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     

September 30, 2010

 

 

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

 

12-2565216




(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(17 CFR § 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o 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 October 31, 2010 there were 26,840,763 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

 

28

 

 

 

 

Recent Legislation Impacting The Financial Services Industry

 

29

 

 

 

 

Income Statement Analysis

 

30

 

 

 

 

Balance Sheet Analysis

 

34

 

 

 

 

Capital

 

41

 

 

 

 

Recently Issued Accounting Pronouncements

 

42

 

 

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

42

 

 

 

 

Average Balance Sheets

 

43

 

 

 

 

Rate/Volume Analysis

 

45

 

 

 

 

Regulatory Capital and Ratios

 

47

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset/Liability Management

 

48

 

 

 

 

Interest Rate Sensitivity

 

52

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

53

 

 

 

 

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

54

 

 

 

 

 

 

 

 

SIGNATURES

 

55

 

 

 

 

 

 

 

 

EXHIBITS INDEX

 

 

 

 

 

 

 

 

 

 

 

Exhibit 11

 

Statement Re: Computation of Per Share Earnings

 

57

 

 

 

 

 

 

 

 

 

Exhibit 31.1

 

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

 

58

 

 

 

 

 

 

 

 

 

Exhibit 31.2

 

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

 

59

 

 

 

 

 

 

 

 

 

Exhibit 32.1

 

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

 

60

 

 

 

 

 

 

 

 

 

Exhibit 32.2

 

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

 

61

 

2


STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 


 


 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

37,193

 

$

24,911

 

Interest-bearing deposits with other banks

 

 

19,300

 

 

36,958

 

 

 

 

 

 

 

 

 

Securities available for sale (at estimated fair value; pledged: $124,405 in 2010 and $150,034 in 2009)

 

 

421,984

 

 

346,526

 

Securities held to maturity (pledged: $161,416 in 2010 and $278,598 in 2009) (estimated fair value: $355,462 in 2010 and $396,150 in 2009)

 

 

342,477

 

 

390,539

 

 

 



 



 

Total investment securities

 

 

764,461

 

 

737,065

 

 

 



 



 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

34,046

 

 

33,889

 

 

 



 



 

Loans held in portfolio, net of unearned discounts

 

 

1,296,166

 

 

1,195,415

 

Less allowance for loan losses

 

 

18,152

 

 

19,872

 

 

 



 



 

Loans, net

 

 

1,278,014

 

 

1,175,543

 

 

 



 



 

 

 

 

 

 

 

 

 

Federal Reserve and Federal Home Loan Bank stock, at cost

 

 

9,381

 

 

8,482

 

Customers’ liability under acceptances

 

 

313

 

 

27

 

Goodwill

 

 

22,901

 

 

22,901

 

Premises and equipment, net

 

 

15,725

 

 

9,658

 

Other real estate

 

 

744

 

 

1,385

 

Accrued interest receivable

 

 

9,216

 

 

9,001

 

Cash surrender value of life insurance policies

 

 

50,877

 

 

49,009

 

Other assets

 

 

61,306

 

 

56,780

 

 

 



 



 

 

 

$

2,303,477

 

$

2,165,609

 

 

 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

539,633

 

$

546,337

 

Savings, NOW and money market deposits

 

 

555,262

 

 

592,015

 

Time deposits

 

 

550,718

 

 

442,315

 

 

 



 



 

Total deposits

 

 

1,645,613

 

 

1,580,667

 

 

 



 



 

Securities sold under agreements to repurchase - customers

 

 

21,084

 

 

21,048

 

Securities sold under agreements to repurchase - dealers

 

 

5,000

 

 

 

Federal funds purchased

 

 

60,000

 

 

41,000

 

Commercial paper

 

 

15,245

 

 

17,297

 

Short-term borrowings - FRB

 

 

 

 

50,000

 

Short-term borrowings - other

 

 

2,221

 

 

2,509

 

Long-term borrowings - FHLB

 

 

144,528

 

 

130,000

 

Long-term borrowings - subordinated debentures

 

 

25,774

 

 

25,774

 

 

 



 



 

Total borrowings

 

 

273,852

 

 

287,628

 

 

 



 



 

Acceptances outstanding

 

 

313

 

 

27

 

Accrued interest payable

 

 

1,639

 

 

1,291

 

Due to factored clients

 

 

92,854

 

 

82,401

 

Accrued expenses and other liabilities

 

 

64,828

 

 

51,645

 

 

 



 



 

Total liabilities

 

 

2,079,099

 

 

2,003,659

 

 

 



 



 

Shareholders’ equity

 

 

 

 

 

 

 

Preferred stock, Series A, $5 par value; $1,000 liquidation value. Authorized 644,389 shares; issued 42,000 shares, respectively

 

 

40,472

 

 

40,113

 

Common stock, $1 par value. Authorized 50,000,000 shares; issued 31,138,545 and 22,226,425 shares, respectively

 

 

31,139

 

 

22,227

 

Warrants to purchase common stock

 

 

2,615

 

 

2,615

 

Capital surplus

 

 

236,368

 

 

178,734

 

Retained earnings

 

 

10,306

 

 

15,828

 

Accumulated other comprehensive loss

 

 

(9,966

)

 

(12,399

)

Common shares in treasury at cost, 4,297,782 and 4,119,934 shares, respectively

 

 

(86,556

)

 

(85,168

)

 

 



 



 

Total shareholders’ equity

 

 

224,378

 

 

161,950

 

 

 



 



 

 

 

$

2,303,477

 

$

2,165,609

 

 

 



 



 

See Notes to Consolidated Financial Statements.

3


STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

18,275

 

$

18,024

 

$

51,907

 

$

53,840

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

2,985

 

 

4,123

 

 

9,315

 

 

13,751

 

Held to maturity

 

 

3,320

 

 

4,357

 

 

11,622

 

 

11,485

 

FRB and FHLB stock

 

 

112

 

 

191

 

 

296

 

 

387

 

Deposits with other banks

 

 

10

 

 

27

 

 

53

 

 

46

 

 

 



 



 



 



 

Total interest income

 

 

24,702

 

 

26,722

 

 

73,193

 

 

79,509

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market

 

 

746

 

 

872

 

 

2,536

 

 

2,940

 

Time

 

 

1,545

 

 

1,933

 

 

4,857

 

 

6,148

 

Securities sold under agreements to repurchase - customers

 

 

49

 

 

79

 

 

175

 

 

282

 

Securities sold under agreements to repurchase - dealers

 

 

23

 

 

 

 

28

 

 

 

Federal funds purchased

 

 

44

 

 

2

 

 

67

 

 

43

 

Commercial paper

 

 

12

 

 

15

 

 

34

 

 

55

 

Short-term borrowings - FHLB

 

 

 

 

 

 

 

 

11

 

Short-term borrowings - FRB

 

 

 

 

131

 

 

9

 

 

356

 

Short-term borrowings - other

 

 

14

 

 

 

 

18

 

 

1

 

Long-term borrowings - FHLB

 

 

871

 

 

1,197

 

 

2,591

 

 

3,453

 

Long-term borrowings - subordinated debentures

 

 

523

 

 

523

 

 

1,570

 

 

1,570

 

 

 



 



 



 



 

Total interest expense

 

 

3,827

 

 

4,752

 

 

11,885

 

 

14,859

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

20,875

 

 

21,970

 

 

61,308

 

 

64,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

14,000

 

 

6,950

 

 

25,500

 

 

19,950

 

 

 



 



 



 



 

Net interest income after provision for loan losses

 

 

6,875

 

 

15,020

 

 

35,808

 

 

44,700

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest income

 

 

13,058

 

 

11,735

 

 

35,521

 

 

33,337

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expenses

 

 

23,753

 

 

23,177

 

 

67,228

 

 

67,372

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income before income taxes

 

 

(3,820

)

 

3,578

 

 

4,101

 

 

10,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Benefit) Provision for income taxes

 

 

(1,146

)

 

1,180

 

 

1,230

 

 

3,880

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

(2,674

)

 

2,398

 

 

2,871

 

 

6,785

 

Dividends on preferred shares and accretion

 

 

654

 

 

646

 

 

1,934

 

 

2,125

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income available to common shareholders

 

$

(3,328

)

$

1,752

 

$

937

 

$

4,660

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

26,840,763

 

 

18,106,491

 

 

23,787,733

 

 

18,104,057

 

Diluted

 

 

26,840,763

 

 

18,120,412

 

 

23,791,160

 

 

18,192,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders, per average common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

$

0.10

 

$

0.04

 

$

0.26

 

Diluted

 

 

(0.12

)

 

0.10

 

 

0.04

 

 

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

 

0.09

 

 

0.09

 

 

0.27

 

 

0.47

 

See Notes to Consolidated Financial Statements.

4


STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,674

)

$

2,398

 

$

2,871

 

$

6,785

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on available for sale securities and other investments arising during the year

 

 

921

 

 

2,664

 

 

3,081

 

 

4,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for gains included in net income

 

 

(638

)

 

(666

)

 

(1,866

)

 

(2,818

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

9

 

 

9

 

 

27

 

 

27

 

Net actuarial losses

 

 

354

 

 

532

 

 

1,191

 

 

1,404

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

646

 

 

2,539

 

 

2,433

 

 

2,965

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(2,028

)

$

4,937

 

$

5,304

 

$

9,750

 

 

 



 



 



 



 

See Notes to Consolidated Financial Statements.

5


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

 

 

 

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Preferred Stock

 

 

 

 

 

 

 

Balance at January 1,

 

$

40,113

 

$

39,440

 

Discount accretion

 

 

359

 

 

550

 

 

 



 



 

Balance at September 30,

 

$

40,472

 

$

39,990

 

 

 



 



 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Balance at January 1,

 

$

22,227

 

$

22,203

 

Common shares issued

 

 

8,625

 

 

24

 

Restricted shares issued

 

 

84

 

 

 

Common shares issued under stock incentive plan

 

 

203

 

 

 

 

 



 



 

Balance at September 30,

 

$

31,139

 

$

22,227

 

 

 



 



 

 

 

 

 

 

 

 

 

Warrants to Purchase Common Stock

 

 

 

 

 

 

 

Balance at January 1, and September 30,

 

$

2,615

 

$

2,615

 

 

 



 



 

 

 

 

 

 

 

 

 

Capital Surplus

 

 

 

 

 

 

 

Balance at January 1,

 

$

178,734

 

$

178,417

 

Common shares issued

 

 

56,256

 

 

 

Restricted shares issued

 

 

(84

)

 

 

Common shares issued under stock incentive plan and related tax benefits

 

 

1,274

 

 

185

 

Stock option compensation expense

 

 

188

 

 

99

 

 

 



 



 

Balance at September 30,

 

$

236,368

 

$

178,701

 

 

 



 



 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

Balance at January 1,

 

$

15,828

 

$

19,088

 

Net income

 

 

2,871

 

 

6,785

 

Cash dividends paid - preferred shares

 

 

(1,575

)

 

(1,353

)

Cash dividends paid - common shares

 

 

(6,459

)

 

(8,503

)

Discount accretion on series A preferred stock

 

 

(359

)

 

(550

)

 

 



 



 

Balance at September 30,

 

$

10,306

 

$

15,467

 

 

 



 



 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

Balance at January 1,

 

$

(12,399

)

$

(16,259

)

Other comprehensive income, net of tax

 

 

2,433

 

 

2,965

 

 

 



 



 

Balance at September 30,

 

$

(9,966

)

$

(13,294

)

 

 



 



 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

Balance at January 1,

 

$

(85,168

)

$

(85,024

)

Surrender of shares issued under stock incentive plan

 

 

(1,388

)

 

(144

)

 

 



 



 

Balance at September 30,

 

$

(86,556

)

$

(85,168

)

 

 



 



 

 

 

 

 

 

 

 

 

Total Shareholders’ Equity

 

 

 

 

 

 

 

Balance at January 1,

 

$

161,950

 

$

160,480

 

Net changes during the period

 

 

62,428

 

 

58

 

 

 



 



 

Balance at September 30,

 

$

224,378

 

$

160,538

 

 

 



 



 

See Notes to Consolidated Financial Statements.

6


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

 

 

 

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Operating Activities

 

 

 

 

 

 

 

Net Income

 

$

2,871

 

$

6,785

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

 

25,500

 

 

19,950

 

Depreciation and amortization of premises and equipment

 

 

1,171

 

 

1,679

 

Securities gains

 

 

(3,419

)

 

(5,160

)

Income from life insurance policies, net

 

 

(757

)

 

(1,094

)

Deferred income tax provision (benefit)

 

 

361

 

 

(2,076

)

Proceeds from sale of loans

 

 

330,050

 

 

492,589

 

Gains on sales of loans, net

 

 

(5,645

)

 

(7,146

)

Originations of loans held for sale

 

 

(325,826

)

 

(487,822

)

Amortization of premiums on securities

 

 

4,793

 

 

1,386

 

Accretion of discounts on securities

 

 

(446

)

 

(1,035

)

(Increase) Decrease in accrued interest receivable

 

 

(215

)

 

776

 

Increase (Decrease) in accrued interest payable

 

 

348

 

 

(509

)

Increase in due to factored clients

 

 

10,453

 

 

39,111

 

Increase in accrued expenses and other liabilities

 

 

5,057

 

 

(14,742

)

Increase in other assets

 

 

(8,517

)

 

(1,872

)

Loss (Gain) on other real estate owned

 

 

17

 

 

(39

)

 

 



 



 

Net cash provided by operating activities

 

 

35,796

 

 

40,781

 

 

 



 



 

Investing Activities

 

 

 

 

 

 

 

Purchase of premises and equipment

 

 

(7,238

)

 

(641

)

Net decrease (increase) in interest-bearing deposits with other banks

 

 

17,658

 

 

(7,171

)

Net (increase) decrease in loans held in portfolio

 

 

(80,961

)

 

21,254

 

Net increase in short-term factored receivables

 

 

(46,279

)

 

(42,870

)

Decrease in other real estate

 

 

1,157

 

 

1,284

 

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

 

 

48,597

 

 

60,172

 

Purchases of securities - held to maturity

 

 

(122,185

)

 

(183,996

)

Proceeds from calls of securities - held to maturity

 

 

132,380

 

 

30,000

 

Proceeds from calls/sales of securities - available for sale

 

 

400,719

 

 

366,526

 

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

 

 

170,701

 

 

95,607

 

Purchases of securities - available for sale

 

 

(645,514

)

 

(285,516

)

Proceeds from redemptions or maturities of securities - FHLB & FRB stock

 

 

961

 

 

3,375

 

Purchases of securities - FHLB & FRB stock

 

 

(1,860

)

 

(503

)

Cash paid in acquisition

 

 

 

 

(21,333

)

 

 



 



 

Net cash (used in) provided by investing activities

 

 

(131,864

)

 

36,188

 

 

 



 



 

Financing Activities

 

 

 

 

 

 

 

Net (decrease) increase in noninterest-bearing demand deposits

 

 

(6,704

)

 

5,819

 

Net decrease in savings, NOW and money market deposits

 

 

(36,753

)

 

(18,376

)

Net increase in time deposits

 

 

108,403

 

 

63,258

 

Net increase (decrease) in Federal funds purchased

 

 

19,000

 

 

(105,325

)

Net increase in securities sold under agreements to repurchase

 

 

5,036

 

 

11,294

 

Net decrease in commercial paper and other short-term borrowings

 

 

(52,340

)

 

(34,590

)

Increase in long-term borrowings

 

 

14,528

 

 

10,000

 

Proceeds from exercise of stock options

 

 

333

 

 

163

 

Proceeds from issuance of common stock

 

 

64,881

 

 

 

Cash dividends paid on preferred stock

 

 

(1,575

)

 

(1,353

)

Cash dividends paid on common stock

 

 

(6,459

)

 

(8,503

)

 

 



 



 

Net cash provided by (used in) financing activities

 

 

108,350

 

 

(77,613

)

 

 



 



 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and due from banks

 

 

12,282

 

 

(644

)

Cash and due from banks - beginning of period

 

 

24,911

 

 

31,832

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash and due from banks - end of period

 

$

37,193

 

$

31,188

 

 

 



 



 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Interest paid

 

$

11,537

 

$

15,368

 

Income taxes paid

 

 

3,716

 

 

5,746

 

Loans held for sale transferred to portfolio

 

 

1,264

 

 

 

Loans transferred to other real estate

 

 

533

 

 

1,538

 

Due to brokers on purchases of securities - AFS

 

 

 

 

5,000

 

Due to brokers on purchases of securities - HTM

 

 

10,300

 

 

613

 

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-Bliley Act of 1999. Throughout the notes, the term the “Company” refers to Sterling Bancorp and its subsidiaries and the term the “bank” refers to Sterling National Bank 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 the New York metropolitan area and conducts business throughout the United States.

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) which, effective for all interim and annual periods ending after September 15, 2009, principally consist of the Financial Accounting Standards Board Accounting Standards Codification (“FASB Codification”). FASB Codification Topic 105: Generally Accepted Accounting Principles establishes the FASB codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the FASB Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the FASB Codification is superseded and deemed non-authoritative.

Basis of Presentation. The consolidated financial statements include the accounts of Sterling Bancorp and its subsidiaries, principally the bank, after elimination of intercompany transactions. The consolidated financial statements as of and for the interim periods ended September 30, 2010 and 2009 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 year’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, 2009 (the “2009 Form 10-K”).

Use of Estimates. 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. Actual results could differ from management’s current estimates as a result of changing conditions and future events. The current economic environment has increased the degree of uncertainty inherent in these significant estimates. Several accounting estimates are particularly critical and are susceptible to significant near-term change, including the allowance for loan losses and asset impairment judgments, such as other-than-temporary declines in the value of securities and the accounting for income taxes. The judgments used by management in applying these critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect outstanding principal may result in increased loan losses. The Company evaluates subsequent events through the date that the financial statements are issued. Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current presentation. Throughout the notes, dollar amounts presented in tables are in thousands, except per share data.

8


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

Note 2. Investment Securities

The following tables present information regarding securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

 

Fair
Value

 


 


 


 


 

 


 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

$

1,109

 

$

31

 

$

 

$

1,140

 

CMO’s (Government National Mortgage Association)

 

 

12,535

 

 

311

 

 

 

 

12,846

 

Federal National Mortgage Association

 

 

7,075

 

 

339

 

 

 

 

7,414

 

Federal Home Loan Mortgage Corporation

 

 

238

 

 

26

 

 

1

 

 

263

 

Government National Mortgage Association

 

 

2,220

 

 

272

 

 

 

 

2,492

 

 

 



 



 



 



 

Total mortgage-backed securities

 

 

23,177

 

 

979

 

 

1

 

 

24,155

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

45,087

 

 

191

 

 

 

 

45,278

 

Federal Home Loan Bank

 

 

15,000

 

 

114

 

 

 

 

15,114

 

Federal Home Loan Mortgage Corporation

 

 

89,962

 

 

449

 

 

 

 

90,411

 

Federal Farm Credit Bank

 

 

10,000

 

 

50

 

 

 

 

10,050

 

 

 



 



 



 



 

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

 

 

183,226

 

 

1,783

 

 

1

 

 

185,008

 

 

Obligations of state and political institutions-New York Bank Qualified

 

 

22,658

 

 

1,415

 

 

 

 

24,073

 

Single-issuer, trust preferred securities

 

 

3,878

 

 

76

 

 

26

 

 

3,928

 

Corporate debt securities

 

 

203,646

 

 

470

 

 

210

 

 

203,906

 

Other securities

 

 

5,044

 

 

25

 

 

 

 

5,069

 

 

 



 



 



 



 

Total

 

$

418,452

 

$

3,769

 

$

237

 

$

421,984

 

 

 



 



 



 



 

9


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

$

2,882

 

$

 

$

5

 

$

2,877

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

 

5,563

 

 

171

 

 

 

 

5,734

 

CMO’s (Government National Mortgage Association)

 

 

9,181

 

 

 

 

133

 

 

9,048

 

Federal National Mortgage Association

 

 

21,055

 

 

868

 

 

71

 

 

21,852

 

Federal Home Loan Mortgage Corporation

 

 

10,321

 

 

299

 

 

 

 

10,620

 

Government National Mortgage Association

 

 

6,807

 

 

351

 

 

1

 

 

7,157

 

 

 



 



 



 



 

Total mortgage-backed securities

 

 

55,809

 

 

1,689

 

 

210

 

 

57,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

20,291

 

 

 

 

835

 

 

19,456

 

Federal Home Loan Bank

 

 

83,983

 

 

6

 

 

1,039

 

 

82,950

 

Federal Home Loan Mortgage Corporation

 

 

4,995

 

 

 

 

96

 

 

4,899

 

Federal Farm Credit Bank

 

 

24,999

 

 

 

 

669

 

 

24,330

 

 

 



 



 



 



 

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

 

 

190,077

 

 

1,695

 

 

2,849

 

 

188,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political institutions-New York Bank Qualified

 

 

22,820

 

 

1,061

 

 

17

 

 

23,864

 

Single-issuer, trust preferred securities

 

 

4,878

 

 

 

 

395

 

 

4,483

 

Corporate debt securities

 

 

127,900

 

 

1,382

 

 

82

 

 

129,200

 

Other securities

 

 

44

 

 

12

 

 

 

 

56

 

 

 



 



 



 



 

Total

 

$

345,719

 

$

4,150

 

$

3,343

 

$

346,526

 

 

 



 



 



 



 

10


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

The following tables present information regarding securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

Carrying
Value

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 


 


 


 


 


 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

$

8,846

 

$

448

 

$

 

$

9,294

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

 

13,558

 

 

667

 

 

 

 

14,225

 

Federal National Mortgage Association

 

 

77,289

 

 

4,324

 

 

 

 

81,613

 

Federal Home Loan Mortgage Corporation

 

 

45,564

 

 

2,291

 

 

 

 

47,855

 

Government National Mortgage Association

 

 

5,191

 

 

590

 

 

 

 

5,781

 

 

 



 



 



 



 

Total mortgage-backed securities

 

 

150,448

 

 

8,320

 

 

 

 

158,768

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

34,989

 

 

36

 

 

19

 

 

35,006

 

Federal Home Loan Bank

 

 

19,990

 

 

7

 

 

6

 

 

19,991

 

Federal Home Loan Mortgage Corporation

 

 

14,995

 

 

50

 

 

 

 

15,045

 

Federal Farm Credit Bank

 

 

5,081

 

 

2

 

 

 

 

5,083

 

 

 



 



 



 



 

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

 

 

225,503

 

 

8,415

 

 

25

 

 

233,893

 

 

Obligations of state and political institutions-New York Bank Qualified

 

 

116,974

 

 

4,679

 

 

84

 

 

121,569

 

 

 



 



 



 



 

Total

 

$

342,477

 

$

13,094

 

$

109

 

 

355,462

 

 

 



 



 



 



 

11


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

Carrying
Value

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 


 


 


 


 


 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

$

10,863

 

$

339

 

$

 

$

11,202

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

 

16,964

 

 

573

 

 

 

 

17,537

 

Federal National Mortgage Association

 

 

103,821

 

 

4,329

 

 

2

 

 

108,148

 

Federal Home Loan Mortgage Corporation

 

 

61,095

 

 

2,005

 

 

 

 

63,100

 

Government National Mortgage Association

 

 

5,989

 

 

501

 

 

 

 

6,490

 

 

 



 



 



 



 

Total mortgage-backed securities

 

 

198,732

 

 

7,747

 

 

2

 

 

206,477

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

97,147

 

 

14

 

 

1,742

 

 

95,419

 

Federal Home Loan Bank

 

 

19,849

 

 

 

 

474

 

 

19,375

 

Federal Home Loan Mortgage Corporation

 

 

10,000

 

 

 

 

218

 

 

9,782

 

Federal Farm Credit Bank

 

 

5,088

 

 

 

 

94

 

 

4,994

 

 

 



 



 



 



 

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

 

 

330,816

 

 

7,761

 

 

2,530

 

 

336,047

 

 

Obligations of state and political institutions-New York Bank Qualified

 

 

59,473

 

 

737

 

 

357

 

 

59,853

 

Debt securities issued by foreign governments

 

 

250

 

 

 

 

 

 

250

 

 

 



 



 



 



 

Total

 

$

390,539

 

$

8,498

 

$

2,887

 

$

396,150

 

 

 



 



 



 



 

12


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

The following tables present information regarding securities available for sale with temporary unrealized losses for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 


 


 


 

September 30, 2010

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 


 


 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Mortgage Corporation

 

$

29

 

$

1

 

$

 

$

 

$

29

 

$

1

 

 

 



 



 



 



 



 



 

Total mortgage-backed securities

 

 

29

 

 

1

 

 

 

 

 

 

29

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single-issuer, trust preferred securities

 

 

 

 

 

 

2,110

 

 

26

 

 

2,110

 

 

26

 

Corporate debt securities

 

 

58,625

 

 

210

 

 

 

 

 

 

58,625

 

 

210

 

 

 



 



 



 



 



 



 

Total

 

$

58,654

 

$

211

 

$

2,110

 

$

26

 

$

60,764

 

$

237

 

 

 



 



 



 



 



 



 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

$

2,877

 

$

5

 

$

 

$

 

$

2,877

 

$

5

 

CMO’s (Government National Mortgage Association)

 

 

4,926

 

 

91

 

 

4,122

 

 

42

 

 

9,048

 

 

133

 

Federal National Mortgage Association

 

 

2,057

 

 

71

 

 

 

 

 

 

2,057

 

 

71

 

Government National Mortgage Association

 

 

 

 

 

 

123

 

 

1

 

 

123

 

 

1

 

 

 



 



 



 



 



 



 

Total mortgage-backed securities

 

 

9,860

 

 

167

 

 

4,245

 

 

43

 

 

14,105

 

 

210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

19,456

 

 

835

 

 

 

 

 

 

19,456

 

 

835

 

Federal Home Loan Bank

 

 

68,231

 

 

751

 

 

9,713

 

 

288

 

 

77,944

 

 

1,039

 

Federal Home Loan Mortgage Corporation

 

 

4,899

 

 

96

 

 

 

 

 

 

4,899

 

 

96

 

Federal Farm Credit Bank

 

 

24,330

 

 

669

 

 

 

 

 

 

24,330

 

 

669

 

 

 



 



 



 



 



 



 

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

 

 

126,776

 

 

2,518

 

 

13,958

 

 

331

 

 

140,734

 

 

2,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political institutions-New York Bank Qualified

 

 

872

 

 

17

 

 

 

 

 

 

872

 

 

17

 

Single-issuer, trust preferred securities

 

 

 

 

 

 

3,540

 

 

395

 

 

3,540

 

 

395

 

Corporate debt securities

 

 

23,575

 

 

82

 

 

 

 

 

 

23,575

 

 

82

 

 

 



 



 



 



 



 



 

Total

 

$

151,223

 

$

2,617

 

$

17,498

 

$

726

 

$

168,721

 

$

3,343

 

 

 



 



 



 



 



 



 

13


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

The following tables present information regarding securities held to maturity with temporary unrealized losses for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 


 


 


 

September 30, 2010

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 


 


 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

$

14,977

 

$

19

 

$

 

$

 

$

14,977

 

$

19

 

Federal Home Loan Bank

 

 

4,986

 

 

6

 

 

 

 

 

 

4,986

 

 

6

 

 

 


















 

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

 

 

19,963

 

 

25

 

 

 

 

 

 

19,963

 

 

25

 

Obligations of state and political institutions-New York Bank Qualified

 

 

5,064

 

 

84

 

 

 

 

 

 

5,064

 

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 



 

Total

 

$

25,027

 

$

109

 

$

 

$

 

$

25,027

 

$

109

 

 

 



 



 



 



 



 



 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

$

 

$

 

$

459

 

$

2

 

$

459

 

$

2

 

 

 



 



 



 



 



 



 

Total mortgage-backed securities

 

 

 

 

 

 

459

 

 

2

 

 

459

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

86,027

 

 

1,742

 

 

 

 

 

 

86,027

 

 

1,742

 

Federal Home Loan Bank

 

 

19,375

 

 

474

 

 

 

 

 

 

19,375

 

 

474

 

Federal Home Loan Mortgage Corporation

 

 

9,782

 

 

218

 

 

 

 

 

 

9,782

 

 

218

 

Federal Farm Credit Bank

 

 

4,994

 

 

94

 

 

 

 

 

 

4,994

 

 

94

 

 

 



 



 



 



 



 



 

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

 

 

120,178

 

 

2,528

 

 

459

 

 

2

 

 

120,637

 

 

2,530

 

Obligations of state and political institutions-New York Bank Qualified

 

 

16,478

 

 

357

 

 

 

 

 

 

16,478

 

 

357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 



 

Total

 

$

136,656

 

$

2,885

 

$

459

 

$

2

 

$

137,115

 

$

2,887

 

 

 



 



 



 



 



 



 

14


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

The Company invests principally in obligations of U.S. government corporations and government sponsored enterprises and other investment-grade securities. The fair value of these investments fluctuates based on several factors, including credit quality and general interest rate changes. The Company determined that it is not more likely than not that the Company would be required to sell before anticipated recovery.

At September 30, 2010, approximately $120.7 million, representing approximately 15.8%, of the Company’s held to maturity and available for sale securities are comprised of securities issued by financial service companies/banks including single-issuer trust preferred securities (6 issuers), corporate debt (20 issuers) and equity securities (8 issuers). These investments may pose a higher risk of future impairment charges as a result of a possible further deterioration of the U.S. economy. Some of the single-issuer trust preferred securities held by the Company are financial institutions that are participating in the U.S. Treasury’s TARP Capital Purchase Program (“CPP”). It is possible that these financial institutions may elect to defer future interest payments on such securities based upon recommendations by the U.S. Government and the banking regulators or management decisions driven by potential liquidity needs. Such elections could result in future impairment charges if collection of deferred and accrued interest (or principal upon maturity) is deemed unlikely by management. The Company would be required to recognize impairment charges on these securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators or unanticipated changes in the competitive environment could have a negative effect on the Company’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods.

At September 30, 2010, the Company held 6 securities positions of single-issuer, trust preferred securities and 42 security positions of corporate debt securities issued by financial institutions, in the available for sale portfolio, all of which are paying in accordance with their terms and have no deferrals of interest or other deferrals. In addition, management analyzes the performance of the issuers on a periodic basis, including a review of each issuer’s most recent bank regulatory report to assess credit risk and the probability of impairment of the contractual cash flows of the applicable securities. Based upon management’s third quarter review, all of the issuers have maintained performance levels adequate to support the contractual cash flows of the securities.

15


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

The following table presents information regarding single-issuer, trust preferred securities at September 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuer

 

TARP
Recipient

 

Credit
Rating

 

Amortized
Cost

 

Fair
Value

 

Unrealized
Gain/(Loss)

 


 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sterling Bancorp Trust I, 8.375%, due 3/31/2032

 

 

Yes

 

 

NA

 

$

980

 

$

1,036

 

$

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NPB Capital Trust II, 7.85%, due 9/30/2032

 

 

Yes

 

 

NA

 

 

126

 

 

121

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VNB Capital Trust I, 7.75%, due 12/15/2031

 

 

Yes

*

 

BBB-

 

 

22

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HSBC Finance, 6.875%, due 1/30/2033,

 

 

No

 

 

A

 

 

740

 

 

760

 

 

20

 

owned by HSBC Group, PLC

 

 

No

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Citigroup Capital VII, 7.125%, due 7/31/2031

 

 

Yes

*

 

BB-

 

 

1,508

 

 

1,488

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fleet Capital Trust VIII, 7.20%, due 3/15/2032,

 

 

No

 

 

BB

 

 

502

 

 

501

 

 

(1

)

owned by Bank of America Corporation

 

 

Yes

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,878

 

$

3,928

 

$

50

 

 

 

 

 

 

 

 

 



 



 



 

* TARP obligation was repaid prior to September 30, 2010.

16


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

The following tables present information regarding securities available for sale and securities held to maturity at September 30, 2010, based on contractual maturity. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

Available for sale

 

Amortized
Cost

 

Fair
Value

 


 


 


 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

$

1,109

 

$

1,140

 

CMO’s (Government National Mortgage Association)

 

 

12,535

 

 

12,846

 

Federal National Mortgage Association

 

 

7,075

 

 

7,414

 

Federal Home Loan Mortgage Corporation

 

 

238

 

 

263

 

Government National Mortgage Association

 

 

2,220

 

 

2,492

 

 

 



 



 

Total mortgage-backed securities

 

 

23,177

 

 

24,155

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

 

 

 

 

 

Due after 1 year but within 5 years

 

 

29,988

 

 

30,117

 

Due after 5 years but within 10 years

 

 

15,099

 

 

15,161

 

Federal Home Loan Bank

 

 

 

 

 

 

 

Due after 5 years but within 10 years

 

 

15,000

 

 

15,114

 

Federal Home Loan Mortgage Corporation

 

 

 

 

 

 

 

Due after 1 year but within 5 years

 

 

29,982

 

 

30,130

 

Due after 5 years but within 10 years

 

 

59,980

 

 

60,281

 

Federal Farm Credit Bank

 

 

 

 

 

 

 

Due after 10 years

 

 

10,000

 

 

10,050

 

 

 



 



 

 

 

 

 

 

 

 

 

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

 

 

183,226

 

 

185,008

 

 

 



 



 

 

 

 

 

 

 

 

 

Obligations of state and political institutions - New York Bank Qualified

 

 

 

 

 

 

 

Due within 1 year

 

 

1,469

 

 

1,491

 

Due after 1 year but within 5 years

 

 

11,679

 

 

12,424

 

Due after 5 years but within 10 years

 

 

4,928

 

 

5,377

 

Due after 10 years

 

 

4,582

 

 

4,781

 

 

 



 



 

 

 

 

 

 

 

 

 

Total obligations of state and political institutions-New York Bank Qualified

 

 

22,658

 

 

24,073

 

 

 



 



 

 

 

 

 

 

 

 

 

Single-issuer, trust preferred securities

 

 

 

 

 

 

 

Due after 10 years

 

 

3,878

 

 

3,928

 

 

 



 



 

Corporate debt securities

 

 

 

 

 

 

 

Due within 6 months

 

 

85,933

 

 

86,020

 

Due after 6 months but within 1 year

 

 

84,235

 

 

84,464

 

Due after 1 year but within 2 years

 

 

24,478

 

 

24,478

 

Due after 2 years but within 5 years

 

 

9,000

 

 

8,944

 

 

 



 



 

Total corporate debt securities

 

 

203,646

 

 

203,906

 

 

 



 



 

 

 

 

 

 

 

 

 

Other securities

 

 

5,044

 

 

5,069

 

 

 



 



 

Total

 

$

418,452

 

$

421,984

 

 

 



 



 

17


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

Carrying
Value

 

Fair
Value

 






 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

 

 

 

 

 

 

$

8,846

 

$

9,294

 

CMO’s (Federal Home Loan Mortgage Corporation)

 

 

 

 

 

 

 

 

13,558

 

 

14,225

 

Federal National Mortgage Association

 

 

 

 

 

 

 

 

77,289

 

 

81,613

 

Federal Home Loan Mortgage Corporation

 

 

 

 

 

 

 

 

45,564

 

 

47,855

 

Government National Mortgage Association

 

 

 

 

 

 

 

 

5,191

 

 

5,781

 

 

 

 

 

 

 

 

 



 



 

Total mortgage-backed securities

 

 

 

 

 

 

 

 

150,448

 

 

158,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after 1 year but within 5 years

 

 

 

 

 

 

 

 

19,995

 

 

19,992

 

Due after 5 years but within 10 years

 

 

 

 

 

 

 

 

9,994

 

 

10,000

 

Due after 10 years

 

 

 

 

 

 

 

 

5,000

 

 

5,014

 

Federal Home Loan Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after 1 year but within 5 years

 

 

 

 

 

 

 

 

14,990

 

 

14,988

 

Due after 5 years but within 10 years

 

 

 

 

 

 

 

 

5,000

 

 

5,003

 

Federal Home Loan Mortgage Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after 1 year but within 5 years

 

 

 

 

 

 

 

 

14,995

 

 

15,045

 

Federal Farm Credit Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after 5 years but within 10 years

 

 

 

 

 

 

 

 

5,081

 

 

5,083

 

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

225,503

 

 

233,893

 

 

 

 

 

 

 

 

 



 



 

Obligations of state and political institutions - New York Bank Qualified

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after 5 years but within 10 years

 

 

 

 

 

 

 

 

886

 

 

947

 

Due after 10 years

 

 

 

 

 

 

 

 

116,088

 

 

120,622

 

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total obligations of state and political institutions-New York Bank Qualified

 

 

 

 

 

 

 

 

116,974

 

 

121,569

 

 

 

 

 

 

 

 

 



 



 

Total

 

 

 

 

 

 

 

$

342,477

 

$

355,462

 

 

 

 

 

 

 

 

 



 



 

Information regarding sales and/or calls of available for sale securities is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

Proceeds

 

$

133,919

 

$

143,682

 

$

400,719

 

$

396,526

 

Gross gains

 

 

846

 

 

1,221

 

 

3,339

 

 

5,160

 

Gross losses

 

 

3

 

 

 

 

288

 

 

 

Information regarding calls of held to maturity securities is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

Proceeds

 

$

65,500

 

$

 

$

132,380

 

$

 

Gross gains

 

 

328

 

 

 

 

368

 

 

 

Gross losses

 

 

 

 

 

 

 

 

 

18


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

Note 3. Loans

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

 

 


 


 

Loans held for sale, net of valuation reserve ($42 at September 30, 2010 and $7 at December 31, 2009)

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential mortgage

 

 

 

 

 

 

 

$

34,046

 

$

33,889

 

 

 

 

 

 

 

 

 



 



 

Loans held in portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

$

698,647

 

$

587,038

 

Lease financing receivables

 

 

 

 

 

 

 

 

168,816

 

 

219,198

 

Factored receivables

 

 

 

 

 

 

 

 

186,435

 

 

140,265

 

Real estate - residential mortgage

 

 

 

 

 

 

 

 

129,072

 

 

124,681

 

Real estate - commercial mortgage

 

 

 

 

 

 

 

 

96,022

 

 

92,614

 

Real estate - construction and land development

 

 

 

 

 

 

 

 

25,092

 

 

24,277

 

Loans to individuals

 

 

 

 

 

 

 

 

12,401

 

 

12,984

 

Loans to depository institutions

 

 

 

 

 

 

 

 

 

 

20,000

 

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held in portfolio, gross

 

 

 

 

 

 

 

 

1,316,485

 

 

1,221,057

 

Less unearned discounts

 

 

 

 

 

 

 

 

20,319

 

 

25,642

 

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held in portfolio, net of unearned discounts

 

 

 

 

 

 

 

$

1,296,166

 

$

1,195,415

 

 

 

 

 

 

 

 

 



 



 

Note 4. Noninterest income and expenses

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable management/ factoring commissions and other fees

 

$

6,454

 

$

4,997

 

$

17,527

 

$

13,098

 

Service charges on deposit accounts

 

 

1,606

 

 

1,553

 

 

4,627

 

 

4,296

 

Trade finance income

 

 

657

 

 

569

 

 

1,650

 

 

1,411

 

Other customer related fees

 

 

250

 

 

248

 

 

576

 

 

725

 

Mortgage banking income

 

 

2,458

 

 

2,505

 

 

5,631

 

 

7,152

 

Trust fees

 

 

81

 

 

110

 

 

247

 

 

366

 

Income from life insurance policies

 

 

290

 

 

280

 

 

850

 

 

828

 

Securities gains

 

 

1,171

 

 

1,221

 

 

3,419

 

 

5,160

 

(Loss) Gain on other real estate owned

 

 

(11

)

 

19

 

 

17

 

 

39

 

Other income

 

 

102

 

 

233

 

 

977

 

 

262

 

 

 



 



 



 



 

Total noninterest income

 

$

13,058

 

$

11,735

 

$

35,521

 

$

33,337

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

10,689

 

$

9,960

 

$

30,809

 

$

29,934

 

Employee benefits

 

 

2,834

 

 

3,206

 

 

9,537

 

 

9,151

 

 

 



 



 



 



 

Total personnel expense

 

 

13,523

 

 

13,166

 

 

40,346

 

 

39,085

 

Occupancy and equipment expenses, net

 

 

3,375

 

 

2,806

 

 

8,967

 

 

8,381

 

Advertising and marketing

 

 

816

 

 

916

 

 

2,500

 

 

2,596

 

Professional fees

 

 

1,540

 

 

1,847

 

 

3,913

 

 

4,870

 

Communications

 

 

392

 

 

429

 

 

1,302

 

 

1,295

 

Deposit insurance

 

 

1,033

 

 

1,195

 

 

2,557

 

 

3,059

 

Other expenses

 

 

3,074

 

 

2,818

 

 

7,643

 

 

8,086

 

 

 



 



 



 



 

Total noninterest expenses

 

$

23,753

 

$

23,177

 

$

67,228

 

$

67,372

 

 

 



 



 



 



 

19



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

Note 5. Common Stock and Stock Incentive Plan

On March 19, 2010, the Company completed an underwritten public offering of 8,625,000 common shares at an offering price of $8.00 per share, which resulted in net proceeds of $64.9 million after underwriting discounts and expenses.

On March 25, 2010, the Board of Directors, upon recommendation by the Compensation and Corporate Governance Committees, granted a total of 40,000 shares of restricted stock to the 8 non-management directors (“director restricted shares”) and 43,728 restricted shares to the Chairman, President and 5 Executive Vice Presidents (“officer restricted shares”). The director restricted shares will vest 25% annually over four years beginning on the first anniversary of the grant date. The officer restricted shares vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date and are also limited by the 2008 agreement between the Company and the U.S. Treasury. The director restricted shares and the officer restricted shares were issued at $9.23 per share, the closing price on the date of the grant. The agreements for both the director restricted shares and the officer restricted shares have additional provisions regarding transferability and accelerated vesting of the shares and the continuation of performing substantial services for the Company.

Note 6. Employee Benefit Plans

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

Service Cost

 

$

494

 

$

620

 

$

1,632

 

$

1,626

 

Interest Cost

 

 

914

 

 

959

 

 

2,811

 

 

2,467

 

Expected return on plan assets

 

 

(721

)

 

(760

)

 

(2,299

)

 

(1,906

)

Amortization of prior service cost

 

 

17

 

 

17

 

 

50

 

 

50

 

Recognized actuarial loss

 

 

650

 

 

974

 

 

2,181

 

 

2,570

 

 

 



 



 



 



 

Net periodic benefit cost

 

$

1,354

 

$

1,810

 

$

4,375

 

$

4,807

 

 

 



 



 



 



 

The Company contributed $1.7 million to the defined benefit pension plan in the 2010 third quarter.

Note 7. Income Taxes

The Internal Revenue Service (“IRS”) has completed its examination of the Company’s federal tax returns for the years 2002 through 2004 and has issued a report disallowing certain bad debt deductions arising from the worthlessness of loans made to customers. The Company, assisted by outside counsel, has prepared a written protest which vigorously challenges all of the IRS findings and the Company will exercise its right to a conference with the Appeals Office of the IRS to discuss the issues and arguments raised in the Company’s protest. The Company and its outside counsel believe that the bad debt deductions were proper and that the position of the IRS is unsupportable as a matter of fact and law.

Note 8. Segment Reporting

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 2010 year-to-date average interest-earning assets were 60.4% loans (corporate lending was 72.6% and real estate lending was 23.4% of total loans, respectively) and 39.2% investment securities and money market investments. There are no industry concentrations exceeding 10% of loans, gross, in the corporate lending segment. Approximately 67% of loans are to borrowers located in the metropolitan New York area. In order to comply with the segment reporting guidance under U.S. GAAP, the Company has determined that it has three reportable operating segments: corporate lending, real estate lending and company-wide treasury.

20


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

The following tables provide certain information regarding the Company’s operating segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate
Lending

 

Real Estate
Lending

 

Company-wide
Treasury

 

Totals

 

 

 


 


 


 


 

 

 

(in thousands)

 

Three Months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

10,630

 

$

4,824

 

$

5,199

 

$

20,653

 

Noninterest income

 

 

8,971

 

 

2,486

 

 

1,473

 

 

12,930

 

Depreciation and amortization

 

 

178

 

 

28

 

 

 

 

206

 

Segment income before income taxes

 

 

7,849

 

 

3,284

 

 

6,281

 

 

17,414

 

Segment assets

 

 

935,960

 

 

397,953

 

 

919,790

 

 

2,253,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

9,815

 

$

4,966

 

$

6,984

 

$

21,765

 

Noninterest income

 

 

7,059

 

 

2,536

 

 

1,609

 

 

11,204

 

Depreciation and amortization

 

 

158

 

 

29

 

 

1

 

 

188

 

Segment income before income taxes

 

 

8,273

 

 

4,745

 

 

8,374

 

 

21,392

 

Segment assets

 

 

822,485

 

 

383,694

 

 

897,699

 

 

2,103,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

29,480

 

$

13,364

 

$

17,805

 

$

60,649

 

Noninterest income

 

 

24,625

 

 

5,936

 

 

4,583

 

 

35,144

 

Depreciation and amortization

 

 

532

 

 

86

 

 

2

 

 

620

 

Segment income before income taxes

 

 

21,891

 

 

10,303

 

 

21,260

 

 

53,454

 

Segment assets

 

 

935,960

 

 

397,953

 

 

919,790

 

 

2,253,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

28,493

 

$

14,884

 

$

20,701

 

$

64,078

 

Noninterest income

 

 

18,740

 

 

7,274

 

 

5,984

 

 

31,998

 

Depreciation and amortization

 

 

512

 

 

106

 

 

2

 

 

620

 

Segment income before income taxes

 

 

20,381

 

 

13,511

 

 

25,876

 

 

59,768

 

Segment assets

 

 

822,485

 

 

383,694

 

 

897,699

 

 

2,103,878

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

 

 

(in thousands)

 

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments

 

$

20,653

 

$

21,765

 

$

60,649

 

$

64,078

 

Other [1]

 

 

222

 

 

205

 

 

659

 

 

572

 

 

 



 



 



 



 

Consolidated net interest income

 

$

20,875

 

$

21,970

 

$

61,308

 

$

64,650

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments

 

$

12,930

 

$

11,204

 

$

35,144

 

$

31,998

 

Other [1]

 

 

128

 

 

531

 

 

377

 

 

1,339

 

 

 



 



 



 



 

Consolidated noninterest income

 

$

13,058

 

$

11,735

 

$

35,521

 

$

33,337

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments

 

$

17,414

 

$

21,392

 

$

53,454

 

$

59,768

 

Other [1]

 

 

(21,234

)

 

(17,814

)

 

(49,353

)

 

(49,103

)

 

 



 



 



 



 

Consolidated income before income taxes

 

$

(3,820

)

$

3,578

 

$

4,101

 

$

10,665

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for reportable operating segments

 

$

2,253,703

 

$

2,103,878

 

$

2,253,703

 

$

2,103,878

 

Other [1]

 

 

49,774

 

 

34,119

 

 

49,774

 

 

34,119

 

 

 



 



 



 



 

Consolidated assets

 

$

2,303,477

 

$

2,137,997

 

$

2,303,477

 

$

2,137,997

 

 

 



 



 



 



 

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

21


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

Note 9. Other Comprehensive Income

Information related to the components of other comprehensive income included in accumulated other comprehensive loss is as follows with related tax effects:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on securities, arising during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Before tax

 

$

1,686

 

$

4,878

 

$

5,640

 

$

7,968

 

Tax effect

 

 

(765

)

 

(2,214

)

 

(2,559

)

 

(3,616

)

 

 



 



 



 



 

Net of tax

 

 

921

 

 

2,664

 

 

3,081

 

 

4,352

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for securities gains included in net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Before tax

 

 

(1,168

)

 

(1,221

)

 

(3,416

)

 

(5,160

)

Tax effect

 

 

530

 

 

555

 

 

1,550

 

 

2,342

 

 

 



 



 



 



 

Net of tax

 

 

(638

)

 

(666

)

 

(1,866

)

 

(2,818

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of prior service cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Before tax

 

 

17

 

 

17

 

 

50

 

 

50

 

Tax effect

 

 

(8

)

 

(8

)

 

(23

)

 

(23

)

 

 



 



 



 



 

Net of tax

 

 

9

 

 

9

 

 

27

 

 

27

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of net actuarial losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Before tax

 

 

650

 

 

974

 

 

2,181

 

 

2,570

 

Tax effect

 

 

(296

)

 

(442

)

 

(990

)

 

(1,166

)

 

 



 



 



 



 

Net of tax

 

 

354

 

 

532

 

 

1,191

 

 

1,404

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

$

646

 

$

2,539

 

$

2,433

 

$

2,965

 

 

 



 



 



 



 

22


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

Note 10. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that 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.

FASB Codification Topic 820: Fair Value Measurements and Disclosures establishes a 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 values 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 1 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 that trade in 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.

In general, fair value of securities is based upon quoted market prices, where available (level 1 inputs). If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based parameters (level 2 inputs). Fair value of loans held for sale is based upon internally developed models 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 (level 3 inputs). Any such valuation adjustments are applied consistently over time. The Company 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. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth in the 2009 Form 10-K.

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 that 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. Interactive Data Corporation (“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. Substantially all securities available for sale evaluated in this manner are deemed to be Level 2 valuations. For mortgage-backed 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 conditions. All mortgage-backed securities are deemed to be valued based on Level 2 inputs.

23


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

Publicly traded common and preferred stocks are valued by reference to the market closing price (last trade) on the measurement date (Level 1 inputs). 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 (Level 2 inputs).

The following table summarizes financial assets measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no financial liabilities measured at fair value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

 

Level 1
Inputs

 

Level 2
Inputs

 

Level 3
Inputs

 

Total
Fair Value

 


 

 


 


 


 


 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises
Mortgage-backed securities

 

$

 

$

24,155

 

$

 

$

24,155

 

    Agency Notes

 

 

 

 

160,853

 

 

 

 

160,853

 

 

 



 



 



 



 

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

 

 

 

 

185,008

 

 

 

 

185,008

 

Obligations of state and political institutions - New York Bank Qualified

 

 

 

 

24,073

 

 

 

 

24,073

 

Single-issuer, trust preferred securities

 

 

3,928

 

 

 

 

 

 

3,928

 

Corporate debt securities

 

 

 

 

203,906

 

 

 

 

203,906

 

Equity and other securities

 

 

5,069

 

 

 

 

 

 

5,069

 

 

 



 



 



 



 

Total

 

$

8,997

 

$

412,987

 

$

 

$

421,984

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

10,987

 

$

6,108

 

$

 

$

17,095

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and government sponsored enterprises
Mortgage-backed securities

 

$

 

$

57,288

 

$

 

$

57,288

 

    Agency Notes

 

 

 

 

131,635

 

 

 

 

131,635

 

 

 



 



 



 



 

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

 

 

 

 

188,923

 

 

 

 

188,923

 

Obligations of state and political institutions - New York Bank Qualified

 

 

 

 

23,864

 

 

 

 

23,864

 

Single-issuer, trust preferred securities

 

 

4,483

 

 

 

 

 

 

4,483

 

Corporate debt securities

 

 

 

 

129,200

 

 

 

 

129,200

 

Equity and other securities

 

 

56

 

 

 

 

 

 

56

 

 

 



 



 



 



 

Total

 

$

4,539

 

$

341,987

 

$

 

$

346,526

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

9,128

 

$

5,484

 

$

 

$

14,612

 

 

 



 



 



 



 

24


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

Certain financial assets and financial liabilities, including impaired loans, 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). The following table summarizes the period end fair value of financial assets, based on significant unobservable (Level 3) inputs, measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 


 


 

Impaired loans

 

$

5,961

 

$

2,329

 

Other real estate owned

 

 

744

 

 

1,385

 

Impaired loans. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on either recent real estate appraisals or, for loans with modification agreements in place, discounted cash flow analyses. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other real estate owned. Nonrecurring adjustments to certain residential real estate properties classified as other real estate owned (“OREO”) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Other real estate owned (comprised of foreclosed assets), which is measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $744 thousand, which is made up of the outstanding balance of $1,162 thousand, net of a valuation allowance of $418 thousand at September 30, 2010. Certain of these assets, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discount criteria. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs in the allowance for loan losses totaling $538 thousand.

For those financial instruments that are not recorded at fair value in the Consolidated Balance Sheets, but are measured at fair value for disclosure purposes, management follows the same fair value measurement principles and guidance as for instruments recorded at fair value.

25


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

Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. The subjective factors include, among other things, estimated cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. With the exception of investment securities and certain long-term debt, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments that are not readily marketable depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be significantly different.

In particular, fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the financial instrument. Illiquid credit markets have resulted in inactive markets for certain of the Company’s financial instruments. As a result, there is no or limited observable market data for these assets and liabilities. Fair value estimates for financial instruments for which no or limited observable market data is available are based on our judgments regarding current economic conditions, liquidity discounts, currency, credit, and interest rate risks, loss experience and other factors, all of which are Level 3 inputs as discussed above. These estimates involve significant judgments and uncertainties and cannot be substantiated by comparison to quoted prices in active markets and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used in the fair value measurement technique, including discount rates, liquidity risks, and estimates of future cash flows, could significantly affect these fair value estimates.

A more detailed description of the methods, factors and significant assumptions utilized in estimating the fair values for significant categories of financial instruments is set forth in the 2009 Form 10-K.

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

 

 


 

 

 

Carrying Amount

 

Fair Value

 

 

 


 


 

FINANCIAL ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

37,193

 

$

37,193

 

Interest-bearing deposits with other banks

 

 

19,300

 

 

19,300

 

Investment securities

 

 

764,461

 

 

777,446

 

Loans held for sale

 

 

34,046

 

 

34,046

 

Loans held in portfolio, net

 

 

1,278,014

 

 

1,282,342

 

Accrued interest receivable

 

 

9,216

 

 

9,216

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

Demand, NOW, savings and money market deposits

 

 

1,094,895

 

 

1,094,895

 

Time deposits

 

 

550,718

 

 

552,962

 

Securities sold under agreements to repurchase

 

 

26,084

 

 

26,131

 

Federal funds purchased

 

 

60,000

 

 

60,000

 

Commercial paper

 

 

15,245

 

 

15,245

 

Other short-term borrowings

 

 

2,221

 

 

2,221

 

Accrued interest payable

 

 

1,639

 

 

1,639

 

Long-term borrowings

 

 

170,302

 

 

176,316

 

26


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

Note 11. New Accounting Standards

Financial Accounting Standards Board (“FASB”) Codification Topic 860: Transfers and Servicing includes amendments to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The amendments to U.S. GAAP guidance on transfer and servicing of financial assets eliminate the concept of a “qualifying special-purpose entity”, change the requirements for derecognizing financial assets and requires additional disclosures about all continuing involvements with transferred financial information about gains and losses (resulting from transfers) during the period. These amendments were effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

Amendments to FASB Codification Topic 810: Consolidation change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design as well as its ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The amendments to U.S. GAAP require additional disclosures about the reporting entity’s involvement with variable-interest entities, as well as any significant changes in risk exposure due to that involvement and its effect on the entity’s financial statements. These amendments were effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)- Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, which significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchased, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class and liabilities (rather major category), which would generally be a subject of assets or liabilities within a line in statement of financial position and (ii) company’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchased, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010. See Note 10 - Fair Value Measurements.

ASU No. 2010-11, “Derivatives and Hedging (Topic 815) - Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 were effective for the Company on July 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2010-20, “Receivables (Topic 830) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivables, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 will be effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relates to activity during a reporting period will be required for the Company’s financial statements that include periods beginning on or after January 1, 2011.

27



 

 

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. Throughout this discussion and analysis, the term the “Company” refers to Sterling Bancorp and its subsidiaries and the term the “bank” refers to Sterling National Bank and its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and supplemental data contained elsewhere in this quarterly report and the Company’s annual report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). Certain reclassifications have been made to prior years’ financial data to conform to current financial statement presentations. Throughout management’s discussion and analysis of financial condition and results of operations, dollar amounts in tables are presented in thousands, except per share data.

OVERVIEW

The Company provides a broad range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, 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 principally in New York, New Jersey and Connecticut (“the New York metropolitan 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 New York metropolitan area have a significant impact on loan demand, the ability of borrowers to repay these loans and the value of any collateral securing these loans 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 nine months ended September 30, 2010, the bank’s average earning assets represented approximately 98.1% of the Company’s average earning assets. Loans represented 60.8% and investment securities represented 37.5% of the bank’s average earning assets for the first nine months of 2010.

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

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

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

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

Recent economic conditions during 2010, such as the continuing decrease in real estate values in the principal markets the Company serves and illiquid credit markets, have reduced demands for corporate and real estate lending. If these trends continue, the Company would expect its income from corporate and real estate lending to decrease from the current levels in the near term. In addition, due to the geographic concentration of the Company’s loan portfolio in the New York metropolitan area, representing approximately 67% of total loans at September 30, 2010, an adverse change in market conditions in that geographic area could result in a decrease in our income from corporate and real estate lending. A significant prolonged decrease in income from our lending segments, if realized, may have a severe adverse impact on the operations of the Company.

28


RECENT LEGISLATION IMPACTING THE FINANCIAL SERVICES INDUSTRY

On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”). The Dodd-Frank Act will result in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. The Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions. However, it contains numerous other provisions that will affect all banks and bank holding companies, and will fundamentally change the system of oversight described in Part I, Item 1 of our 2009 Form 10-K under the caption “Supervision and Regulation”. The Dodd-Frank Act includes provisions that, among other things:

 

 

 

 

Centralize responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

 

 

 

 

Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks such as the bank from availing themselves of such preemption.

 

 

 

 

Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.

 

 

 

 

Require the OCC to seek to make its capital requirements for national banks, such as the bank, countercyclical.

 

 

 

 

Require financial holding companies such as the parent company to be well-capitalized and well-managed as of July 21, 2011. Bank holding companies and banks must also be both well-capitalized and well-managed in order to acquire banks located outside their home state.

 

 

 

 

Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders that apply to all public companies, not just financial institutions.

 

 

 

 

Make permanent the $250 thousand limit for federal deposit insurance and increase the cash limit of Securities Investor Corporation protection from $100 thousand to $250 thousand, and provide unlimited federal deposit insurance until January 1, 2013, for noninterest-bearing demand transaction accounts at all depository institutions.

 

 

 

 

Repeal the federal prohibitions on the payment of interest on business transaction and other accounts.

 

 

 

 

Increase the authority of the Federal Reserve to examine the Company and its non-bank subsidiaries.

Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The environment in which banking organizations will operate after the financial crisis, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen. The specific impact of the Dodd-Frank Act on our current activities or new financial activities we may consider in the future, our financial performance and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally.

29


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 45 and 46. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown on pages 43 and 44.

Comparison of the Three Months Ended September 30, 2010 and 2009

The Company reported a net loss available to common shareholders for the three months ended September 30, 2010 of $3.3 million, representing $0.12 per share calculated on a diluted basis, compared to net income available to common shareholders of $1.8 million, or $0.10 per share calculated on a diluted basis, for the third quarter of 2009. The decrease in net income available to common shareholders was primarily due to a $7.0 million increase in the provision for loan losses, a $1.1 million decrease in net interest income and a $0.6 million increase in noninterest expenses which more than offset a $1.3 million increase in noninterest income and a $2.3 million decrease in the provision for income taxes.

Net Interest Income

Net interest income, on a tax-equivalent basis, was $21.6 million for the third quarter of 2010 compared to $22.3 million for the 2009 period. Net interest income benefitted from lower cost of funding, lower levels of borrowings and higher levels of loans and investment securities. Those benefits were more than offset by the impact of lower yields on loans and investment securities and higher interest-bearing deposits balances. The net interest margin, on a tax-equivalent basis, was 4.11% for the third quarter of 2010 compared to 4.57% for the 2009 period. The net interest margin was impacted by the mix of earning assets and funding, including the higher level of noninterest-bearing demand deposits.

Total interest income, on a tax-equivalent basis, aggregated $25.4 million for the third quarter of 2010, down $1.6 million from the 2009 period. The tax-equivalent yield on interest-earning assets was 4.86% for the third quarter of 2010 compared to 5.56% for the 2009 period.

Interest earned on the loan portfolio increased to $18.3 million for the third quarter of 2010 from $18.0 million in the prior year period primarily due to increased loans outstanding on average partially offset by a lower yield on loans in the 2010 quarter. Average loan balances amounted to $1,314.8 million, an increase of $125.8 million from an average of $1,189.0 million in the prior year period. The increase in average loans, primarily due to the Company’s business development activities, accounted for a $1.9 million increase in interest earned on loans. The decrease in the yield on the loan portfolio to 5.71% for the third quarter of 2010 from 6.25% for the 2009 period was primarily attributable to the mix of average outstanding balances among the components of the loan portfolio.

Interest earned on the securities portfolio, on a tax-equivalent basis, amounted to $7.0 million for the third quarter of 2010 compared to $8.8 million in the prior year period. Average outstandings increased to $783.9 million (36.9% of average earning assets) for the third quarter of 2010 from $726.9 million (36.8% of average earning assets) in the prior year period. The increase reflects the impact of the Company’s asset/liability management strategy designed to shorten the average life of the portfolio. The average life of the securities portfolio was approximately 2.6 years at September 30, 2010 compared to 4.6 years at September 30, 2009. The average yield in the investment securities portfolio decreased to 3.59% from 4.84% reflecting the impact of the above referenced asset/liability management strategy coupled with calls of higher yielding securities.

30


Total interest expense decreased by $0.9 million for the third quarter of 2010 from $4.7 million for the 2009 period, primarily due to the impact of lower rates paid for interest-bearing deposits and borrowings and lower levels of borrowings partially offset by the impact of higher interest-bearing deposits.

Interest expense on deposits decreased to $2.3 million for the third quarter of 2010 from $2.8 million for the 2009 period, due to decreases in the cost of those funds partially offset by the impact of higher balances. The average rate paid on interest-bearing deposits was 0.81%, which was 42 basis points lower than the prior year period. The decrease in average cost of interest-bearing deposits reflects the impact of deposit pricing strategies and the Company’s purchase of certificates of deposit from the Certificate of Deposit Account Registry Service (“CDARS”) which provided certificate of deposit balances at lower rates than rates paid for traditional certificates of deposit products. Average interest-bearing deposits were $1,125.3 million for the third quarter of 2010 compared to $903.9 million for the prior year period, reflecting the impact of the Company’s business development activities as well the purchase of funds from CDARS.

Interest expense on borrowings decreased to $1.5 million for the third quarter of 2010 from $1.9 million for the 2009 period, primarily due to lower balances partially offset by the impact of the changes in mix. Average borrowings decreased to $316.8 million for the third quarter of 2010 from $490.8 million in the prior year period, reflecting a lesser reliance by the Company on wholesale borrowed funds. The change in mix resulted in an increase in the blended cost of borrowings to 1.93% from 1.58%.

Provision for Loan Losses

In light of recent economic developments and continued economic uncertainty, during the third quarter, the Company decided, after consultation with external professionals and regulators, to implement an accelerated resolution of certain categories of nonaccrual loans. As a result, net charge-offs of loans to small business borrowers (primarily in the lease financing portfolio) increased $10.9 million when compared to the second quarter of 2010. Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” on page 36), the provision for loan losses for the third quarter of 2010 was $14.0 million, compared to $7.0 million for the prior year period.

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

During 2010, the allowance for loan losses decreased $1.7 million from $19.9 million at December 31, 2009 primarily due to a reduction in the allowance allocated to lease financing receivables ($5.7 million) partially offset by increases in the allowance allocated to commercial and industrial loans ($0.8 million), factored receivables ($0.6 million), real estate residential mortgage ($0.8 million) and real estate commercial mortgage ($1.6 million). The allowance allocated to lease financing receivables decreased primarily as a result of the lower level of lease financing receivables nonaccrual balances following charge-offs during the third quarter of 2010. The increase of the allowance allocated to commercial and industrial loans was primarily the result of the unsteady economic recovery. The allowance allocated to factored receivables increased based on the continued weakening in the consumer sectors. The increase in the allowance allocated to real estate residential mortgage was primarily due to the persistent decline in residential real estate values. As a result of the disruption in the commercial real estate markets, the allowance allocated to real estate commercial mortgage was increased.

Noninterest Income

Noninterest income increased to $13.1 million for the third quarter of 2010 from $11.7 million in the 2009 period. The increase principally resulted from the benefit derived from increased accounts receivable management/factoring commissions and other fees. Commissions and other fees earned from accounts receivable management and factoring services were higher primarily due to increased volumes in our factoring unit and billings by clients providing temporary staffing services.

31


Noninterest Expenses

Noninterest expenses for the third quarter of 2010 increased $0.6 million when compared to the 2009 period. The increase was primarily due to higher personnel and occupancy expenses. Partially offsetting those increases was the impact of lower professional fees. The increase in personnel expenses was related to our business development activities offset by a reduction in retirement plan expenses. Occupancy expenses were higher due to our leasing additional space to support our business development activities. The reduction in professional fees reflects primarily reduced utilization of various providers.

Provision for Income Taxes

Reflecting a reduction in pre-tax income of $7.4 million, the benefit for income taxes for the third quarter of 2010 was $1.1 million, reflecting an effective tax rate of 30.0%, compared with a provision for income taxes of $1.2 million for the third quarter of 2009 reflecting an effective tax rate of 33.0%. The reduction in the effective tax rate was primarily due to a higher proportion of tax exempt income in the 2010 period compared to 2009 period.

Comparison of the Nine Months Ended September 30, 2010 and 2009

The Company reported net income available to common shareholders for the nine months ended September 30, 2010 of $0.9 million, representing $0.04 per share calculated on a diluted basis, compared to $4.7 million, or $0.26 per share calculated on a diluted basis, for the first nine months of 2009. This decrease reflects lower net interest income and higher provision for loan losses partially offset by an increase in noninterest income and a decrease in provision for income taxes.

Net Interest Income

Net interest income, on a tax-equivalent basis, was $63.1 million for the first nine months of 2010 compared to $65.3 million for the 2009 period. Net interest income benefitted from higher average loan and investment securities balances, and lower cost of funding. Offsetting those benefits was the impact of lower yield on loans and investment securities, lower borrowed funds and higher interest-bearing deposit balances. The net interest margin, on a tax-equivalent basis, was 4.26% for the first nine months of 2010 compared to 4.60% for the 2009 period. The net interest margin was impacted by the lower interest rate environment in 2010, the higher level of noninterest-bearing demand deposits and the effect of higher average loans outstanding.

Total interest income, on a tax-equivalent basis, aggregated $75.0 million for the first nine months of 2010, down $5.1 million from the 2009 period. The tax-equivalent yield on interest-earning assets was 5.07% for the first nine months of 2010 compared to 5.66% for the 2009 period.

Interest earned on the loan portfolio decreased to $51.9 million for the first nine months of 2010 from $53.8 million for the prior year period. Average loan balances amounted to $1,232.0 million, an increase of $47.0 million from an average of $1,185.0 million in the prior year period. The increase in average loans, primarily due to the Company’s business development activities, accounted for a $1.8 million increase in interest earned on loans. The yield on the loan portfolio decreased to 5.96% for the first nine months of 2010 from 6.32% for the 2009 period, which was primarily attributable to the lower interest rate environment in 2010 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, decreased to $22.8 million for the first nine months of 2010 from $25.9 million in the prior year period. Average outstandings increased to $772.4 million (37.9% of average earning assets) for the first nine months of 2010 from $712.2 million (36.8% of average earning assets) in the prior year period. The increase reflects the impact of the Company’s asset/liability management strategy designed to shorten the average life of the portfolio. The average life of the securities portfolio was approximately 2.6 years at September 30, 2010 compared to 4.6 years at September 30, 2009. The average yield on the investment securities portfolio decreased to 3.93% from 4.84%, reflecting the impact of the above referenced asset/liability management strategy coupled with calls of higher yielding securities.

32


Total interest expense decreased by $3.0 million for the first nine months of 2010 from $14.9 million for the 2009 period, primarily due to the impact of lower rates paid for interest-bearing deposits and borrowings and lower balances of borrowed funds partially offset by the impact of higher interest-bearing deposit balances.

Interest expense on deposits decreased to $7.4 million for the first nine months of 2010 from $9.1 million for the 2009 period, primarily due to a decrease in the cost of those funds partially offset by the impact of higher average interest-bearing deposit balances. The average rate paid on interest-bearing deposits was 0.89%, which was 46 basis points lower than the prior year period. The decrease in the average cost of interest-bearing deposits reflects the impact of deposit pricing strategies and the Company’s purchase of certificates of deposit from CDARS which provided deposit balances at lower rates than paid for traditional certificate of deposit products. Average interest-bearing deposits were $1,107.7 million for the first nine months of 2010 compared to $902.4 million for the prior year period, reflecting an increase in certificates of deposit, largely related to the CDARS program which is a lower cost product than traditional certificates of deposit.

Interest expense on borrowings decreased to $4.5 million for the first nine months of 2010 from $5.8 million for the 2009 period, primarily due to lower balances partially offset by the impact of the changes in mix. Average borrowings decreased to $278.3 million for the first nine months of 2010 from $482.9 million in the prior year period, reflecting a lesser reliance by the Company on wholesale borrowed funds. The change in mix resulted in an increase in the blended cost of borrowings to 2.16% from 1.60%.

Provision for Loan Losses

In light of recent economic developments and continued economic uncertainty, during the third quarter the Company decided, after consultation with external professionals and regulators, to implement an accelerated resolution of certain categories of nonaccrual loans. As a result, net charge-offs during the nine months of 2010 of loans to small business borrowers (primarily in the lease financing portfolio) increased $10.4 million when compared to the comparable 2009 period. Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” on page 36), the provision for loan losses for the first nine months of 2010 was $25.5 million, compared to $20.0 million for the prior year period.

Noninterest Income

Noninterest income increased to $35.5 million for the first nine months of 2010 from $33.3 million in the 2009 period. The increase principally resulted from higher income related to accounts receivable management and factoring services offset partly by lower mortgage banking income and securities gains. Commissions and other fees earned from accounts receivable management and factoring services were higher primarily due to the impact of the acquisition of the business of DCD Finance Inc. on April 6, 2009. Increased volumes at our factoring unit and billings by clients providing temporary staffing also contributed to the improved level of fee income. Mortgage banking income declined due to a lower volume of loans closed and a change in the mix of products being sold. Securities gains declined but reflected a continuation of the asset liability management program commenced in 2009 that was designed to reduce the average life of the investment securities portfolio. The Company sold approximately $143.3 million of securities with a weighted average life of approximately 2.3 years. The Company expects to reinvest a significant portion of the proceeds in securities with an average life of less than two years.

Noninterest Expenses

Noninterest expenses for the first nine months of 2010 decreased $0.1 million when compared to the 2009 period. The expense decrease was mainly related to lower expenses related to professional fees and deposit insurance partially offset by higher personnel and occupancy expenses. The decrease in professional fees was primarily due to reduced utilization of various outside service providers. The decrease in deposit insurance was the result of the inclusion in the 2009 period of a special one-time assessment of $1.0 million. The increase in personnel expenses was related to our business development activities, partially offset by a reduction in retirement plan expenses.

Provision for Income Taxes

The provision for income taxes for the first nine months of 2010 decreased to $1.2 million from $3.9 million for the first nine months of 2009. The decrease was primarily due to lower taxable income and a lower effective income tax rate in the 2010 period (30.0%) compared to the 2009 period (36.4%). The decrease in the effective tax rate is primarily related to the higher proportion of tax exempt income achieved in 2010 compared to the 2009 period.

33


BALANCE SHEET ANALYSIS

Securities

At September 30, 2010, the Company’s portfolio of securities totaled $764.5 million, of which obligations of U.S. government corporations and government sponsored enterprises amounted to $410.5 million which is approximately 53.7% of the total. The Company has the intent and ability to hold to maturity securities classified as held to maturity, at which time it will receive full value for these securities. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. The gross unrealized gains and losses on held to maturity securities were $13.1 million and $0.1 million, respectively. Securities classified as available for sale may be sold in the future, prior to maturity. These securities are carried at fair value. Net aggregate unrealized gains or losses on these securities are included, net of taxes, as a component of shareholders’ equity. Given the generally high credit quality of the portfolio, management expects to realize all of its investments upon market recovery or, the maturity of such instruments and thus believes that any impairment in value is interest rate related and therefore temporary. Available for sale securities included gross unrealized gains of $3.8 million and gross unrealized losses of $0.2 million. As of September 30, 2010, management does not have the intent to sell any of the securities classified as available for sale in the table on page 17 and management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

In connection with an asset liability management program designed to reduce the average life of the investment securities portfolio, the Company sold approximately $143.3 million of securities with a weighted average life of approximately 2.3 years during the first nine months of 2010 and approximately $206.4 million of securities with a weighted average life of approximately 3.5 years in the same period of 2009. The Company reinvested a significant portion of the proceeds in securities with an average life of less than two years.

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

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

Weighted Average Life

 

Weighted Average Yield

 


 


 


 

 

 

AFS

 

HTM

 

AFS

 

HTM

 

 

 


 


 


 


 

Mortgage-backed securities

 

3.2 Years

 

2.5 Years

 

3.45

%

4.60

%

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

 

0.4 Years

 

2.4 Years

 

2.22

%

1.37

%

Corporate debt securities

 

0.8 Years

 

 

2.30

%

 

Obligations of state and political subdivisionsNew York Bank Qualified

 

4.3 Years

 

8.3 Years

 

5.35

%[1]

5.86

%[1]

 

 

 

 

 

 

 

 

 

 

[1] tax equivalent

 

 

 

 

 

 

 

 

 

34


The following table sets forth the composition of the Company’s investment securities by type, with related values:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 


 


 

 

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

 

 


 


 


 


 

 

Obligations of U.S. government corporations and government sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO’s (Federal National Mortgage Association)

 

$

8,846

 

 

1.16

%

$

13,740

 

 

1.86

%

CMO’s (Federal Home Loan Mortgage Corporation)

 

 

14,698

 

 

1.92

 

 

22,698

 

 

3.08

 

CMO’s (Government National Mortgage Association)

 

 

12,846

 

 

1.68

 

 

9,048

 

 

1.23

 

Federal National Mortgage Association

 

 

84,703

 

 

11.08

 

 

125,673

 

 

17.05

 

Federal Home Loan Mortgage Corporation

 

 

45,827

 

 

6.00

 

 

71,715

 

 

9.73

 

Government National Mortgage Association

 

 

7,683

 

 

1.01

 

 

13,146

 

 

1.78

 

 

 



 



 



 



 

Total mortgage-backed securities

 

 

174,603

 

 

22.85

 

 

256,020

 

 

34.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

80,267

 

 

10.50

 

 

116,603

 

 

15.82

 

Federal Home Loan Bank

 

 

35,104

 

 

4.59

 

 

102,799

 

 

13.95

 

Federal Home Loan Mortgage Corporation

 

 

105,406

 

 

13.79

 

 

14,899

 

 

2.02

 

Federal Farm Credit Bank

 

 

15,131

 

 

1.98

 

 

29,418

 

 

3.99

 

 

 



 



 



 



 

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

 

 

410,511

 

 

53.71

 

 

519,739

 

 

70.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political institutions-New York Bank Qualified

 

 

141,047

 

 

18.45

 

 

83,337

 

 

11.31

 

Single-issuer, trust preferred securities

 

 

3,928

 

 

0.51

 

 

4,483

 

 

0.61

 

Corporate debt securities

 

 

203,906

 

 

26.67

 

 

129,200

 

 

17.53

 

Other securities

 

 

5,069

 

 

0.66

 

 

56

 

 

0.01

 

 

 



 



 



 



 

Total marketable securities

 

 

764,461

 

 

100.00

 

 

736,815

 

 

99.97

 

Debt securities issued by foreign governments

 

 

 

 

 

 

250

 

 

0.03

 

 

 



 



 



 



 

Total

 

$

764,461

 

 

100.00

%

$

737,065

 

 

100.00

%

 

 



 



 



 



 

35


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 represent approximately 66% of all loans. Loans in this category are typically made to small- and medium-sized businesses and range between $250,000 and $15 million. The Company’s real estate mortgage portfolio, which represents approximately 21% 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 11% of all loans. Sources of repayment are 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

 

 

Balances

 

% of
Gross

 

Balances

 

% of
Gross

 

 

 


 


 


 


 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

696,460

 

 

52.36

%

$

543,443

 

 

44.05

%

Lease financing receivables

 

 

150,913

 

 

11.34

 

 

211,697

 

 

17.16

 

Factored receivables

 

 

186,206

 

 

14.00

 

 

152,068

 

 

12.33

 

Real estate-residential mortgage

 

 

163,118

 

 

12.26

 

 

159,805

 

 

12.96

 

Real estate-commercial mortgage

 

 

96,022

 

 

7.22

 

 

103,785

 

 

8.41

 

Real estate-construction and land development

 

 

25,092

 

 

1.89

 

 

24,112

 

 

1.95

 

Loans to individuals

 

 

12,401

 

 

0.93

 

 

13,660

 

 

1.11

 

Loans to depository institutions

 

 

 

 

 

 

25,000

 

 

2.03

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net of unearned discounts

 

$

1,330,212

 

 

100.00

%

$

1,233,570

 

 

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 future economic conditions, the financial condition of borrowers, the realization of collateral and the credit management process.

Nonaccrual loans at September 30, 2010 decreased $11.7 million compared to December 31, 2009. This primarily reflected decreases of $3.1 million, $11.1 million and $0.6 million in commercial and industrial loans, lease financing receivables and residential real estate mortgage loans, respectively. Partially offsetting these items was a $3.1 million increase in commercial real estate loans (related to two borrowers). Net loan charge-offs in the third quarter of 2010 were $10.9 million higher than net loan charge-offs in the second quarter of 2010 (primarily reflecting an increase of $7.3 million in net charge-offs for lease financing receivables, $2.9 million for commercial and industrial loans, and $0.4 million in factored receivables). A worsening of existing economic conditions will likely result in levels of charge-offs and nonaccrual loans that will be higher than historical levels.

36


The following table sets forth the amount of non-performing assets (nonaccrual loans and other real estate owned). Also shown are loans that are past due more than 90 and are still accruing because they are both well secured or guaranteed by financially responsible third parties and are in the process of collection.

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Gross loans

 

$

1,350,531

 

$

1,261,938

 

 

 



 



 

Nonaccrual loans

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,093

 

$

3,809

 

Lease financing receivables

 

 

820

 

 

13,276

 

Factored receivables

 

 

 

 

 

Real estate-residential mortgage

 

 

1,232

 

 

2,609

 

Real estate-commercial mortgage

 

 

3,125

 

 

 

Real estate-construction and land development

 

 

 

 

 

Loans to individuals

 

 

 

 

100

 

 

 



 



 

 

 

 

 

 

 

 

 

Total nonaccrual loans

 

 

6,270

 

 

19,794

 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

744

 

 

1,837

 

 

 



 



 

Total non-performing assets

 

$

7,014

 

$

21,631

 

 

 



 



 

 

 

 

 

 

 

 

 

Loans past due 90 days or more and still accruing

 

$

3,162

 

$

1,523

 

 

 



 



 

At September 30, 2010, commercial and industrial nonaccruals represented 0.16% of commercial and industrial loans. There were 4 loans made to small business borrowers located in 3 states with balances ranging between approximately $76.0 thousand and $747.6 thousand.

At September 30, 2010, lease financing nonaccruals represented 0.49% of lease financing receivables. The lessees of equipment are located in 11 states. There were 18 leases ranging between approximately $0.7 thousand and $187.6 thousand, 16 of which were under $100 thousand. The value of the underlying collateral related to lease financing nonaccruals varies depending on the type and condition of equipment. While most leases are written on a recourse basis, with personal guarantees of the principals, the current value of the collateral is often less than the lease financing balance. Collection efforts include repossession and/or sale of leased equipment, payment discussions with the lessee, the principal and/or guarantors, and obtaining judgments against the lessee, the principal and/or guarantors. The balance is charged off when it is determined that collection efforts are no longer productive. Factors considered in determining whether collection efforts are no longer productive include any amounts currently being collected, the status of discussions or negotiations with the lessee, the principal and/or guarantors, the cost of continuing efforts to collect, the status of any foreclosure or other legal actions, the value of the collateral, and any other pertinent factors.

At September 30, 2010, residential real estate nonaccruals represented 0.95% of residential real estate loans held in portfolio. There were 11 loans ranging between approximately $6.4 thousand and $361.0 thousand secured by properties located in 5 states.

At September 30, 2010, commercial real estate nonaccrual represented 3.25% of commercial real estate loans. There were 2 loans of approximately $745.3 thousand and $2,379.1 thousand, respectively, secured by properties located in New York.

At September 30, 2010, other real estate owned consisted of 5 properties with values between approximately $31.7 thousand and $293.2 thousand located in 4 states.

37


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 include, but are 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 greater than that indicated by the evaluation process previously described. The allowance reflects management’s best estimate of probable losses within the existing loan portfolio and of the risk inherent in various components of the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on guidance provided by the “Interagency Policy Statement on the Allowance for Loan and Lease losses” issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, The Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of Thrift Supervision in December 2006 and includes an allowance allocation calculated in accordance with the U.S. GAAP guidance on loans with deteriorated credit quality in FASB Codification Topic 310: Receivables. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.

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

At September 30, 2010, the ratio of the allowance to loans held in portfolio, net of unearned discounts, was 1.40% and the allowance was $18.2 million. At such date, the Company’s nonaccrual loans amounted to $6.3 million. Loans 90 days past due and still accruing amounted to $3.2 million. At September 30, 2010, loans judged to be impaired under U.S. GAAP guidance on receivables, amounted to $8.4 million and had a valuation allowance totaling $2.5 million, which is included within the overall allowance for loan losses. Included in the impaired loans are $4.3 million in accruing impaired restructured loans as defined by U.S. GAAP guidance on receivables, with allowances for loan impairment of $883 thousand. Based on the foregoing, as well as management’s judgment as to the current risk in loans held in portfolio, the Company’s allowance for loan losses was deemed adequate to absorb all probable losses on specifically known and other credit risks associated with the portfolio as of September 30, 2010. 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 provision recognized in the first nine months of 2010. 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 $0.6 million at September 30, 2010 and $8.2 million at September 30, 2009, respectively.

38


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 




 




 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,271,495

 

$

1,144,597

 

$

1,199,952

 

$

1,141,475

 

 

 






 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

20,512

 

$

18,134

 

$

19,872

 

$

16,010

 

 

 






 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

4,065

 

 

1,230

 

 

5,988

 

 

2,107

 

Lease financing receivables

 

 

11,379

 

 

4,517

 

 

20,427

 

 

14,144

 

Factored receivables

 

 

381

 

 

69

 

 

620

 

 

378

 

Real estate - residential mortgage

 

 

136

 

 

41

 

 

234

 

 

41

 

Real estate - commercial mortgage

 

 

 

 

 

 

129

 

 

 

Real estate - construction and land development

 

 

 

 

 

 

 

 

 

Loans to individuals

 

 

155

 

 

 

 

218

 

 

 

 

 






 






 

Total charge-offs

 

 

16,116

 

 

5,857

 

 

27,616

 

 

16,670

 

 

 






 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

67