UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended

   June 30, 2008

 

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________________________________________

Commission File Number: 1-5273-1

 

Sterling Bancorp


(Exact name of registrant as specified in its charter)


 

 

 

     New York

 

13-2565216     




(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification)


 

 

650 Fifth Avenue, New York, N.Y.

10019-6108     



(Address of principal executive offices)

(Zip Code)

 

 

212-757-3300


(Registrant’s telephone number, including area code)

 

N/A


(Former name, former address and former fiscal year, if changed since last report)

          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. x Yes   o No

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o Smaller Reporting Company o

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

As of July 31, 2008 there were 17,988,970 shares of common stock,
$1.00 par value, outstanding.




STERLING BANCORP

 

 

 

 

 

 

 

 

 

Page

 

 


PART I FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements (Unaudited)

 

3

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Overview

 

17

 

 

 

 

Income Statement Analysis

 

18

 

 

 

 

Balance Sheet Analysis

 

23

 

 

 

 

Capital

 

28

 

 

 

 

Recently Issued Accounting Pronouncements

 

29

 

 

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

29

 

 

 

 

Average Balance Sheets

 

30

 

 

 

 

Rate/Volume Analysis

 

32

 

 

 

 

Regulatory Capital and Ratios

 

34

 

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About
Market Risk


 

 

 

 

 

 

Asset/Liability Management

 

35

 

 

 

 

Interest Rate Sensitivity

 

40

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

41

 


PART II OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and
Use of Proceeds

 

42

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

43

 

 

 

 

 

 

 

 

SIGNATURES

 

44

 

 

 

 

 

 

 

 

EXHIBIT INDEX

 

 

 


 

 

 

 

 

 

 

Exhibit 11

Statement Re: Computation of Per Share Earnings

 

46

 

 

 

Exhibit 31.1

Certification of the CEO pursuant to Exchange Act Rule 13a-14(a)

 

47

 

 

 

Exhibit 31.2

Certification of the CFO pursuant to Exchange Act Rule 13a-14(a)

 

48

 

 

 

Exhibit 32.1

Certification of the CEO required by Section 1350 of Chapter 63 of Title 18 of the U.S. Code

 

49

 

 

 

Exhibit 32.2

Certification of the CFO required by Section 1350 of Chapter 63 of Title 18 of the U.S. Code

 

50

 




STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

 

 

 

 

 

 

 

 

 

 

June 30,
2008

 

December 31,
2007

 

 

 


 


 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

49,995,333

 

$

66,412,612

 

Interest-bearing deposits with other banks

 

 

880,586

 

 

979,984

 

Federal funds sold

 

 

2,500,000

 

 

 

 

Securities available for sale (at estimated fair value; pledged: $354,714,456 in 2008 and $102,326,258 in 2007)

 

 

434,700,315

 

 

263,380,570

 

Securities held to maturity (pledged: $189,255,930 in 2008 and $191,549,044 in 2007) (estimated fair value: $331,036,664 in 2008 and $359,725,008 in 2007)

 

 

333,105,325

 

 

361,860,847

 

 

 



 



 

Total investment securities

 

 

767,805,640

 

 

625,241,417

 

 

 



 



 

 

Loans held for sale

 

 

24,409,918

 

 

23,755,906

 

 

 



 



 

Loans held in portfolio, net of unearned discounts

 

 

1,193,983,072

 

 

1,187,123,984

 

Less allowance for loan losses

 

 

15,480,483

 

 

15,084,775

 

 

 



 



 

Loans, net

 

 

1,178,502,589

 

 

1,172,039,209

 

 

 



 



 

Customers’ liability under acceptances

 

 

327,653

 

 

200,942

 

Goodwill

 

 

22,900,912

 

 

22,900,912

 

Premises and equipment, net

 

 

10,868,661

 

 

11,178,883

 

Other real estate

 

 

2,251,834

 

 

1,669,993

 

Accrued interest receivable

 

 

9,877,401

 

 

7,081,304

 

Bank owned life insurance

 

 

29,603,613

 

 

29,041,115

 

Other assets

 

 

62,215,485

 

 

52,146,506

 

 

 



 



 

 

 

$

2,162,139,625

 

$

2,012,648,783

 

 

 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Demand deposits

 

$

492,928,765

 

$

535,350,808

 

Savings, NOW and money market deposits

 

 

486,515,818

 

 

467,446,622

 

Time deposits

 

 

459,038,839

 

 

524,188,749

 

 

 



 



 

Total deposits

 

 

1,438,483,422

 

 

1,526,986,179

 

 

 



 



 

Securities sold under agreements to repurchase - customers

 

 

64,757,726

 

 

60,053,947

 

Securities sold under agreements to repurchase - dealers

 

 

72,832,845

 

 

10,200,000

 

Federal funds purchased

 

 

70,000,000

 

 

65,000,000

 

Commercial paper

 

 

20,543,819

 

 

20,878,494

 

Short-term borrowings - FHLB

 

 

77,000,000

 

 

45,000,000

 

Short-term borrowings - other

 

 

20,713,415

 

 

4,285,198

 

Long-term borrowings - FHLB

 

 

160,000,000

 

 

40,000,000

 

Long-term borrowings - subordinated debentures

 

 

25,774,000

 

 

25,774,000

 

 

 



 



 

Total borrowings

 

 

511,621,805

 

 

271,191,639

 

 

 



 



 

Acceptances outstanding

 

 

327,653

 

 

200,942

 

Accrued expenses and other liabilities

 

 

91,981,800

 

 

93,199,746

 

 

 



 



 

Total liabilities

 

 

2,042,414,680

 

 

1,891,578,506

 

 

 



 



 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock, $1 par value. Authorized 50,000,000 shares; issued 21,813,131 and 21,278,531 shares, respectively

 

 

21,813,131

 

 

21,278,531

 

Capital surplus

 

 

174,632,887

 

 

168,868,895

 

Retained earnings

 

 

18,159,357

 

 

17,537,732

 

Accumulated other comprehensive loss, net of tax

 

 

(13,859,228

)

 

(10,811,811

)

 

 



 



 

 

 

 

200,746,147

 

 

196,873,347

 

Less

 

 

 

 

 

 

 

Common shares in treasury at cost, 3,824,161 and 3,459,302 shares, respectively

 

 

81,021,202

 

 

75,803,070

 

 

 



 



 

Total shareholders’ equity

 

 

119,724,945

 

 

121,070,277

 

 

 



 



 

 

 

$

2,162,139,625

 

$

2,012,648,783

 

 

 



 



 

See Notes to Consolidated Financial Statements.

3



STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

20,000,524

 

$

23,123,622

 

$

40,821,067

 

$

44,850,620

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

5,669,751

 

 

1,701,584

 

 

10,381,636

 

 

3,546,298

 

Held to maturity

 

 

4,033,645

 

 

4,698,726

 

 

8,258,967

 

 

9,567,851

 

Federal funds sold

 

 

1,615

 

 

367,338

 

 

1,615

 

 

1,002,646

 

Deposits with other banks

 

 

7,004

 

 

36,694

 

 

18,640

 

 

67,378

 

 

 



 



 



 



 

Total interest income

 

 

29,712,539

 

 

29,927,964

 

 

59,481,925

 

 

59,034,793

 

 

 



 



 



 



 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market

 

 

1,089,413

 

 

3,279,559

 

 

2,699,220

 

 

6,138,965

 

Time

 

 

4,033,361

 

 

6,581,415

 

 

9,371,592

 

 

13,128,913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements
to repurchase

 

 

 

 

 

 

 

 

 

 

 

 

 

- customers

 

 

442,140

 

 

804,625

 

 

1,088,187

 

 

1,879,619

 

- dealers

 

 

416,200

 

 

 

 

733,091

 

 

 

Federal funds purchased

 

 

217,346

 

 

23,369

 

 

578,968

 

 

35,748

 

Commercial paper

 

 

117,837

 

 

355,519

 

 

312,388

 

 

705,258

 

Short-term borrowings - FHLB

 

 

310,635

 

 

 

 

525,559

 

 

 

Short-term borrowings - other

 

 

6,246

 

 

15,694

 

 

20,388

 

 

27,562

 

Long-term borrowings - FHLB

 

 

1,084,831

 

 

136,522

 

 

1,799,146

 

 

361,023

 

Long-term borrowings -
subordinated debentures

 

 

523,437

 

 

523,437

 

 

1,046,875

 

 

1,046,875

 

 

 



 



 



 



 

Total interest expense

 

 

8,241,446

 

 

11,720,140

 

 

18,175,414

 

 

23,323,963

 

 

 



 



 



 



 

Net interest income

 

 

21,471,093

 

 

18,207,824

 

 

41,306,511

 

 

35,710,830

 

 

Provision for loan losses

 

 

2,200,000

 

 

1,078,332

 

 

4,150,000

 

 

2,328,332

 

 

 



 



 



 



 

Net interest income after provision
for loan losses

 

 

19,271,093

 

 

17,129,492

 

 

37,156,511

 

 

33,382,498

 

 

 



 



 



 



 

Total noninterest income

 

 

8,572,293

 

 

8,914,913

 

 

17,244,177

 

 

18,097,754

 

 

 



 



 



 



 

Total noninterest expenses

 

 

21,129,655

 

 

20,093,555

 

 

41,296,201

 

 

39,731,231

 

 

 



 



 



 



 

Income from continuing operations
before income taxes

 

 

6,713,731

 

 

5,950,850

 

 

13,104,487

 

 

11,749,021

 

 

Provision for income taxes

 

 

2,543,664

 

 

2,159,412

 

 

4,932,529

 

 

4,385,910

 

 

 



 



 



 



 

Income from continuing operations

 

 

4,170,067

 

 

3,791,438

 

 

8,171,958

 

 

7,363,111

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(Loss), net of income tax

 

 

 

 

71,252

 

 

 

 

(20,719

)

 

 



 



 



 



 

Net income

 

$

4,170,067

 

$

3,862,690

 

$

8,171,958

 

$

7,342,392

 

 

 



 



 



 



 

Average number of common
shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,988,970

 

 

18,439,318

 

 

17,950,095

 

 

18,524,871

 

Diluted

 

 

18,122,247

 

 

18,856,903

 

 

18,238,860

 

 

18,994,625

 

 

Income from continuing operations,
per average common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.21

 

$

0.46

 

$

0.40

 

Diluted

 

 

0.23

 

 

0.20

 

 

0.45

 

 

0.39

 

 

Net income, per average
common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

0.23

 

 

0.21

 

 

0.46

 

 

0.40

 

Diluted

 

 

0.23

 

 

0.20

 

 

0.45

 

 

0.39

 

 

Dividends per common share

 

 

0.19

 

 

0.19

 

 

0.38

 

 

0.38

 

See Notes to Consolidated Financial Statements.

4



STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss)/Income
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

4,170,067

 

$

3,862,690

 

$

8,171,958

 

$

7,342,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding losses arising during the period

 

 

(5,159,388

)

 

(1,233,699

)

 

(3,804,316

)

 

(897,251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses included in net income

 

 

277,899

 

 

1,098

 

 

277,899

 

 

1,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

9,126

 

 

13,544

 

 

18,252

 

 

27,089

 

Net actuarial losses

 

 

230,374

 

 

182,447

 

 

460,748

 

 

364,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

Comprehensive (loss)/income

 

$

(471,922

)

$

2,826,080

 

$

5,124,541

 

$

6,838,221

 

 

 



 



 



 



 

See Notes to Consolidated Financial Statements.

5



STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

 

 


 


 

Common Stock

 

 

 

 

 

 

 

Balance at January 1

 

$

21,278,531

 

$

21,177,084

 

Common shares issued under stock incentive plan

 

 

534,600

 

 

85,086

 

 

 



 



 

Balance at June 30

 

$

21,813,131

 

$

21,262,170

 

 

 



 



 

 

 

 

 

 

 

 

 

Capital Surplus

 

 

 

 

 

 

 

Balance at January 1

 

$

168,868,895

 

$

167,960,063

 

Common shares issued under stock incentive plan and related tax benefits

 

 

5,763,992

 

 

691,183

 

 

 



 



 

Balance at June 30

 

$

174,632,887

 

$

168,651,246

 

 

 



 



 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

Balance at January 1

 

$

17,537,732

 

$

16,693,987

 

Adjustment upon adoption of EITF 06-4 effective January 1, 2008

 

 

(726,008

)

 

 

 

 



 



 

Balance at January 1 as adjusted

 

 

16,811,724

 

 

16,693,987

 

Net income

 

 

8,171,958

 

 

7,342,392

 

Cash dividends paid - common shares

 

 

(6,824,325

)

 

(6,993,026

)

 

 



 



 

Balance at June 30

 

$

18,159,357

 

$

17,043,353

 

 

 



 



 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

Balance at January 1

 

$

(10,811,811

)

$

(11,842,908

)

 

 



 



 

Unrealized holding losses arising during the period:

 

 

 

 

 

 

 

Before tax

 

 

(6,938,628

)

 

(1,635,526

)

Tax effect

 

 

3,134,312

 

 

738,275

 

 

 



 



 

Net of tax

 

 

(3,804,316

)

 

(897,251

)

 

 



 



 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses included in net income:

 

 

 

 

 

 

 

Before tax

 

 

506,800

 

 

2,001

 

Tax effect

 

 

(228,901

)

 

(903

)

 

 



 



 

Net of tax

 

 

277,899

 

 

1,098

 

 

 



 



 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of:

 

 

 

 

 

 

 

Prior service cost, net of tax

 

 

18,252

 

 

27,089

 

Net actuarial losses, net of tax

 

 

460,748

 

 

364,893

 

 



 



 

Total

 

 

479,000

 

 

391,982

 

 

 



 



 

Balance at June 30

 

$

(13,859,228

)

$

(12,347,079

)

 

 



 



 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

Balance at January 1

 

$

(75,803,070

)

$

(61,725,455

)

Purchase of common shares

 

 

 

 

(10,515,732

)

Surrender of shares issued under stock incentive plan

 

 

(5,218,132

)

 

(455,955

)

 

 



 



 

Balance at June 30

 

$

(81,021,202

)

$

(72,697,142

)

 

 



 



 

 

 

 

 

 

 

 

 

Total Shareholders’ Equity

 

 

 

 

 

 

 

Balance at January 1

 

$

121,070,277

 

$

132,262,771

 

Net changes during the period

 

 

(1,345,332

)

 

(10,350,223

)

 

 



 



 

Balance at June 30

 

$

119,724,945

 

$

121,912,548

 

 

 



 



 

See Notes to Consolidated Financial Statements.

6



STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

 

 


 


 

Operating Activities

 

 

 

 

 

 

 

Net Income

 

$

8,171,958

 

$

7,342,392

 

Loss from discontinued operations included below in operating cash flows from discontinued operations

 

 

 

 

20,719

 

 

 



 



 

Income from continuing operations

 

 

8,171,958

 

 

7,363,111

 

Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

 

4,150,000

 

 

2,328,332

 

Depreciation and amortization of premises and equipment

 

 

1,301,681

 

 

1,297,663

 

Securities losses

 

 

506,800

 

 

2,001

 

Income from bank owned life insurance

 

 

(562,498

)

 

(538,681

)

Deferred income tax (benefit)/provision

 

 

(1,521,655

)

 

207,295

 

Proceeds from sale of loans

 

 

237,013,728

 

 

271,851,297

 

Gains on sales of loans, net

 

 

(5,200,984

)

 

(5,376,076

)

Originations of loans held for sale

 

 

(235,762,482

)

 

(280,335,148

)

Amortization of premiums on securities

 

 

192,186

 

 

231,135

 

Accretion of discounts on securities

 

 

(405,264

)

 

(180,222

)

(Increase) Decrease in accrued interest receivable

 

 

(2,796,097

)

 

950,958

 

Decrease in accrued expenses and other liabilities

 

 

(1,217,946

)

 

(12,071,201

)

Increase in other assets

 

 

(5,875,538

)

 

(5,338,491

)

Other, net

 

 

284,156

 

 

(17,854

)

 

 



 



 

Net cash used in operating activities

 

 

(1,721,955

)

 

(19,625,881

)

 

 



 



 

Investing Activities

 

 

 

 

 

 

 

Purchase of premises and equipment

 

 

(991,459

)

 

(1,484,112

)

Net decrease in interest-bearing deposits with other banks

 

 

99,398

 

 

83,725

 

Net (increase) decrease in Federal funds sold

 

 

(2,500,000

)

 

10,000,000

 

Net increase in loans held in portfolio

 

 

(9,087,748

)

 

(12,619,362

)

Decrease in other real estate

 

 

1,188,253

 

 

1,250,632

 

Proceeds from calls of securities - held to maturity

 

 

 

 

18,125,000

 

Proceeds from prepayments, redemptions or maturities of securities - held to maturity

 

 

28,740,877

 

 

41,344,375

 

Purchases of securities - held to maturity

 

 

 

 

(25,003,500

)

Proceeds from sales of securities - available for sale

 

 

 

 

2,750

 

Proceeds from prepayments, redemptions or maturities of securities - available for sale

 

 

164,817,687

 

 

31,703,892

 

Purchases of securities - available for sale

 

 

(342,331,989

)

 

(30,996,171

)

 

 



 



 

Net cash (used in) provided by investing activities

 

 

(160,064,981

)

 

32,407,229

 

 

 



 



 

Financing Activities

 

 

 

 

 

 

 

Net decrease in noninterest-bearing deposits

 

 

(42,422,043

)

 

(26,009,965

)

Net (decrease) increase in interest-bearing deposits

 

 

(46,080,714

)

 

37,807,205

 

Net increase in Federal funds purchased

 

 

5,000,000

 

 

 

Net increase in securities sold under agreement to repurchase

 

 

67,336,624

 

 

23,727,446

 

Net increase (decrease) in commercial paper and other short-term borrowings

 

 

48,093,542

 

 

(1,810,731

)

Increase (Decrease) in long-term borrowings

 

 

120,000,000

 

 

(10,000,000

)

Purchase of treasury stock

 

 

 

 

(10,515,732

)

Net proceeds from exercise of stock options

 

 

266,573

 

 

776,269

 

Cash dividends paid on common stock

 

 

(6,824,325

)

 

(6,993,026

)

 

 



 



 

Net cash provided by financing activities

 

 

145,369,657

 

 

6,981,466

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from discontinued operations

 

 

 

 

 

 

 

Operating cash flows

 

 

 

 

208,813

 

 

 



 



 

Total

 

 

 

 

208,813

 

 

 



 



 

Net (decrease) increase in cash and due from banks

 

 

(16,417,279

)

 

19,971,627

 

Cash and due from banks - beginning of period

 

 

66,412,612

 

 

50,058,593

 

 

 



 



 

Cash and due from banks - end of period

 

$

49,995,333

 

$

70,030,220

 

 

 



 



 

Supplemental disclosures:

 

 

 

 

 

 

 

Interest paid

 

$

18,985,459

 

$

23,508,403

 

Income taxes paid

 

 

7,968,572

 

 

949,459

 

 

 

 

 

 

 

 

 

Loans held for sale transferred to portfolio

 

 

2,530,727

 

 

 

Loans transferred to other real estate

 

 

1,770,094

 

 

1,065,578

 

See Notes to Consolidated Financial Statements.

7



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Significant Accounting Policies

Nature of Operations. Sterling Bancorp (the “parent company”) is a financial holding company, pursuant to an election made under the Gramm-Leach-Biley 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.

Basis of Presentation . The consolidated financial statements include the accounts of Sterling Bancorp and its subsidiaries, principally Sterling National Bank and its subsidiaries (the “bank”), after elimination of intercompany transactions. The consolidated financial statements as of and for the interim periods ended June 30, 2008 and 2007 are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of such periods have been made. Certain reclassifications have been made to the prior period’s consolidated financial statements to conform to the current presentation. The interim consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2007.

Use of Estimates . The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“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.

Fair Value Measurements. On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements (see Note 7 - Fair Value Measurements). The Company also adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS No. 159”) on January 1, 2008 but did not elect the fair value option for any of its financial assets or financial liabilities.

Endorsement Split-Dollar Life Insurance Arrangements. On January 1, 2008, the Company recognized a cumulative-effect adjustment to retained earnings totaling $726 thousand related to accounting for certain endorsement split-dollar life insurance arrangements in connection with the adoption of Emerging Issues Task Force (“EITF”) Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements (“EITF 06-4”) (see Note 4-Employee Benefit Plans).

Note 2. Loans

The major components of domestic loans held for sale and loans held in portfolio are as follows:

 

 

 

 

 

 

 

 

 

 

June 30,
2008

 

December 31,
2007

 

 

 


 


 

Loans held for sale, net of valuation reserve
($-0- at June 30, 2008 and $64,958
at December 31, 2007)

 

 

 

 

 

 

 

Real estate-residential mortgage

 

$

24,409,918

 

$

23,755,906

 

 

 



 



 

Loans held in portfolio

 

 

 

 

 

 

 

Commercial and industrial

 

$

534,778,988

 

$

539,969,407

 

Lease financing

 

 

299,412,183

 

 

287,563,583

 

Factored receivables

 

 

89,739,700

 

 

93,016,702

 

Real estate-residential mortgage

 

 

145,363,629

 

 

129,464,803

 

Real estate-commercial mortgage

 

 

95,155,430

 

 

99,093,560

 

Real estate-construction and land development

 

 

30,212,165

 

 

37,161,197

 

Installment

 

 

17,442,850

 

 

12,103,045

 

Loans to depository institutions

 

 

20,000,000

 

 

27,000,000

 

 

 



 



 

 

 

 

 

 

 

 

 

Loans held in portfolio, gross

 

 

1,232,104,945

 

 

1,225,372,297

 

Less unearned discounts

 

 

38,121,873

 

 

38,248,313

 

 

 



 



 

Loans held in portfolio, net of
unearned discounts

 

$

1,193,983,072

 

$

1,187,123,984

 

 

 



 



 

8



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 3. Investment Securities

The following information is provided in connection with the calls of available for sale securities:

Three Months Ended June 30,
  Six Months Ended June 30,
 
2008
  2007
  2008
  2007
 
                             
        Proceeds     $   $ 2,750   $   $ 2,750  
        Gross Gains                    
        Gross Losses           22         22  

The following information is provided in connection with the calls of held to maturity securities:

Three Months Ended June 30,
  Six Months Ended June 30,
 
2008
  2007
  2008
  2007
 
                             
        Proceeds     $   $ 18,125,000   $   $ 18,125,000  
        Gross Gains                    
        Gross Losses           1,979         1,979  

During the three and six months ended June 30, 2008, the Company incurred an other-than-temporary charge of $506,800 against a single-issuer, investment grade trust preferred security that was recorded in securities losses. The charge resulted from management's regular review of the valuation of the investment portfolio and reduced the carrying amount of the security to $493,200.

Note 4. Employee Benefit Plans

The following table sets forth components of net periodic benefit cost for the Company’s noncontributory defined benefit pension plan and unfunded supplemental retirement plan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 

 

Service cost

 

$

496,234

 

$

409,271

 

$

992,468

 

$

818,542

 

Interest cost

 

 

752,180

 

 

567,201

 

 

1,504,360

 

 

1,134,402

 

Expected return on plan assets

 

 

(647,686

)

 

(475,457

)

 

(1,295,372

)

 

(950,914

)

Amortization of prior service cost

 

 

16,643

 

 

24,689

 

 

33,286

 

 

49,378

 

Recognized actuarial loss

 

 

420,129

 

 

332,567

 

 

840,258

 

 

665,134

 

 

 



 



 



 



 

Net periodic benefit cost

 

$

1,037,500

 

$

858,271

 

$

2,075,000

 

$

1,176,542

 

 

 



 



 



 



 

The Company previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to contribute approximately $2,000,000 to the defined benefit pension plan in 2008. No contribution has been made as of June 30, 2008.

EITF 06-4 requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits are considered not to have effectively settled an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106, Employer’s Accounting for Postretirement Benefits Other Than Pensions. The Company adopted EITF 06-4 on January 1, 2008 as a change in accounting principle through a cumulative-effect adjustment to retained earnings totaling $726 thousand.

9



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 5. Noninterest income and expenses

The following tables set forth the significant components of noninterest income and noninterest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable management/
factoring commissions and other fees

 

$

3,799,429

 

$

3,820,957

 

$

7,364,133

 

$

7,488,576

 

Service charges on deposit accounts

 

 

1,331,671

 

 

1,424,778

 

 

2,683,269

 

 

2,906,390

 

Other customer related service charges and fees

 

 

736,858

 

 

743,002

 

 

1,411,984

 

 

1,433,110

 

Mortgage banking income

 

 

2,702,386

 

 

2,543,656

 

 

5,200,974

 

 

5,376,076

 

Trust fees

 

 

124,039

 

 

125,180

 

 

259,319

 

 

266,383

 

Bank owned life insurance income

 

 

293,251

 

 

286,130

 

 

562,498

 

 

538,681

 

Securities losses

 

 

(506,800

)

 

(2,001

)

 

(506,800

)

 

(2,001

)

Losses on sales of other real
estate owned, net

 

 

(75,690

)

 

(134,476

)

 

(303,358

)

 

(180,550

)

Other income

 

 

167,149

 

 

107,687

 

 

572,158

 

 

271,089

 

 

 



 



 



 



 

Total noninterest income

 

$

8,572,293

 

$

8,914,913

 

$

17,244,177

 

$

18,097,754

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

9,489,731

 

$

8,710,499

 

$

18,838,393

 

$

17,919,665

 

Employee benefits

 

 

2,252,592

 

 

2,475,051

 

 

5,088,314

 

 

4,752,960

 

 

 



 



 



 



 

Total personnel expense

 

 

11,742,323

 

 

11,185,550

 

 

23,926,707

 

 

22,672,625

 

Occupancy and equipment expenses, net

 

 

2,773,548

 

 

2,638,634

 

 

5,783,190

 

 

5,346,337

 

Advertising and marketing

 

 

1,352,757

 

 

1,121,979

 

 

1,987,711

 

 

2,085,880

 

Professional fees

 

 

1,874,893

 

 

1,950,928

 

 

3,238,596

 

 

3,290,703

 

Communications

 

 

405,708

 

 

453,841

 

 

861,584

 

 

970,111

 

Other expenses

 

 

2,980,426

 

 

2,742,623

 

 

5,498,413

 

 

5,365,575

 

 

 



 



 



 



 

Total noninterest income

 

$

21,129,655

 

$

20,093,555

 

$

41,296,201

 

$

39,731,231

 

 

 



 



 



 



 

Note 6. Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, established standards for the way that public business enterprises report and disclose selected information about operating segments in interim financial statements provided to stockholders.

The Company provides a broad range of financial products and services, including commercial loans, asset-based financing, factoring and accounts receivable management services, trade financing, equipment leasing, corporate and consumer deposit services, commercial and residential mortgage lending and brokerage, trust and estate administration and investment management services. The Company’s primary source of earnings is net interest income, which represents the difference between interest earned on interest-earning assets and the interest incurred on interest-bearing liabilities. The Company’s 2008 year-to-date average interest-earning assets were 60.0% loans (corporate lending was 67.9% and real estate lending was 27.0% of total loans, respectively) and 40.0% investment securities and money market investments. There are no industry concentrations exceeding 10% of loans, gross, in the corporate lending segment. Approximately 79% of loans are to borrowers located in the metropolitan New York area. In order to comply with the provisions of SFAS No. 131, the Company has determined that it has three reportable operating segments: corporate lending, real estate lending and company-wide treasury.

10



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following tables provide certain information regarding the Company’s operating segments (all amounts are from continuing operations except where designated as discontinued):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate
Lending

 

Real Estate
Lending

 

Company-wide
Treasury

 

Totals

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

9,298,442

 

$

4,762,893

 

 

7,201,327

 

$

21,262,662

 

Noninterest income

 

 

5,532,319

 

 

2,785,670

 

 

(136,635

)

 

8,181,354

 

Depreciation and amortization

 

 

213,130

 

 

91,014

 

 

793

 

 

304,937

 

Segment income before income taxes

 

 

6,355,505

 

 

3,797,624

 

 

6,500,029

 

 

16,653,158

 

Segment assets

 

 

822,241,586

 

 

402,638,290

 

 

906,626,274

 

 

2,131,506,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

6,591,874

 

$

5,394,533

 

 

5,967,782

 

$

17,954,189

 

Noninterest income

 

 

5,651,376

 

 

2,437,854

 

 

376,751

 

 

8,465,981

 

Depreciation and amortization

 

 

190,536

 

 

94,181

 

 

615

 

 

285,332

 

Segment income from continuing operations before income taxes

 

 

4,175,336

 

 

3,856,976

 

 

5,702,458

 

 

13,734,770

 

Segment income from discontinued operations before income taxes

 

 

129,732

 

 

 

 

 

 

129,732

 

Segment assets from continuing operations

 

 

744,023,452

 

 

399,817,522

 

 

715,189,386

 

 

1,859,030,360

 

Segment assets from discontinued operations

 

 

1,226,062

 

 

 

 

 

 

1,226,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

17,362,735

 

$

9,618,334

 

 

13,865,207

 

$

40,846,276

 

Noninterest income

 

 

10,778,995

 

 

5,141,528

 

 

423,698

 

 

16,344,221

 

Depreciation and amortization

 

 

405,524

 

 

181,102

 

 

1,586

 

 

588,212

 

Segment income before income taxes

 

 

14,535,190

 

 

6,506,873

 

 

12,854,566

 

 

33,896,629

 

Segment assets

 

 

822,241,586

 

 

402,638,290

 

 

906,626,274

 

 

2,131,506,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

12,817,524

 

$

10,368,705

 

 

12,021,830

 

$

35,208,059

 

Noninterest income

 

 

11,233,401

 

 

5,312,779

 

 

712,474

 

 

17,258,654

 

Depreciation and amortization

 

 

370,940

 

 

186,489

 

 

1,229

 

 

558,658

 

Segment income from continuing operations before income taxes

 

 

8,297,305

 

 

8,104,876

 

 

11,448,675

 

 

27,850,856

 

Segment income from discontinued operations before income taxes

 

 

(37,722

)

 

 

 

 

 

(37,722

)

Segment assets from continuing operations

 

 

744,023,452

 

 

399,817,522

 

 

715,189,386

 

 

1,859,030,360

 

Segment assets from discontinued operations

 

 

1,226,062

 

 

 

 

 

 

1,226,062

 

11



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table sets forth reconcilations of net interest income, noninterest income, income before taxes and total assets for the reportable operating segments to the Company’s consolidated totals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments

 

$

21,262,662

 

$

17,954,189

 

$

40,846,276

 

$

35,208,059

 

Other [1]

 

 

208,431

 

 

253,635

 

 

460,235

 

 

502,771

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net interest income

 

$

21,471,093

 

$

18,207,824

 

$

41,306,511

 

$

35,710,830

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments

 

$

8,181,354

 

$

8,465,981

 

$

16,344,221

 

$

17,258,654

 

Other [1]

 

 

390,939

 

 

448,932

 

 

899,956

 

 

839,100

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated noninterest income

 

$

8,572,293

 

$

8,914,913

 

$

17,244,177

 

$

18,097,754

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments

 

$

16,653,158

 

$

13,734,770

 

$

33,896,629

 

$

27,850,856

 

Other [1]

 

 

(9,939,427

)

 

(7,783,920

)

 

(20,792,142

)

 

(16,101,835

)

 

 



 



 



 



 

Consolidated income from continuing operations before income taxes

 

$

6,713,731

 

$

5,950,850

 

$

13,104,487

 

$

11,749,021

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

-  continuing operations

 

$

2,131,506,150

 

$

1,859,030,360

 

$

2,131,506,150

 

$

1,859,030,360

 

-  discontinued operations

 

 

 

 

1,226,062

 

 

 

 

1,226,062

 

Other [1]

 

 

30,633,475

 

 

26,721,680

 

 

30,633,475

 

 

26,721,680

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated assets

 

$

2,162,139,625

 

$

1,886,978,102

 

$

2,162,139,625

 

$

1,886,978,102

 

 

 



 



 



 



 

[1] Represents operations not considered to be a reportable segment and/or general operating expenses of the Company.

12



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 7. Fair Value Measurements

The Company adopted SFAS No. 157 as of January 1, 2008. In accordance with Financial Accounting Standards Board Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, the Company will delay application of SFAS No. 157 for certain non-financial assets and non-financial liabilities, until January 1, 2009. 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. The expanded disclosures include a requirement to disclose fair value measurements according to a hierarchy, segregating measurements using (1) quoted prices in active markets for identical assets or liabilities (2) significant other observable inputs and (3) significant unobservable inputs.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact and willing to transact.

SFAS No. 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS No. 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

 

 

 

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Examples of financial instruments generally included in this level are U.S. Treasury securities, equity and trust preferred securities that trade in active markets and listed derivative instruments.

 

 

 

 

Level 2 Inputs - Inputs other than quoted prices included in Level I that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. Examples of financial instruments generally included in this level are corporate debt, mortgage-backed certificates issued by U.S. government corporations and government sponsored enterprises, equity securities (including Federal Home Loan Bank and Federal Reserve Bank common stock) that trade in inactive (or less active) markets, and certain derivative instruments.

 

 

 

 

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own judgments about the assumptions that market participants would use in pricing the assets or liabilities. Examples of financial instruments generally included in this level are private equities, certain loans held for sale and other alternative investments.

13



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

In general, fair value of securities is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities available for sale and other investments. Securities classified as available for sale and other investments (included in “Other assets” on the consolidated balance sheet) are generally reported at fair value utilizing Level 1 and Level 2 inputs. Investments in fixed income securities, exclusive of preferred stock and mortgage-backed securities, are valued based on evaluations provided by Interactive Data Corporation (“IDC”), a leading global provider of market data information. IDC evaluations represent an exit price or their opinion as to what a buyer would pay for a security, typically in an institutional round lot position in a current sale. IDC seeks to utilize market data and observations in its evaluation service, and gives priority to observable benchmark yields and reported trades. IDC utilizes evaluated pricing techniques that vary by asset class and incorporate available market information; because many fixed income securities do not trade on a daily basis, IDC applies available information through processes such as benchmark curves, benchmarking of similar securities, sector groupings and matrix pricing. Model processes such as option-adjusted spread models are used to value securities that have prepayment features.

For mortgage-backed securities issued by U.S. government corporations and government sponsored enterprises management considers dealer indicative bids in the valuation process. Indicative bids are estimates of value and do not necessarily represent the price at which the dealer would be willing to transact. Such bids are compared to IDC evaluated prices for reasonableness as well as consistency with observable market conditions.

Publicly traded common and preferred stocks are valued by reference to the market closing price (last trade) on the measurement date. In the unlikely event that no trade occurred on the measurement date, reference would be made to an indicative bid or the last trade most proximate to the measurement date.

Interest rate floor contract. The value of the interest rate floor derivative contract is determined by reference to quotes from an independent broker.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1
Inputs

 

Level 2
Inputs

 

Level 3
Inputs

 

Total
Fair Value

 

 

 













Securities available for sale

 

$

4,470,603

 

$

430,229,712

 

$

 

$

434,700,315

 

Other investments

 

$

7,430,253

 

$

3,674,517

 

$

 

$

11,104,770

 

Interest rate floor contract

 

$

 

$

53,824

 

$

 

$

53,824

 

14



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Certain financial assets and financial liabilities, such as loans held for sale, impaired loans (if any) and other real estate owned, are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). There were no financial assets or financial liabilities measured at fair value on a non-recurring basis as of June 30, 2008.

In accordance with SFAS No.65, Accounting for Certain Mortgage Banking Activities, mortgage loans held for sale with a carrying amount of $1,037,494 were written down to their fair value of $774,693 during the three month period ended March 31, 2008 resulting in a loss of $262,801, which was included in earnings for the six month period ended June 30, 2008. No mortgage loans held for sale were written down to their fair value during the three month period ended June 30, 2008.

Reporting units measured at fair value in the first step of a goodwill impairment test and certain non-financial assets measured at fair value on a non-recurring basis (such as those measured at fair value in the second step of a goodwill impairment test) and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment, including other real estate owned, will be measured at fair value under SFAS No. 157 beginning January 1, 2009.

Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115. SFAS No. 159 permits the Company to choose to report eligible items at fair value in the financial statements and on an ongoing basis, after making an election to do so at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. The Company adopted SFAS No. 159 on January 1, 2008 but did not elect a fair value option for any of its financial assets or financial liabilities.

Note 8. New Accounting Standards

On January 1, 2008, the Company adopted the guidance contained in the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (“SAB No. 109”). SAB No. 109 supersedes SAB No. 105, Application of Accounting Principles to Loan Commitments, and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB No. 109 did not have a material impact on the Company’s financial statements.

SFAS No.161, Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, amends and expands the disclosure requirements of SFAS No. 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No.161 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company’s financial statements.

15



STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

SFAS No.162, The Hierarchy of Generally Accepted Accounting Principles, identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States “the GAAP hierarchy”. SFAS No. 162 will be effective 60 days following the approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The guidance provided by SFAS No. 162 is not expected to have a significant impact on the Company’s financial statements.s

FASB Staff Position (“FSP”) EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This FSP will be effective on January 1, 2009. All previously reported earnings per share data will be retrospectively adjusted to conform with the provisions of FSP EITF 03-6-1. FSP EITF 03-6-1 is not expected to have a significant impact on the Company’s computations of earnings per share.

16



 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following commentary presents management’s discussion and analysis of the financial condition and results of operations of Sterling Bancorp (the “parent company”), a financial holding company under the 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 supplemental data contained elsewhere in this quarterly report and the Company’s annual report on Form 10-K for the year ended December 31, 2007. Certain reclassifications have been made to prior years’ financial data to conform to current financial statement presentations.

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, trust and estate administration and investment management services. The Company has operations in the metropolitan New York area 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.

For the six months ended June 30, 2008, the bank’s average earning assets represented approximately 99.7% of the Company’s average earning assets. Loans represented 59.9% and investment securities represented 40.0% of the bank’s average earning assets for the first six months of 2008.

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.

17



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

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

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 pages 32 and 33. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown on pages 30 and 31.

Comparison of the Three Months Ended June 30, 2008 and 2007

The Company reported net income for the three months ended June 30, 2008 of $4.2 million, representing $0.23 per share calculated on a diluted basis, compared to $3.9 million, or $0.20 per share calculated on a diluted basis, for the second quarter of 2007. This increase reflects higher net interest income which was partially offset by increases in the provision for loan losses, noninterest expenses and the provision for income taxes and a decrease in noninterest income.

18



Net Interest Income

Net interest income, on a tax-equivalent basis, was $21.6 million for the second quarter of 2008 compared to $18.3 million for the 2007 period. Net interest income benefitted from higher average investment securities and loan balances, higher yields on investment securities and lower cost of funding. Partially offsetting those benefits was the impact of lower yield on loans and higher borrowed funds balances. The net interest margin, on a tax-equivalent basis, was 4.49% for the second quarter of 2008 compared to 4.35% for the 2007 period. The net interest margin was impacted by the lower interest rate environment in 2008, and the effect of higher average investment securities and loans outstanding.

Total interest income, on a tax-equivalent basis, decreased to $29.8 million for the second quarter of 2008, from $30.1 million in the prior year period. The tax-equivalent yield on interest-earning assets was 6.26% for the second quarter of 2008 compared to 7.24% for the 2007 period.

Interest earned on the loan portfolio decreased to $20.0 million for the second quarter of 2008 from $23.1 million in the prior year period. Average loan balances amounted to $1,153.1 million, an increase of $48.4 million from an average of $1,104.7 million in the prior year period. The increase in average loans, primarily due to the Company’s business development activities, accounted for a $1.0 million increase in interest earned on loans, which was more than offset by the impact of a decrease in yield. The decrease in the yield on the loan portfolio to 7.16% for the second quarter of 2008 from 8.66% for the 2007 period was primarily attributable to the lower interest rate environment in 2008 and the mix of average outstanding balances among the components of the loan portfolio.

Interest earned on the securities portfolio, on a tax-equivalent basis, increased to $9.8 million for the second quarter of 2008 from $6.5 million in the prior year period. Average outstandings increased to $781.2 million (40.3% of average earning assets) for the second quarter of 2008 from $554.6 million (32.8% of average earning assets) in the prior year period. The average life of the securities portfolio was approximately 7.2 years at June 30, 2008 compared to 4.4 years at June 30, 2007.

Interest earned on federal funds sold and deposits with other banks decreased by $0.4 million for the second quarter of 2008 from $0.4 million for the 2007 period, primarily due to lower funds employed in these assets. Average outstandings for these assets decreased to $2.8 million for the second quarter of 2008 from $30.8 million in the prior year period.

Total interest expense decreased by $3.5 million for the second quarter of 2008 from $11.7 million for the 2007 period, primarily due to the impact of lower rates paid for interest-bearing deposits and borrowings. Partially offsetting the benefit of the lower cost of funds was the impact of higher borrowed funds balances which was the result of th Company’s strategy to employ cost effective wholesale funding in lieu of higher priced certificates of deposit.

Interest expense on deposits decreased to $5.1 million for the second quarter of 2008 from $9.9 million for the 2007 period, primarily due to a decrease in the cost of those funds. The average rate paid on interest-bearing deposits was 2.10% which was 167 basis points lower than the prior year period. The decrease in average cost of deposits reflects the lower interest rate environment during 2008.

19



Interest expense on borrowings increased to $3.1 million for the second quarter of 2008 from $1.9 million for the 2007 period, primarily due to an increase in average balances which was partially offset by lower rates paid for these funds. Average borrowings increased to $452.0 million for the second quarter of 2008 from $144.4 million in the prior year period, reflecting greater reliance by the Company on wholesale funding. The average rate paid for borrowed funds was 2.77% which was 242 basis points lower than the prior year period. The decrease in the average cost of borrowings reflects the lower interest rate environment in 2008.

Provision for Loan Losses

Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” beginning on page 25), the provision for loan losses for the second quarter of 2008 was $2.2 million, compared to $1.1 million for the prior year period. Factors affecting the level of provision included the growth in the loan portfolio, changes in general economic conditions and the amount and trend of nonaccrual loans.

Noninterest Income

Noninterest income decreased to $8.6 million for the second quarter of 2008 from $8.9 million in the 2007 period. The decrease was principally due to an other-than-temporary impairment charge for a single-issuer, investment grade trust preferred security. The charge, which resulted from management’s regular review of the valuation of the investment portfolio, amounted to approximately $507,000 and reduced the carrying amount of the security to $493,000.

Noninterest Expenses

Noninterest expenses for the second quarter of 2008 increased $1.0 million when compared to the 2007 period. The increase was primarily due to initiatives to support the growth of the Company’s business, particularly in the area of marketing, and advertising along with higher personnel and occupancy costs.

Provision for Income Taxes

The provision for income taxes for the second quarter of 2008 increased to $2.5 million from $2.2 million for the second quarter of 2007. The increase was primarily due to the higher level of pre-tax income in the 2008 period.

Comparison of the Six Months Ended June 30, 2008 and 2007

The Company reported net income for the six months ended June 30, 2008 of $8.2 million, representing $0.45 per share calculated on a diluted basis, compared to $7.3 million, or $0.39 per share calculated on a diluted basis, for the first six months of 2007. This increase reflects higher net interest income which was partially offset by increases in the provision for loan losses, noninterest expenses and the provision for income taxes coupled with lower noninterest income.

20



Net Interest Income

Net interest income, on a tax-equivalent basis, was $41.6 million for the first six months of 2008 compared to $36.0 million for the 2007 period. Net interest income benefitted from higher average investment securities and loan balances, higher yields on investment securities and lower cost of funding. Partially offsetting those benefits was the impact of lower yield on loans and higher borrowed funds balances. The net interest margin, on a tax-equivalent basis, was 4.49% for the first six months of 2008 compared to 4.34% for the 2007 period. The net interest margin was impacted by the lower interest rate environment in 2008, and the effect of higher average investment securities, borrowed funds, loans outstanding and noninterest-bearing demand deposits and lower average interest-bearing deposits.

Total interest income, on a tax-equivalent basis, increased to $59.7 million for the first six months of 2008 from $59.3 million in the prior year period. The tax-equivalent yield on interest-earning assets was 6.50% for the first six months of 2008 compared to 7.24% for the 2007 period.

Interest earned on the loan portfolio decreased to $40.8 million for the first six months of 2008 from $44.9 million for the prior year period. Average loan balances amounted to $1,128.8 million, an increase of $49.7 million from an average of $1,079.1 million in the prior year period. The increase in average loans, primarily due to the Company’s business development activities, accounted for a $2.4 million increase in interest earned on loans, which was more than offset by the impact of a decrease in yield. The decrease in the yield on the loan portfolio to 7.55% for the fist six months of 2008 from 8.74% for the 2007 period was primarily attributable to the lower interest rate environment in 2008 and the mix of average outstanding balances among the components of the loan portfolio.

Interest earned on the securities portfolio, on a tax-equivalent basis, increased to $18.9 million for the first six months of 2008 from $13.4 million in the prior year period. Average outstandings increased to $750.9 million (39.9% of average earning assets) for the first six months of 2008 from $566.8 million (33.6% of average earning assets) in the prior year period. The average life of the securities portfolio was approximately 7.2 years at June 30, 2008 compared to 4.4 years at June 30, 2007.

Interest earned on federal funds sold and deposits with other banks decreased by $1.1 million for the first six months of 2008 from $1.1 million for the 2007 period, primarily due to lower funds employed in these assets. Average outstandings for these assets decreased to $3.1 million for the first six months of 2008 from $40.6 million in the prior year period.

Total interest expense decreased by $5.1 million for the first six months of 2008 from $23.3 million for the 2007 period, primarily due to the impact of lower rates paid for interest-bearing deposits and borrowings. Partially offsetting the benefit of the lower cost of funds was the impact of higher borrowed funds balances which was the result of the Company’s strategy to employ cost effective wholesale funding in lieu of higher priced certificates of deposit.

Interest expense on deposits decreased to $12.1 million for the first six months of 2008 from $19.3 million for the 2007 period, primarily due to a decrease in the cost of those funds. The average rate paid on interest-bearing deposits was 2.43% which was 133 basis points lower than the prior year period. The decrease in average cost of deposits reflects the lower interest rate environment during 2008.

21



Interest expense on borrowings increased to $6.1 million for the first six months of 2008 from $4.1 million for the 2007 period, primarily due to an increase in average balances which was partially offset by lower rates paid for these funds. Average borrowings increased to $391.3 million for the first six months of 2008 from $157.4 million in the prior year period, reflecting greater reliance by the Company on wholesale funding. The average rate paid for borrowed funds was 3.13% which was 208 basis points lower than the prior year period. The decrease in the average cost of borrowings reflects the lower interest rate environment in 2008.

Provision for Loan Losses

Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” beginning on page 25), the provision for loan losses for the first six months of 2008 was $4.2 million, compared to $2.3 million for the prior year period. Factors affecting the level of provision included the growth in the loan portfolio, changes in general economic conditions and the amount and trend of nonaccrual loans.

Noninterest Income

Noninterest income decreased to $17.2 million for the first six months of 2008 from $18.1 million in the 2007 period. The decrease was principally due to an other-than-temporary impairment charge, taken in the second quarter of 2008, for a single-issuer, investment grade trust preferred security. The charge, which resulted from management’s regular review of the investment portfolio, amounted to approximately $507,000 and reduced the carrying amount of the security to $493,000.

Noninterest Expenses

Noninterest expenses for the first six months of 2008 increased $1.6 million when compared to the 2007 period. The increase was primarily due to higher salaries, related to normal salary adjustments, employee benefits primarily related to increased healthcare insurance and pension costs and occupancy and equipment costs related to greater rent expense.

Provision for Income Taxes

The provision for income taxes for the first six months of 2008 increased to $4.9 million from $4.4 million in the 2007 period. The increase was primarily due to the higher level of pre-tax income in the 2008 period.

22



BALANCE SHEET ANALYSIS

Securities

At June 30, 2008, the Company’s portfolio of securities totaled $767.8 million, of which obligations of U.S. government corporations and government sponsored enterprises amounted to $714.2 million which is approximately 93.0% of total. 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 $2.3 million and $4.3 million, respectively. Securities classified as “available for sale” may be sold in the future, prior to maturity. These securities are carried at estimated fair 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. Given the generally high credit quality of the portfolio, management expects to realize all of its investment upon market recovery or the maturity of such instruments and thus believes that the impairment in value is primarily interest rate related and therefore temporary. “Available for sale” securities included gross unrealized gains of $0.9 million and gross unrealized losses of $9.4 million. Management has the intent and ability to hold available for sale and held to maturity securities with unrealized losses until there is a market recovery, which may be maturity.

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Life

 

Weighted Average Yield

 

June 30, 2008

 

AFS

 

HTM

 

AFS

 

HTM

 


 


 


 


 


 

Mortgage-backed securities

 

4.2 years

 

4.1 years

 

4.81

%

4.64

%

Agency notes (with original call dates ranging between 3 and 36 months)

 

12.9 years

 

9.2 years

 

5.57

%

6.20

%

Agency notes (noncallable)

 

 

0.1 years

 

 

4.50

%

Obligations of state and political subdivisions

 

6.4 years

 

 

6.11

% (1)

 

(1) tax equivalent

23



The following table presents information regarding securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2008

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 


 


 


 


 


 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

$

8,805,117

 

$

 

$

359,270

 

$

8,445,847

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

 

22,378,095

 

 

 

 

963,529

 

 

21,414,566

 

CMO’s (Government National Mortgage Association)

 

 

7,517,660

 

 

 

 

176,084

 

 

7,341,576

 

Federal National Mortgage Association

 

 

62,162,598

 

 

185,529

 

 

1,320,428

 

 

61,027,699

 

Federal Home Loan Mortgage Corporation

 

 

33,993,163

 

 

29,100

 

 

649,062

 

 

33,373,201

 

Government National Mortgage Association

 

 

3,099,248

 

 

144,099

 

 

2,781

 

 

3,240,566

 

 

 



 



 



 



 

Total mortgage-backed securities

 

 

137,955,881

 

 

358,728

 

 

3,471,154

 

 

134,843,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank

 

 

149,949,930

 

 

260,938

 

 

2,501,492

 

 

147,709,376

 

Federal Farm Credit Bank

 

 

99,914,182

 

 

136,398

 

 

1,250,580

 

 

98,800,000

 

 

 



 



 



 



 

Total obligations of U.S. Government corporations and government sponsored enterprises

 

 

387,819,993

 

 

756,064

 

 

7,223,226

 

 

381,352,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political institutions

 

 

23,080,718

 

 

122,566

 

 

266,047

 

 

22,937,237

 

Trust preferred securities

 

 

5,078,078

 

 

22,831

 

 

630,306

 

 

4,470,603

 

Corporate securities

 

 

13,642,645

 

 

 

 

1,263,510

 

 

12,379,135

 

Federal Reserve Bank stock

 

 

1,130,700

 

 

 

 

 

 

1,130,700

 

Federal Home Loan Bank stock

 

 

12,114,000

 

 

 

 

 

 

12,114,000

 

Other securities

 

 

304,442

 

 

11,367

 

 

 

 

315,809

 

 

 



 



 



 



 

Total

 

$

443,170,576

 

$

912,828

 

$

9,383,089

 

$

434,700,315

 

 

 



 



 



 



 

The following table presents information regarding securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2008

 

Carrying
Value

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 


 


 


 


 


 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

$

12,217,797

 

$

 

$

479,200

 

$

11,738,597

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

 

20,673,350

 

 

14,202

 

 

742,290

 

 

19,945,262

 

Federal National Mortgage Association

 

 

156,647,161

 

 

981,245

 

 

1,302,660

 

 

156,325,746

 

Federal Home Loan Mortgage Corporation

 

 

110,290,269

 

 

401,746

 

 

1,795,347

 

 

108,896,668

 

Government National Mortgage Association

 

 

8,027,180

 

 

304,234

 

 

 

 

8,331,414

 

 

 



 



 



 



 

Total mortgage-backed securities

 

 

307,855,757

 

 

1,701,427

 

 

4,319,497

 

 

305,237,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank agency notes

 

 

24,999,568

 

 

550,432

 

 

 

 

25,550,000

 

 

 



 



 



 



 

Total obligations of U.S. Government corporations and government sponsored enterprises

 

 

332,855,325

 

 

2,251,859

 

 

4,319,497

 

 

330,787,687

 

Debt securities issued by foreign governments

 

 

250,000

 

 

 

 

1,023

 

 

248,977

 

 

 



 



 



 



 

Total

 

$

333,105,325

 

$

2,251,859

 

$

4,320,520

 

$

331,036,664

 

 

 



 



 



 



 

24



The Company invests principally in obligations of U.S. government corporations and government sponsored enterprises and A- rated or better investments. The fair value of these investments fluctuates based on several factors, including credit quality and general interest rate changes. The Company determined that it has the ability to hold its investments until maturity and, given its current intention to do so, anticipates that it will realize the full carrying value of its investment.

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 originating loans in markets with which the Company is familiar.

The Company’s commercial and industrial loan and factored receivables portfolios represents approximately 51% of all loans. Loans in this category are typically made to small and medium-sized businesses and range between $25,000 and $10 million. The Company’s real estate mortgage portfolio, which represents approximately 22% of all loans, is comprised of mortgages secured by real property located principally in the states of New York, New Jersey, Virginia and North Carolina. The Company’s leasing portfolio, which consists of finance leases for various types of business equipment, represents approximately 21% of all loans. Sources of repayment are from the borrower’s operating profits, cash flows and liquidation of pledged collateral. Based on underwriting standards, loans may be secured in 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 or lease and may vary in value based on market conditions.

The following table sets forth the composition of the Company’s loans held for sale and loans held in portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

 

 

($ in thousands)

 

 

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

 

 


 


 


 


 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

534,569

 

 

43.88

%

$

509,747

 

 

43.63

%

Equipment lease financing

 

 

261,628

 

 

21.47

 

 

227,660

 

 

19.49

 

Factored receivables

 

 

89,612

 

 

7.36

 

 

86,877

 

 

7.44

 

Real estate - residential mortgage

 

 

169,774

 

 

13.93

 

 

177,819

 

 

15.22

 

Real estate- commercial mortgage

 

 

95,155

 

 

7.81

 

 

92,718

 

 

7.94

 

Real estate -construction and land development

 

 

30,212

 

 

2.48

 

 

38,147

 

 

3.26

 

Installment - individuals

 

 

17,443

 

 

1.43

 

 

10,333

 

 

0.88

 

Loans to depository institutions

 

 

20,000

 

 

1.64

 

 

25,000

 

 

2.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

Loans, net of unearned discounts

 

$

1,218,393

 

 

100.00

%

$

1,168,301

 

 

100.00

%

 

 



 



 



 



 

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.

25



The following table sets forth certain information with respect to the Company’s loan loss experience:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2008

 

2007

 

 

2008

 

2007

 

 

 


 


 

 

($ in thousands)

 

Average loans held in portfolio, net of unearned discounts, during period

 

$

1,121,929

 

$

1,052,427

 

 

$

1,101,506

 

$

1,033,359

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

15,162

 

$

15,806

 

 

$

15,085

 

$

16,288

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

262

 

 

251

 

 

 

1,096

 

 

690

 

Lease financing

 

 

1,408

 

 

756

 

 

 

2,159

 

 

1,757

 

Factored receivables

 

 

110

 

 

120

 

 

 

195

 

 

177

 

Real estate - residential mortgage

 

 

15

 

 

100

 

 

 

15

 

 

100

 

Installment

 

 

 

 

 

 

 

 

 

67

 

 

 







 







Total charge-offs

 

 

1,795

 

 

1,227

 

 

 

3,465

 

 

2,791

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

108

 

 

22

 

 

 

111

 

 

29

 

Lease financing

 

 

64

 

 

143

 

 

 

161

 

 

184

 

Factored receivables

 

 

10

 

 

10

 

 

 

15

 

 

14

 

Real estate - residential mortgage

 

 

 

 

 

 

 

 

 

 

Installment

 

 

2

 

 

62

 

 

 

69

 

 

83

 

 

 







 







Total recoveries

 

 

184

 

 

237

 

 

 

356

 

 

310

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtract:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs

 

 

1,611

 

 

990

 

 

 

3,109

 

 

2,481

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,200

 

 

1,078

 

 

 

4,150

 

 

2,328

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less losses on transfers to other real estate owned

 

 

271

 

 

312

 

 

 

646

 

 

553

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

15,480

 

$

15,582

 

 

$

15,480

 

$

15,582