UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

 

 

 

For the fiscal year ended December 31, 2007

 

Commission File No. 1-5273-1

 

 

 

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


 

 

 

New York

 

13-2565216

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

 

 

 

TITLE OF EACH CLASS

 

NAME OF EACH EXCHANGE
ON WHICH REGISTERED

Common Shares, $1 par value per share,

 

 

and attached Preferred Stock Purchase Rights

 

New York Stock Exchange

Cumulative Trust Preferred

 

 

Securities 8.375% (Liquidation Amount

 

 

$10 per Preferred Security) of Sterling

 

 

Bancorp Trust I and Guarantee of Sterling

 

 

Bancorp with respect thereto

 

New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o  No x

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

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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 Act).
Yes o   No x

On June 30, 2007, the aggregate market value of the common equity held by non-affiliates of the Registrant was $261,866,176.

The Registrant has one class of common stock, of which 17,960,620 shares were outstanding at March
5, 2008
.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of Sterling Bancorp’s definitive 2008 Proxy Statement to be filed pursuant to Regulation 14A are incorporated by reference in Part III.




TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

 

 

PART I

 

 

 

 

 

Item 1.

 

BUSINESS

1

 

 

 

 

Item 1A.

 

RISK FACTORS

10

 

 

 

 

Item 1B.

 

UNRESOLVED STAFF COMMENTS

16

 

 

 

 

Item 2.

 

PROPERTIES

16

 

 

 

 

Item 3.

 

LEGAL PROCEEDINGS

16

 

 

 

 

Item 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

17

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 5.

 

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

17

 

 

 

 

Item 6.

 

SELECTED FINANCIAL DATA

18

 

 

 

 

Item 7.

 

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

18

 

 

 

 

Item 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

18

 

 

 

 

Item 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

38

 

 

 

 

Item 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

83

 

 

 

 

Item 9A.

 

CONTROLS AND PROCEDURES

83

 

 

 

 

Item 9B.

 

OTHER INFORMATION

86

 

 

 

 

 

 

PART III

 

 

 

 

 

Item 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

87

 

 

 

 

Item 11.

 

EXECUTIVE COMPENSATION

87

 

 

 

 

Item 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

87

 

 

 

 

Item 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

87

 

 

 

 

Item 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

87

 

 

 

 

 

 

PART IV

 

 

 

 

 

Item 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

88

 

 

SIGNATURES

90

 

 

Exhibits Submitted in a Separate Volume.

 




PART I

ITEM 1. BUSINESS

The disclosures set forth in this item are qualified by Item 1A. Risk Factors on pages 10-15 and the section captioned “FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS” on page 20 and other cautionary statements set forth elsewhere in this report.

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

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

In September 2006, the business conducted by Sterling Financial Services Company, Inc. (“Sterling Financial”) was sold (see Note 2 beginning on page 51). The results of operations of Sterling Financial have been reported as a discontinued operation and all prior period amounts have been restated as appropriate.

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

GOVERNMENT MONETARY POLICY

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

BUSINESS OPERATIONS

The Bank

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

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

For the year ended December 31, 2007, the bank’s average earning assets represented approximately 99.7% of the Company’s average earning assets. Loans represented 64.4% and investment securities represented 34.1% of the bank’s average earning assets in 2007.

PAGE 1



Commercial Lending, Asset-Based Financing and Factoring/Accounts Receivable Management. The bank provides loans to small and medium-sized businesses. The businesses are diversified across industries, and the loans generally range in size from $250,000 to $15 million. Business loans can be tailored to meet customers’ specific long- and short-term needs, and include secured and unsecured lines of credit, business installment loans, business lines of credit, and debtor-in-possession financing. Loans are often collateralized by assets, such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other assets.

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

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

As of December 31, 2007, the outstanding loan balance (net of unearned discounts) for commercial and industrial lending and factored receivables was $632.6 million, representing approximately 52.2% of the bank’s total loan portfolio.

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

Equipment Leasing. The bank offers equipment leasing services in the New York metropolitan area and across the United States through direct leasing programs, third party sources and vendor programs. The bank finances small and medium-sized equipment leases with an average term of 24 to 30 months. At December 31, 2007, the outstanding loan balance (net of unearned discounts) for equipment leases was $249.7 million, and equipment leases comprised approximately 20.6% of the bank’s total loan portfolio.

Residential and Commercial Mortgages. The bank’s real estate loan portfolio consists of real estate loans on one-to-four family residential properties and commercial properties. The residential mortgage banking and brokerage business is conducted through offices located principally in New York and North Carolina. Residential mortgage loans—focused on conforming credit, government insured FHA and other high quality loan products—are originated primarily in the New York metropolitan area, Virginia and other mid-Atlantic states, almost all of these for resale. Commercial real estate financing is offered on income-producing investor properties and owner-occupied properties, professional co-ops and condos. At December 31, 2007, the outstanding loan balance for real estate mortgage loans was $252.3 million, representing approximately 20.8% of the bank’s total loans outstanding.

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

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

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

PAGE 2



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

The composition of total revenues (interest income and non-interest income) of the bank and its subsidiaries for the three most recent fiscal years was as follows:

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2007

 

2006

 

2005

 












Interest and fees on loans

 

59

%

 

58

%

 

51

%

 

Interest and dividends on investment securities

 

18

 

 

20

 

 

23

 

 

Other

 

23

 

 

22

 

 

26

 

 

 

 










 

 

100

%

 

100

%

 

100

%

 

 

 










At December 31, 2007, the bank and its subsidiaries had 586 full-time equivalent employees, consisting of 207 officers and 379 supervisory and clerical employees. The bank considers its relations with its employees to be satisfactory.

COMPETITION

There is intense competition in all areas in which the Company conducts its business. As a result of the deregulation of the financial services industry under the Gramm-Leach-Bliley Act of 1999, the Company competes with banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions. Many of these competitors have substantially greater resources and lending limits and provide a wider array of banking services. To a limited extent, the Company also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. Competition is based on a number of factors, including prices, interest rates, services, availability of products, and geographic location.

SUPERVISION AND REGULATION

General

The banking industry is highly regulated. Statutory and regulatory controls are designed primarily for the protection of depositors and the banking system, and not for the purpose of protecting the shareholders of the parent company. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the bank. It is intended only to briefly summarize some material provisions.

Sterling Bancorp is a bank holding company and a financial holding company under the BHCA and is subject to supervision, examination and reporting requirements of the Federal Reserve Board. Sterling Bancorp is also under the jurisdiction of the Securities and Exchange Commission and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Sterling Bancorp is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “STL” and is subject to the rules of the NYSE for listed companies.

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

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

Bank Holding Company Regulation

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

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

Financial Holding Company Regulation

The Gramm-Leach-Bliley Act:

 

 

allows bank holding companies, the depository institution subsidiaries of which meet management, capital and the Community Reinvestment Act (the “CRA”) standards, to engage in a substantially broader range of non-banking financial activities than was previously permissible, including (a) insurance underwriting and agency, (b) making merchant banking investments in commercial companies, (c) securities underwriting, dealing and market making, and (d) sponsoring mutual funds and investment companies;

 

 

allows insurers and other financial services companies to acquire banks; and

 

 

establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

PAGE 3



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

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

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

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

Payment of Dividends and Transactions with Affiliates

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

Various legal restrictions limit the extent to which the bank can fund the parent company and its nonbank subsidiaries. All national banks are limited in the payment of dividends without the approval of the OCC to an amount not to exceed the net profits (as defined) for that year-to-date combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing restrictions, and without adversely affecting its “well capitalized” status, as of December 31, 2007, the bank could pay dividends of approximately $20 million to the parent company, without obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future periods.

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

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

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

PAGE 4



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

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

Capital Adequacy and Prompt Corrective Action

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

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

 

 

Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, less goodwill, most intangible assets and certain other assets.

 

 

Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.

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

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

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

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

PAGE 5



capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than that indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2007, the Company and the bank were “well capitalized,” based on the ratios and guidelines described above. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

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

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

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

The U.S. banking and thrift agencies are developing proposed revisions to their existing capital adequacy regulations and standards based on BIS II. In November 2007, the agencies adopted a definitive final rule for implementing BIS II in the United States that would apply only to internationally active banking organizations, or “core banks”—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance-sheet foreign exposures of $10 billion or more. The final rule will be effective as of April 1, 2008. Other U.S. banking organizations may elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but they will not be required to apply them. The rule also allows a banking organization’s primary federal supervisor to determine that the application of the rule would not be appropriate in light of the bank’s asset size, level of complexity, risk profile, or scope of operations. This new proposal, which is intended to be finalized before the core banks may start their first transition period year under BIS II, will replace the agencies’ earlier proposed amendments to existing risk-based capital guidelines to make them more risk sensitive (formerly referred to as the “BIS I-A” approach).

The Company is not required to comply with BIS II. The Company has not made a determination as to whether it will elect to apply the BIS II requirements when they become effective.

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Support of the Bank

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

FDIC Insurance

The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. As of January 1, 2007, the previous nine risk categories utilized in the risk matrix were condensed into four risk categories which continue to be distinguished by capital levels and supervisory ratings.

The three capital categories are “well capitalized,” “adequately capitalized,” and “undercapitalized.” These three categories are substantially the same as the prompt corrective action categories previously described, with the “undercapitalized” category including institutions that are “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized” for prompt corrective action purposes.

The bank was not required to pay any deposit insurance premium in 2007 as the entire premium assessed was offset by the assessment credit described below. Under the final regulations, assessment rates for 2008 will range from 5 to 7 basis points per $100 of deposits for banks in Risk Category I, to 43 basis points for banks assigned to Risk Category IV. However, under the Federal Deposit Insurance Reform Act of 2005, which became law in 2006, the bank received a onetime assessment credit that can be applied against future premiums through 2010, subject to certain limitations. Any increase in insurance assessments could have an adverse impact on the earnings of insured institutions, including the bank. As of December 31, 2007, approximately $110,000 of the credit remained available to offset deposit insurance assessments through the second quarter of 2008.

In addition, the bank is required to make payments for the servicing of obligations of the Financing Corporation (“FICO”) issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. The FICO annual assessment rate for the first quarter of 2008 is 1.14 cents per $100 of deposits. The bank’s assessment credit is not available to offset FICO assessments.

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

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

Depositor Preference

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

Liability of Commonly Controlled Institutions

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

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Community Reinvestment Act

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

Financial Privacy

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

Anti-Money Laundering Initiatives and the USA Patriot Act

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

Office of Foreign Assets Control Regulation

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

Legislative Initiatives

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

Safety and Soundness Standards

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

PAGE 8



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

SELECTED CONSOLIDATED STATISTICAL INFORMATION

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

The information appears on pages 31 and 32 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

II. Investment Portfolio

A summary of the Company’s investment securities by type with related carrying values at the end of each of the three most recent fiscal years appears on page 25 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Information regarding book values and range of maturities by type of security and weighted average yields for totals of each category is presented in Note 5 beginning on page 53 of the Company’s consolidated financial statements.

III. Loan Portfolio

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

A table setting forth the maturities and sensitivity to changes in interest rates of the Company’s commercial and industrial loans at December 31, 2007 appears on page 26 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

IV. Summary of Loan Loss Experience

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

The Company considers its allowance for loan losses to be adequate based upon the size and risk characteristics of the outstanding loan portfolio at December 31, 2007. Net losses within the loan portfolio are not, however, statistically predictable and are subject to various external factors that are beyond the control of the Company. Consequently, changes in conditions in the next twelve months could result in future provisions for loan losses varying from the provision recorded in 2007.

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

V. Deposits

Average deposits and average rates paid for each of the three most recent years are presented on page 31 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Outstanding time certificates of deposit issued from domestic and foreign offices and interest expense on domestic and foreign deposits are presented in Note 9 of the Company’s consolidated financial statements.

The table providing selected information with respect to the Company’s deposits for each of the three most recent fiscal years appears on page 30 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Interest expense for the three most recent fiscal years is presented in Note 9 of the Company’s consolidated financial statements.

VI. Return on Assets and Equity

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

VII. Short-Term Borrowings

Balance and rate data for significant categories of the Company’s Short-Term Borrowings for each of the three most recent years is presented in Note 10 of the Company’s consolidated financial statements.

INFORMATION AVAILABLE ON OUR WEB SITE

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

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

ITEM 1A. RISK FACTORS

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

If any of the following risks adversely affect the Company’s business, financial condition or results of operations, the value of the Company’s common stock could decline significantly and you could lose all or part of your investment.

RISKS RELATED TO THE COMPANY’S BUSINESS

The Company Is Subject to Interest Rate Risk

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

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. For further discussion related to the Company’s

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management of interest rate risk, see “ASSET/LIABILITY MANAGEMENT” beginning on page 33 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company Is Subject to Lending Risk

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

As of December 31, 2007, approximately 63.5% of the Company’s loan portfolio consisted of commercial and industrial, factored receivables, construction and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because the Company’s loan portfolio contains a significant number of commercial and industrial, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations. For further discussion related to commercial and industrial, construction and commercial real estate loans, see “Loan Portfolio” on page 26 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company’s Allowance for Loan Losses May Be Insufficient

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

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

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

If we were unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying

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capital. For further discussion, see “Liquidity Risk” beginning on page 34 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Sterling Bancorp Relies on Dividends from Its Subsidiaries

Sterling Bancorp is a separate and distinct legal entity from its subsidiaries. It receives dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the parent company’s common stock and interest and principal on its debt. Various federal and/or state laws and regulations limit the amount of dividends that Sterling National Bank and certain non-bank subsidiaries may pay to the parent company. Also, Sterling Bancorp’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event Sterling National Bank is unable to pay dividends to Sterling Bancorp, Sterling Bancorp may not be able to service debt, pay obligations or pay dividends on the Company’s common stock. The inability to receive dividends from Sterling National Bank could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Supervision and Regulation” on pages 3–9 and Note 15 of the Company’s consolidated financial statements.

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

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

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

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

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

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

The Company Operates in a Highly Competitive Industry and Market Area

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

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

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

 

 

The ability to develop, maintain and build upon customer relationships based on top quality service, high ethical standards and safe, sound assets.

 

 

The ability to expand the Company’s market position.

 

 

The scope, relevance and pricing of products and services offered to meet customer needs and demands.

 

 

The rate at which the Company introduces new products and services relative to its competitors.

 

 

Customer satisfaction with the Company’s level of service.

 

 

Industry and general economic trends.

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

The Company Is Subject to Extensive Government Regulation and Supervision

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

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

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

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

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

For an entity to qualify as a REIT, it must satisfy the following six asset tests under the Internal Revenue Code each quarter: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At December 31, 2007, SREHC met all six quarterly asset tests.

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

PAGE 13



must distribute at least 90% of its taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. For 2007, SREHC had met the two annual income tests and the distribution test.

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

The Current New York State Executive Budget Proposals Would, If Enacted, Increase New York State Tax on the Company’s REIT

Provisions in the 2008-09 New York State Executive Budget Proposal would, if enacted, increase the taxes imposed by New York State on the Company’s REIT. The Company cannot predict whether or in what form any such proposal would be enacted.

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

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

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

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

 

 

Potential exposure to unknown or contingent liabilities of the target company.

 

 

Exposure to potential asset quality issues of the target company.

 

 

Difficulty and expense of integrating the operations and personnel of the target company.

 

 

Potential disruption to the Company’s business.

 

 

Potential diversion of the Company’s management time and attention.

 

 

The possible loss of key employees and customers of the target company.

 

 

Difficulty in estimating the value of the target company.

 

 

Potential changes in banking or tax laws or regulations that may affect the target company.

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

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

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

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

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

PAGE 14



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

The Company Continually Encounters Technological Change

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

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

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

RISKS ASSOCIATED WITH THE COMPANY’S COMMON STOCK

The Company’s Stock Price Can Be Volatile

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

 

 

Actual or anticipated variations in quarterly results of operations.

 

 

Recommendations by securities analysts.

 

 

Operating and stock price performance of other companies that investors deem comparable to the Company.

 

 

News reports relating to trends, concerns and other issues in the financial services industry.

 

 

Perceptions in the marketplace regarding the Company and/or its competitors.

 

 

New technology used, or services offered, by competitors.

 

 

Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors.

 

 

Failure to integrate acquisitions or realize anticipated benefits from acquisitions.

 

 

Changes in government regulation.

 

 

Geopolitical conditions such as acts or threats of terrorism or military conflicts.

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

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

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

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

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

PAGE 15



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

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

RISKS ASSOCIATED WITH THE COMPANY’S INDUSTRY

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

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

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The principal offices of the Company occupy one floor at 650 Fifth Avenue, New York, N.Y., consisting of approximately 14,400 square feet. The lease for these premises expires April 30, 2016. Rental commitments to the expiration date approximate $7,379,000.

The bank also maintains operating leases for nine branch offices, the International Banking Facility, an Operations Center, and additional office space in New York City, Nassau, Suffolk and Westchester counties (New York) and in Charlotte (North Carolina) with an aggregate of approximately 143,000 square feet. The aggregate office rental commitments for these premises approximates $14,590,000. The leases have expiration dates ranging from 2008 through 2018 with varying renewal options. The bank owns free and clear (not subject to a mortgage) a building in which it maintains a branch located in Forest Hills, Queens.

ITEM 3. LEGAL PROCEEDINGS

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

PAGE 16



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

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

 

 

 

 

Name of Executive

Title

Age

Held Executive
Office Since





Louis J. Cappelli

Chairman of the Board and Chief Executive Officer, Director

77

1967

John C. Millman

President, Director

65

1986

John W. Tietjen

Executive Vice President and Chief Financial Officer

63

1989

Howard M. Applebaum

Senior Vice President

49

2002

Eliot S. Robinson

Executive Vice President of Sterling National Bank

65

1998

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

On March 10, 2008, the Compensation Committee of the Board of Directors extended the terms of the Company’s Employment Agreements with Mr. Cappelli and Mr. Millman to December 31, 2012 and December 31, 2010, respectively.



The Company’s 2007 Domestic Company Section 303A Annual CEO Certification was filed (without qualifications) with the New York Stock Exchange. The certifications under Section 302 of the Sarbanes-Oxley Act are filed as exhibits to this annual report of Form 10-K.

PART II

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

The parent company’s common stock is traded on the New York Stock Exchange under the symbol STL. Information regarding the quarterly prices of the common stock is presented in Note 25 on page 80. Information regarding the average common shares outstanding and dividends per common share is presented in the Consolidated Statements of Income on page 40. Information regarding legal restrictions on the ability of the bank to pay dividends is presented in Note 15 on page 64. Although such restrictions do not apply to the payment of dividends by the parent company to its shareholders, such dividends may be limited by other factors, such as the requirement to maintain adequate capital under the risk-based capital regulations described in Note 21 beginning on page 74. As of March 5, 2008, there were 1,466 shareholders of record of our common shares.

During the fiscal years ended December 31, 2006 and 2007, the following dividends were declared on our common shares on the dates indicated: February 23, 2006: $.19; May 2, 2006: $.19; August 17, 2006: $.19; November 16, 2006: $.19; February 15, 2007: $.19; May 3, 2007: $.19; August 16, 2007: $.19; and November 15, 2007: $.19.

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

Under its share repurchase program, the Company buys back common shares from time to time. The Company did not repurchase any of its common shares during the fourth quarter of 2007. At December 31, 2007, the maximum number of shares that may yet be repurchased under the share repurchase program was 870,963.

PAGE 17



For information regarding securities authorized for issuance under the Company’s equity compensation plan, see Item 12 on page 87.

The following performance graph compares for the fiscal years ended December 31, 2003, 2004, 2005, 2006 and 2007 (a) the yearly cumulative total shareholder return (i.e., the change in share price plus the cumulative amount of dividends, assuming dividend reinvestment, divided by the initial share price, expressed as a percentage) on Sterling’s common shares, with (b) the cumulative total return of the Standard & Poor’s 500 Stock Index, and with (c) the cumulative total return on the KBW 50 Index (a market-capitalization weighted bank-stock index):

CUMULATIVE TOTAL RETURNS
of $100 investment made on December 31, 2002

(LINE GRAPH)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

12/02

 

12/03

 

12/04

 

12/05

 

12/06

 

12/07

 



Sterling Bancorp

 

 

100.00

 

 

139.27

 

 

170.29

 

 

129.33

 

 

134.34

 

 

97.81

 

S&P 500

 

 

100.00

 

 

128.68

 

 

142.69

 

 

149.70

 

 

173.34

 

 

182.87

 

KBW 50

 

 

100.00

 

 

134.03

 

 

147.50

 

 

149.23

 

 

178.18

 

 

137.16

 

ITEM 6. SELECTED FINANCIAL DATA

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

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

The information appears on pages 20–37 and supplementary quarterly data appears in Note 25 of the Company’s consolidated financial statements. All such information should be read in conjunction with the consolidated financial statements and the notes thereto.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information appears on pages 33–35 under the caption “ASSET/LIABILITY MANAGEMENT.” All such information should be read in conjunction with the consolidated financial statements and notes thereto.

PAGE 18



Sterling Bancorp
SELECTED FINANCIAL DATA [1]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

 

2007

 

2006

 

2005

 

2004

 

2003

 


















SUMMARY OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

121,452

 

$

116,586

 

$

101,888

 

$

86,228

 

$

80,251

 

Total interest expense

 

 

47,560

 

 

42,021

 

 

26,463

 

 

18,351

 

 

16,115

 

Net interest income

 

 

73,892

 

 

74,565

 

 

75,425

 

 

67,877

 

 

64,136

 

Provision for loan losses

 

 

5,853

 

 

4,503

 

 

5,214

 

 

6,139

 

 

5,412

 

Net securities gains/(losses)

 

 

188

 

 

(443

)

 

337

 

 

1,256

 

 

551

 

Noninterest income, excluding net securities gains/(losses)

 

 

35,536

 

 

34,101

 

 

33,679

 

 

32,683

 

 

30,946

 

Noninterest expenses

 

 

79,809

 

 

77,355

 

 

67,654

 

 

61,929

 

 

56,182

 

Income before taxes

 

 

23,954

 

 

26,365

 

 

36,573

 

 

33,748

 

 

34,039

 

Provision for income taxes

 

 

8,560

 

 

5,367

 

 

13,110

 

 

11,074

 

 

12,605

 

Income from continuing operations

 

 

15,394

 

 

20,998

 

 

23,463

 

 

22,674

 

 

21,434

 

(Loss)/income from discontinued operations, net of tax

 

 

(795

)

 

(603

)

 

564

 

 

1,930

 

 

2,469

 

Loss on sale of discontinued operations, net of tax

 

 

 

 

(9,635

)

 

 

 

 

 

 

Net income

 

 

14,599

 

 

10,760

 

 

24,027

 

 

24,604

 

 

23,903

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per average common share—basic

 

 

0.85

 

 

1.12

 

 

1.22

 

 

1.19

 

 

1.13

 

 

       —diluted

 

 

0.83

 

 

1.09

 

 

1.19

 

 

1.13

 

 

1.08

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per average common share—basic

 

 

0.80

 

 

0.57

 

 

1.25

 

 

1.29

 

 

1.26

 

 

       —diluted

 

 

0.79

 

 

0.56

 

 

1.22

 

 

1.23

 

 

1.20

 

Dividends per common share

 

 

0.76

 

 

0.76

 

 

0.73

 

 

0.63

 

 

0.54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR END BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

625,241

 

 

569,324

 

 

715,299

 

 

680,220

 

 

683,118

 

Loans held for sale

 

 

23,756

 

 

33,320

 

 

40,977

 

 

37,059

 

 

40,556

 

Loans held in portfolio, net of unearned discounts

 

 

1,187,124

 

 

1,112,602

 

 

1,012,057

 

 

906,762

 

 

772,919

 

Other assets—discontinued operations

 

 

 

 

1,663

 

 

116,250

 

 

114,596

 

 

127,053

 

Total assets, including discontinued operations

 

 

2,012,649

 

 

1,885,957

 

 

2,056,042

 

 

1,871,112

 

 

1,759,824

 

Noninterest-bearing deposits

 

 

535,351

 

 

546,443

 

 

510,884

 

 

511,307

 

 

474,092

 

Interest-bearing deposits

 

 

991,635

 

 

975,587

 

 

937,442

 

 

832,544

 

 

737,649

 

Short-term borrowings

 

 

205,418

 

 

83,776

 

 

281,838

 

 

150,825

 

 

189,489

 

Long-term debt

 

 

65,774

 

 

45,774

 

 

85,774

 

 

135,774

 

 

135,774

 

Shareholders’ equity

 

 

121,070

 

 

132,263

 

 

147,587

 

 

148,704

 

 

143,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

586,463

 

 

647,602

 

 

713,629

 

 

689,569

 

 

593,005

 

Loans held for sale

 

 

43,919

 

 

40,992

 

 

53,948

 

 

46,395

 

 

71,779

 

Loans held in portfolio, net of unearned discounts

 

 

1,069,453

 

 

1,002,688

 

 

890,085

 

 

778,272

 

 

673,412

 

Total assets, including discontinued operations

 

 

1,892,751

 

 

1,944,776

 

 

1,931,101

 

 

1,777,720

 

 

1,587,623

 

Noninterest-bearing deposits

 

 

444,672

 

 

439,064

 

 

452,632

 

 

415,664

 

 

370,554

 

Interest-bearing deposits

 

 

1,055,696

 

 

951,333

 

 

936,665

 

 

830,950

 

 

683,748

 

Short-term borrowings

 

 

131,573

 

 

255,204

 

 

198,879

 

 

166,804

 

 

179,002

 

Long-term debt

 

 

44,130

 

 

59,938

 

 

106,514

 

 

135,774

 

 

139,870

 

Shareholders’ equity

 

 

124,140

 

 

143,178

 

 

149,836

 

 

142,536

 

 

134,150

 

 

RATIOS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average total assets

 

 

0.81

%

 

1.13

%

 

1.29

%

 

1.36

%

 

1.45

%

Return on average tangible shareholders’ equity[2]

 

 

15.20

 

 

17.43

 

 

18.23

 

 

18.68

 

 

18.97

 

Return on average shareholders’ equity

 

 

12.40

 

 

14.67

 

 

15.66

 

 

15.91

 

 

15.98

 

Dividend payout ratio

 

 

89.35

 

 

67.70

 

 

59.82

 

 

53.39

 

 

47.17

 

Average shareholders’ equity to average total assets

 

 

6.56

 

 

7.70

 

 

8.23

 

 

8.56

 

 

9.09

 

Net interest margin (tax-equivalent basis)

 

 

4.49

 

 

4.64

 

 

4.76

 

 

4.63

 

 

4.83

 

Loans/assets, year end[3]

 

 

60.16

 

 

60.81

 

 

54.29

 

 

53.73

 

 

49.82

 

Net charge-offs/loans, year end[4]

 

 

0.49

 

 

0.43

 

 

0.41

 

 

0.43

 

 

0.41

 

Nonperforming loans/loans, year end[3]

 

 

0.53

 

 

0.51

 

 

0.37

 

 

0.23

 

 

0.37

 

Allowance/loans, year end[4]

 

 

1.27

 

 

1.46

 

 

1.52

 

 

1.59

 

 

1.65

 


 

 

[1]

All data presented is from continuing operations unless indicated otherwise.

 

 

[2]

Average tangible shareholders’ equity is average shareholders’ equity less average goodwill.

 

 

[3]

In this calculation, the term “loans” means loans held for sale and loans held in portfolio.

 

 

[4]

In this calculation, the term “loans” means loans held in portfolio.


PAGE 19



Sterling Bancorp
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 Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999, and its subsidiaries, principally Sterling National Bank (the “bank”). Throughout this discussion and analysis, the term the “Company” refers to Sterling Bancorp and its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and selected financial data contained elsewhere in this annual report. Certain reclassifications have been made to prior years’ financial data to conform to current financial statement presentations.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, assumptions and judgments based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions and judgments. Certain policies inherently have greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation allowance to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily available. Actual results could differ significantly from those estimates.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. The most significant accounting policies followed by the Company are presented in Note 1 beginning on page 45. The accounting for factoring transactions also is discussed under “Business Operations—The Bank—Commercial Lending, Asset-Based Financing and Factoring/Accounts Receivable Management” on pages 1 and 2.

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

PAGE 20



The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The methodology used to determine the allowance for loan losses is outlined in Note 1 to the consolidated financial statements and a discussion of the factors driving changes in the amount of the allowance for loan losses is included under the caption “Asset Quality” beginning on page 27.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. In connection with determining its income tax provision under statement of Financial Accounting Standard No. 109 and Financial Accounting Standards Board Interpretation No. 48, the Company maintains a reserve related to certain tax positions and strategies that management believes contain an element of uncertainty. The Company evaluates each of its tax positions and strategies periodically to determine whether the reserve continues to be appropriate. Additional discussion on the accounting for income taxes is presented in Notes 1 and 18 of the Company’s consolidated financial statements.

OVERVIEW

The Company provides a broad range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, factoring/accounts receivable management services, trade financing, equipment leasing, deposit services, trust and estate administration, and investment management services. The Company has operations in the metropolitan New York area, New Jersey and North Carolina, and conducts business throughout the United States. The general state of the U.S. economy and, in particular, economic and market conditions in the metropolitan New York area have a significant impact on loan demand, the ability of borrowers to repay these loans and the value of any collateral securing these loans and may also affect deposit levels. Accordingly, future general economic conditions are a key uncertainty that management expects will materially affect the Company’s results of operations.

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

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

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

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

In 2007, the bank’s average earning assets represented approximately 99.7% of the Company’s average earning assets. Loans represented 64.4% and investment securities represented 34.1% of the bank’s average earning assets in 2007.

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.

PAGE 21



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, services, availability of products and geographic location.

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

INCOME STATEMENT ANALYSIS

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders’ equity. Net interest spread is the difference between the average rate earned, on a tax-equivalent basis, on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets (“net interest margin”) is calculated by dividing tax equivalent net interest income by average interest-earning assets. Generally, the net interest margin will exceed the net interest spread because a portion of interest-earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders’ equity. The increases (decreases) in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are provided in the Rate/Volume Analysis shown on page 32. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown on page 31.

COMPARISON OF THE YEARS 2007 AND 2006

The Company reported income from continuing operations, after income taxes, for the year ended December 31, 2007 of $15.4 million, representing $0.83 per share, calculated on a diluted basis, compared to $ 21.0 million, or $1.09 per share, calculated on a diluted basis, for the year 2006. This decrease reflected higher interest and noninterest expenses, a higher provision for loan losses and a higher provision for income taxes, which were partially offset by increases in interest and noninterest income.

Net Interest Income

Net interest income, on a tax-equivalent basis, was $74.4 million for 2007 compared to $75.3 million for 2006. Net interest income was positively impacted by higher average loan and federal funds sold balances, a higher yield on investment securities and lower balances for borrowed funds and negatively impacted by lower average investment securities outstandings, lower yield on loans and higher average balances coupled with higher rates paid for interest-bearing deposits. The net interest margin, on a tax-equivalent basis, was 4.49% for 2007 compared to 4.64% for 2006. The net interest margin was impacted by the higher interest rate environment during most of 2007 and by the earning asset and the funding mix. Additionally, the more competitive pricing practices in the Company’s markets caused the cost of interest-bearing deposits to increase more rapidly than the yield on interest-earning assets.

Total interest income, on a tax-equivalent basis, aggregated $121.9 million for 2007, up from $117.3 million for 2006. The tax equivalent yield on interest-earning assets was 7.36% for 2007 compared to 7.23% for 2006.

Interest earned on the loan portfolio amounted to $92.3 million for 2007, up $5.4 million from the year ago period. Average loan balances amounted to $1,113.4 million, an increase of $69.7 million from an average of $1,043.7 million in the prior year. The increase in average loans (across many segments of the Company’s loan portfolio), primarily due to the acquisition of Sterling Resource Funding Corp. coupled with the Company’s other business development activities and the ongoing consolidation of banks in the Company’s marketing area, accounted for a $6.7 million increase in interest earned on loans. The decrease in the yield on the loan portfolio to 8.83% for 2007 from 8.97% for 2006 was primarily attributable to the mix of average outstanding balances among the components of the loan portfolio partially offset by the higher interest rate environment during most of 2007 and the competitive pricing practice in the Company’s markets.

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $28.3 million for 2007 from $30.1 million in the prior year. Average outstandings decreased to $586.5 million (34.0% of average earning assets) for 2007 from $647.6 million (38.1% of average earning assets) in the prior year. The average yield increased to 4.83% for 2007 compared to 4.65% for 2006. The average life of the securities portfolio was approximately 6.2 years at December 31, 2007 compared to 4.7 years at December 31, 2006.

Total interest expense increased to $47.6 million for 2007 from $42.0 million for 2006, primarily due to higher rates paid and higher average balances for interest-bearing deposits. Partially offsetting those increases was the impact of lower borrowed funds balances.

PAGE 22



Interest expense on deposits increased to $38.8 million for 2007 from $29.0 million for 2006 due to an increase in the cost of those funds coupled with higher average balances. The average rate paid on interest-bearing deposits was 3.67% in 2007 which was 62 basis points higher than the prior year. The increase in average costs of deposits reflects the higher interest rate environment during most of 2007 coupled with the more competitive pricing practices in the Company’s market. Average interest-bearing deposit balances increased to $1,055.7 million for 2007 from $951.3 million for 2006 reflecting the benefit derived from the Company’s business development activities.

Interest expense on borrowings decreased to $8.8 million for 2007 from $15.5 million for 2006 primarily due to the lower average balances for borrowed funds. Average borrowed funds balances decreased to $175.7 million for 2007 from $315.1 million in 2006 reflecting less reliance by the Company on wholesale funding.

Provision for Loan Losses

Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” below), the provision for loan losses for 2007 increased to $5.9 million from $4.5 million for the prior year. Factors affecting the level of provision included the growth in the loan portfolios, changes in general economic conditions, levels of charge-offs and the amount of nonaccrual loans.

Noninterest Income

Noninterest income increased to $35.7 million for 2007 from $33.7 million in 2006, primarily due to higher accounts receivable management/factoring commissions and other fees principally due to revenues attributable to the acquisition of Sterling Resource Funding Corp. Also contributing to the increase were net gains on securities sales/calls in 2007 compared with net losses for 2006. Partially offsetting these increases was a decrease in mortgage banking income primarily due to revaluation charges which reduced the carrying values of residential mortgage loans held for sale to the lower of cost or market and a charge for settlement of potential repurchase obligations as part of our loss mitigation efforts.

Noninterest Expenses

Noninterest expenses increased to $79.8 million for 2007 from $77.4 million in 2006. The increase was primarily due to higher salaries, employee benefits, equipment and occupancy costs related to investments in the Sterling franchise, including the new branches and the acquisition of Sterling Resource Funding Corp. Also contributing to higher employee benefits expense were increases in pension costs.

Provision for Income Taxes

The provision for income taxes for 2007 increased by $3.2 million from 2006. The provision for 2006 was reduced as the result of reversals aggregating $4.4 million (during the first and third quarters of 2006) of reserves for state and local taxes, net of federal tax effect, as a result of the resolution of certain state and local tax issues and the closure of certain tax years for local tax purposes. The year-over-year change in the provision was also impacted by the lower level of pre-tax income in 2007.

Discontinued Operations

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

The loss from discontinued operations was $0.8 million for 2007, representing $0.04 per share, compared to a loss of $0.6 million, or $.03 per share, for 2006.

Income taxes were calculated using a “with and without” methodology that resulted in an overall tax rate of 39.16% in 2007 and 38.54% in 2006.

COMPARISON OF THE YEARS 2006 AND 2005

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

Net Interest Income

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

PAGE 23



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

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

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

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

Interest expense on deposits increased to $29.0 million for 2006 from $18.1 million for 2005 primarily due to an increase in the cost of those funds. The average rate paid on interest-bearing deposits was 3.05% in 2006, which was 111 basis points higher than the prior year. The increase in average cost of deposits reflects the higher interest rate environment during 2006. Average interest-bearing deposit balances increased to $951.3 million for 2006 from $936.7 million for 2005.

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

Provision for Loan Losses

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

Noninterest Income

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

Noninterest Expenses

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

Provision for Income Taxes

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

Discontinued Operations

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

PAGE 24



The loss from discontinued operations was $0.6 million for 2006, representing $0.03 per share, compared to income of $0.6 million, or $.03 per share, for 2005. The decrease was due to lower net interest income and a higher provision for loan losses for 2006 compared to 2005.

The net after-tax loss on the disposal of discontinued operations was $9.6 million, or $0.50 per share, for 2006.

Income taxes were calculated using a “with and without” methodology that resulted in an overall tax rate of 38.54% in 2006 and 45.80% in 2005.

BALANCE SHEET ANALYSIS

Securities

The Company’s securities portfolios are composed principally of obligations of U.S. government corporations and government sponsored enterprises along with other debt and equity securities. At December 31, 2007, the Company’s portfolio of securities totaled $625.2 million, of which obligations of U.S. government corporations and government sponsored enterprises amounted to $469.2 million which is approximately 93.1% of the total. The Company has the intent and ability to hold to maturity securities classified as “held to maturity.” These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. The gross unrealized gains and losses on “held to maturity” securities were $2.2 million and $4.3 million, respectively. Securities classified as “available for sale” may be sold in the future, prior to maturity. These securities are carried at market value. Net aggregate unrealized gains or losses on these securities are included in a valuation allowance account and are shown net of taxes, as a component of shareholders’ equity. “Available for sale” securities included gross unrealized gains of $1.5 million and gross unrealized losses of $4.0 million. Given the generally high credit quality of the portfolio, management expects to realize all of its investment upon the maturity of such instruments and, thus, believes that any market value impairment is temporary. Management has no current intention to sell any available for sale securities at a loss.

Information regarding book values and range of maturities by type of security and weighted average yields for totals of each category is presented in Note 5 beginning on page 53.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2007

2006

 

2005

 








 

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

 

 



 

 

(dollars in thousands)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMOs (Federal National Mortgage Association)

 

$

20,789

 

 

3.33

%   

$

21,159

 

 

3.72

%   

$

22,871

 

 

3.20

%

CMOs (Federal Home Loan Mortgage Corporation)

 

 

42,634

 

 

6.82

 

 

44,444

 

 

7.81

 

 

48,687

 

 

6.80

 

CMOs (Government National Mortgage Association)

 

 

9,094

 

 

1.45

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

225,736

 

 

36.10

 

 

251,615

 

 

44.19

 

 

299,372

 

 

41.85

 

Federal Home Loan Mortgage Corporation

 

 

158,705

 

 

25.38

 

 

184,667

 

 

32.44

 

 

215,528

 

 

30.13

 

Government National Mortgage Association

 

 

12,247

 

 

1.96

 

 

14,922

 

 

2.62

 

 

19,645

 

 

2.74

 

 

 



















Total mortgage-backed securities

 

 

469,205

 

 

75.04

 

 

516,807

 

 

90.78

 

 

606,103

 

 

84.72

 

Federal Home Loan Bank agency notes

 

 

85,502

 

 

13.68

 

 

9,992

 

 

1.76

 

 

39,689

 

 

5.55

 

Federal Farm Credit Bank agency notes

 

 

27,218

 

 

4.35

 

 

15,000

 

 

2.63

 

 

29,795

 

 

4.17

 

 

 



















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

 

 

581,925

 

 

93.07

 

 

541,799

 

 

95.17

 

 

675,587

 

 

94.44

 

Obligations of state and political subdivisions

 

 

19,142

 

 

3.06

 

 

21,601

 

 

3.79

 

 

31,307

 

 

4.38

 

Trust preferred securities

 

 

4,303

 

 

0.69

 

 

1,248

 

 

0.22

 

 

 

 

 

Corporate securities

 

 

12,810

 

 

2.05

 

 

 

 

 

 

 

 

 

Federal Reserve Bank stock

 

 

1,131

 

 

0.18

 

 

1,131

 

 

0.19

 

 

1,131

 

 

0.16

 

Federal Home Loan Bank stock

 

 

5,360

 

 

0.86

 

 

2,719

 

 

0.48

 

 

5,950

 

 

0.83

 

Other securities

 

 

320

 

 

0.05

 

 

326

 

 

0.06

 

 

324

 

 

0.05

 

Debt securities issued by foreign governments

 

 

250

 

 

0.04

 

 

500

 

 

0.09

 

 

1,000

 

 

0.14

 

 

 



















Total

 

$

625,241

 

 

100.00

%

$

569,324

 

 

100.00

%

$

715,299

 

 

100.00

%

 

 



















PAGE 25



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

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Life

 

Weighted Average Yield

 

 


 



December 31, 2007

 

AFS

 

HTM

 

AFS

 

HTM

 











Mortgage-backed securities

 

4.7 years

 

4.6 years

 

4.69

%

4.64

%

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

 

13.5 years

 

9.7 years

 

6.01

%

5.00

%

Agency notes (noncallable)

 

 

0.6 years

 

 

4.50

%

Obligations of state and political subdivisions

 

5.7 years

 

 

6.24

%(1)

 

[1]       tax equivalent

Loan Portfolio

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

The Company’s commercial and industrial loan and factored receivables portfolios represents approximately 52% of all loans. Loans in this category are typically made to individuals, small and medium-sized businesses and range between $250,000 and $15 million. The Company’s leasing portfolio, which consists of finance leases for various types of business equipment, represents approximately 21% of all loans. The leasing and commercial and industrial loan portfolios are included in corporate lending for segment reporting purposes as presented in Note 22 beginning on page 75. The Company’s real estate loan portfolios, which represent approximately 24% of all loans, are secured by mortgages on real property located principally in the states of New York, New Jersey, Virginia and North Carolina. Sources of repayment are from the borrower’s operating profits, cash flows and liquidation of pledged collateral. Based on underwriting standards, loans and leases may be secured whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory, and real property. The collateral securing any loan or lease may depend on the type of loan and may vary in value based on market conditions.

The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 51), sets forth the composition of the Company’s loans held for sale and loans held in portfolio, net of unearned discounts, at the end of each of the five most recent fiscal years:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2007

 

2006

 

2005

 

2004

 

2003

 













 

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

 

 





















 

 

(dollars in thousands)

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

539,969

 

 

44.59

%

$

521,992

 

 

45.55

%

$

414,952

 

 

39.40

%

$

386,557

 

 

40.96

%

$

334,547

 

 

41.12

%

Lease financing

 

 

249,702

 

 

20.62

 

 

207,771

 

 

18.13

 

 

190,391

 

 

18.08

 

 

162,961

 

 

17.27

 

 

148,737

 

 

18.29

 

Factored receivables

 

 

92,631

 

 

7.65

 

 

100,156

 

 

8.74

 

 

100,663

 

 

9.56

 

 

93,186

 

 

9.87

 

 

101,653

 

 

12.50

 

Real estate—residential mortgage

 

 

153,221

 

 

12.66

 

 

153,376

 

 

13.39

 

 

188,723

 

 

17.92

 

 

149,387

 

 

15.83

 

 

107,766

 

 

13.25

 

Real estate—commercial mortgage

 

 

99,093

 

 

8.18

 

 

93,215

 

 

8.13

 

 

110,871

 

 

10.53

 

 

113,933

 

 

12.07

 

 

94,145

 

 

11.57

 

Real estate—construction and land development

 

 

37,161

 

 

3.07

 

 

30,031

 

 

2.62

 

 

2,309

 

 

0.22

 

 

2,320

 

 

0.24

 

 

2,368

 

 

0.29

 

Installment—individuals

 

 

12,103

 

 

1.00

 

 

12,381

 

 

1.08

 

 

13,125

 

 

1.25

 

 

15,477

 

 

1.64

 

 

14,259

 

 

1.75

 

Loans to depository institutions

 

 

27,000

 

 

2.23

 

 

27,000

 

 

2.36

 

 

32,000

 

 

3.04

 

 

20,000

 

 

2.12

 

 

10,000

 

 

1.23

 

 

 































Total

 

$

1,210,880

 

 

100.00

%

$

1,145,922

 

 

100.00

%

$

1,053,034

 

 

100.00

%

$

943,821

 

 

100.00

%

$

813,475

 

 

100.00

%

 

 































The following table sets forth the maturities of the Company’s commercial and industrial, factored receivables and construction and land development loans, as of December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due One
Year
or Less

 

Due One
to Five
Years

 

Due
After Five
Years

 

Total
Gross
Loans

 










 

 

 

(in thousands)

 

Commercial and industrial

 

$

468,285

 

$

59,638

 

 

$

12,046

 

 

$

539,969

 

Factored receivables

 

 

93,017

 

 

 

 

 

 

 

 

93,017

 

Real estate—construction and land development

 

 

 

 

37,161

 

 

 

 

 

 

37,161

 

All commercial and industrial loans due after one year have predetermined interest rates.

All real estate—construction and land development loans due after one year have floating or adjustable interest rates.

PAGE 26



Asset Quality

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

The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 51), sets forth the amount of domestic nonaccrual and past due loans of the Company at the end of each of the five most recent fiscal years; there were no foreign loans accounted for on a nonaccrual basis and there were no troubled debt restructurings for any types of loans. Loans contractually past due 90 days or more as to principal or interest and still accruing are loans that are both well-secured or guaranteed by financially responsible third parties and are in the process of collection.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2007

 

2006

 

2005

 

2004

 

2003

 













 

 

(dollars in thousands)

 

Gross loans

 

$

1,249,128

 

$

1,177,705

 

$

1,081,701

 

$

967,184

 

$

833,675

 

 

 
















Nonaccrual loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

610

 

$

1,490

 

$

611

 

$

67

 

$

1,695

 

Lease financing

 

 

2,571

 

 

2,933

 

 

2,109

 

 

1,304

 

 

783

 

Factored receivables

 

 

 

 

 

 

 

 

 

 

 

Real estate—residential mortgage

 

 

2,786

 

 

1,011

 

 

740

 

 

704

 

 

489

 

Installment—individuals

 

 

416

 

 

427

 

 

397

 

 

72

 

 

49

 

 

 
















Total nonaccrual loans

 

 

6,383

 

 

5,861

 

 

3,857

 

 

2,147

 

 

3,016

 

Past due 90 days or more (other than the above)

 

 

1,329

 

 

989

 

 

821

 

 

1,672

 

 

127

 

 

 
















Total

 

$

7,712

 

$

6,850

 

$

4,678

 

$

3,819

 

$

3,143

 

 

 
















Interest income that would have been earned on nonaccrual loans outstanding

 

$

655

 

$

545

 

$

294

 

$

185

 

$

146

 

 

 
















Applicable interest income actually realized on nonaccrual loans outstanding

 

$

222

 

$

335

 

$

95

 

$

92

 

$

93

 

 

 
















Nonaccrual and past due loans as a percentage of total gross loans

 

 

0.62

%

 

0.58

%

 

0.43

%

 

0.39

%

 

0.38

%

 

 
















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 future 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 which will be greater than that indicated by the evaluation process previously described. The allowance reflects management’s evaluation both of loans presenting identified loss potential and of the risk inherent in various components of the portfolio, including loans identified as impaired as required by SFAS No. 114.

Thus, an increase in the size of the portfolio or in any of its components could necessitate an increase in the allowance even though there may not be a decline in credit quality or an increase in potential problem loans. A significant change in any of the evaluation factors described above could result in future additions to the allowance. At December 31, 2007, the ratio of the

PAGE 27



allowance to loans held in portfolio, net of unearned discounts, was 1.27% and the allowance was $15.1 million. At such date, the Company’s nonaccrual loans amounted to $6.4 million; $0.6 million of such loans was judged to be impaired within the scope of SFAS No. 114. Based on the foregoing, as well as management’s judgment as to the current risks inherent in loans held in portfolio, the Company’s allowance for loan losses was deemed adequate as of December 31, 2007. 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 taken in 2007. Potential problem loans, which are loans that are currently performing under present loan repayment terms but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of the borrowers to continue to comply with the present repayment terms, aggregated $-0- million at both December 31, 2007 and 2006.

The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 51), sets forth certain information with respect to the Company’s loan loss experience for each of the five most recent fiscal years:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2007

 

2006

 

2005

 

2004

 

2003

 


















 

 

(dollars in thousands)

 

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

 

$

1,069,453

 

$

1,002,688

 

$

890,085

 

$

778,272

 

$

673,412

 

 

 
















Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

16,288

 

$

15,369

 

$

14,437

 

$

12,730

 

$

10,644

 

 

 
















Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

2,620

 

 

1,075

 

 

446

 

 

1,784

 

 

1,588

 

Lease financing

 

 

3,345

 

 

4,618

 

 

3,732

 

 

2,446

 

 

1,155

 

Factored receivables

 

 

243

 

 

223

 

 

369

 

 

552

 

 

478

 

Real estate—residential mortgage

 

 

215

 

 

24

 

 

13

 

 

8

 

 

547

 

Installment

 

 

67

 

 

 

 

 

 

9

 

 

38

 

 

 
















Total charge-offs

 

 

6,490

 

 

5,940

 

 

4,560

 

 

4,799

 

 

3,806

 

 

 
















Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

219

 

 

786

 

 

219

 

 

737

 

 

480

 

Lease financing

 

 

316

 

 

310

 

 

76

 

 

44

 

 

25

 

Factored receivables

 

 

31

 

 

32

 

 

39

 

 

63

 

 

72

 

Real estate—residential mortgage

 

 

30

 

 

 

 

 

 

 

 

 

Installment

 

 

110

 

 

38

 

 

39

 

 

43

 

 

61

 

 

 
















Total recoveries

 

 

706

 

 

1,166

 

 

373

 

 

887

 

 

638

 

 

 
















Subtract:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs

 

 

5,784

 

 

4,774

 

 

4,187

 

 

3,912

 

 

3,168

 

 

 
















Provision for loan losses

 

 

5,853

 

 

4,503

 

 

5,214

 

 

6,139

 

 

5,412

 

 

 
















Add allowance from acquisition

 

 

 

 

1,845

 

 

 

 

 

 

 

 

 
















Less loss on transfers to other real estate owned

 

 

1,272

 

 

655

 

 

95

 

 

520

 

 

158

 

 

 
















Balance at end of year

 

$

15,085

 

$

16,288

 

$

15,369

 

$

14,437

 

$

12,730

 

 

 
















Ratio of net charge-offs to average loans held in portfolio, net of unearned discounts, during year

 

 

0.54

%

 

0.48

%

 

0.47

%

 

0.50

%

 

0.47

%

 

 
















PAGE 28



The following table, restated to reflect the disposition of Sterling Financial (see Note 2 beginning on page 51), presents the Company’s allocation of the allowance for loan losses. This allocation is based on estimates by management and may vary from year to year based on management’s evaluation of the risk characteristics of the loan portfolio. The amount allocated to a particular loan category of the Company’s loans held in portfolio may not necessarily be indicative of actual future charge-offs in that loan category.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2007

 

2006

 

2005

 

2004

 

2003

 


















 

 

Amount

 

% of
Loans
in each
category
to total
loans
held in
portfolio

 

Amount

 

% of
Loans
in each
category
to total
loans
held in
portfolio

 

Amount

 

% of
Loans
in each
category
to total
loans
held in
portfolio

 

Amount

 

% of
Loans
in each
category
to total
loans
held in
portfolio

 

Amount

 

% of
Loans
in each
category
to total
loans
held in
portfolio

 

 

 





















 

 

(dollars in thousands)

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

5,655

 

 

45.49

%

 

$

6,488

 

 

46.92

%

 

$

7,017

 

 

41.00

%

 

$

6,674

 

 

42.63

%

 

$

5,316

 

 

43.28

%

 

Loans to depository institutions

 

 

54

 

 

2.27

 

 

 

135

 

 

2.43

 

 

 

112

 

 

3.16

 

 

 

120

 

 

2.20

 

 

 

80

 

 

1.29

 

 

Lease financing

 

 

5,398

 

 

21.03

 

 

 

6,356

 

 

18.67

 

 

 

4,636

 

 

18.81

 

 

 

4,073

 

 

17.97

 

 

 

2,686

 

 

19.24

 

 

Factored receivables

 

 

1,083

 

 

7.80

 

 

 

1,127

 

 

9.00

 

 

 

1,260

 

 

9.95

 

 

 

1,071

 

 

10.28

 

 

 

1,592

 

 

13.15

 

 

Real estate—residential mortgage

 

 

1,988

 

 

10.91

 

 

 

1,468

 

 

10.79

 

 

 

1,437

 

 

14.60

 

 

 

1,412

 

 

12.39

 

 

 

1,228

 

 

8.70

 

 

Real estate—commercial mortgage

 

 

613

 

 

8.35

 

 

 

501

 

 

8.38

 

 

 

509

 

 

10.95

 

 

 

772

 

 

12.56

 

 

 

1,082

 

 

12.18

 

 

Real estate—construction and land development

 

 

183

 

 

3.13

 

 

 

150

 

 

2.70

 

 

 

10

 

 

0.23

 

 

 

15

 

 

0.26

 

 

 

24

 

 

0.31

 

 

Installment—individuals

 

 

15

 

 

1.02

 

 

 

 

 

1.11

 

 

 

110

 

 

1.30

 

 

 

100

 

 

1.71

 

 

 

14

 

 

1.85

 

 

Unallocated

 

 

96

 

 

 

 

 

63

 

 

 

 

 

278

 

 

 

 

 

200

 

 

 

 

 

708

 

 

 

 

 

 




































Total

 

$

15,085

 

 

100.00

%

 

$

16,288

 

 

100.00

%

 

$

15,369

 

 

100.00

%

 

$

14,437

 

 

100.00

%

 

$

12,730

 

 

100.00

%

 

 

 




































During 2007 the allowance for loan losses decreased primarily because decreases in the allowance allocated to commercial and industrial loans and lease financing more than offset an increase in the allowance allocated to real estate—residential mortgage loans. During 2007 the allowance allocated to commercial and industrial loans decreased primarily as a result of another year of low loss experience in Sterling Resource Funding Corp. compared to its loss experience before the Company acquired it as of April 1, 2006. The allowance allocated to lease financing decreased primarily as a result of improved loss experience in that category in 2007 compared to 2006. The allowance allocated to real estate—residential mortgage loans increased primarily due to increased risks in the real estate market in 2007 compared to 2006 and an increase in the specific valuation allowance for impaired loans.

PAGE 29



Deposits

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2007

 

2006

 

2005

 









 

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

Balances

 

% of
Total

 

 

 













 

 

(dollars in thousands)

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

535,351

 

 

35.06

%   

$

546,443

 

 

35.90

%   

$

510,884

 

 

35.27

%

NOW

 

 

241,333

 

 

15.80

 

 

233,990

 

 

15.37

 

 

208,217

 

 

14.38

 

Savings

 

 

17,690

 

 

1.16

 

 

19,007

 

 

1.25

 

 

25,296

 

 

1.75

 

Money Market

 

 

208,423

 

 

13.65

 

 

194,604

 

 

12.79

 

 

202,660

 

 

13.99

 

Time deposits by remaining maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 3 months

 

 

216,024

 

 

14.15

 

 

203,038

 

 

13.34

 

 

252,383

 

 

17.43

 

After 3 months but within 1 year

 

 

256,686

 

 

16.81

 

 

243,806

 

 

16.02

 

 

173,301

 

 

11.96

 

After 1 year but within 2 years

 

 

48,138

 

 

3.15

 

 

78,808

 

 

5.18

 

 

67,897

 

 

4.69

 

After 2 years but within 3 years

 

 

1,270

 

 

0.08

 

 

1,035

 

 

0.07

 

 

4,269

 

 

0.29

 

After 3 years but within 4 years

 

 

472

 

 

0.03

 

 

337

 

 

0.02

 

 

144

 

 

0.01

 

After 4 years but within 5 years

 

 

1,022

 

 

0.07

 

 

353

 

 

0.02

 

 

233

 

 

0.02

 

After 5 years

 

 

1

 

 

 

 

35

 

 

 

 

20

 

 

 

 

 



















Total domestic deposits

 

 

1,526,410

 

 

99.96

 

 

1,521,456

 

 

99.96

 

 

1,445,304

 

 

99.79

 

 

 



















Foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits by remaining maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 3 months

 

 

395

 

 

0.03

 

 

395

 

 

0.03

 

 

1,645

 

 

0.11

 

After 3 months but within 1 year

 

 

181

 

 

0.01

 

 

179

 

 

0.01

 

 

1,377

 

 

0.10

 

 

 



















Total foreign deposits

 

 

576

 

 

0.04

 

 

574

 

 

0.04

 

 

3,022

 

 

0.21

 

 

 



















Total deposits

 

$

1,526,986

 

 

100.00

%

$

1,522,030

 

 

100.00

%

$

1,448,326

 

 

100.00

%

 

 



















Fluctuations of balances in total or among categories at any date can occur based on the Company’s mix of assets and liabilities, as well as on customers’ balance sheet strategies. Historically, however, average balances for deposits have been relatively stable. Information regarding these average balances for the three most recent fiscal years is presented on page 31.

PAGE 30



Sterling Bancorp
CONSOLIDATED AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST EARNINGS [1]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2007

 

2006

 

2005

 









 

 

Average
Balance

 

Interest

 

Average
Rate

 

Average
Balance

 

Interest

 

Average
Rate

 

Average
Balance

 

Interest

 

Average
Rate

 

 

 



















 

 

 

 

 

 

 

 

 

 

 

       (dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits with other banks

 

$

3,033

 

$

117

 

 

3.86

%

$

2,624

 

$

103

 

 

4.48

%

$

3,040

 

$

65

 

 

1.96

%

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

165,289

 

 

8,379

 

 

5.07

 

 

146,820

 

 

6,841

 

 

4.66

 

 

192,354

 

 

8,438

 

 

4.39

 

Held to maturity

 

 

401,212

 

 

18,705

 

 

4.66

 

 

473,608

 

 

21,496

 

 

4.54

 

 

495,187

 

 

22,181

 

 

4.48

 

Tax-exempt[2]

 

 

19,962

 

 

1,250

 

 

6.26

 

 

27,174

 

 

1,760

 

 

6.47

 

 

26,088

 

 

1,816

 

 

6.96

 

Federal funds sold

 

 

23,219

 

 

1,236

 

 

5.32

 

 

4,041

 

 

195

 

 

4.84

 

 

10,986

 

 

309

 

 

2.81

 

Loans, net of unearned discounts[3]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

1,113,372

 

 

92,255

 

 

8.83

 

 

1,043,680

 

 

86,882

 

 

8.97

 

 

944,033

 

 

69,787

 

 

7.99

 

 

 






 

 

 

 






 

 

 

 






 

 

 

 

TOTAL INTEREST-EARNING ASSETS

 

 

1,726,087

 

 

121,942

 

 

7.36

%

 

1,697,947

 

 

117,277

 

 

7.23

%

 

1,671,688

 

 

102,596

 

 

6.41

%