding cost. Interest expense allocated to the funding supporting the Sterling Financial net loans for those periods was assigned based on the average net loan balances proportionately funded by all interest-bearing liabilities at an average rate equal to the cost of each applied to its average balance for the period.

The results of operations of Sterling Financial have been reported as a discontinued operation in the consolidated statements of income for all periods presented. The Company recorded a pre-tax loss on the sale of $15,677,360 and a tax benefit of $6,042,449. Total revenues generated by the operations of Sterling Financial amounted to $8,340,544, $11,692,798 and $12,350,495 for the years ended December 31, 2006, 2005 and 2004, respectively. For the years ended December 31, 2006, 2005 and 2004, the income tax (benefit) and income tax expense associated with discontinued operations, exclusive of loss on sale, were $(378,639), $476,766 and $1,677,661, respectively. Income taxes were calculated at the Company’s overall marginal tax rate of 45.14%. In addition, state and local taxes included the effect of the elimination of REIT benefits recognized in prior 2006 periods and the impact of required minimum state and local tax liabilities.

The assets and liabilities of discontinued operations are presented separately in the accompanying consolidated balance sheets. The details are as follows: