XNYS:STL Sterling Bancorp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended  June 30, 2012
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________________________ to __________________________
 
Commission File Number: 1-5273-1

 

Sterling Bancorp

(Exact name of registrant as specified in its charter)

 

New York   12-2565216
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification)
     
650 Fifth Avenue, New York, N.Y.   10019-6108
(Address of principal executive offices)   (Zip Code)

 

212-757-3300

(Registrant's telephone number, including area code)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes oNo

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (17 CFR § 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

xYes oNo

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

oYes x No

 

As of July 31, 2012 there were 30,917,138 shares of common stock,

$1.00 par value, outstanding.

 



 


 

 

STERLING BANCORP

 

PART I FINANCIAL INFORMATION   Page
         
  Item 1. Financial Statements    
         
    Consolidated Financial Statements (Unaudited)   3
    Notes to Consolidated Financial Statements (Unaudited)   8
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    
         
    Overview   41
    Income Statement Analysis   42
    Balance Sheet Analysis   46
    Capital   53
    Recently Issued Accounting Pronouncements   55
    Cautionary Statement Regarding Forward-Looking Statements   55
    Average Balance Sheets   56
    Rate/Volume Analysis   58
    Regulatory Capital and Ratios   60
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk    
         
    Asset/Liability Management   61
    Information Available on Our Web Site   63
    Interest Rate Sensitivity   64
         
  Item 4. Controls and Procedures   65
         
PART II OTHER INFORMATION    
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   65
         
  Item 5. Other Information   65
         
  Item 6. Exhibits   66
         
SIGNATURES   67
         
EXHIBITS INDEX   68
         
  Exhibit 11 Statement Re: Computation of Per Share Earnings   69
  Exhibit 31.1 Certification of the CEO pursuant to Exchange Act Rule 13a-14(a)   70
  Exhibit 31.2 Certification of the CFO pursuant to Exchange Act Rule 13a-14(a)   71
  Exhibit 32.1 Certification of the CEO required by Section  1350 of Chapter 63 of Title 18 of the U.S. Code   72
  Exhibit 32.2 Certification of the CFO required by Section 1350 of Chapter 63 of Title 18 of the U.S. Code   73
  101.INS* XBRL Instance Document.    
  101.SCH* XBRL Taxonomy Extension Schema.    
  101.CAL* XBRL Taxonomy Extension Calculation Linkbase.    
  101.LAB* XBRL Taxonomy Extension Label Linkbase.    
  101.PRE* XBRL Taxonomy Extension Presentation Linkbase.    
  101.DEF* XBRL Taxonomy Definition Linkbase.    

 

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

2
 

 

STERLING BANCORP AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(dollars in thousands, except per share data)

 

   June 30,   December 31, 
   2012   2011 
ASSETS          
Cash and due from banks  $44,138   $31,046 
Interest-bearing deposits with other banks   39,517    126,448 
           
Securities available for sale (at estimated fair value; pledged: $170,012 in 2012 and $146,429 in 2011)   348,714    270,014 
Securities held to maturity (pledged: $130,862 in 2012 and $206,282 in 2011) (estimated fair value: $395,298 in 2012 and $425,775 in 2011)   378,664    407,857 
Total investment securities   727,378    677,871 
           
Loans held for sale, net   30,287    43,372 
Loans held in portfolio, net of unearned discounts   1,565,580    1,473,309 
Less allowance for loan losses   21,135    20,029 
Loans, net   1,544,445    1,453,280 
           
Federal Reserve and Federal Home Loan Bank stock, at cost   8,394    8,486 
Customers' liability under acceptances       4 
Goodwill   22,901    22,901 
Premises and equipment, net   23,174    23,625 
Other real estate   1,547    1,929 
Accrued interest receivable   8,077    6,838 
Cash surrender value of life insurance policies   54,039    53,446 
Other assets   47,799    44,051 
Total assets  $2,551,696   $2,493,297 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits          
Noninterest-bearing demand deposits  $786,359   $765,800 
Savings, NOW and money market deposits   638,870    565,423 
Time deposits   617,817    657,848 
Total deposits   2,043,046    1,989,071 
           
Securities sold under agreements to repurchase - customers   43,199    47,313 
Securities sold under agreements to repurchase - dealers       5,000 
Federal funds purchased   5,000     
Commercial paper   12,455    13,485 
Advances - FHLB   122,002    122,733 
Long-term borrowings - subordinated debentures   25,774    25,774 
Total borrowings   208,430    214,305 
Acceptances outstanding       4 
Accrued interest payable   754    1,064 
Accrued expenses and other liabilities   71,915    68,032 
Total liabilities   2,324,145    2,272,476 
           
Shareholders' equity          
Common stock, $1 par value. Authorized 50,000,000 shares; issued 35,225,110 and 35,225,110 shares, respectively   35,225    35,225 
Capital surplus   271,058    270,869 
Retained earnings   19,434    15,523 
Accumulated other comprehensive loss   (11,511)   (14,216)
Common shares in treasury at cost, 4,307,972 and 4,300,278 shares, respectively   (86,655)   (86,580)
Total shareholders' equity   227,551    220,821 
Total liabilities and shareholders' equity  $2,551,696   $2,493,297 

 

See Notes to Consolidated Financial Statements.

 

3
 

 

STERLING BANCORP AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(dollars in thousands, except per share data)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
INTEREST INCOME                    
Loans  $20,044   $18,110   $39,730   $35,285 
Investment securities                    
Available for sale   2,643    2,824    5,020    5,378 
Held to maturity   2,844    3,482    5,874    6,879 
FRB and FHLB stock   134    143    215    166 
Deposits with other banks   18    22    64    57 
Total interest income   25,683    24,581    50,903    47,765 
                     
INTEREST EXPENSE                    
Deposits                    
Savings, NOW and money market   658    700    1,302    1,400 
Time   1,012    1,382    2,075    2,742 
Short-term borrowings   69    87    133    165 
Advances - FHLB   518    500    1,037    1,164 
Long-term borrowings -                    
subordinated debentures   524    524    1,047    1,047 
Total interest expense   2,781    3,193    5,594    6,518 
                     
Net interest income   22,902    21,388    45,309    41,247 
                     
Provision for loan losses   2,750    3,000    5,750    6,000 
                     
Net interest income after provision for loan losses   20,152    18,388    39,559    35,247 
                     
NONINTEREST INCOME                    
Accounts receivable management/factoring commissions and other related fees   5,065    5,768    9,933    10,837 
Mortgage banking income   2,393    1,600    4,729    3,775 
Service charges on deposit accounts   1,615    1,432    3,028    2,803 
Securities gains, net   329    505    1,208    1,629 
Other income   1,281    1,092    2,224    2,365 
Total noninterest income   10,683    10,397    21,122    21,409 
                     
NONINTEREST EXPENSE                    
Salaries and employee benefits   14,895    14,465    29,806    28,725 
Occupancy and equipment expenses, net   3,402    3,515    6,616    6,788 
Deposit insurance   540    897    1,124    1,830 
Professional fees   1,508    889    2,411    1,707 
Other expenses   3,489    3,680    7,074    6,849 
Total noninterest expenses   23,834    23,446    47,031    45,899 
                     
Income before income taxes   7,001    5,339    13,650    10,757 
                     
Provision for income taxes   2,128    1,394    4,175    2,869 
                     
Net income   4,873    3,945    9,475    7,888 
Dividends on preferred shares and accretion       189        833 
Accelerated accretion from redemption of preferred shares       1,241        1,241 
Net income available to common shareholders  $4,873   $2,515   $9,475   $5,814 
                     
Average number of common shares outstanding                    
Basic   30,818,709    30,414,947    30,805,484    28,883,154 
Diluted   30,818,709    30,414,947    30,805,484    28,883,154 
                     
Net income available to common shareholders, per average common share                    
Basic  $0.16   $0.08   $0.31   $0.20 
Diluted   0.16    0.08    0.31    0.20 
                     
Dividends per common share   0.09    0.09    0.18    0.18 

 

See Notes to Consolidated Financial Statements.

 

4
 

 

STERLING BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(dollars in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Net income  $4,873   $3,945   $9,475   $7,888 
                     
Other comprehensive income, net of tax:                    
Unrealized (losses)gains on securities available for sale arising during the year   (338)   929    2,347    1,308 
                     
Reclassification adjustment for securities' gains included in net income   (183)   (208)   (671)   (606)
                     
Reclassification adjustment for amortization of:                    
Prior service cost   7    8    12    17 
Net actuarial losses   564    390    1,017    779 
                     
Other comprehensive income   50    1,119    2,705    1,498 
                     
Comprehensive income  $4,923   $5,064   $12,180   $9,386 

 

See Notes to Consolidated Financial Statements.

 

5
 

 

STERLING BANCORP AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

(dollars in thousands)

 

   Six Months Ended 
   June 30, 
   2012   2011 
Preferred Stock          
Balance at January 1,  $   $40,602 
Discount accretion       157 
Redemption       (42,000)
Accelerated accretion       1,241 
Balance at June 30,  $   $ 
           
Common Stock          
Balance at January 1,  $35,225   $31,139 
Common shares issued       4,025 
Restricted shares issued       61 
Balance at June 30,  $35,225   $35,225 
           
Warrants to Purchase Common Stock          
Balance at January 1,  $   $2,615 
Repurchase of warrants       (2,615)
Balance at June 30,  $   $ 
           
Capital Surplus          
Balance at January 1,  $270,869   $236,437 
Common shares issued       32,429 
Restricted shares issued       (61)
Repurchase of warrants       1,670 
Stock option compensation and restricted stock expense   189    146 
Balance at June 30,  $271,058   $270,621 
           
Retained Earnings          
Balance at January 1,  $15,523   $11,392 
Net income   9,475    7,888 
Cash dividends paid - preferred shares       (945)
Cash dividends paid - common shares   (5,564)   (5,558)
Discount accretion on series A preferred stock    —    (157)
Accelerated accretion - preferred shares       (1,241)
Balance at June 30,  $19,434   $11,379 
           
Accumulated Other Comprehensive Loss          
Balance at January 1,  $(14,216)  $(12,887)
Other comprehensive income, net of tax   2,705    1,498 
Balance at June 30,  $(11,511)  $(11,389)
           
Treasury Stock          
Balance at January 1,  $(86,580)  $(86,556)
Surrender of shares issued under stock incentive plan   (75)   (24)
Balance at June 30,  $(86,655)  $(86,580)
           
Total Shareholders' Equity          
Balance at January 1,  $220,821   $222,742 
Net changes during the period   6,730    (3,486)
Balance at June 30,  $227,551   $219,256 

 

See Notes to Consolidated Financial Statements.

 

6
 

 

STERLING BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

 

 

   Six Months Ended 
   June 30, 
   2012   2011 
Operating Activities          
Net Income  $9,475   $7,888 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   5,750    6,000 
Depreciation and amortization of premises and equipment   1,822    1,497 
Securities gains, net   (1,208)   (1,629)
Gains from life insurance policies, net   (458)   (216)
Deferred income tax benefit   (1,221)   (498)
Proceeds from sale of loans   238,680    188,026 
Gains on sales of loans, net   (4,735)   (3,787)
Originations of loans held for sale   (221,687)   (178,286)
Amortization of premiums on securities   4,248    4,686 
Accretion of discounts on securities   (344)   (219)
Increase in accrued interest receivable   (1,167)   (1,235)
Decrease in accrued interest payable   (310)   (340)
Decrease in accrued expenses and other liabilities   (4,412)   (23,060)
Decrease (Increase) in other assets   586    (2,607)
Loss (Gain) on other real estate owned   66    (5)
Net cash provided by (used in) operating activities   25,085    (3,785)
           
Investing Activities          
Purchase of premises and equipment   (1,371)   (7,972)
Net decrease (increase) in interest-bearing deposits with other banks   86,931    (62,386)
Net increase in loans held in portfolio   (110,556)   (52,151)
Net decrease (increase) in short-term factored receivables   14,325    (4,488)
Proceeds from sale of other real estate   404    36 
Proceeds from prepayments, redemptions or maturities of securities - held to maturity   20,735    27,866 
Purchases of securities - held to maturity   (142,469)   (159,305)
Proceeds from calls of securities - held to maturity   160,962    60,000 
Proceeds from prepayments, redemptions or maturities of securities - available for sale   259,771    149,427 
Purchases of securities - available for sale   (455,460)   (318,695)
Proceeds from calls/sales of securities - available for sale   112,107    146,961 
Proceeds from redemptions or maturities of FHLB & FRB stock   317    831 
Purchases of FHLB & FRB stock   (225)   (210)
Net cash used in investing activities   (54,529)   (220,086)
           
Financing Activities          
Net increase in noninterest-bearing demand deposits   20,559    31,950 
Net increase in savings, NOW and money market deposits   73,447    73,996 
Net (decrease) increase in time deposits   (40,031)   147,084 
Net increase (decrease) in Federal funds purchased   5,000    (15,000)
Net (decrease) increase in securities sold under agreements to repurchase   (9,114)   6,220 
Net (decrease) increase in commercial paper and other short-term borrowings   (1,030)   21,414 
Decrease in long-term borrowings   (731)   (15,717)
Proceeds from issuance of common stock       36,454 
Cash dividends paid on preferred stock       (945)
Cash dividends paid on common stock   (5,564)   (5,558)
Net repayment redemption of preferred stock and common stock warrants       (42,945)
Net cash provided by financing activities   42,536    236,953 
           
Net increase in cash and due from banks   13,092    13,082 
Cash and due from banks - beginning of period   31,046    26,824 
           
Cash and due from banks - end of period  $44,138   $39,906 
           
Supplemental disclosures:          
Interest paid  $5,905   $6,858 
Income taxes paid   2,248    3,458 
Loans held for sale transferred to portfolio   827    942 
Loans transferred to other real estate   144    1,903 
Due to brokers on sale of securities - AFS   5,173     
Due to brokers on purchases of securities - HTM   10,072     

 

See Notes to Consolidated Financial Statements.

 

7
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 1. Significant Accounting Policies

 

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

 

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

 

Basis of Presentation. The consolidated financial statements include the accounts of Sterling Bancorp and its subsidiaries, principally the bank, after elimination of intercompany transactions. The consolidated financial statements as of and for the interim periods ended June 30, 2012 and 2011 are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of such periods have been made. Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current presentation. Throughout the notes, dollar amounts presented in tables are in thousands, except per share data. The interim consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2011 (the “2011 Form

10-K”).

 

Use of Estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make assumptions and estimates which impact the amounts reported in those statements and are, by their nature, subject to change in the future as additional information becomes available or as circumstances vary. Actual results could differ from management’s current estimates as a result of changing conditions and future events. The current economic environment has increased the degree of uncertainty inherent in these significant estimates. Several accounting estimates are particularly critical and are susceptible to significant near-term change, including the allowance for loan losses and asset impairment judgments, such as other-than-temporary declines in the value of securities and the accounting for income taxes. The judgments used by management in applying these critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect outstanding principal may result in increased loan losses. The Company evaluates subsequent events through the date that the financial statements are issued.

 

8
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 2. Investment Securities

 

The following tables present information regarding securities available for sale:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
June 30, 2012  Cost   Gains   Losses   Value 
                 
U.S. Treasury securities  $5,991   $   $2   $5,989 
                     
Obligations of U.S. government corporations and government sponsored enterprises                    
Residential mortgage-backed securities                    
CMOs (Federal Home Loan Mortgage Corporation)   27,757    46    200    27,603 
CMOs (Government National Mortgage Association)   4,766    6    17    4,755 
Federal National Mortgage Association   1,889    107        1,996 
Federal Home Loan Mortgage Corporation   36        1    35 
Government National Mortgage Association   93            93 
Total residential mortgage-backed securities   34,541    159    218    34,482 
                     
Agency notes                    
Federal National Mortgage Association   200            200 
Federal Home Loan Bank   300            300 
Federal Home Loan Mortgage Corporation   75    5        80 
Total obligations of U.S. government corporations and government sponsored enterprises   35,116    164    218    35,062 
                     
Obligations of state and political institutions-New York Bank Qualified   17,019    1,294        18,313 
Single-issuer, trust preferred securities   31,821    465    471    31,815 
Other preferred securities   5,393    1    55    5,339 
Corporate debt securities   236,309    405    1,496    235,218 
Equity and other securities   15,758    1,840    620    16,978 
Total  $347,407   $4,169   $2,862   $348,714 

 

9
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
December 31, 2011  Cost   Gains   Losses   Value 
                 
Obligations of U.S. government corporations and government sponsored enterprises                    
Residential mortgage-backed securities                    
CMOs (Federal Home Loan Mortgage Corporation)  $21,642   $103   $6   $21,739 
CMOs (Government National Mortgage Association)   5,666    12    11    5,667 
Federal National Mortgage Association   2,137    74        2,211 
Federal Home Loan Mortgage Corporation   38        1    37 
Government National Mortgage Association   98            98 
Total residential mortgage-backed securities   29,581    189    18    29,752 
                     
Agency notes                    
Federal National Mortgage Association   501            501 
Federal Home Loan Bank   101    1        102 
Federal Home Loan Mortgage Corporation   376    7        383 
Federal Farm Credit Bank   251            251 
Total obligations of U.S. government corporations and government sponsored enterprises   30,810    197    18    30,989 
                     
Obligations of state and political institutions-New York Bank Qualified   21,171    1,606        22,777 
Single-issuer, trust preferred securities   28,506    214    1,661    27,059 
Corporate debt securities   175,920    263    2,876    173,307 
Equity and other securities   15,322    958    398    15,882 
Total  $271,729   $3,238   $4,953   $270,014 

 

10
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables present information regarding securities held to maturity:

 

       Gross   Gross     
   Carrying   Unrealized   Unrealized   Fair 
June 30, 2012  Value   Gains   Losses   Value 
                 
Obligations of U.S. government corporations and government sponsored enterprises                    
Residential mortgage-backed securities                    
CMOs (Federal National Mortgage Association)  $2,784   $135   $   $2,919 
CMOs (Federal Home Loan Mortgage Corporation)   4,639    212        4,851 
Federal National Mortgage Association   39,188    3,392        42,580 
Federal Home Loan Mortgage Corporation   18,727    1,416        20,143 
Government National Mortgage Association   3,732    579        4,311 
Total residential mortgage-backed securities   69,070    5,734        74,804 
                     
Agency notes                    
Federal National Mortgage Association   63,478    81    25    63,534 
Federal Home Loan Bank   68,409    6    80    68,335 
Federal Home Loan Mortgage Corporation   39,991    182        40,173 
Total obligations of U.S. government corporations and government sponsored enterprises   240,948    6,003    105    246,846 
                     
Obligations of state and political institutions-New York Bank Qualified   137,716    10,738    2    148,452 
Total  $378,664   $16,741   $107   $395,298 

 

11
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

       Gross   Gross     
   Carrying   Unrealized   Unrealized   Fair 
December 31, 2011  Value   Gains   Losses   Value 
                 
Obligations of U.S. government corporations and government sponsored enterprises                    
Residential mortgage-backed securities                    
CMOs (Federal National Mortgage Association)  $3,942   $192   $   $4,134 
CMOs (Federal Home Loan Mortgage Corporation)   6,474    305        6,779 
Federal National Mortgage Association   46,937    3,777        50,714 
Federal Home Loan Mortgage Corporation   23,682    1,669        25,351 
Government National Mortgage Association   4,132    603        4,735 
Total residential mortgage-backed securities   85,167    6,546        91,713 
                     
Agency notes                    
Federal National Mortgage Association   104,981    203        105,184 
Federal Home Loan Bank   44,992    34        45,026 
Federal Home Loan Mortgage Corporation   34,991    49    9    35,031 
Total obligations of U.S. government corporations and government sponsored enterprises   270,131    6,832    9    276,954 
                     
Obligations of state and political institutions-New York Bank Qualified   137,726    11,105    10    148,821 
Total  $407,857   $17,937   $19   $425,775 

 

12
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   Less Than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
June 30, 2012  Value   Losses   Value   Losses   Value   Losses 
                         
U.S. Treasury securities  $5,989   $2   $   $   $5,989   $2 
                               
Obligations of U.S. government corporations and government sponsored enterprises                              
Residential mortgage-backed securities                               
CMOs (Federal Home Loan Mortgage Corporation)   16,481    200            16,481    200 
CMOs (Government National Mortgage Association)   2,830    17            2,830    17 
Federal Home Loan Mortgage Corporation           20    1    20    1 
Total obligations of U.S. government corporations and government sponsored enterprises   19,311    217    20    1    19,331    218 
                               
Single-issuer, trust preferred securities   3,121    146    6,262    325    9,383    471 
Other preferred securities   5,236    55            5,236    55 
Corporate debt securities   143,530    868    27,158    628    170,688    1,496 
Equity and other securities   2,503    505    948    115    3,451    620 
Total  $179,690   $1,793   $34,388   $1,069   $214,078   $2,862 
                         
December 31, 2011                        
                         
Obligations of U.S. government corporations and government sponsored enterprises                              
Residential mortgage-backed securities                              
CMOs (Federal Home Loan Mortgage Corporation)  $4,276   $6   $   $   $4,276   $6 
CMOs (Government National Mortgage Association)   3,448    11            3,448    11 
Federal Home Loan Mortgage Corporation           22    1    22    1 
Total obligations of U.S. government corporations and government sponsored enterprises   7,724    17    22    1    7,746    18 
                               
Single-issuer, trust preferred securities   11,721    1,574    415    87    12,136    1,661 
Corporate debt securities   139,972    1,937    10,607    939    150,579    2,876 
Equity and other securities   2,974    398            2,974    398 
Total  $162,391   $3,926   $11,044   $1,027   $173,435   $4,953 

 

13
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   Less Than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
June 30, 2012  Value   Losses   Value   Losses   Value   Losses 
                         
Obligations of U.S. government corporations and government sponsored enterprises                              
Agency notes                              
Federal National Mortgage Association  $9,972   $25   $   $   $9,972   $25 
Federal Home Loan Bank   38,907    80            38,907    80 
                               
Total obligations of U.S. government corporations and government sponsored enterprises   48,879    105            48,879    105 
                               
Obligations of state and political institutions-New York Bank Qualified   850    2            850    2 
Total  $49,729   $107   $   $   $49,729   $107 
                               
December 31, 2011                              
                               
Obligations of U.S. government corporations and government sponsored enterprises                              
Agency notes                              
Federal Home Loan Mortgage Corporation  $14,991   $9   $   $   $14,991   $9 
                               
Total obligations of U.S. government corporations and government sponsored enterprises   14,991    9            14,991    9 
Obligations of state and political institutions-New York Bank Qualified   736    9    289    1    1,025    10 
Total  $15,727   $18   $289   $1   $16,016   $19 

 

14
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents information regarding single-issuer, trust preferred securities at June 30, 2012:

 

   TARP   Credit   Amortized   Fair   Unrealized 
Issuer  Recipient   Rating   Cost   Value   Gain/(Loss) 
                          
Sterling Bancorp Trust I, 8.375%, due 3/31/2032   Yes *    NA   $990   $1,066   $76 
                          
NPB Capital Trust II, 7.85%, due 9/30/2032   Yes *    NA    126    129    3 
                          
Allfirst Pfd Cap Trust, Floating Rate, due 7/15/2029 owned by M&T Bank Corporation   Yes    BBB    378    377    (1)
                          
BAC Capital Trust II, 7.00%, due 2/01/2032   Yes *    BB+    299    302    3 
                          
BAC Capital Trust IV, 5.875%, due 5/03/2033   Yes *    BB+    50    48    (2)
                          
BNY Capital Trust V, 5.95%, due 5/01/2033   Yes *    BBB    50    52    2 
                          
Capital One Cap VI, 8.875% due 5/15/2040   Yes *    BB+    103    102    (1)
                          
Citigroup Capital VII, 7.125%, due 7/31/2031   Yes *    BB    1,507    1,509    2 
                          
Citigroup Capital VIII, 6.95%, due 9/15/2031   Yes *    BB    246    249    3 
                          
Citigroup Capital IX, 6.00%, due 2/14/2033   Yes *    BB    2,884    2,939    55 
                          
Citigroup Capital X, 6.10%, due 9/30/2033   Yes *    BB    293    293     
                          
Citigroup Capital XVII, 6.35%, due 3/15/2067   Yes *    BB    46    62    16 
                          
First Tennessee Capital II, 6.30%, due 4/15/2034   Yes *    BB    3,284    3,083    (201)
                          
Fleet Capital Trust VIII, 7.20%, due 3/15/2032, owned by Bank of America Corporation   Yes *    BB+    501    503    2 
                          
Goldman Sachs Capital I, 6.345%, due 2/15/2034   Yes *    BB+    5,939    5,675    (264)
                          
JP Morgan Chase Capital XIII, Floating Rate, due 9/30/2034   Yes *    BBB    754    755    1 
                          
JP Morgan Chase Capital XI, 5.875%, due 6/15/2033   Yes *    BBB    1,623    1,642    19 
                          
JP Morgan Chase Capital XV, 5.875%, due 3/15/2035   Yes *    BBB    2,195    2,200    5 
                          
JP Morgan Chase Capital XVII, 5.85%, due 8/01/2035   Yes *    BBB    2,245    2,275    30 
                          
Morgan Stanley Capital Trust III, 6.25%, due 3/01/2033   Yes *    BB+    1,043    1,065    22 
                          
Keycorp Capital II, 6.875%, due 3/17/2029   Yes *    BBB-    93    97    4 
                          
Keycorp Capital VII, 5.70%, due 6/15/2035   Yes *    BBB-    1,553    1,600    47 
                          
SunTrust Capital I, Floating Rate, due 5/15/2027   Yes *    BB+    722    740    18 
                          
VNB Capital Trust I, 7.75%, due 12/15/2031   Yes *    BBB-    21    21     
                          
Wells Fargo Capital Trust VII, 5.85%, due 5/01/2033   Yes *    BBB+    424    437    13 
                          
Wells Fargo Capital Trust VIII, 5.625%, due 8/01/2033   Yes *    BBB+    367    386    19 
                          
Wells Fargo Capital IX, 5.625%, due 4/08/2034   Yes *    BBB+    4,085    4,208    123 
             $31,821   $31,815   $(6)

 

* TARP obligation was repaid prior to June 30, 2012.

 

15
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company invests principally in obligations of U.S. government corporations and government sponsored enterprises, New York bank qualified obligations of state and political institutions, and corporate debt and equity securities. The fair value of these investments fluctuates based on several factors, including credit quality and general interest rate changes. The Company determined that it is not more likely than not that the Company would be required to sell before anticipated recovery.

 

At June 30, 2012, approximately $151.4 million, representing approximately 20.8% of the Company’s held to maturity and available for sale securities are comprised of securities issued by financial service companies/banks including single-issuer trust preferred securities (27 issuers), corporate debt (50 issuers) and equity securities (12 issuers). These investments may pose a higher risk of future impairment charges as a result of possible further deterioration of the U.S. economy. The Company would be required to recognize impairment charges on these securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators or unanticipated changes in the competitive environment could have a negative effect on the Company’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods.

 

At June 30, 2012, the Company held 8 security positions of single-issuer, trust preferred securities issued by financial institutions, in the available for sale portfolio, that were in an unrealized loss position for more than 12 months and are paying in accordance with their terms and have no deferrals of interest or other deferrals. In addition, management analyzes the performance of the issuers on a periodic basis, including a review of the issuers’ most recent bank regulatory reports and other public regulatory disclosures, to assess credit risk and the probability of impairment of the contractual cash flows of the applicable securities. Based upon management’s second quarter review, the issuers have maintained performance levels adequate to support the contractual cash flows of the securities.

 

At June 30, 2012, the Company held 16 security positions of corporate debt securities issued by financial institutions and other corporate issuers, in the available for sale portfolio, that were in an unrealized loss position for more than 12 months. Each of these positions are paying in accordance with their terms and have no deferrals of interest or other deferrals. In addition, management analyzes the performance of each issuer on a periodic basis, including a review of the issuer’s most recent public regulatory disclosures, to assess credit risk and the probability of impairment of the applicable securities. Based upon management’s second quarter review, management has concluded that the unrealized losses are deemed to be temporary.

 

At June 30, 2012, the Company held 2 issues of equity securities, in the available for sale portfolio, that were in an unrealized loss position for more than 12 months. Management analyzes the performance of each issuer on a periodic basis, including a review of the issuer’s most recent public regulatory disclosures, to assess credit risk and the probability of impairment of the applicable securities. Based upon management’s second quarter review, management has concluded that the unrealized losses are deemed to be temporary.

 

16
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables present information regarding securities available for sale and securities held to maturity at June 30, 2012, based on contractual maturity. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized   Fair 
Available for sale  Cost   Value 
         
U.S. Treasury securities  $5,991   $5,989 
           
Obligations of U.S. government corporations and government sponsored enterprises          
Residential mortgage-backed securities          
CMOs (Federal Home Loan Mortgage Corporation)   27,757    27,603 
CMOs (Government National Mortgage Association)   4,766    4,755 
Federal National Mortgage Association   1,889    1,996 
Federal Home Loan Mortgage Corporation   36    35 
Government National Mortgage Association   93    93 
Total residential mortgage-backed securities   34,541    34,482 
           
Agency notes          
Federal National Mortgage Association          
Due after 1 year but within 5 years   200    200 
Federal Home Loan Bank          
Due after 1 year but within 5 years   300    300 
Federal Home Loan Mortgage Corporation          
Due after 1 year but within 5 years   75    80 
Total obligations of U.S. government corporations and government sponsored enterprises   35,116    35,062 
           
Obligations of state and political institutions - New York Bank Qualified          
Due within 1 year   520    521 
Due after 5 years but within 10 years   3,225    3,479 
Due after 10 years   13,274    14,313 
Total obligations of state and political institutions-New York Bank Qualified   17,019    18,313 
           
Single-issuer, trust preferred securities          
Due after 10 years   31,821    31,815 
Total single-issuer, trust preferred securities   31,821    31,815 
           
Other preferred securities          
Due after 1 year but within 5 years   5,291    5,236 
Due after 10 years   102    103 
Total other preferred securities   5,393    5,339 
           
Corporate debt securities          
Due within 6 months   51,619    51,489 
Due after 6 months but within 1 year   45,903    45,700 
Due after 1 year but within 2 years   96,285    95,958 
Due after 2 years but within 5 years   39,267    38,769 
Due after 5 years but within 10 years   2,872    2,923 
Due after 10 years   363    379 
Total corporate debt securities   236,309    235,218 
           
Equity and other securities   15,758    16,978 
Total  $347,407   $348,714 

 

17
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

   Carrying   Fair 
Held to maturity  Value   Value 
         
Obligations of U.S. government corporations and government sponsored enterprises          
Residential mortgage-backed securities          
CMOs (Federal National Mortgage Association)  $2,784   $2,919 
CMOs (Federal Home Loan Mortgage Corporation)   4,639    4,851 
Federal National Mortgage Association   39,188    42,580 
Federal Home Loan Mortgage Corporation   18,727    20,143 
Government National Mortgage Association   3,732    4,311 
Total residential mortgage-backed securities   69,070    74,804 
           
Agency notes          
Federal National Mortgage Association          
Due after 5 years but within 10 years   4,998    5,015 
Due after 10 years   58,480    58,519 
Federal Home Loan Bank          
Due after 5 years but within 10 years   19,421    19,418 
Due after 10 years   48,988    48,917 
Federal Home Loan Mortgage Corporation          
Due after 5 years but within 10 years   24,991    25,113 
Due after 10 years   15,000    15,060 
Total obligations of U.S. government corporations and government sponsored enterprises   240,948    246,846 
Obligations of state and political institutions - New York Bank Qualified          
Due after 1 year but within 5 years   155    169 
Due after 5 years but within 10 years   8,708    9,570 
Due after 10 years   128,853    138,713 
Total obligations of state and political institutions-New York Bank Qualified   137,716    148,452 
Total  $378,664   $395,298 

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Sales                    
Proceeds  $47,510   $29,075   $95,884   $89,007 
Gross gains   300    608    1,042    1,802 
Gross losses       158    1    200 
                     
Calls                    
Proceeds   5,638    22,265    21,396    57,954 
Gross gains   28    48    184    96 
Gross losses   14        36     

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Calls                    
Proceeds  $90,962   $55,000   $160,962   $60,000 
Gross gains   15    7    19    7 
Gross losses               76 

 

There were no sales or transfers of held to maturity securities during the three-month or six-month periods ended June 30, 2012 or June 30, 2011.

 

18
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 3. Loans and allowance for loan losses

 

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

 

   June 30,   December 31, 
   2012   2011 
Loans held for sale, net of valuation reserve ($72 at June 30, 2012 and $-0- at December 31, 2011)          
Real estate—residential mortgage  $30,287   $43,372 
Loans held in portfolio, net of unearned discounts          
Commercial and industrial   618,596    626,063 
Loans to nondepository financial institutions   290,544    246,587 
Factored receivables   157,655    172,082 
Equipment financing receivables   169,896    166,690 
Real estate—residential mortgage   172,659    170,153 
Real estate—commercial mortgage   148,694    85,825 
Real estate—construction and land development   12,833    13,621 
Loans to individuals   12,337    10,376 
Loans to depository institutions       10 
Loans held in portfolio, gross   1,583,214    1,491,407 
Less unearned discounts   17,634    18,098 
Loans held in portfolio, net of unearned discounts   1,565,580    1,473,309 
   $1,595,867   $1,516,681 

 

At June 30, 2012, the bank had qualified loans, with a carrying value of approximately $493.6 million, available to secure borrowings from the FHLB and the FRB, of which approximately $17.6 million were pledged to the FHLB. There were no loans pledged at December 31, 2011.

 

Loan Origination/Risk Management

The Company has lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

The Company maintains an independent loan review process that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders.

 

Commercial and Industrial and Loans to Nondepository Financial Institutions

Sterling provides a full range of loans to small and medium-sized businesses with the objective of establishing longer-term relationships. Loans generally range in size up to $20 million, tailored to meet customers’ long- and short-term needs, and include secured and unsecured lines of credit and business installment loans.

 

Loans generally are collateralized by accounts receivable, inventory and other assets. Sterling also provides back-office services, i.e., processing payroll, generating customer invoices, credit collection assistance and related payroll services. The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers and guarantors, which may be negatively impacted by adverse economic conditions. While these loans are secured, collateral type, marketability, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability.

 

19
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Factoring

Factoring provides a financing service that combines working capital financing, credit risk protection, and accounts receivable management for companies in a variety of industries. This business may be conducted on a recourse or non-recourse basis, depending upon the needs of the client.

 

In general, Sterling records a receivable for the amount of accounts receivables due from customers of its clients and records a liability for the funds due to the client. Under advance factoring arrangements, clients can draw an advance as accounts receivables are sold/assigned to Sterling. With advance factoring, Sterling normally has recourse against the client if the customer fails to pay. Under collection factoring arrangements, clients sell Sterling their accounts receivables and Sterling provides credit protection to the client guaranteeing the collection of the amount due and back office support. Collection factoring is generally under a nonrecourse basis where the principal source of payment for Sterling is through the collection of the receivable from our client’s customer whose credit has been approved by Sterling following a rigorous review process. Also, with collection factoring, Sterling has credit default insurance with a nationally recognized insurance company to provide it with protection against customer default.

 

Commercial Real Estate

Sterling offers a range of commercial real estate lending including financing on commercial buildings, retail properties and mixed use properties. Loans are predicated on the cash flow of the property, the value of the property determined by an independent appraisal and the strength of personal guarantees, if any. Loans are made at fixed or floating rates. Floating rate loans are based on the prime rate. Fixed rate loans are tied to Treasury or FHLB benchmarks and other indices.

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geographic and risk grade criteria.

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with funds, with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to timely completion of the project, interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.

 

Loans are made at fixed or floating rates. Fixed rate loans are tied to U.S. Treasury or FHLB benchmarks or other indices. Floating rate loans are based on the prime rate or other indices.

 

Equipment Financing

Sterling engages in direct and indirect lease financing. Direct lease financing is when requests for financing originate with an end user seeking to finance equipment for up to 60 months. Indirect lease finance arises through relationships with equipment financing brokers.

 

In both cases, credit approval is based upon on a full underwriting process that involves the submission of financial and other information, including the applicant’s historical performance, cash flow projections and value of equipment, and for customers who are not public entities, Sterling generally obtains the personal guarantees of the principals of the entities.

 

20
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Residential Mortgage

Residential mortgage loans, principally on single-family residences, are made primarily for re-sale into the secondary market. Offering both fixed and adjustable rate residential mortgage loan products, Sterling focuses on conforming credit, government insured FHA and other high-quality loan products. Jumbo loans are also originated for sale into the secondary market, or brokered to third-party providers.

 

The ability of borrowers to service debt in the residential mortgage loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominantly collateralized by first and second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions.

 

Concentrations of Credit

There are no industry concentrations (exceeding 10% of loans, gross), other than loans to nondepository financial institutions, of loans held in portfolio. Loans to nondepository financial institutions, which include the Company’s residential mortgage warehouse funding product and loans to finance companies, represent approximately 18.2% of all loans. Approximately 66.1% of loans are to borrowers located in the New York metropolitan area. A further deterioration in economic conditions within the region, including a decline in real estate values, higher unemployment and other factors which could adversely impact small and mid-sized businesses, could have a significant adverse impact on the quality of the Company’s loan portfolio. In addition, a decline in real estate values and higher unemployment within the mid-Atlantic region and North Carolina could adversely impact the Company’s residential real estate loan portfolio.

 

Approximately 26.5% or $8.9 million and 19.9% or $6.3 million of the Company’s net interest income and noninterest income are related to real estate lending for the three months ended June 30, 2012 and 2011, respectively. Approximately 25.8% or $ 17.2 million and 21.1% or $ 13.2 million of the Company’s interest income and noninterest income are related to real estate lending for the six months ended June 30, 2012 and 2011, respectively. Real estate prices in the U.S. market decreased during 2011 and have continued to decrease in 2012. Continuing declines in real estate values could necessitate charge-offs in our mortgage loan portfolio that may impact our operating results. In addition, a sustained period of declining real estate values combined with the continued turbulence in the financial and credit markets would continue to limit our mortgage-related revenues.

 

As of June 30, 2012 approximately 58.6% of the Company’s loan portfolio consisted of commercial and industrial, factored receivables, construction and commercial real estate mortgage loans. Because the Company’s loan portfolio contains a 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.

 

Related Party Loans

Loans are made to officers or directors (including their immediate families) of the Company or for the benefit of corporations in which they have a beneficial interest subject to applicable regulations. There were no outstanding balances on such loans in excess of $60 thousand to any individual or entity at June 30, 2012 or 2011.

 

Nonperforming Loans

Nonaccrual loans are those on which the accrual of interest has ceased. Loans, including loans that are individually identified as being impaired under FASB Codification Topic 310: Receivables, are generally placed on nonaccrual status immediately if, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days or more and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Interest income is recognized on nonaccrual loans only to the extent received in cash. Where there is doubt regarding the ultimate collectibility of the loan principal, cash receipts, whether designated as principal or interest, are thereafter applied to reduce the carrying value of the loan. Loans are restored to accrual status when interest and principal payments are brought current and future payments are reasonably assured.

 

21
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Nonaccrual loans at June 30, 2012 and December 31, 2011 totaled $5.6 million and $6.4 million, respectively. The interest income that would have been earned on nonaccrual loans outstanding at June 30, 2012, in accordance with their original terms, is estimated to be $123 thousand and $242 thousand, respectively, for the three and six months then ended. Applicable interest income actually realized was $6 thousand and $7 thousand, respectively, for the aforementioned periods. The interest income that would have been earned on nonaccrual loans outstanding at December 31, 2011, in accordance with their original terms is estimated to be $780 thousand, for the year then ended; the applicable interest income actually realized was $200 thousand. There were no commitments to lend additional funds on nonaccrual loans.

 

The following table sets forth the amount of nonaccrual loans of the Company as of the dates indicated:

 

   June 30,   December 31, 
   2012   2011 
Commercial and industrial  $504   $834 
Equipment financing receivables   376    370 
Factored receivables        
Real estate—residential mortgage   2,268    1,991 
Real estate—commercial mortgage   2,453    3,124 
Real estate—construction and land development        
Loans to individuals       39 
   Total nonaccrual loans  $5,601   $6,358 

 

The following table provides information regarding the past due status of loans held in portfolio:

 

June 30, 2012  30–59 Days Past Due   60–89 Days Past Due   90 Days & Over Past Due   Total Past Due   Current   Total Loans   MEMO 90 & Over and Still Accruing 
Commercial and industrial  $19,174   $6,155   $536   $25,865   $590,457   $616,322   $32 
Loans to nondepository financial institutions                   290,544    290,544     
Factored receivables   1,085    363    632    2,080    155,426    157,506    632 
Equipment financing receivables   170    146    376    692    153,993    154,685     
Real estate—residential mortgage—portfolio   898    1,206    2,268    4,372    168,287    172,659     
Real estate—commercial mortgage           2,453    2,453    146,241    148,694     
Real estate—construction and land development                   12,833    12,833     
Loans to individuals   4    2        6    12,331    12,337     
Loans to depository institutions                            
   Total loans, net of unearned discount  $21,331   $7,872   $6,265   $35,468   $1,530,112   $1,565,580   $664 
                                    
December 31, 2011                                   
Commercial and industrial  $23,665   $5,344   $837   $29,846   $594,278   $624,124   $165 
Loans to nondepository institutions                   246,587    246,587     
Factored receivables   3,266    665    162    4,093    167,738    171,831     
Equipment financing receivables   546    386    370    1,302    149,480    150,782     
Real estate—residential mortgage   1,570    633    1,991    4,194    165,959    170,153     
Real estate—commercial mortgage           3,124    3,124    82,701    85,825     
Real estate—construction and land development                   13,621    13,621     
Loans to individuals   41    7    39    87    10,289    10,376     
Loans to depository institutions                   10    10     
   Total loans, net of unearned discount  $29,088   $7,035   $6,523   $42,646   $1,430,663   $1,473,309   $165 

 

22
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Impaired Loans

Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans on a loan-by-loan basis. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment of the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows.

 

If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

 

When the ultimate collectibility of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectibility of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

The following tables include the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable. Management determined the specific allowance based on the present value of the expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded.

 

June 30, 2012  Recorded Investment in Impaired Loans   Unpaid Principal Balance With No Allowance   Unpaid Principal Balance With Allowance   Related Allowance   Average [1] Recorded Investment in Impaired Loans 
Commercial and industrial  $450   $   $1,250   $201   $1,453 
Loans to nondepository institutions                    
Factored receivables                    
Equipment financing receivables   56        56    3    159 
Real estate—residential mortgage   5,523    998    5,284    1,361    5,482 
Real estate—commercial mortgage   2,453    2,379    745    350    2,900 
Real estate—construction and land development                    
Loans to individuals                    
Loans to depository institutions                    
   Total  $8,482   $3,377   $7,335   $1,915   $9,994 
                          
December 31, 2011                         
Commercial and industrial  $2,954   $1,395   $2,159   $287   $2,596 
Loans to nondepository institutions                    
Factored receivables                    
Equipment financing receivables   151        151    17    230 
Real estate—residential mortgage   5,275    825    4,966    1,234    4,886 
Real estate—commercial mortgage   3,124        3,124    1,113    3,124 
Real estate—construction and land development                    
Loans to individuals                    
Loans to depository institutions                    
   Total  $11,504   $2,220   $10,400   $2,651   $10,836 
                          
[1] Year-to-date  

 

23
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The average recorded investment and interest income recognized in accruing impaired loans for the three months ended June 30, 2012 amounted to $5.1 million (commercial and industrial $0.1 million, equipment financing receivables $0.1 million and real estate-residential mortgage $4.9 million) and $74 thousand (commercial and industrial $-0- thousand, equipment financing receivables $1 thousand and real estate-residential mortgage $73 thousand), respectively. The average recorded investment and interest income recognized in accruing impaired loans for the six months ended June 30, 2012 amounted to $5.8 million (commercial and industrial $0.8 million, equipment financing receivables $0.1 million and real estate-residential mortgage $4.9 million) and $165 thousand (commercial and industrial $7 thousand, equipment financing receivables $2 thousand and real estate-residential mortgage $156 thousand), respectively.

 

The average recorded investment and interest income recognized in accruing impaired loans for the year ended December 31, 2011 amounted to $6.7 million (commercial and industrial $1.8 million, equipment financing receivables $0.2 million and real estate – residential mortgage $4.7 million) and $430 thousand (commercial and industrial $95 thousand, equipment financing receivables $8 thousand and real estate – residential mortgage $327 thousand), respectively.

 

The Company had troubled debt restructured loans (“TDRs”) totaling $7.1 million as of June 30, 2012 and $6.4 million as of December 31, 2011. The Company has allocated $1.4 million and $1.3 million of specific reserves to customers with equipment financing receivables and residential real estate loans whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and December 31, 2011. The Company has no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

 

During the three and six months ended June 30, 2012, the terms of $602 thousand and $1.1 million of residential real estate loans were modified as troubled debt restructurings. The modification of terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. No lease financing receivables were modified during the three months ended June 30, 2012. No lease financing receivables were modified during the six months ended June 30, 2012.

 

Modifications of residential real estate loans involving a reduction of the stated interest rate or an extension of the maturity date were for periods ranging up to 40 years.

 

The troubled debt restructurings described above increased the allowance for loan losses by $79 thousand for the three months ended June 30, 2012 and resulted in charge-offs of $151 thousand during the three months ended June 30, 2012. The troubled debt restructurings described above increased the allowance for loan losses by $221 thousand for the six months ended June 30, 2012 and resulted in charge-offs of $151 thousand during the six months ended June 30, 2012.

 

During the twelve months ended June 30, 2012, five residential real estate loans amounting to $501 thousand had both a modification of terms and a payment default under the modified terms of the loans.

 

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of loans, (ii) the level of classified loans, (iii) charge-offs, (iv) nonperforming loans and (v) the general economic conditions in the New York metropolitan area.

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company has a process for analyzing non-homogeneous loans, such as commercial and industrial and commercial real estate loans, individually by grading the loans based on credit risk. This analysis occurs at varying times based on the type of loan as well as the loan balance and occurs at least once every 18 months for those loans greater than $500,000.

 

24
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

For homogeneous loan pools, such as residential mortgages, leases and consumer loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Company’s personnel and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools at June 30, 2012 is included in the aging of the recorded investment of past due loans table above. In addition, the total nonperforming portion of these homogeneous loan pools at June 30, 2012 is presented in the recorded investment in nonaccrual loans table above.

 

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans under $100,000 are not risk rated. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:

 

  Risk Rating 1 & 2/High Quality/Minimal Risk—These loans are well secured by liquid or high quality, diversified, and readily marketable securities within the bank’s defined margin requirements including cash surrender value of life insurance, or loans to strong privately held obligors secured by real estate with satisfactory loan to value, and support guarantors. They could include loans to publicly traded entities with strong credit ratings (A-1 or better) with Moody’s or Standard & Poor’s.
     
  Risk Rating 3 & 4/Very Good/Good Quality—These loans can be either unsecured or secured (with monthly monitoring of Accounts Receivable and/or Inventory) to adequately or moderately capitalized privately held obligors with satisfactory sales, revenue, earnings trends, cash flow, and leverage. These secured loans may be monitored in the Asset Based Lending or the Factoring Department to include control of cash receipts and defined formula advances. These categories could include loans to publicly traded entities with credit ratings of A-3 or lower by Moody’s or Standard & Poor’s.
     
  Risk Rating 5/Watch List—These loans are to companies with uneven financial performance containing exceptions to loan policy without mitigating factors. These loans may exist when the obligors experience temporary credit and/or structural deficiencies. Such credits have not been criticized by Loan Review. Close supervision is warranted to avoid further deterioration.
     
  Risk Rating 6/Special Mention (OCC Definition)—Other Assets Especially Mentioned (OAEM) are loans that are currently protected but are potentially weak. Special Mention ratings have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the bank’s credit position at some future date. Such assets constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific asset.
     
  Risk Rating 7/Substandard (OCC Definition)—These loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.
     
  Risk Rating 8/Doubtful (OCC Definition)—These loans have all the weakness inherent in loans classified as substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidating procedures, capital injection, perfecting liens or additional collateral and refinancing plans.
     
  Risk Rating 9/Loss (OCC Definition)—These loans are classified as loss and charged-off because they are determined to be uncollectible and unbankable assets. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. The bank should not be allowed to attempt long-term recoveries while the asset remains booked. Losses should be taken in the period in which they are determined to be uncollectible.

  

25
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents weighted average risk grades and classified loans by class of loan. Classified loans include loans in Risk Grades 6, 7 and 8.

 

   June 30, 2012   December 31, 2011 
   Weighted Average Risk Grade   Loans   Weighted Average Risk Grade   Loans 
Commercial and industrial                    
Risk grades 1-4   3.47   $599,657    3.41   $603,375 
Risk grade 5   5.00    5,079    5.00    5,006 
Risk grade 6   6.00    10,135    6.00    11,872 
Risk grade 7   7.00    1,451    7.00    3,871 
Risk grade 8                
Risk grade 9                
Total   3.54   $616,322    3.50   $624,124 
                     
Loans to nondepository financial institutions                    
Risk grades 1-4   3.12   $283,086    3.14   $240,154 
Risk grade 5                
Risk grade 6   6.00    1,025         
Risk grade 7   7.00    6,433    7.00    6,433 
Risk grade 8                
Risk grade 9                
Total   3.20   $290,544    3.24   $246,587 
                     
Factored receivables                    
Risk grades 1-4   3.02   $153,205    2.84   $170,256 
Risk grade 5   5.00    4,301    5.00    1,575 
Risk grade 6                
Risk grade 7                
Risk grade 8                
Risk grade 9                
Total   3.08   $157,506    2.86   $171,831 
                     
Equipment financing receivables                    
Risk grades 1-4   3.92   $154,255    3.89   $150,412 
Risk grade 5                
Risk grade 6                
Risk grade 7   7.00    430    7.00    370 
Risk grade 8                
Risk grade 9                
Total   3.93   $154,685    3.90   $150,782 
                     
Real estate-commercial mortgage                    
Risk grades 1-4   3.06   $146,241    3.14   $82,701 
Risk grade 5                
Risk grade 6                
Risk grade 7   7.00    2,453    7.00    3,124 
Risk grade 8                
Risk grade 9                
Total   3.13   $148,694    3.28   $85,825 

 

26
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Allowance for Loan Losses

The allowance reflects management’s best estimate of probable losses within the existing loan portfolio and of the risk inherent in various components of the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risk inherent in the loan portfolio. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

 

The Company’s allowance for loan loss methodology is based on guidance provided by the “Interagency Policy Statement on the Allowance for Loan and Lease Losses” issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of Thrift Supervision in December 2006 and includes an allowance allocation calculated in accordance with U.S. GAAP guidance in FASB Codification Topic 310: Receivables and allowance allocations calculated in accordance with FASB Codification Topic 450: Contingencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.

 

The level of the allowance for loan losses relies on a consistent process that requires multiple layers of management review and judgment and 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. Portions of the allowance may be allocated to specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged-off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

 

The Company’s allowance for loan losses includes (1) specific valuation allowances for impaired loans evaluated in accordance with FASB Codification Topic 310: Receivables; (2) formulaic allowances based on historical loss experience by loan category, adjusted, as necessary, to reflect the impact of current conditions; and (3) unallocated general valuation allowances determined in accordance with FASB Codification Topic 450: Contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Company.

 

The allowance established for losses on specific loans is based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all loans. When a loan has a calculated grade of 6 or higher, an analysis is performed to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

 

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the portion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool.

 

The Company’s pool of similar loans includes similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, residential real estate loans and consumer and other loans.

 

27
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things:

 

  Estimated losses in all significant loans
  Existence and effect of any concentrations of credit
  Existence and effect of any geographic concentration
  Other external factors such as competition, legal matters or regulation that may affect risk
  Effect of criticized and classified loans
  Effects from risk arising with international lending
  Effectiveness of internal problem loan identification and risk ratings
  Trends in portfolio volume, maturity and compositions of loans within segments
  Volumes and trends in delinquencies and nonaccrual loans
  Changes in the quality of lending policies and procedures
  Changes in local and national economic conditions
  Experience, ability and depth of lending staff
  Changes in value of underlying collateral

 

Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined based on degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

 

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

 

Loans are generally charged-off at the earlier of when it is determined that collection efforts are no longer productive or when they have been identified as losses by management, internal loan review and/or bank examiners. Furthermore, equipment financing receivables and revolving credit lines to small businesses are charged-off at the earlier of when payments are 120 days past due or when it is determined that collection efforts are no longer productive.

 

Factors considered in determining whether collection efforts are no longer productive include any amounts currently being collected, the status of discussions or negotiations with the lessee/borrower, the principal and/or guarantors, the cost of continuing efforts to collect, the status of any foreclosure or other legal actions, the value of the collateral, and any other pertinent factors.

 

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STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents the activity in the allowance for loan losses by portfolio segment:

 

Three Months Ended June 30, 2012  Balance, Beginning of Period   Charge-Offs[1]    Recoveries   Net Charge-Offs[1]   Provision for Loan Losses   Balance, End of Period 
                         
Commercial and industrial  $7,515   $140   $117   $23   $152   $7,644 
Loans to nondepository financial institutions   1,265                362    1,627 
Factored receivables   1,498    223    45    178    189    1,509 
Equipment financing receivables   3,448    731    223    508    593    3,533 
Real estate – residential mortgage   3,746    348[1]   1    347[1]   557    3,956 
Real estate – commercial mortgage   2,228    671        671    825    2,382 
Real estate – construction and land development   139                11    150 
Loans to individuals   125        7    (7)   9    141 
Loans to depository institutions                        
Unallocated   141                52    193 
  Total  $20,105   $2,113[1]  $393   $1,720[1]  $2,750   $21,135 

 

Six Months Ended June 30, 2012  Balance, Beginning of Period   Charge-Offs[1]    Recoveries   Net Charge-Offs[1]   Provision for Loan Losses   Balance, End of Period 
                         
Commercial and industrial  $7,647   $2,009   $151   $1,858   $1,855   $7,644 
Loans to nondepository financial institutions   1,369                258    1,627 
Factored receivables   1,450    340    51    289    348    1,509 
Equipment financing receivables   3,515    1,833    561    1,272    1,290    3,533 
Real estate – residential mortgage   3,490    479[1]   2    477[1]   943    3,956 
Real estate – commercial mortgage   2,151    671        671    902    2,382 
Real estate – construction and land development   165                (15)   150 
Loans to individuals   104    87    10    77    114    141 
Loans to depository institutions                        
Unallocated   138                55    193 
  Total  $20,029   $5,419[1]  $775   $4,644[1]  $5,750   $21,135 
                               
[1] Includes losses on transfers to OREO  

 

29
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Three Months Ended June 30, 2011  Balance, Beginning of Period   Charge-Offs[1]    Recoveries   Net Charge-Offs[1]   Provision for Loan Losses   Balance, End of Period 
                         
Commercial and industrial  $7,479   $719   $10   $709   $737   $7,507 
Loans to nondepository financial institutions   664                48    712 
Factored receivables   1,340    36    11    25    45    1,360 
Equipment financing receivables   3,055    2,329    773    1,556    1,835    3,334 
Real estate – residential mortgage   2,596    215[1]       215[1]   411    2,792
Real estate – commercial mortgage   2,285                41    2,326 
Real estate – construction and land development   286                (5)   281 
Loans to individuals   116                (12)   104 
Loans to depository institutions   77                (68)   9 
Unallocated   142                (32)   110 
  Total  $18,040   $3,299[1]  $794   $2,505[1]  $3,000   $18,535

 

Six Months Ended June 30, 2011  Balance, Beginning of Period   Charge-Offs[1]    Recoveries   Net Charge-Offs[1]   Provision for Loan Losses   Balance, End of Period 
                         
Commercial and industrial  $7,454   $888   $30   $858   $911   $7,507 
Loans to nondepository financial institutions   564                148    712 
Factored receivables   1,424    168    32    136    72    1,360 
Equipment financing receivables   3,423    6,105    1,696    4,409    4,320    3,334 
Real estate – residential mortgage   2,497    463[1]   163    300[1]   595    2,792
Real estate – commercial mortgage   2,275                51    2,326 
Real estate – construction and land development   310                (29)   281 
Loans to individuals   119                (15)   104 
Loans to depository institutions   46                (37)   9 
Unallocated   126                (16)   110 
  Total  $18,238   $7,624[1]   $1,921   $5,703   $6,000   $18,535

 

[1] Includes losses on transfers to OREO

 

30
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

 

   Ending Allowance Balance Attributable to Loans Evaluated for Impairment   Loan Balances
Evaluated for Impairment
 
June 30, 2012  Individually   Collectively   Total   Individually   Collectively   Total 
Commercial and industrial  $201   $7,443   $7,644   $450   $615,872   $616,322 
Loans to nondepository institutions       1,627    1,627        290,544    290,544 
Factored receivables       1,509    1,509        157,506    157,506 
Equipment financing receivables   3    3,530    3,533    56    154,629    154,685 
Real estate—residential mortgage   1,361    2,595    3,956    5,523    167,136    172,659 
Real estate—commercial mortgage   350    2,032    2,382    2,453    146,241    148,694 
Real estate—construction and land development       150    150        12,833    12,833 
Loans to individuals       141    141        12,337    12,337 
Loans to depository institutions                        
Unallocated       193    193             
   Total  $1,915   $19,220   $21,135   $8,482   $1,557,098   $1,565,580 

 

   Ending Allowance Balance Attributable to Loans Evaluated for Impairment   Loan Balances
Evaluated for Impairment
 
December 31, 2011  Individually   Collectively   Total   Individually   Collectively   Total 
Commercial and industrial  $287   $7,360   $7,647   $2,954   $621,170   $624,124 
Loans to nondepository institutions       1,369    1,369        246,587    246,587 
Factored receivables       1,450    1,450        171,831    171,831 
Equipment financing receivables   17    3,498    3,515    151    150,631    150,782 
Real estate—residential mortgage   1,234    2,256    3,490    5,275    164,878    170,153 
Real estate—commercial mortgage   1,113    1,038    2,151    3,124    82,701    85,825 
Real estate—construction and land development       165    165        13,621    13,621 
Loans to individuals       104    104        10,376    10,376 
Loans to depository institutions                   10    10 
Unallocated       138    138             
   Total  $2,651   $17,378   $20,029   $11,504   $1,461,805   $1,473,309 

 

31
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 4. Federal Home Loan Bank Advances

 

During the 2011 first quarter, the bank restructured a portion of its Federal Home Loan Bank fixed rate advances by repaying $100 million of existing borrowings and replacing them with $100 million of lower cost, floating rate advances. This transaction resulted in $4.2 million in prepayment penalties that were deferred and will be recognized in interest expense as an adjustment to the cost of these borrowings in future periods. The existing borrowings were a combination of fixed rate and amortizing advances with an average cost of 2.58% and an average duration of 3.2 years. The new borrowings were all floating-rate advances with a current average cost of 1.74%, including the deferred adjustment, with an average duration of three months. The relevant accounting treatment for this transaction was provided in ASC 470-50. This transaction was executed as an earnings and interest rate risk strategy, resulting in lower FHLB advance costs and a reduction of average duration.

 

Note 5. Preferred Stock

 

On April 27, 2011, the parent company paid $42.4 million to the U.S. Treasury for the repurchase in full of the Treasury’s investment in 42,000 shares of the parent company’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, liquidation preference of $1,000 per share (the “Preferred Shares”), issued under the provisions of the TARP Capital Purchase Program. As a result of this action, the Preferred Shares were redeemed in full, eliminating an annual dividend of $2.1 million. In this connection, in determining net income available to common shareholders, the Company recognized in the second quarter a $1.2 million charge for accelerated accretion which represents the difference between the carrying value and the liquidation value for the repurchased Preferred Shares.

 

On May 18, 2011, the parent company completed the repurchase of a warrant held by the U.S. Treasury. The ten-year warrant was issued on December 23, 2008 as part of the parent company’s participation in the U.S. Treasury’s TARP Capital Purchase Program, and entitled the U.S. Treasury to purchase 516,817 common shares of the parent company at an exercise price of $12.19 per share. The parent company paid approximately $0.95 million to the U.S. Treasury to repurchase the warrant. The parent company’s repurchase of the warrant concluded its participation in the TARP Capital Purchase Program.

 

Note 6. Common Shares and Stock Incentive Plan

 

On March 9, 2011, the Company completed an underwritten public offering of 4.025 million common shares at an offering price of $9.60 per share, which resulted in net proceeds of $36.5 million after underwriting discounts and expenses.

 

On March 24, 2011, the Board of Directors, upon recommendation by the Compensation and Corporate Governance Committees, granted a total of 20,000 shares of restricted stock to the eight non-management directors (“director restricted shares”) and 41,565 restricted shares to the Chairman, President and five Executive Vice Presidents (“officer restricted shares”). The director restricted shares will vest 25% annually over four years beginning on the first anniversary of the grant date. The officer restricted shares vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date and had been limited by the 2008 agreement between the Company and the U.S. Treasury until the Preferred Shares were redeemed on April 27, 2011. The director restricted shares and the officer restricted shares were issued at $9.71 per share, the closing price on the date of the grant. The agreements for both the director restricted shares and the officer restricted shares have additional provisions regarding transferability and accelerated vesting of the shares and the continuation of performing substantial services for the Company.

 

32
 

  

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 7. Other noninterest income and expenses

 

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

 

   Three Months Ended  Six Months Ended
   June 30,     June 30,   
   2012    2011    2012    2011  
OTHER NONINTEREST INCOME                    
Trade finance income  $467   $540   $967   $1,128 
Other customer related fees   256    241    505    421 
Trust fees               53 
Income from life insurance policies   536    297    792    572 
Gain (Loss) on other real estate owned       5    (66)   5 
Other income   22    9    26    186 
Total other noninterest income  $1,281   $1,092   $2,224   $2,365 
                     
OTHER NONINTEREST EXPENSES                    
Advertising and marketing  $775   $873   $1,418   $1,298 
Communications   462    474    932    884 
Other expenses   2,252    2,333    4,724    4,667 
Total other noninterest expenses  $3,489   $3,680   $7,074   $6,849 

 

Note 8. Employee Benefit Plans

 

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

 

   Three Months Ended  Six Months Ended
   June 30,    June 30,   
   2012    2011    2012    2011  
Service cost  $620   $544   $1,240   $1,089 
Interest cost   1,033    895    2,065    1,790 
Expected return on plan assets   (994)   (771)   (1,988)   (1,543)
Amortization of prior service cost   10    16    20    32 
Recognized actuarial loss   1,032    700    1,863    1,400 
Net periodic benefit cost  $1,701   $1,384   $3,200   $2,768 

 

The Company contributed $7.0 million to the defined benefit pension plan in January 2012 and expects to contribute an additional $2.0 million to the defined benefit pension plan in 2012.

 

33
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 9. Other Comprehensive Income

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Other Comprehensive Income                    
Unrealized holding (losses) gains on securities available for sale arising during the period:                    
Before tax  $(609)  $1,702   $4,230   $2,395 
Tax effect   271    (773)   (1,883)   (1,087)
Net of tax   (338)   929    2,347    1,308 
                     
Reclassification adjustment for securities gains included in net income:                    
Before tax   (329)   (380)   (1,208)   (1,109)
Tax effect   146    172    537    503 
Net of tax   (183)   (208)   (671)   (606)
                     
Reclassification adjustment for amortization of prior service cost:                    
Before tax   10    16    20    32 
Tax effect   (3)   (8)   (8)   (15)
Net of tax   7    8    12    17 
                     
Reclassification adjustment for amortization of net actuarial losses:                    
Before tax   1,017    713    1,833    1,425 
Tax effect   (453)   (323)   (816)   (646)
Net of tax   564    390    1,017    779 
                     
Other comprehensive income  $50   $1,119   $2,705   $1,498 

 

34
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 10. Fair Value Measurements

 

The fair value of an asset or liability is the price that would be received upon a sale of that asset or paid to transfer that liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact and willing to transact.

 

FASB Codification Topic 820: Fair Value Measurements and Disclosures establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

 

  Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Examples of financial instruments generally included in this level are U.S. Treasury securities, equity and trust preferred securities that trade in active markets and listed derivative instruments.
     
  Level 2 Inputs - Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. Examples of financial instruments generally included in this level are corporate debt, mortgage-backed certificates issued by U.S. government corporations and government sponsored enterprises, equity securities that trade in less active markets and certain derivative instruments.
     
  Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own judgments about the assumptions that market participants would use in pricing the assets or liabilities. Examples of financial instruments generally included in this level are private equities, certain loans held for sale and other alternative investments.

 

Fair value of securities is based upon quoted market prices, where available (level 1 inputs). If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based parameters (level 2 inputs). Fair value of loans held for sale is based upon internally developed models that primarily use as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters (level 3 inputs). Any such valuation adjustments are applied consistently over time. The Company valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

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

 

35
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

For mortgage-backed securities issued by U.S. government corporations and government sponsored enterprises, management considers dealer indicative bids in the valuation process. Indicative bids are estimates of value and do not necessarily represent the price at which the dealer would be willing to transact. Such bids are compared to IDC evaluated prices for reasonableness as well as consistency with observable market conditions. All mortgage-backed securities are deemed to be valued based on level 2 inputs.

 

Publicly traded common and preferred stocks are valued by reference to the market closing price (last trade) on the measurement date (level 1 inputs). In the unlikely event that no trade occurred on the measurement date, reference would be made to an indicative bid or the last trade most proximate to the measurement date (level 2 inputs).

 

The following table summarizes financial assets measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no financial liabilities measured at fair value. There have been no transfers between level 1 and level 2 of the fair value hierarchy.

 

   Level 1   Level 2   Level 3   Total 
June 30, 2012  Inputs   Inputs   Inputs   Fair Value 
Securities available for sale:                
U.S. Treasury securities  $   $5,989   $   $5,989 
Obligations of U.S. government corporations and government sponsored enterprises                    
Residential mortgage-backed securities       34,482        34,482 
Agency notes       580        580 
Total obligations of U.S. government corporations and government sponsored enterprises       35,062        35,062 
Obligations of state and political institutions—New York Bank Qualified       18,313        18,313 
Single-issuer, trust preferred securities   31,815            31,815 
Other preferred securities   5,339            5,339 
Corporate debt securities       235,218        235,218 
Equity and other securities   16,978            16,978 
Total marketable securities  $54,132   $294,582   $   $348,714 
                     
December 31, 2011                    
Securities available for sale:                    
Obligations of U.S. government corporations and government-sponsored enterprises                    
Residential mortgage-backed securities  $   $29,752   $   $29,752 
Agency notes       1,237        1,237 
Total obligations of U.S. government corporations and government-sponsored enterprises       30,989        30,989 
Obligations of state and political institutions institutions—New York Bank Qualified       22,777        22,777 
Single-issuer, trust preferred securities   27,059            27,059 
Corporate debt securities       173,307        173,307 
Equity and other securities   15,882            15,882 
Total marketable securities  $42,941   $227,073   $   $270,014 

 

36
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Certain financial assets, such as collateral-dependent impaired loans, are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table summarizes the period end fair value of financial assets, based on significant unobservable (level 3) inputs, measured on a non-recurring basis:

 

   June 30,   December 31, 
   2012   2011 
Impaired loans          
Commercial and industrial  $   $1,298 
Commercial real estate   2,103    2,011 
Other real estate owned, net   1,547    1,929 

 

Impaired loans. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value may receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. At June 30, 2012, two commercial real estate loans were carried at fair value. The fair value for one of these loans was based upon a pending sales agreement that closed in mid-July 2012.

 

Other real estate owned. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are generally based on third-party appraisals of the property utilizing a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

Impaired loans that are measured for impairment using the fair value of the collateral dependent loans had a principal balance of $2.5 million, with a valuation allowance of $0.4 million at June 30, 2012, resulting in no additional provision for loan losses for the three months ended June 30, 2012. At December 31, 2011, impaired loans had a principal balance of $4.5 million, and a valuation allowance of $1.2 million.

 

Other real estate owned measured at fair value less costs to sell had a net carrying amount of $1.5 million, which is made up of the outstanding balance of $1.6 million, net of valuation allowance of $56 thousand. For the three months ended June 30, 2012, $22 thousand of other real estate owned was written down through a charge to noninterest expense. For the six months ended June 30, 2012, $56 thousand of other real estate owned was written down through a charge to noninterest expense. At December 31, 2011, other real estate owned had net carrying amount of $1.9 million, made up of the outstanding balance of $1.9 million, net of valuation allowance of $-0- million.

 

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STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

A description of the methods, factors and significant assumptions utilized in estimating the fair values for significant categories of financial instruments follows:

 

Financial Instruments with Carrying Amounts Equal to Fair Value

The carrying amounts for cash and due from banks, interest-bearing deposits with other banks, accrued interest receivable, Federal funds purchased, securities sold under agreements to repurchase, commercial paper, other short-term borrowings, and accrued interest payable, as a result of their short-term nature, are considered to approximate fair value.

 

Investment Securities

The methods, factors and significant assumptions used to estimate fair values of all securities are described more fully beginning on page 35.

 

Loans, Net

The fair value of loans, net, which reprice within 90 days reflecting changes in the base rate, approximate their carrying amount. For other loans held in portfolio, the fair value is calculated based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and for similar maturities. These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience.

 

The fair value for secured nonaccrual loans is the value of the underlying collateral which is sufficient to repay each loan. For other nonaccrual loans, the fair value represents book value less a credit risk adjustment based on the Company’s historical credit loss experience.

 

The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

Deposits

FASB Codification Topic 825: Financial Instruments requires that the fair value of demand, savings, NOW (negotiable order of withdrawal) and certain money market deposits be equal to their carrying amount. The Company believes that the fair value of these deposits, including the value of deposit relationships, is greater than that prescribed by FASB Codification Topic 825. For other types of deposits with fixed maturities, fair value has been estimated based upon interest rates currently being offered on deposits with similar characteristics and maturities.

 

Advances—FHLB and Long-Term Borrowings

For advances—FHLB and long-term borrowings, the fair value is calculated based on discounted cash flow analyses, using interest rates currently being quoted for debt with similar characteristics and maturities.

 

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STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees

The fees received for the issuance of commitments to extend credit, standby letters of credit, and financial guarantees, are considered to approximate fair value. Due to the uncertainty involved in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the amount of consideration received.

 

The following is a summary of the carrying amounts and fair values of the Company’s financial assets and liabilities. There were no transfers between Level 1 and Level 2 during the first six months of 2012 or in 2011.

 

       Fair Value Measurements at June 30, 2012 
   Carrying Value   Level 1   Level 2   Level 3   Total 
FINANCIAL ASSETS                         
Cash and due from banks  $44,138   $44,138   $   $   $44,138 
Interest-bearing deposits with other banks   39,517    39,517            39,517 
Investment securities   727,378    54,132    689,880        744,012 
Loans, net   1,574,732            1,585,752    1,585,752 
Accrued interest receivable   8,077    469    5,664    1,944    8,077 
FINANCIAL LIABILITIES                         
Demand, NOW, savings and money market deposits   1,425,229    1,425,229            1,425,229 
Time deposits   617,817        618,733        618,733 
Securities sold under agreements to repurchase   43,199    43,199            43,199 
Federal funds purchased   5,000    5,000            5,000 
Commercial paper   12,455    12,455            12,455 
Accrued interest payable   754    124    630        754 
Advances-FHLB and long-term borrowings   147,776    100,000    22,035    26,499    148,534 
                          
                          
        Fair Value Measurements at December 31, 2011 
    Carrying Value    Level 1    Level 2    Level 3    Total 
FINANCIAL ASSETS                         
Cash and due from banks  $31,046   $31,046   $   $   $31,046 
Interest-bearing deposits with other banks   126,448    126,448            126,448 
Investment securities   677,871    42,941    652,848        695,789 
Loans, net   1,496,652            1,505,005    1,505,005 
Accrued interest receivable   6,838    377    4,732    1,729    6,838 
FINANCIAL LIABILITIES                         
Demand, NOW, savings and money market deposits   1,331,223    1,331,223            1,331,223 
Time deposits   657,848        659,439        659,439 
Securities sold under agreements to repurchase   52,313    52,313            52,313 
Federal funds purchased                    
Commercial paper   13,485    13,485            13,485 
Accrued interest payable   1,064    135    929        1,064 
Advances-FHLB and long-term borrowings   148,507    100,000    22,886    26,170    149,056 

 

39
 

 

STERLING BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 11. New Accounting Standards

 

ASU No. 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 was effective for the Company on January 1, 2012. The effect of adopting this guidance did not have a significant impact on the Company’s financial statements.

 

ASU No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 was effective for the Company on January 1, 2012. The effect of adopting this guidance did not have a significant impact on the Company’s financial statements.

 

ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 was effective for the Company on January 1, 2012. The effect of adopting this guidance did not have a significant impact on the Company’s financial statements.

 

ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles-Goodwill and Other,” so that entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 for its annual period ending December 31, 2011. The effect of adopting this guidance did not have a significant impact on the Company’s financial statements.

 

ASU No. 2011-11, “Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet”, to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have significant impact on the Company’s financial statements.

 

ASU 2011-12, “Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 is effective for annual and interim periods beginning after December 15, 2011 and did not have a significant impact on the Company’s financial statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following commentary presents management’s discussion and analysis of the financial condition and results of operations of Sterling Bancorp (the “parent company”), a financial holding company under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999, and its subsidiaries, principally Sterling National Bank. Throughout this discussion and analysis, the term the “Company” refers to Sterling Bancorp and its subsidiaries and the term the “bank” refers to Sterling National Bank and its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and supplemental data contained elsewhere in this quarterly report and the Company’s annual report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”). Certain reclassifications have been made to prior years’ financial data to conform to current financial statement presentations. Throughout management’s discussion and analysis of financial condition and results of operations, dollar amounts in tables are presented in thousands, except per share data.

 

OVERVIEW

 

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

 

For the six months ended June 30, 2012, the bank’s average earning assets represented approximately 99.1% of the Company’s average earning assets. Loans represented 63.3% and investment securities represented 33.9% of the bank’s average earning assets for the first six months of 2012.

 

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

 

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

 

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

 

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

 

While the domestic economy continued to show moderate improvement during the 2012 second quarter, the pace was not consistent month-to-month and the rate of expansion also varied across regions of the country. Recent economic conditions during 2012, such as the modest increase in residential real estate values in the principal markets the Company serves, have increased demand for residential real estate lending. The Company also believes there are opportunities to prudently expand its loan portfolio, particularly in the corporate and commercial real estate sectors, under current economic conditions. If some of the positive economic trends observed during the second quarter of 2012 were not to continue, the Company would expect its income from real estate lending to decrease from the current levels in the near term. In addition, due to the geographic concentration of the Company’s loan portfolio in the New York metropolitan area, representing approximately 66.1% of total loans at June 30, 2012, an adverse change in market conditions in that geographic area could result in a decrease in our income from residential and commercial real estate lending. A significant prolonged decrease in income from our lending segments, if realized, may have a severe adverse impact on the operations of the Company.

 

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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 beginning on page 58. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown beginning on page 56.

 

Comparison of the Three Months Ended June 30, 2012 and 2011

 

The Company reported net income available to common shareholders for the three months ended June 30, 2012 of $4.9 million, representing $0.16 per share calculated on a diluted basis, compared to $2.5 million, or $0.08 per share calculated on a diluted basis, for the second quarter of 2011. The increase in net income available to common shareholders was primarily due to a $1.5 million increase in net interest income, a $0.2 million decrease in provision for loan losses, a $0.3 million increase is noninterest income and a $1.4 million decrease in dividend and accretion on the preferred shares, resulting from the repurchase in the second quarter of 2011 of all of the preferred shares and the warrant issued under the TARP Capital Purchase Program. Those benefits were partially offset by a $0.4 million increase in noninterest expenses and a $0.7 million increase in provision for income taxes.

 

Net Interest Income

Net interest income, on a tax-equivalent basis, was $23.8 million for the second quarter of 2012 compared to $22.2 million for the corresponding 2011 period. Net interest income benefitted from higher average loan balances, lower average balances for interest-bearing liabilities and lower cost of interest-bearing deposits. Net interest income also benefitted from the reclassification from accounts receivable management/factoring commissions and other fees into interest income from loans of revenues related to one of the Company’s lending products, thereby more appropriately reflecting the characteristics of the product. Those benefits were partially offset by the impact of lower yields on loans and investment securities, lower average investment securities balances and a higher cost for borrowings. The net interest margin, on a tax-equivalent basis, was 4.04% for the second quarter of 2012 compared to 3.90% for the corresponding 2011 period. The net interest margin was impacted by the mix of earning assets and funding, including the higher level of noninterest-bearing demand deposits.

 

Total interest income, on a tax-equivalent basis, aggregated $26.5 million for the second quarter of 2012, up $1.1 million from the corresponding 2011 period as the benefit of higher average loan balances more than offset the impact of lower average investment securities balances and lower yields. Total interest earning assets increased to $2,363.5 million for the second quarter of 2012 compared to $2,295.3 million in the prior year period. The tax-equivalent yield on interest-earning assets was 4.52% for the second quarter of 2012 compared to 4.48% for the corresponding 2011 period.

 

Interest earned on the loan portfolio increased to $20.0 million for the second quarter of 2012 from $18.1 million in the prior year period. Average loan balances amounted to $1,515.1 million for the second quarter of 2012, an increase of $190.9 million from an average of $1,324.2 million in the prior year period. The increase in average loans, primarily due to the Company’s business development activities, accounted for a $2.7 million increase in interest earned on loans. The yield on the loan portfolio decreased to 5.39% for the second quarter of 2012 from 5.61% for the corresponding 2011 period, which was primarily attributable to the mix of average outstanding balances among the components of the loan portfolio.

 

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $6.3 million for the second quarter of 2012 from $7.2 million in the corresponding 2011 period. Average outstandings decreased to $804.0 million (34.0% of average earning assets) for the second quarter of 2012 from $922.8 million (40.2% of average earning assets) in the second quarter of 2011. The average yield on investment securities increased to 3.15% for the second quarter of 2012 from 3.10% in the corresponding 2011 period. The decrease in balances and increase in yield reflect the Company’s decision to replace a portion of medium term (approximate 5 year original maturities), lower yielding U.S. Government Agency Securities that were called by the issuer with longer term (approximate 10-15 year original maturities) U.S. Government Agency securities having approximately the same or slightly higher yield thereby maintaining a pool of pledgable collateral. Management’s Asset/Liability strategy continues to be designed to maintain a portfolio of corporate securities with a relatively short-term average life positioning the Company for higher interest rates in future periods. This strategy was implemented through the sale of available for sale securities, principally longer dated corporate securities and selected obligations of states and political subdivisions with longer average lives.

 

42
 

 

Total interest expense decreased by $0.4 million for the second quarter of 2012 from $3.2 million for the corresponding 2011 period, primarily due to the impact of lower rates paid for interest-bearing deposit balances and lower rates paid for those funds lower balances.

 

Interest expense on deposits decreased to $1.7 million for the second quarter of 2012 from $2.1 million for the corresponding 2011 period, due to decreases in the cost of those funds coupled with the impact of lower balances. The average rate paid on interest-bearing deposits was 0.53%, which was 11 basis points lower than the prior year period. The decrease in average cost of deposits reflects the impact of deposit pricing strategies and the Company’s purchase of certificates of deposit from the Certificate of Deposit Account Registry Service (“CDARS”) and various listing services which provided certificate of deposit balances at lower rates. Average interest-bearing deposits were $1,258.2 million for the second quarter of 2012 compared to $1,297.3 million for the prior year period, reflecting the impact of the Company’s business development activities as well as funds received from CDARS and various listing services.

 

Provision for Loan Losses

Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” beginning on page 48), the provision for loan losses for the second quarter of 2012 was $2.8 million, compared to $3.0 million in the prior year period. Factors affecting the provision for the second quarter of 2012 included current economic conditions during the quarter and a lower level of net charge-offs and lower nonaccrual loan balances.

 

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

 

As of June 30, 2012, the allowance for loan losses increased $1.1 million from $20.0 million at December 31, 2011, primarily due to an increase in the level of special mention and substandard loans partially offset by a lower level of nonaccrual loans, primarily in the equipment finance portfolio.

 

Noninterest Income

Noninterest income increased to $10.7 million for the second quarter of 2012 from $10.4 million in the corresponding 2011 period. The increase was principally due to higher mortgage banking income, service charges on deposit accounts and other income partially offset by lower accounts receivable management/factoring commissions and other related fees and security gains. Mortgage banking income increased principally due to higher volume of loans sold. Noninterest income was negatively impacted by the reclassification from accounts receivable management/factoring commissions and other fees into interest income from loans of revenues related to one of the Company’s lending products, thereby more appropriately reflecting the characteristics of the product. Accounts receivable management/factoring commissions and other related fees was also negatively impacted by the level and mix of sales volume and by lower trade finance volume.

 

Noninterest Expense

Noninterest expenses were $23.8 million for the second quarter of 2012, compared to $23.4 million for the prior year period. Higher compensation, reflecting the Company’s continued investment in the franchise, and higher professional fees were partially offset by a reduction in deposit insurance premiums.

 

Provision for Income Taxes

Reflecting an increase in pre-tax income of $1.7 million, the provision for income taxes for the second quarter of 2012 was $2.1 million, reflecting an effective tax rate of 30.4%, compared with $1.4 million for the second quarter of 2011, reflecting an effective tax rate of 26.1%. The increase in the effective tax rate was primarily due to a higher level of pre-tax income in the 2012 period compared to the 2011 period.

 

43
 

 

Comparison of the Six Months Ended June 30, 2012 and 2011

 

The Company reported net income available to common shareholders for the six months ended June 30, 2012 of $9.5 million, representing $0.31 per share calculated on a diluted basis, compared to $5.8 million, or $0.20 per share calculated on a diluted basis, for the first six months of 2011. The increase in net income available to common shareholders was primarily due to a $4.1 million increase in net interest income a $0.2 million decrease in provision for loan losses and a $2.1 million decrease in dividend and accretion on the preferred shares, resulting from the repurchase in the second quarter of 2011 of all of the preferred shares and the warrant issued under the TARP Capital Purchase Program. Those benefits were partially offset by a $0.3 million decrease in noninterest income, a $1.1 million increase in noninterest expenses and a $1.3 million increase in provision for income taxes.

 

Net Interest Income

Net interest income, on a tax-equivalent basis, was $47.0 million for the first six months of 2012 compared to $42.9 million for the corresponding 2011 period. Net interest income benefitted from higher average loan balances, lower interest-bearing liabilities balances and lower cost of funding. Net interest income also benefitted from the reclassification from accounts receivable management/factoring commissions and other fees into interest income from loans of revenues related to one of the Company’s lending products, thereby more appropriately reflecting the characteristics of the product. Those benefits were partially offset by the impact of lower yields on loans and lower average investment securities balances. The net interest margin, on a tax-equivalent basis, was 4.09% for the first six months of 2012 compared to 3.93% for the corresponding 2011 period. The net interest margin was impacted by the mix of earning assets and funding, including the higher level of noninterest-bearing demand deposits.

 

Total interest income, on a tax-equivalent basis, aggregated $52.6 million for the first six months of 2012, up $3.2 million from the corresponding 2011 period as the benefit of higher average loan balances more than offset the impact of lower investment securities balances and lower yields. Total interest earning assets increased to $2,327.9 million for the first six months of 2012 compared to $2,227.0 million in the prior year period. The tax-equivalent yield on interest-earning assets was 4.59% for the first quarter of 2012 compared to 4.54% for the corresponding 2011 period.

 

Interest earned on the loan portfolio increased to $39.7 million for the first six months of 2012 from $35.3 million in the prior year period. Average loan balances amounted to $1,478.5 million for the first six months of 2012, an increase of $189.0 million from an average of $1,289.5 million in the prior year period. The increase in average loans, primarily due to the Company’s business development activities, accounted for a $5.5 million increase in interest earned on loans. The yield on the loan portfolio decreased to 5.54% for the first six months of 2012 from 5.71% for the corresponding 2011 period, which was primarily attributable to the mix of average outstanding balances among the components of the loan portfolio.

 

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $12.6 million for the first six months of 2012 from $14.0 million in the corresponding 2011 period. Average outstandings decreased to $784.4 million (33.7% of average earning assets) for the first six months of 2012 from $882.6 million (39.6% of average earning assets) in the first six months of 2011. The average yield on investment securities increased to 3.22% for the first six months of 2012 from 3.16% in the corresponding 2011 period. The decrease in balances and increase in yield reflect the Company’s decision to replace a portion of medium term (approximate 5 year original maturities), lower yielding U.S. Government Agency Securities that were called by the issuer with longer term (approximate 10-15 year original maturities) U.S. Government Agency securities having approximately the same or slightly higher yield thereby maintaining a pool of pledgable collateral. Management’s Asset/Liability strategy continues to be designed to maintain a portfolio of corporate securities with a relatively short-term average life positioning the Company for higher interest rates in future periods. This strategy was implemented through the sale of available for sale securities, principally longer dated corporate securities and selected obligations of states and political subdivisions with longer average lives.

 

Total interest expense decreased by $0.9 million for the first six months of 2012 from $6.5 million for the corresponding 2011 period, due to the impact of lower balances and rates paid for interest-bearing liabilities.

 

44
 

 

Interest expense on deposits decreased to $3.4 million for the first six months of 2012 from $4.1 million for the corresponding 2011 period, due to decreases in the cost of those funds, coupled with the impact of change in the mix. The average rate paid on interest-bearing deposits was 0.55%, which was 12 basis points lower than the prior year period. The decrease in average cost of deposits reflects the impact of deposit pricing strategies and the Company’s purchase of certificates of deposit from the Certificate of Deposit Account Registry Service (“CDARS”) and various listing services which provided certificate of deposit balances at lower rates. Average interest-bearing deposits were $1,234.2 million for the first six months of 2012 compared to $1,239.7 million for the prior year period.

 

Interest expense on borrowings decreased to $2.2 million for the first six months of 2012 from $2.4 million for the corresponding 2011 period, primarily due to lower average balances. Average borrowings decreased to $216.4 million for the first six months of 2012 from $241.4 million in the prior year period, reflecting a lesser reliance by the Company on wholesale borrowed funds.

 

Provision for Loan Losses

Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” beginning on page 48), the provision for loan losses for the first six months of 2012 was $5.8 million, compared to $6.0 million in the prior year period. Factors affecting the provision for the first six months of 2012 included current economic conditions during the quarter and a lower level of net charge-offs and lower nonaccrual loan balances.

 

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

 

As of June 30, 2012, the allowance for loan losses increased $1.1 million from $20.0 million at December 31, 2011, primarily due to an increase in the level of special mention and substandard loans partially offset by a lower level of nonaccrual loans, primarily in the equipment finance portfolio.

 

Noninterest Income

Noninterest income decreased to $21.1 million for the first six months of 2012 from $21.4 million in the corresponding 2011 period. The decrease principally resulted from lower accounts receivable management/factoring commissions and other related fees and security gains partially offset by higher mortgage banking income. Noninterest income was negatively impacted by the reclassification from accounts receivable management/factoring commissions and other fees into interest income from loans of revenues related to one of the Company’s lending products, thereby more appropriately reflecting the characteristics of the product. Accounts receivable management/factoring commissions and other related fees was also negatively impacted by the level and mix of sales volume and by lower trade finance volume. Mortgage banking income increased principally due to higher volume of loans sold.

 

Noninterest Expense

Noninterest expenses were $47.0 million for the first six months of 2012, compared to $45.9 million for the prior year period. Higher compensation reflecting the Company’s continued investment in the franchise and professional fees, were partially offset by reductions in deposit insurance premiums.

 

Provision for Income Taxes

Reflecting an increase in pre-tax income of $2.9 million, the provision for income taxes for the first six months of 2012 was $4.2 million, reflecting an effective tax rate of 30.6%, compared with $2.9 million for the first six months of 2011, reflecting an effective tax rate of 26.7%. The increase in the effective tax rate was primarily due to a higher level of pre-tax income in the 2012 period compared to the 2011 period.

 

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BALANCE SHEET ANALYSIS

 

Securities

At June 30, 2012, the Company’s portfolio of securities totaled $727.4 million, of which obligations of U.S. government corporations and government sponsored enterprises amounted to $276.0 million, which is approximately 37.9% of the total portfolio. The Company has the intent and ability to hold to maturity securities classified as held to maturity, at which time it expects to receive full value for these securities. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. The gross unrealized gains and losses on held to maturity securities were $16.7 million and $0.1 million, respectively. Securities classified as available for sale may be sold in the future, prior to maturity. These securities are carried at fair value. Net aggregate unrealized gains or losses on these securities are included, net of taxes, as a component of shareholders’ equity. Given the generally high credit quality of the portfolio, management expects to realize all of its investments upon market recovery or the maturity of such instruments, and thus believes that any impairment in value is related to either interest rates or market conditions and therefore temporary. Available for sale securities included gross unrealized gains of $4.2 million and gross unrealized losses of $2.9 million. As of June 30, 2012, management does not have the intent to sell any of the securities classified as available for sale in the table on page 9 and management believes that it is not more likely than not that the Company would be required to sell any such securities before a recovery of cost.

 

In connection with an asset-liability management strategy described under Net Interest Income on page 42, during the second quarter 2012, the Company sold approximately $47.2 million of securities with a weighted average life of about 1.9 years. A significant portion of the proceeds was used to fund loan growth.

 

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

 

June 30, 2012  Weighted Average Life   Weighted Average Yield 
    AFS    HTM    AFS    HTM 
Residential mortgage-backed securities   2.0 Years    3.2 Years    1.34%   4.50%
Agency notes (with original call dates ranging between 3 and 36 months)   2.0 Years    4.1 Years    1.33%   1.48%
Corporate debt securities   1.4 Years        2.11%   %
Obligations of state and political subdivisions – New York Bank Qualified   5.5 Years    6.2 Years    5.75%[1]  5.80%[1]
                     
[1] tax equivalent  

 

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

 

   June 30, 2012   December 31, 2011