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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2005 Commission File No. 1-5273-1
STERLING BANCORP
(Exact name of Registrant as specified in its charter)
New York 13-2565216
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
650 Fifth Avenue, New York, N.Y. 10019-6108
(Address of principal executive offices) (Zip Code)
(212) 757-3300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Shares, $1 par value per share,
and attached Preferred Stock Purchase Rights New York Stock Exchange
Cumulative Trust Preferred
Securities 8.375% (Liquidation Amount
$10 per Preferred Security) of Sterling
Bancorp Trust I and Guarantee of Sterling
Bancorp with respect thereto New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated
Filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
On June 30, 2005, the aggregate market value of the common equity held by
non-affiliates of the Registrant was $354,287,474.
The Registrant has one class of common stock, of which 18,760,850 shares were
outstanding at March 3, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Sterling Bancorp's definitive 2006 Proxy Statement to be filed
pursuant to Regulation 14A are incorporated by reference in Part III.
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TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS 1
Item 1A. RISK FACTORS 10
Item 1B. UNRESOLVED STAFF COMMENTS 16
Item 2. PROPERTIES 16
Item 3. LEGAL PROCEEDINGS 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 18
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 77
Item 9A. CONTROLS AND PROCEDURES 77
Item 9B. OTHER INFORMATION 79
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 80
Item 11. EXECUTIVE COMPENSATION 80
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 80
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 80
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 80
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 81
SIGNATURES 83
Exhibits Submitted in a Separate Volume.
PART I
ITEM 1. BUSINESS
The disclosures set forth in this item are qualified by Item 1A. Risk Factors on
pages 10-16 and the section captioned "FORWARD-LOOKING STATEMENTS AND FACTORS
THAT COULD AFFECT FUTURE RESULTS" on page 20 and other cautionary statements set
forth elsewhere in this report.
Sterling Bancorp (the "parent company" or the "Registrant") is a bank holding
company and a financial holding company as defined by the Bank Holding Company
Act of 1956, as amended (the "BHCA"), which was organized in 1966. Throughout
this report, the terms the "Company" or "Sterling" refer to Sterling Bancorp and
its subsidiaries. The Company has operations in New York, New Jersey, Virginia
and North Carolina and conducts business throughout the United States.
The parent company owns, directly or indirectly, all of the outstanding shares
of Sterling National Bank (the "bank"), its principal subsidiary, and all of the
outstanding shares of Sterling Banking Corporation, Sterling Financial Services
Company, Inc. ("Sterling Financial") and Sterling Real Estate Abstract Holding
Company, Inc. (the "finance subsidiaries") and Sterling Bancorp Trust I (the
"trust"). Sterling National Mortgage Company, Inc. ("SNMC"), Sterling National
Servicing, Inc. ("SNS-Virginia"), Sterling Factors Corporation ("Factors"),
Sterling Trade Services, Inc. ("Trade Services") and Sterling Holding Company of
Virginia, Inc. are wholly-owned subsidiaries of the bank. Trade Services owns
all of the outstanding common shares of Sterling National Asia Limited, Hong
Kong; both companies commenced operations as of July 2, 2001. Sterling Holding
Company of Virginia, Inc. owns all of the outstanding common shares of Sterling
Real Estate Holding Company, Inc. Sterling Bancorp Trust I was formed as of
February 4, 2002. Sterling Real Estate Abstract Holding Company, Inc., which
commenced operations as of January 16, 2003, owns 51% of the outstanding common
shares of SBC Abstract Company, LLC, which commenced operations as of January
17, 2004.
Segment information appears in Note 21 of the Company's consolidated financial
statements.
GOVERNMENT MONETARY POLICY
The Company is affected by the credit policies of monetary authorities,
including the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). An important objective of the Federal Reserve System is to
regulate the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve Board are open market operations in U.S.
Government securities, changes in the discount rate, reserve requirements on
member bank deposits, and funds availability regulations. The monetary policies
of the Federal Reserve Board have in the past had a significant effect on
operations of financial institutions, including the bank, and will continue to
do so in the future. Changing conditions in the national economy and in the
money markets make it difficult to predict future changes in interest rates,
deposit levels, loan demand or their effects on the business and earnings of the
Company. Foreign activities of the Company are not considered to be material.
BUSINESS OPERATIONS
The Bank
Sterling National Bank was organized in 1929 under the National Bank Act and
commenced operations in New York City. The bank maintains eleven offices in New
York, nine offices in New York City (six branches and an international banking
facility in Manhattan and three branches in Queens), one branch in Nassau County
in Great Neck, New York and one branch in Yonkers, New York. The executive
office is located at 650 Fifth Avenue, New York, New York.
The bank provides a broad range of banking and financial products and services,
including business and consumer lending, asset-based financing,
factoring/accounts receivable management services, equipment leasing, commercial
and residential mortgage lending and brokerage, international trade financing,
deposit services, trust and estate administration, investment management and
investment services. Business lending, depository and related financial services
are furnished to a wide range of customers in diverse industries, including
commercial, industrial and financial companies, and government and non-profit
entities.
For the year ended December 31, 2005, the bank's average earning assets
represented approximately 96% of the Company's average earning assets. Loans
represented 58% and investment securities represented 41% of the bank's average
earning assets in 2005.
Commercial Lending, Asset-Based Financing and Factoring/Accounts Receivable
Management. The bank provides loans to small and medium-sized businesses. The
businesses are diversified across industries, and the loans generally range in
size from $250,000 to $15 million. Business loans can be tailored to meet
customers' specific long- and short-term needs, and include secured and lines
of credit, business installment loans, business lines of credit, and unsecured
debtor-in-possession financing. Our loans are often collateralized by assets,
such as accounts receivable, inventory, marketable securities, other liquid
collateral, equipment and other assets.
Through its factoring subsidiary ("Factors"), the bank provides accounts
receivable management services. The purchase of a
PAGE 1
client's accounts receivable is traditionally known as "factoring" and results
in payment by the client of a non-refundable factoring fee, which is generally a
percentage of the factored receivables or sales volume and is designed to
compensate for the bookkeeping and collection services provided by Factors and,
if applicable, its credit review of the client's customer and assumption of
customer credit risk. When Factors "factors" (i.e., purchases) an account
receivable from a client, it records the receivable as an asset (included in
"Loans held in portfolio, net of unearned discounts"), records a liability for
the funds due to the client (included in "Accrued expenses and other
liabilities") and credits to noninterest income the non-refundable factoring fee
(included in "Factoring income"). Factors also may advance funds to its client
prior to the collection of receivables, charging interest on such advances (in
addition to any factoring fees) and normally satisfying such advances by the
collection of receivables. The accounts receivable factored are primarily for
clients engaged in the apparel and textile industries.
As of December 31, 2005, the outstanding loan balance (net of unearned
discounts) for commercial and industrial lending was $632.4 million,
representing approximately 54% of the bank's total loan portfolio.
Equipment Leasing. The bank offers equipment leasing services in the New York
metropolitan area and across the United States through direct leasing programs,
third party sources and vendor programs. The bank finances small and
medium-sized equipment leases with an average term of 24 to 30 months. At
December 31, 2005, the outstanding loan balance (net of unearned discounts) for
equipment leases was $190.4 million, and equipment leases comprised
approximately 16% of the bank's total loan portfolio.
Residential and Commercial Mortgages. The bank's real estate loan portfolio
consists of real estate loans on one-to-four family residential properties and
commercial properties. The residential mortgage banking and brokerage business
is conducted through SNMC offices located principally in New York, New Jersey,
North Carolina and other mid-Atlantic states. The mortgage company originates
conforming residential mortgage loans throughout the tri-state metropolitan
area, as well as in Virginia and other mid-Atlantic states, primarily for
resale, and non-conforming residential mortgage loans, for its own portfolio and
primarily for resale. Commercial real estate financing is offered on
income-producing investor properties and owner-occupied properties, professional
co-ops and condos. At December 31, 2005, the outstanding loan balance for real
estate mortgage loans was $299.6 million, representing approximately 26% of the
bank's total loans outstanding.
International Trade Finance. Through its international division, international
banking facility and Hong Kong trade services subsidiary, the bank offers
financial services to its customers and correspondents in the world's major
financial centers. These services consist of financing import and export
transactions, issuing of letters of credit and creating banker's acceptances. In
addition to its direct worldwide correspondent banking relationships, active
bank account relationships are maintained with leading foreign banking
institutions in major financial centers.
Trust Services. The bank's trust department provides a variety of fiduciary,
investment management, custody and advisory and corporate agency services to
individuals and corporations. The bank acts as trustee for pension,
profit-sharing, 401(k) and other employee benefit plans and personal trusts and
estates. For corporations, the bank acts as trustee, transfer agent, registrar
and in other corporate agency capacities.
There are no industry concentrations in the commercial and industrial loan
portfolio that exceed 10% of gross loans. Approximately 68% of the bank's loans
are to borrowers located in the metropolitan New York area. The bank has no
foreign loans.
The composition of income from the operations of the bank and its subsidiaries
for the three most recent fiscal years was as follows:
Years Ended December 31, 2005 2004 2003
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Interest and fees on loans 54% 48% 49%
Interest and dividends on investment
securities 22 25 25
Other 24 27 26
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100% 100% 100%
=========================
At December 31, 2005, the bank and its subsidiaries had 525 employees,
consisting of 200 officers and 325 supervisory and clerical employees. The bank
considers its relations with its employees to be satisfactory.
Parent Company and Sterling Financial
The parent company, through Sterling Financial, makes loans that are secured by
personal property, accounts receivable or other collateral; occasionally,
unsecured advances are provided to its customers.
Dealer Receivable Financing. Through Sterling Financial, we provide loans to
independent dealers who market products, such as furniture, appliances,
automobiles and educational material to consumers on an installment basis with
repayment terms between 12 and 60 months. We administer the majority of these
installment contracts for the dealer by providing billing, payment processing
and other bookkeeping services. We generally lend up to 85% of the value of the
borrower's collateral. More than 75% of the payments are received
electronically.
PAGE 2
The composition of income (excluding equity in undistributed net income of the
bank) of the parent company and its non-bank subsidiaries for the three most
recent fiscal years was as follows:
Years Ended December 31, 2005 2004 2003
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Interest and fees on loans 17% 18% 26%
Dividends, interest and service fees 79 80 69
Other 4 2 5
--------------------------
100% 100% 100%
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At December 31, 2005, the parent company and Sterling Financial employed 20
persons, consisting of 1 officer with the balance of the employees performing
supervisory and clerical functions. The parent company and its finance
subsidiaries consider employee relations to be satisfactory.
COMPETITION
There is intense competition in all areas in which the Company conducts its
business. As a result of the deregulation of the financial services industry
under the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), the Company competes
with banks and other financial institutions, including savings and loan
associations, savings banks, finance companies, and credit unions. Many of these
competitors have substantially greater resources and lending limits and provide
a wider array of banking services. To a limited extent, the Company also
competes with other providers of financial services, such as money market mutual
funds, brokerage firms, consumer finance companies and insurance companies.
Competition is based on a number of factors, including prices, interest rates,
service, availability of products, and geographic location.
SUPERVISION AND REGULATION
General
The banking industry is highly regulated. Statutory and regulatory controls are
designed primarily for the protection of depositors and the banking system, and
not for the purpose of protecting the shareholders of the parent company. The
following discussion is not intended to be a complete list of all the activities
regulated by the banking laws or of the impact of such laws and regulations on
the bank. It is intended only to briefly summarize some material provisions.
Sterling Bancorp is a bank holding company and a financial holding company under
the BHCA and is subject to supervision, examination and reporting requirements
of the Federal Reserve Board. Sterling Bancorp is also under the jurisdiction of
the Securities and Exchange Commission and is subject to the disclosure and
regulatory requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, as administered by the SEC.
Sterling Bancorp is listed on the New York Stock Exchange (NYSE) under the
trading symbol "STL" and is subject to the rules of the NYSE for listed
companies.
As a national bank, the bank is principally subject to the supervision,
examination and reporting requirements of the Office of the Comptroller of the
Currency (the "OCC"), as well as the Federal Deposit Insurance Corporation (the
"FDIC"). Insured banks, including the bank, are subject to extensive regulation
of many aspects of their business. These regulations, among other things, relate
to: (a) the nature and amount of loans that may be made by the bank and the
rates of interest that may be charged; (b) types and amounts of other
investments; (c) branching; (d) permissible activities; (e) reserve
requirements; and (f) dealings with officers, directors and affiliates.
Sterling Banking Corporation is subject to supervision and regulation by the
Banking Department of the State of New York.
Sterling Financial Services Company, Inc. is subject to regulation by the
Federal Reserve Board.
Bank Holding Company Regulation
The BHCA requires the prior approval of the Federal Reserve Board for the
acquisition by a bank holding company of more than 5% of the voting stock or
substantially all of the assets of any bank or bank holding company. Also, under
the BHCA, bank holding companies are prohibited, with certain exceptions, from
engaging in, or from acquiring more than 5% of the voting stock of any company
engaging in, activities other than (1) banking or managing or controlling banks,
(2) furnishing services to or performing services for their subsidiaries, or (3)
activities that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
As discussed below under "Financial Holding Company Regulation," the
Gramm-Leach-Bliley Act of 1999 amended the BHCA to permit a broader range of
activities for bank holding companies that qualify as "financial holding
companies."
Financial Holding Company Regulation
The Gramm-Leach-Bliley Act:
o allows bank holding companies, the depository institution subsidiaries of
which meet management, capital and the Community Reinvestment Act (the
"CRA") standards, to engage in a substantially broader range of
nonbanking financial activities than was previously permissible,
including (a) insurance underwriting and agency, (b) making merchant
banking investments in commercial companies, (c) securities underwriting,
dealing and market making, and (d) sponsoring mutual funds and investment
companies;
PAGE 3
o allows insurers and other financial services companies to acquire banks;
and
o establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
In order for a bank holding company to engage in the broader range of activities
that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository
subsidiaries must be and remain well capitalized and well managed and have
received at least a satisfactory CRA rating, and (2) it must file a declaration
with the Federal Reserve Board that it elects to be a "financial holding
company."
Requirements and standards to remain "well capitalized" are discussed below. To
maintain financial holding company status, the bank must have at least a
"satisfactory" rating under the CRA. Under the CRA, during examinations of the
bank, the OCC is required to assess the bank's record of meeting the credit
needs of the communities serviced by the bank, including low- and moderate-
income communities. Banks are given one of four ratings under the CRA:
"outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The bank received a rating of outstanding on the most recent
exam completed by the OCC.
Pursuant to an election made under the Gramm-Leach-Bliley Act, the parent
company has been designated as a financial holding company. As a financial
holding company, Sterling Bancorp may conduct, or acquire a company (other than
a U.S. depository institution or foreign bank) engaged in, activities that are
"financial in nature," as well as additional activities that the Federal Reserve
Board determines (in the case of incidental activities, in conjunction with the
Department of the Treasury) are incidental or complementary to financial
activities, without the prior approval of the Federal Reserve Board. Under the
Gramm-Leach-Bliley Act, activities that are financial in nature include
insurance, securities underwriting and dealing, merchant banking, and sponsoring
mutual funds and investment companies. Under the merchant banking authority
added by the Gramm-Leach-Bliley Act, financial holding companies may invest in
companies that engage in activities that are not otherwise permissible
"financial" activities, subject to certain limitations, including that the
financial holding company makes the investment with the intention of limiting
the investment duration and does not manage the company on a day-to-day basis.
Generally, financial holding companies must continue to meet all the
requirements for financial holding company status in order to maintain the
ability to undertake new activities or acquisitions that are financial in nature
and the ability to continue those activities that are not generally permissible
for bank holding companies. If the parent company ceases to so qualify it would
be required to obtain the prior approval of the Federal Reserve Board to engage
in non-banking activities or to acquire more than 5% of the voting stock of any
company that is engaged in non-banking activities. With certain exceptions, the
Federal Reserve Board can only provide prior approval to applications involving
activities that it had previously determined, by regulation or order, are so
closely related to banking as to be properly incident thereto. Such activities
are more limited than the range of activities that are deemed "financial in
nature."
Payment of Dividends and Transactions with Affiliates
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements throughout its history.
Various legal restrictions limit the extent to which the bank can fund the
parent company and its nonbank subsidiaries. All national banks are limited in
the payment of dividends without the approval of the OCC to an amount not to
exceed the net profits (as defined) for that year to date combined with its
retained net profits for the preceding two calendar years, less any required
transfers to surplus. Federal law also prohibits national banks from paying
dividends that would be greater than the bank's undivided profits after
deducting statutory bad debt in excess of the bank's allowance for loan losses.
Under the foregoing restrictions, and, without adversely affecting its "well
capitalized" status, as of December 31, 2005, the bank could pay aggregate
dividends of approximately $29 million to the parent company, without obtaining
affirmative governmental approvals. This is not necessarily indicative of
amounts that may be paid or are available to be paid in future periods.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a depository institution, such as the bank, may not pay dividends if
payment would cause it to become undercapitalized or if it is already
undercapitalized. The payment of dividends by the parent company and the bank
may also be affected or limited by other factors, such as the requirement to
maintain adequate capital.
Federal laws strictly limit the ability of banks to engage in transactions with
their affiliates, including their bank holding companies. Such transactions
between a subsidiary bank and its parent company or the nonbank subsidiaries of
the bank holding company are limited to 10% of a bank subsidiary's capital and
surplus and, with respect to such parent company and all such nonbank
subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and
surplus. Further, loans and extensions of credit generally are required to be
secured by eligible collateral in specified amounts. Federal law also requires
PAGE 4
that all transactions between a bank and its affiliates be on terms only as
favorable to the bank as transactions with non-affiliates.
Federal law also limits a bank's authority to extend credit to its directors,
executive officers and 10% shareholders, as well as to entities controlled by
such persons. Among other things, extensions of credit to insiders are required
to be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons. Also, the terms of such
extensions of credit may not involve more than the normal risk of repayment or
present other unfavorable features and may not exceed certain limitations on the
amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of the bank's capital.
Banks are subject to prohibitions on certain tying arrangements. A depository
institution is prohibited, subject to some exceptions, from extending credit to
or offering any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or its affiliates or not obtain services
of a competitor of the institution.
Capital Adequacy and Prompt Corrective Action
Banks and bank holding companies are subject to various regulatory capital
requirements administered by state and federal banking agencies. Capital
adequacy guidelines and, additionally for banks, prompt corrective action
regulations, involve quantitative measures of assets, liabilities, and certain
off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weighting and other factors.
The Federal Reserve Board, the OCC and the FDIC have substantially similar
risk-based capital ratio and leverage ratio guidelines for banking
organizations. The guidelines are intended to ensure that banking organizations
have adequate capital given the risk levels of assets and off-balance sheet
financial instruments. Under the guidelines, banking organizations are required
to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted
assets (including certain off-balance sheet items, such as letters of credit).
For purposes of calculating the ratios, a banking organization's assets and some
of its specified off-balance sheet commitments and obligations are assigned to
various risk categories.
A depository institution's or holding company's capital, in turn, is classified
in tiers, depending on type:
o Core Capital (Tier 1). Tier 1 capital includes common equity, retained
earnings, qualifying non-cumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual stock at the holding company
level, minority interests in equity accounts of consolidated subsidiaries,
less goodwill, most intangible assets and certain other assets.
o Supplementary Capital (Tier 2). Tier 2 capital includes, among other
things, perpetual preferred stock not meeting the Tier 1 definition,
qualifying mandatory convertible debt securities, qualifying subordinated
debt, and allowances for possible loan and lease losses, subject to
limitations.
Sterling Bancorp, like other bank holding companies, currently is required to
maintain Tier 1 capital and "total capital" (the sum of Tier 1 and Tier 2
capital) equal to at least 4.0% and 8.0%, respectively, of its total
risk-weighted assets (including various off-balance-sheet items, such as standby
letters of credit). Sterling National Bank, like other depository institutions,
is required to maintain similar capital levels under capital adequacy
guidelines. For a depository institution to be considered "well capitalized"
under the regulatory framework for prompt corrective action, its Tier 1 and
total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis,
respectively.
Bank holding companies and banks are also required to comply with minimum
leverage ratio requirements. The leverage ratio is the ratio of a banking
organization's Tier 1 capital to its total adjusted quarterly average assets (as
defined for regulatory purposes). The requirements necessitate a minimum
leverage ratio of 3.0% for financial holding companies and national banks that
have the highest supervisory rating. All other financial holding companies and
national banks are required to maintain a minimum leverage ratio of 4.0%, unless
a different minimum is specified by an appropriate regulatory authority. For a
depository institution to be considered "well capitalized" under the regulatory
framework for prompt corrective action, its leverage ratio must be at least
5.0%. The Federal Reserve Board has not advised Sterling Bancorp, and the OCC
has not advised Sterling National Bank, of any specific minimum leverage ratio
applicable to it.
The Federal Deposit Insurance Act, as amended ("FDIA"), requires among other
things, the federal banking agencies to take "prompt corrective action" in
respect of depository institutions that do not meet minimum capital
requirements. The FDIA sets forth the following five capital tiers: "well
PAGE 5
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier will depend upon how its capital levels compare with various
relevant capital measures and certain other factors, as established by
regulation. The relevant capital measures are the total capital ratio, the Tier
1 capital ratio and the leverage ratio.
Under the regulations adopted by the federal regulatory authorities, a bank will
be: (i) "well capitalized" if the institution has a total risk-based capital
ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater,
and a leverage ratio of 5.0% or greater, and is not subject to any order or
written directive by any such regulatory authority to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
the institution has a total risk-based capital ratio of 8.0% or greater, a Tier
1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or
greater (3.0% in certain circumstances) and is not "well capitalized"; (iii)
"undercapitalized" if the institution has a total risk-based ratio that is less
than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage
ratio of less than 4.0% (3.0% in certain circumstances; (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio of
less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio of less than 3.0%; and (v) "critically undercapitalized" if the
institution's tangible equity is equal to or less than 2.0% of average quarterly
tangible assets. An institution may be downgraded to, or deemed to be in, a
capital category that is lower than that indicated by its capital ratios if it
is determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. As of
December 31, 2005, the bank was "well capitalized," based on the ratios and
guidelines described above. A bank's capital category is determined solely for
the purpose of applying prompt corrective action regulations, and the capital
category may not constitute an accurate representation of the bank's overall
financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any management fee to
its parent holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration plan to
be acceptable, the depository institution's parent holding company must
guarantee that the institution will comply with such a capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser
of (i) an amount equal to 5.0% of the depository institution's total assets at
the time it became undercapitalized and (ii) the amount which is necessary (or
would have been necessary) to bring the institution into compliance with all
capital standards applicable with respect to such institution as of the time it
fails to comply with the plan. If a depository institution fails to submit an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized," requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator.
The federal regulatory authorities' risk-based capital guidelines are based upon
the 1988 capital accord of the Basel Committee on Banking Supervision (the
"BIS"). The BIS is a committee of central banks and bank supervisors/regulators
from the major industrialized countries that develops broad policy guidelines
for use by each country's supervisors in determining the supervisory policies
they apply. In 2004, the BIS published a new capital accord to replace its 1988
capital accord. The new capital accord would, among other things, set capital
requirements for operational risk and refine the existing capital requirements
for credit risk and market risk. Operational risk is defined to mean the risk of
direct or indirect loss resulting from inadequate or failed internal processes,
people and systems in connection with external events. The 1988 capital accord
does not include separate capital requirements for operational risk. The United
States federal regulatory authorities are currently expected to release proposed
rules to implement the BIS's new capital accord in the near term. The Company
cannot predict the timing or final form of the United States rules implementing
the new capital accord and their impact on the Company. The new capital
requirements that may arise from the final rules could increase the minimum
capital requirements applicable to the Company.
Support of the Bank
The Federal Reserve Board has stated that a bank holding company should serve as
a source of financial and managerial strength to its subsidiary banks. As a
result, the Federal Reserve Board may require the parent company to stand ready
to use its resources to provide adequate capital funds to its banking
subsidiaries during periods of financial stress or adversity. This support may
be required at times by the Federal Reserve Board even though not expressly
required by
PAGE 6
regulation. In addition, any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits to certain
other indebtedness of such subsidiary banks. The BHCA provides that, in the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to
priority of payment. Furthermore, under the National Bank Act, if the capital
stock of the bank is impaired by losses or otherwise, the OCC is authorized to
require payment of the deficiency by assessment upon the parent company. If the
assessment is not paid within three months, the OCC could order a sale of the
capital stock of the bank held by the parent company to make good the
deficiency.
FDIC Insurance
Under the FDIC's risk-related insurance assessment system, insured depository
institutions may be required to pay annual assessments to the FDIC based on the
institution's risk classification. An institution's risk classification is based
on the FDIC's assignment of the institution to one of three capital groups and
to one of three supervisory groups. The three supervisory groups are Group "A"
financially solid institutions with only a few minor weaknesses, Group "B"
institutions with weaknesses which, if uncorrected, could cause substantial
deterioration of the institution and increased risk to the insurance fund, and
Group "C" institutions with a substantial probability of loss to the fund absent
effective corrective action.
The three capital categories are well capitalized, adequately capitalized, and
undercapitalized. These three categories are substantially the same as the
prompt corrective action categories previously described, with the
undercapitalized category including institutions that are undercapitalized,
significantly undercapitalized, and critically undercapitalized for prompt
corrective action purposes. A bank's capital and supervisory subgroup is
confidential and may not be disclosed. Assessment rates for deposit insurance
currently range from zero basis points to 27 basis points per $100 of deposits.
Any increase in insurance assessments could have an adverse impact on the
earnings of insured institutions, including the bank. Because of favorable loss
experience and a healthy reserve ratio in the Bank Insurance Fund maintained by
the FDIC, well capitalized and well managed banks, including the bank, have in
recent years paid no premiums for FDIC insurance. In the future, even well
capitalized and well managed banks may be required to pay premiums on deposit
insurance.
In addition, the bank is required to make payments for the servicing of
obligations of the Financing Corporation ("FICO") issued in connection with the
resolution of savings and loan associations, so long as such obligations remain
outstanding. The current FICO annual assessment rate is 1.34 cents per $100 of
deposits.
Under the Federal Deposit Insurance Act (the "FDIA"), insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC.
In addition, the FDIA provides that a depository institution insured by the FDIC
can be held liable by the FDIC for any loss incurred or reasonably expected to
be incurred in connection with the default of a commonly controlled FDIC-
insured depository institution or in connection with any assistance provided by
the FDIC to a commonly controlled institution "in danger of default" (as defined
in the FDIA).
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is generally required to satisfy its
obligations to insured depositors at the least possible cost to the deposit
insurance fund. In addition, the FDIC may not take any action that would have
the effect of increasing the losses to the deposit insurance fund by protecting
depositors for more than the insured portion of deposits (generally $100,000) or
creditors other than depositors.
Depositor Preference
The FDIA provides that, in the event of the "liquidation or other resolution" of
an insured depository institution, the claims of depositors of the institution,
including the claims of the FDIC as subrogee of insured depositors, and certain
claims for administrative expenses of the FDIC as a receiver, will have priority
over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the
FDIC, will have priority in payment ahead of unsecured, non-deposit creditors,
including the parent bank holding company, with respect to any extensions of
credit they have made to such insured depository institution.
Liability of Commonly Controlled Institutions
FDIC-insured depository institutions can be held liable for any loss incurred,
or reasonably expected to be incurred, by the FDIC due to the default of an
FDIC-insured depository institution controlled by the same holding company.
Community Reinvestment Act
The CRA requires depository institutions to assist in meeting the credit needs
of their market areas consistent with safe and sound banking practice. Under the
CRA, each depository
PAGE 7
institution is required to help meet the credit needs of its market areas by,
among other things, providing credit to low- and moderate-income individuals and
communities. Depository institutions are periodically examined for compliance
with the CRA and are assigned ratings. In order for a financial holding company
to commence any new activity permitted by the BHCA, or to acquire any company
engaged in any new activity permitted by the BHCA, each insured depository
institution subsidiary of the financial holding company must have received a
rating of at least "satisfactory" in its most recent examination under the CRA.
Furthermore, banking regulators take into account CRA ratings when considering
approval of a proposed transaction.
Financial Privacy
In accordance with the GLB Act, federal banking regulators adopted rules that
limit the ability of banks and other financial institutions to disclose
non-public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. The privacy provisions of the GLB
Act affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years
has been aimed at combating money laundering and terrorist financing. The USA
Patriot Act of 2001 (the "USA Patriot Act") substantially broadened the scope of
United States anti-money laundering laws and regulations by imposing significant
new compliance and due diligence obligations, creating new crimes and penalties
and expanding the extra-territorial jurisdiction of the United States. The
United States Treasury Department has issued a number of implementing
regulations which apply to various requirements of the USA Patriot Act to
financial institutions such as the Company. These regulations impose obligations
on financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and terrorist financing
and to verify the identity of their customers. Failure of a financial
institution to maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with all of the relevant laws
or regulations, could have serious legal and reputational consequences for the
institution, including the imposition of enforcement actions and civil monetary
penalties.
Legislative Initiatives
From time to time, various legislative and regulatory initiatives are introduced
in Congress and state legislatures, as well as by regulatory agencies. Such
initiatives may include proposals to expand or contract the powers of bank
holding companies and depository institutions or proposals to substantially
change the financial institution regulatory system. Such legislation could
change banking statutes and the operating environment of the Company in
substantial and unpredictable ways. If enacted, such legislation could increase
or decrease the cost of doing business, limit or expand permissible activities
or affect the competitive balance among banks, savings associations, credit
unions and other financial institutions. The Company cannot predict whether any
such legislation will be enacted, and if enacted, the effect that it, or any
implementing regulations, would have on the financial condition or results of
operations of the Company. A change in statutes, regulations or regulatory
policies applicable to the Company could have a material effect on the business
of the Company.
Safety and Soundness Standards
Federal banking agencies promulgate safety and soundness standards relating to,
among other things, internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees, and benefits. With respect to internal controls,
information systems and internal audit systems, the standards describe the
functions that adequate internal controls and information systems must be able
to perform, including: (i) monitoring adherence to prescribed policies; (ii)
effective risk management; (iii) timely and accurate financial, operations, and
regulatory reporting; (iv) safeguarding and managing assets; and (v) compliance
with applicable laws and regulations. The standards also include requirements
that: (i) those performing internal audits be qualified and independent; (ii)
internal controls and information systems be tested and reviewed; (iii)
corrective actions be adequately documented; and (iv) results of an audit be
made available for review of management actions.
SELECTED CONSOLIDATED STATISTICAL INFORMATION
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential
The information appears on pages 29 and 30 in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
II. Investment Portfolio
A summary of the Company's investment securities by type with related carrying
values at the end of each of the three most recent fiscal years appears on page
24 in Management's
PAGE 8
Discussion and Analysis of Financial Condition and Results of Operations.
Information regarding book values and range of maturities by type of security
and weighted average yields for totals of each category is presented in Note 4
beginning on page 49 of the Company's consolidated financial statements.
III. Loan Portfolio
A table setting forth the composition of the Company's loan portfolio, net of
unearned discounts, at the end of each of the five most recent fiscal years
appears on page 25 in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
A table setting forth the maturities and sensitivity to changes in interest
rates of the Company's commercial and industrial loans at December 31, 2005
appears on page 25 in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
It is the policy of the Company to consider all customer requests for extensions
of original maturity dates (rollovers), whether in whole or in part, as though
each was an application for a new loan subject to standard approval criteria,
including credit evaluation. The information appears under "Loan Portfolio" on
page 25 in Management's Discussion and Analysis of Financial Condition and
Results of Operations, and in Note 5 and under "Loans" in Note 1 of the
Company's consolidated financial statements.
A table setting forth the aggregate amount of domestic nonaccrual, past due and
restructured loans of the Company at the end of each of the five most recent
fiscal years appears on page 26 in Management's Discussion and Analysis of
Financial Condition and Results of Operations; there were no foreign loans
accounted for on a nonaccrual basis and there were no troubled debt
restructurings for any types of loans. Loans contractually past due 90 days or
more as to principal or interest and still accruing are loans which are both
well-secured or guaranteed by financially responsible third parties and are in
the process of collection.
IV. Summary of Loan Loss Experience
The information appears in Note 6 of the Company's consolidated financial
statements and beginning on page 26 under "Asset Quality" in Management's
Discussion and Analysis of Financial Condition and Results of Operations. A
table setting forth certain information with respect to the Company's loan loss
experience for each of the five most recent fiscal years appears on page 27 in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The Company considers its allowance for loan losses to be adequate based upon
the size and risk characteristics of the outstanding loan portfolio at December
31, 2005. Net losses within the loan portfolio are not, however, statistically
predictable and are subject to various external factors that are beyond the
control of the Company. Consequently, changes in conditions in the next twelve
months could result in future provisions for loan losses varying from the level
taken in 2005.
A table presenting the Company's allocation of the allowance appears on page 28
in Management's Discussion and Analysis of Financial Condition and Results of
Operations. This allocation is based on estimates by management that may vary
based on management's evaluation of the risk characteristics of the loan
portfolio. The amount allocated to a particular loan category may not
necessarily be indicative of actual future charge-offs in that loan category.
V. Deposits
Average deposits and average rates paid for each of the three most recent years
are presented on page 29 in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Outstanding time certificates of deposit issued from domestic and foreign
offices and interest expense on domestic and foreign deposits are presented in
Note 7 of the Company's consolidated financial statements.
The table providing selected information with respect to the Company's deposits
for each of the three most recent fiscal years appears on page 28 in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Interest expense for the three most recent fiscal years is presented in Note 7
of the Company's consolidated financial statements.
VI. Return on Assets and Equity
The Company's returns on average total assets and average shareholders' equity,
dividend payout ratio and average shareholders' equity to average total assets
for each of the five most recent years is presented in "Selected Financial Data"
on page 19.
VII. Short-Term Borrowings
Balance and rate data for significant categories of the Company's Short-Term
Borrowings for each of the three most recent years is presented in Note 8 of the
Company's consolidated financial statements.
PAGE 9
INFORMATION AVAILABLE ON OUR WEB SITE
Our Internet address is www.sterlingbancorp.com and the investor relations
section of our web site is located at www.sterlingbancorp.com/ir/investor.cfm.
We make available free of charge, on or through the investor relations section
of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission.
Also posted on our web site, and available in print upon request of any
shareholder to our Investor Relations Department, are the Charters for our Board
of Directors' Audit Committee, Compensation Committee and Corporate Governance
and Nominating Committee, our Corporate Governance Guidelines, our Method for
Interested Persons to Communicate with Non-Management Directors and a Code of
Business Conduct and Ethics governing our directors, officers and employees.
Within the time period required by the Securities and Exchange Commission and
the New York Stock Exchange, we will post on our web site any amendment to the
Code of Business Conduct and Ethics and any waiver applicable to our senior
financial officers, as defined in the Code, or our executive officers or
directors. In addition, information concerning purchases and sales of our equity
securities by our executive officers and directors is posted on our web site.
ITEM 1A. RISK FACTORS
An investment in the Company's common stock is subject to risks inherent to the
Company's business. The material risks and uncertainties that management
believes affect the Company are described below. Before making an investment
decision, you should carefully consider the risks and uncertainties described
below together with all of the other information included or incorporated by
reference in this report. The risks and uncertainties described below are not
the only ones facing the Company. Additional risks and uncertainties that
management is not aware of or focused on, or that management currently deems
immaterial, may also impair the Company's business operations. This report is
qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company's financial condition
and results of operations could be materially and adversely affected. If this
were to happen, the value of the Company's common stock could decline
significantly, and you could lose all or part of your investment.
RISKS RELATED TO THE COMPANY'S BUSINESS
The Company Is Subject to Interest Rate Risk
The Company's earnings and cash flows are largely dependent upon its net
interest income. Net interest income is the difference between interest income
earned on interest-earning assets such as loans and securities and interest
expense paid on interest-bearing liabilities such as deposits and borrowed
funds. Interest rates are highly sensitive to many factors that are beyond the
Company's control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Board of Governors
of the Federal Reserve System. Changes in monetary policy, including changes in
interest rates, could influence not only the interest the Company receives on
loans and securities and the amount of interest it pays on deposits and
borrowings, but such changes could also affect (i) the Company's ability to
originate loans and obtain deposits, (ii) the fair value of the Company's
financial assets and liabilities, and (iii) the average duration of the
Company's mortgage-backed securities portfolio. If the interest rates paid on
deposits and other borrowings increase at a faster rate than the interest rates
received on loans and other investments, the Company's net interest income, and
therefore earnings, could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset and liability
management strategies, including the use of derivatives as hedging instruments,
to reduce the potential effects of changes in interest rates on the Company's
results of operations, any substantial, unexpected, prolonged change in market
interest rates could have a material adverse effect on the Company's financial
condition and results of operations. For further discussion related to the
Company's management of interest rate risk, see "Asset/Liability Management"
beginning on page 31 in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company Is Subject to Lending Risk
There are inherent risks associated with the Company's lending activities. These
risks include, among other things, the impact of changes in interest rates and
changes in the economic conditions in the markets where the Company operates as
well as those throughout the United States. Increases in interest rates and/or
weakening economic conditions could adversely impact the ability of borrowers to
repay outstanding
PAGE 10
loans or the value of the collateral securing these loans. The Company is also
subject to various laws and regulations that affect its lending activities.
Failure to comply with applicable laws and regulations could subject the Company
to regulatory enforcement action that could result in the assessment of
significant civil money penalties against the Company.
As of December 31, 2005, approximately 64% of the Company's loan portfolio
consisted of commercial and industrial, construction and commercial real estate
loans. These types of loans are generally viewed as having more risk of default
than residential real estate loans or consumer loans. These types of loans are
also typically larger than residential real estate loans and consumer loans.
Because the Company's loan portfolio contains a significant number of commercial
and industrial, construction and commercial real estate loans with relatively
large balances, the deterioration of one or a few of these loans could cause a
significant increase in non-performing loans. An increase in non-performing
loans could result in a net loss of earnings from these loans, an increase in
the provision for loan losses and an increase in loan charge-offs, all of which
could have a material adverse effect on the Company's financial condition and
results of operations. For further discussion related to commercial and
industrial, construction and commercial real estate loans, see "Loan Portfolio"
on page 25 in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's Allowance for Loan Losses May Be Insufficient
The Company maintains an allowance for loan losses, which is a reserve
established through a provision for loan losses charged to expense, that
represents management's best estimate of probable losses that have been incurred
within the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses and risks inherent
in the loan portfolio. The level of the allowance reflects management's
continuing evaluation of industry concentrations; specific credit risks; loan
loss experience; current loan portfolio quality; present economic, political and
regulatory conditions and unidentified losses inherent in the current loan
portfolio. The determination of the appropriate level of the allowance for loan
losses inherently involves a high degree of subjectivity and requires the
Company to make significant estimates of current credit risks and future trends,
all of which may undergo material changes. Changes in economic conditions
affecting borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of the
Company's control, may require an increase in the allowance for loan losses. In
addition, bank regulatory agencies periodically review the Company's allowance
for loan losses and may require an increase in the provision for loan losses or
the recognition of further loan charge-offs, based on judgments different than
those of management. In addition, if charge-offs in future periods exceed the
allowance for loan losses, the Company will need additional provisions to
increase the allowance for loan losses. Any increases in the allowance for loan
losses will result in a decrease in net income and, possibly, capital, and may
have a material adverse effect on the Company's financial condition and results
of operations. For further discussion related to the Company's process for
determining the appropriate level of the allowance for loan losses, see "Asset
Quality" beginning on page 26 in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The Company May Not Be Able to Meet the Cash Flow Requirements of Its Depositors
and Borrowers or Meet Its Operating Cash Needs to Fund Corporate Expansion and
Other Activities
Liquidity is the ability to meet cash flow needs on a timely basis at a
reasonable cost. The liquidity of the bank is used to make loans and leases and
to repay deposit liabilities as they become due or are demanded by customers.
Liquidity policies and limits are established by the board of directors. The
overall liquidity position of the bank and the parent company are regularly
monitored to ensure that various alternative strategies exist to cover
unanticipated events that could affect liquidity. Funding sources include
Federal funds purchased, securities sold under repurchase agreements and
non-core deposits. The bank is a member of the Federal Home Loan Bank of New
York, which provides funding through advances to members that are collateralized
with mortgage-related assets. We maintain a portfolio of securities that can be
used as a secondary source of liquidity. The bank also can borrow through the
Federal Reserve Bank's discount window.
If we were unable to access any of these funding sources when needed, we might
be unable to meet customers' needs, which could adversely impact our financial
condition, results of operations, cash flows, and level of regulatory-qualifying
capital. For further discussion, see "Liquidity Risk" beginning on page 32 in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Sterling Bancorp Relies on Dividends from Its Subsidiaries
Sterling Bancorp is a separate and distinct legal entity from its subsidiaries.
It receives dividends from its subsidiaries. These dividends are a significant
source of funds to pay dividends on the parent company's common stock and
interest and principal on its debt. Various federal and/or state
PAGE 11
laws and regulations limit the amount of dividends that Sterling National Bank
and certain non-bank subsidiaries may pay to the parent company. Also, Sterling
Bancorp's right to participate in a distribution of assets upon a subsidiary's
liquidation or reorganization is subject to the prior claims of the subsidiary's
creditors. In the event Sterling National Bank is unable to pay dividends to
Sterling Bancorp, Sterling Bancorp may not be able to service debt, pay
obligations or pay dividends on the Company's common stock. The inability to
receive dividends from Sterling National Bank could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Supervision and Regulation" on pages 3-8 and Note 13 of the Company's
consolidated financial statements.
The Company Is Subject to Environmental Liability Risk Associated with
Lending Activities
A portion of the Company's loan portfolio is secured by real property. During
the ordinary course of business, the Company may foreclose on and take title to
properties securing certain loans. In doing so, there is a risk that hazardous
or toxic substances could be found on these properties. If hazardous or toxic
substances are found, the Company may be liable for remediation costs, as well
as for personal injury and property damage. Environmental laws may require the
Company to incur substantial expenses and may materially reduce the affected
property's value or limit the Company's ability to use or sell the affected
property. Future laws or more stringent interpretations or enforcement policies
with respect to existing laws may increase the Company's exposure to
environmental liability. Although the Company has policies and procedures to
perform an environmental review before initiating any foreclosure action on real
property, these reviews may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on
the Company's financial condition and results of operations.
The Company's Profitability Depends Significantly on Local and Overall Economic
Conditions
The Company's success depends significantly on the economic conditions of the
communities it serves and the general economic conditions of the United States.
The Company has operations in New York City and the tri-state area, as well as
Virginia and other mid-Atlantic territories, and conducts business throughout
the United States. The economic conditions in these areas and throughout the
United States have a significant impact on the demand for the Company's products
and services as well as the ability of the Company's customers to repay loans,
the value of the collateral securing loans and the stability of the Company's
deposit funding sources. A significant decline in general economic conditions,
caused by inflation, recession, acts of terrorism, outbreak of hostilities or
other international or domestic occurrences, unemployment, changes in securities
markets, acts of God or other factors could impact these local economic
conditions and, in turn, have a material adverse effect on the Company's
financial condition and results of operations.
Severe Weather, Natural Disasters or Other Acts of God, Acts of War or Terrorism
and Other External Events Could Significantly Impact the Company's Business
Severe weather, natural disasters or other acts of God, acts of war or terrorism
and other adverse external events could have a significant impact on the
Company's ability to conduct business. Such events could affect the stability of
the Company's deposit base, impair the ability of borrowers to repay outstanding
loans, impair the value of collateral securing loans, cause significant property
damage, result in loss of revenue and/or cause the Company to incur additional
expenses. Although management has established disaster recovery policies and
procedures, the occurrence of any such event could have a material adverse
effect on the Company's business, which, in turn, could have a material adverse
effect on the Company's financial condition and results of operations.
The Company Operates in a Highly Competitive Industry and Market Area
The Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include national, regional, and
community banks within the various markets the Company operates. Additionally,
various out-of-state banks have entered the market areas in which the Company
currently operates. The Company also faces competition from many other types of
financial institutions, including, without limitation, savings and loan
associations, credit unions, finance companies, brokerage firms, insurance
companies, factoring companies and other financial intermediaries. The financial
services industry could become even more competitive as a result of legislative,
regulatory and technological changes and continued consolidation. Banks,
securities firms and insurance companies can merge under the umbrella of a
financial holding company, which can offer virtually any type of financial
service, including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. Also, technology has lowered barriers to
entry and made it possible for non-banks to offer products and services
traditionally provided by banks, such as automatic transfer and automatic
payment systems. Many of the Company's competitors have fewer regulatory
constraints and may have lower cost structures. Additionally, due to their size,
many competitors may be able to achieve economies of scale and, as a result, may
offer a
PAGE 12
broader range of products and services as well as better pricing for those
products and services than the Company does.
The Company's ability to compete successfully depends on a number of factors,
including, among other things:
o The ability to develop, maintain and build upon customer relationships
based on top quality service, high ethical standards and safe, sound
assets.
o The ability to expand the Company's market position.
o The scope, relevance and pricing of products and services offered to meet
customer needs and demands.
o The rate at which the Company introduces new products and services
relative to its competitors.
o Customer satisfaction with Company's level of service.
o Industry and general economic trends.
Failure to perform in any of these areas could significantly weaken the
Company's competitive position, which could adversely affect the Company's
growth and profitability, which, in turn, could have a material adverse effect
on the Company's financial condition and results of operations.
The Company Is Subject to Extensive Government Regulation and Supervision
The Company, primarily through the parent company and the bank and certain
non-bank subsidiaries, is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors'
funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect the Company's lending practices, capital
structure, investment practices, dividend policy and growth, among other things.
Congress and federal regulatory agencies continually review banking laws,
regulations and policies for possible changes. Changes to statutes, regulations
or regulatory policies, including changes in interpretation or implementation of
statutes, regulations or policies, could affect the Company in substantial and
unpredictable ways. Such changes could subject the Company to additional costs,
limit the types of financial services and products the Company may offer and/or
increase the ability of non-banks to offer competing financial services and
products, among other things. Failure to comply with laws, regulations or
policies could result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, which could have a material adverse effect on the
Company's business, financial condition and results of operations. While the
Company has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur. See "Supervision
and Regulation" on pages 3-8.
The Company's Controls and Procedures May Fail or Be Circumvented
The Company's internal controls, disclosure controls and procedures, and
corporate governance policies and procedures can provide only reasonable, not
absolute, assurances that the objectives of the system are met. Any failure or
circumvention of the Company's controls and procedures or failure to comply with
regulations related to controls and procedures could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company May Be Subject to a Higher Effective Tax Rate if Sterling Real
Estate Holding Company, Inc. Fails to Qualify as a Real Estate Investment Trust
("REIT")
Sterling Real Estate Holding Company Inc. ("SREHC") operates as a REIT for
federal income tax purposes. SREHC was established to acquire, hold and manage
mortgage assets and other authorized investments to generate net income for
distribution to its shareholders.
For an entity to qualify as a REIT, it must satisfy the following six asset
tests under the Internal Revenue Code each quarter: (1) 75% of the value of the
REIT's total assets must consist of real estate assets, cash and cash items, and
government securities; (2) not more than 25% of the value of the REIT's total
assets may consist of securities, other than those includible under the 75%
test; (3) not more than 5% of the value of its total assets may consist of
securities of any one issuer, other than those securities includible under the
75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of
the outstanding voting power of any one issuer may be held, other than those
securities includible under the 75% test or securities of taxable REIT
subsidiaries; (5) not more than 10% of the total value of the outstanding
securities of any one issuer may be held, other than those securities includible
under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT
cannot own securities in one or more taxable REIT subsidiaries which comprise
more than 20% of its total assets. At December 31, 2005, SREHC met all six
quarterly asset tests.
Also, a REIT must satisfy the following two gross income tests each year: (1)
75% of its gross income must be from qualifying income closely connected with
real estate activities; and (2) 95% of its gross income must be derived from
sources qualifying for the 75% test plus dividends, interest, and gains from the
sale of securities. In addition, a REIT must distribute at least 90% of its
taxable income for the taxable year, excluding any net capital gains, to
maintain its non-taxable status for federal income tax purposes. For 2005, SREHC
had met the two annual income tests and the distribution test.
PAGE 13
If SREHC fails to meet any of the required provisions and, therefore, does not
qualify to be a REIT, our effective tax rate would increase.
New Lines of Business or New Products and Services May Subject the Company to
Additional Risks
The Company may implement new lines of business or offer new products and
services within existing lines of business. There are substantial risks and
uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed. In developing and marketing new lines of
business and/or new products and services, the Company may invest significant
time and resources. Initial timetables for the introduction and development of
new lines of business and/or new products or services may not be achieved and
price and profitability targets may not prove feasible. External factors, such
as compliance with regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the
effectiveness of the Company's system of internal controls. Failure to
successfully manage these risks in the development and implementation of new
lines of business or new products or services could have a material adverse
effect on the Company's business, results of operations and financial condition.
Potential Acquisitions May Disrupt the Company's Business and Dilute Stockholder
Value
The Company seeks merger or acquisition partners that are compatible and have
experienced management and possess either significant market presence or have
potential for improved profitability through financial management, economies of
scale or expanded services. Acquiring other banks, businesses, or branches
involves various risks commonly associated with acquisitions, including, among
other things:
o Potential exposure to unknown or contingent liabilities of the target
company.
o Exposure to potential asset quality issues of the target company.
o Difficulty and expense of integrating the operations and personnel of the
target company.
o Potential disruption to the Company's business.
o Potential diversion of the Company's management time and attention.
o The possible loss of key employees and customers of the target company.
o Difficulty in estimating the value of the target company.
o Potential changes in banking or tax laws or regulations that may affect
the target company.
The Company regularly evaluates merger and acquisition opportunities and
conducts due diligence activities related to possible transactions with other
financial institutions and financial services companies. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving cash, debt or equity securities may
occur at any time. Acquisitions typically involve the payment of a premium over
book and market values, and, therefore, some dilution of the Company's tangible
book value and net income per common share may occur in connection with any
future transaction. Furthermore, failure to realize the expected revenue
increases, cost savings, increases in geographic or product presence, and/or
other projected benefits from an acquisition could have a material adverse
effect on the Company's financial condition and results of operations.
The Company May Not Be Able to Attract and Retain Skilled People
The Company's success depends, in large part, on its ability to attract and
retain key people. Competition for the best people in most activities engaged in
by the Company can be intense, and the Company may not be able to hire people or
to retain them. The unexpected loss of services of one or more of the Company's
key personnel could have a material adverse impact on the Company's business
because of their skills, knowledge of the Company's market, years of industry
experience and the difficulty of promptly finding qualified replacement
personnel. The Company has employment agreements with two of its senior
officers.
The Company's Information Systems May Experience an Interruption or Breach in
Security
The Company relies heavily on communications and information systems to conduct
its business. Any failure, interruption or breach in security of these systems
could result in failures or disruptions in the Company's customer relationship
management, general ledger, deposit, loan and other systems. While the Company
has policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of its information systems, there can
be no assurance that any such failures, interruptions or security breaches will
not occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures, interruptions or security breaches of the Company's
information systems could damage the Company's reputation, result in a loss of
customer business, subject the Company to additional regulatory scrutiny, or
expose the Company to civil litigation and possible financial liability, any of
which could have a material adverse effect on the Company's reputation,
financial condition and results of operations.
PAGE 14
The Company Continually Encounters Technological Change
The financial services industry is continually undergoing rapid technological
change with frequent introductions of new technology-driven products and
services. The Company's future success depends, in part, upon its ability to
address the needs of the customers by using technology to provide products and
services that will satisfy customer demands, as well as to create additional
efficiencies in the company's operations. Many of the Company's competitors have
substantially greater resources to invest in technological improvements. The
Company may not be able to effectively implement new technology-driven products
and services or be successful in marketing these products and services to its
customers. Failure to successfully keep pace with technological change affecting
the financial services industry could have a material adverse impact on the
Company's business and, in turn, the Company's financial condition and results
of operations.
The Company Is Subject to Claims and Litigation Pertaining to Fiduciary
Responsibility
From time to time, customers make claims and take legal action pertaining to the
Company's performance of its fiduciary responsibilities. Whether customer claims
and legal action related to the Company's performance of its fiduciary
responsibilities are founded or unfounded, if such claims and legal actions are
not resolved in a manner favorable to the Company they may result in significant
financial liability and/or adversely affect the market perception of the Company
and its products and services as well as impact customer demand for those
products and services. Any fiduciary liability or reputation damage could have a
material adverse effect on the Company's business, which, in turn, could have a
material adverse effect on the Company's financial condition and results of
operations.
RISKS ASSOCIATED WITH THE COMPANY'S COMMON STOCK
THE COMPANY'S STOCK PRICE CAN BE VOLATILE
Stock price volatility may make it more difficult to resell the Company's common
stock when desired and at attractive prices. The Company's stock price can
fluctuate significantly in response to a variety of factors, including, among
other factors:
o Actual or anticipated variations in quarterly results of operations.
o Recommendations by securities analysts.
o Operating and stock price performance of other companies that investors
deem comparable to the Company.
o News reports relating to trends, concerns and other issues in the
financial services industry.
o Perceptions in the marketplace regarding the Company and/or its
competitors.
o New technology used, or services offered, by competitors.
o Significant acquisitions or business combinations, strategic partnerships,
joint ventures or capital commitments by or involving the Company or its
competitors.
o Failure to integrate acquisitions or realize anticipated benefits from
acquisitions.
o Changes in government regulation.
o Geopolitical conditions such as acts or threats of terrorism or military
conflicts.
General market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause the Company's stock price to
decrease regardless of operating results.
The Trading Volume in the Company's Common Stock Is Less Than That of Other
Larger Financial Services Companies
Although the Company's common stock is listed for trading on the New York Stock
Exchange (NYSE), the trading volume in its common stock is less than that of
other larger financial services companies. A public trading market having the
desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of the Company's
common stock at any given time. This presence depends on the individual
decisions of investors and general economic and market conditions over which the
Company has no control. Given the trading volume of the Company's common stock,
significant sales of the Company's common stock, or the expectation of these
sales, could cause the Company's stock price to fall.
An Investment in the Company's Common Stock Is Not an Insured Deposit
The Company's common stock is not a bank deposit and, therefore, is not insured
against loss by the Federal Deposit Insurance Corporation (FDIC), any other
deposit insurance fund or by any other public or private entity. Investment in
the Company's common stock is inherently risky for the reasons described in this
"Risk Factors" section and elsewhere in this report and is subject to the same
market forces that affect the price of common stock in any company. As a result,
if you acquire the Company's common stock, you may lose some or all of your
investment.
PAGE 15
The Company's Certificate of Incorporation, By-Laws and Shareholders Rights Plan
as Well as Certain Banking Laws May Have an Anti-Takeover Effect
Provisions of the Company's certificate of incorporation and by-laws, federal
banking laws, including regulatory approval requirements, and the Company's
stock purchase rights plan could make it more difficult for a third party to
acquire the Company, even if doing so would be perceived to be beneficial to the
Company's shareholders. The combination of these provisions effectively inhibits
a non-negotiated merger or other business combination, which, in turn, could
adversely affect the market price of the Company's common stock.
RISKS ASSOCIATED WITH THE COMPANY'S INDUSTRY
THE EARNINGS OF FINANCIAL SERVICES COMPANIES ARE SIGNIFICANTLY AFFECTED BY
GENERAL BUSINESS AND ECONOMIC CONDITIONS
The Company's operations and profitability are impacted by general business and
economic conditions in the United States and abroad. These conditions include
short-term and long-term interest rates, inflation, money supply, political
issues, legislative and regulatory changes, fluctuations in both debt and equity
capital markets, broad trends in industry and finance, and the strength of the
U.S. economy and the local economies in which the Company operates, all of which
are beyond the Company's control. A deterioration in economic conditions could
result in an increase in loan delinquencies and non-performing assets, decreases
in loan collateral values and a decrease in demand for the Company's products
and services, among other things, any of which could have a material adverse
impact on the Company's financial condition and results of operations.
Financial Services Companies Depend on the Accuracy and Completeness of
Information About Customers and Counterparties
In deciding whether to extend credit or enter into other transactions, the
Company may rely on information furnished by or on behalf of customers and
counterparties, including financial statements, credit reports and other
financial information. The Company may also rely on representations of those
customers, counterparties or other third parties, such as independent auditors,
as to the accuracy and completeness of that information. Reliance on inaccurate
or misleading financial statements, credit reports or other financial
information could have a material adverse impact on the Company's business and,
in turn, the Company's financial condition and results of operations.
Consumers May Decide Not to Use Banks to Complete Their Financial Transactions
Technology and other changes are allowing parties to complete financial
transactions that historically have involved banks through alternative methods.
For example, consumers can now maintain funds that would have historically been
held as bank deposits in brokerage accounts or mutual funds. Consumers can also
complete transactions such as paying bills and/or transferring funds directly
without the assistance of banks. The process of eliminating banks as
intermediaries, known as "disintermediation," could result in the loss of fee
income, as well as the loss of customer deposits and related income generated
from those deposits. The loss of these revenue streams and the lower cost
deposits as a source of funds could have a material adverse effect on the
Company's financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The principal offices of the Company occupy one floor at 650 Fifth Avenue, New
York, N.Y., consisting of approximately 14,400 square feet. The lease for these
premises expires April 30, 2016. Rental commitments to the expiration date
approximate $9,100,000.
The bank also maintains operating leases for nine branch offices, the
International Banking Facility, an Operations Center, and additional office
space in New York City, Nassau, Suffolk and Westchester counties (New York), in
Charlotte (North Carolina) and in Richmond (Virginia) with an aggregate of
approximately 122,300 square feet. The aggregate office rental commitments for
these premises approximates $17,200,000. The leases have expiration dates
ranging from 2006 through 2018 with varying renewal options. The bank owns free
and clear (not subject to a mortgage) a building in which it maintains a branch
located in Forest Hills, Queens.
PAGE 16
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business there are various legal proceedings pending
against the Company. Management, after consulting with counsel, is of the
opinion that there should be no material liability with respect to such
proceedings, and accordingly no provision has been made in the Company's
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of
the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
This information is included pursuant to Instruction 3 to Item 401(b) of SEC
Regulation S-K:
Held Executive
Name of Executive Title Age Office Since
--------------------------------------------------------------------------------
Louis J. Cappelli Chairman of the Board and
Chief Executive Officer, Director 75 1967
John C. Millman President, Director 63 1986
John W. Tietjen Executive Vice President and
Chief Financial Officer 61 1989
John A. Aloisio* Senior Vice President 63 1992
Howard M. Applebaum Senior Vice President 47 2002
* No longer an executive officer.
All executive officers are elected annually by the Board of Directors and serve
at the pleasure of the Board. There are no arrangements or understandings
between any of the foregoing officers and any other person or persons pursuant
to which he was selected as an executive officer.
On March 15, 2006, the Compensation Committee of the Board of Directors extended
the terms of the Company's Employment Agreements with Mr. Cappelli and Mr.
Millman to December 31, 2010 and December 31, 2008, respectively.
PAGE 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY. RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The parent company's common stock is traded on the New York Stock Exchange under
the symbol STL. Information regarding the quarterly prices of the common stock
is presented in Note 24 on page 75. Information regarding the average common
shares outstanding and dividends per common share is presented in the
Consolidated Statements of Income on page 38. Information regarding legal
restrictions on the ability of the bank to pay dividends is presented in Note 13
on page 60. Although such restrictions do not apply to the payment of dividends
by the parent company to its shareholders, such dividends may be limited by
other factors, such as the requirement to maintain adequate capital under the
risk-based capital regulations described in Note 20 beginning on page 69. As of
March 3, 2006, there were 1,621 shareholders of record of our common shares.
During the fiscal years ended December 31, 2004 and 2005, the following
dividends were declared on our common shares on the dates indicated: February
19, 2004: $.15; May 20, 2004: $.15; August 19, 2004: $.15; November 18, 2004:
$.18; February 17, 2005: $.18; May 5, 2005: $.18; August 18, 2005: $.18; and
November 17, 2005: $.19. The foregoing amounts of dividends per share reflect
the effect of the stock split and stock dividend referred to in the next
paragraph.
The Company effected a six-for-five stock split in the form of a stock dividend
on December 8, 2004 and effected a 5% stock dividend on December 12, 2005.
Under its share repurchase program, the Company buys back common shares from
time to time. The following table discloses the Company's repurchases of its
common shares during the fourth quarter of 2005.
Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------------------
Total Number Total Number of Shares Maximum Number of Shares
of Shares Average Price Purchased as Part of Publicly that May Yet Be Purchased
Period Purchased Paid Per Share Announced Plans or Programs Under the Plans or Programs
-----------------------------------------------------------------------------------------------------------------
October 1-31, 2005 22,000 $ 19.75 22,000 758,819
November 1-30, 2005 142,200 20.58 142,200 616,619
December 1-31, 2005 204,400 19.68 204,400 412,219
------- -------
Total 368,600 368,600
======= =======
All shares were repurchased through the Company's share purchase program.
The Board of Directors initially authorized the repurchase of common shares in
1997 and since then has approved increases in the number of common shares that
the Company is authorized to repurchase. The latest increase was announced on
June 16, 2005, when the Board of Directors increased the Company's authority to
repurchase common shares by an additional 800,000 shares. As of June 30, 2005
and September 30, 2005, the remaining number of shares that could be repurchased
was 916,819 and 780,819, respectively.
For information regarding securities authorized for issuance under the Company's
equity compensation plan, see Item 12 on page 80.
ITEM 6. SELECTED FINANCIAL DATA
The information appears on page 19. All such information should be read in
conjunction with the consolidated financial statements and notes thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information appears on pages 20-35 and supplementary quarterly data appears
in Note 24 of the Company's consolidated financial statements. All such
information should be read in conjunction with the consolidated financial
statements and the notes thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appears on pages 31-33 under the caption "ASSET/LIABILITY
MANAGEMENT." All such information should be read in conjunction with the
consolidated financial statements and notes thereto.
PAGE 18
Sterling Bancorp
SELECTED FINANCIAL DATA
(dollars in thousands except per share data) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Total interest income $ 113,044 $ 97,799 $ 91,583 $ 94,197 $ 95,866
Total interest expense 29,109 19,583 17,591 21,210 26,816
Net interest income 83,935 78,216 73,992 72,987 69,050
Provision for loan losses 9,664 9,965 8,740 10,771 7,401
Net securities gains 337 1,256 551 996 --
Noninterest income, excluding net securities gains 34,216 33,461 32,127 28,289 24,144
Noninterest expenses 71,210 65,613 59,275 57,350 54,997
Income before taxes 37,614 37,355 38,655 34,151 30,795
Provision for income taxes 13,587 12,751 14,752 12,310 12,207
Net income 24,027 24,604 23,903 21,841 18,588
Per common share--basic[1] 1.25 1.29 1.26 1.15 0.97
--diluted[1] 1.22 1.23 1.20 1.09 0.93
Dividends per common share[1] 0.73 0.63 0.54 0.44 0.38
YEAR END BALANCE SHEETS
Investment securities 715,299 680,220 683,118 588,774 576,028
Loans held for sale 40,977 37,059 40,557 54,685 48,603
Loans held in portfolio, net of unearned discounts 1,128,799 1,022,286 900,556 791,315 760,084
Total assets 2,056,042 1,871,112 1,759,824 1,563,165 1,485,112
Noninterest-bearing deposits 510,884 511,307 474,092 401,568 356,303
Interest-bearing deposits 937,442 832,544 737,649 645,540 628,621
Long-term debt 85,774 135,774 135,774 140,774 95,350
Shareholders' equity 147,587 148,704 143,262 129,220 125,705
AVERAGE BALANCE SHEETS
Investment securities 713,629 689,569 593,005 589,390 468,861
Loans held for sale 53,948 46,395 71,779 37,459 30,906
Loans held in portfolio, net of unearned discounts 1,000,235 891,107 785,575 708,656 674,310
Total assets 1,931,101 1,777,720 1,587,623 1,466,922 1,267,856
Noninterest-bearing deposits 452,632 415,664 370,554 315,757 292,918
Interest-bearing deposits 936,665 830,950 683,748 676,296 594,303
Long-term debt 106,514 135,774 139,870 140,153 47,055
Shareholders' equity 149,836 142,536 134,150 126,274 123,935
RATIOS
Return on average total assets 1.24% 1.38% 1.51% 1.49% 1.47%
Return on average tangible shareholders' equity[2] 18.67 20.27 21.15 20.78 18.09
Return on average shareholders' equity 16.04 17.26 17.82 17.30 15.00
Dividend payout ratio 58.41 49.20 42.30 34.67 33.41
Average shareholders' equity to average total assets 7.76 8.02 8.45 8.61 9.78
Net interest margin (tax-equivalent basis) 4.94 5.02 5.33 5.74 6.23
Loans/assets, year end[3] 56.89 56.62 53.48 54.12 54.45
Net charge-offs/loans, year end[4] 0.84 0.79 0.85 1.39 0.79
Nonperforming loans/loans, year end[3] 0.36 0.29 0.36 0.21 0.22
Allowance/loans, year end[4] 1.46 1.60 1.61 1.71 1.85
[1] Prior period amounts have been restated to reflect the 5% stock dividend
effected on December 12, 2005.
[2] Average tangible shareholders' equity is average shareholders' equity less
average goodwill.
[3] In this calculation, the term "loans" means loans held for sale and loans
held in portfolio.
[4] In this calculation, the term "loans" means loans held in portfolio.
PAGE 19
Sterling Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
financial condition and results of operations of Sterling Bancorp (the "parent
company"), a financial holding company under the Bank Holding Company Act of
1956, as amended by the Gramm-Leach-Bliley Act of 1999, and its subsidiaries,
principally Sterling National Bank (the "bank"). Throughout this discussion and
analysis, the term the "Company" refers to Sterling Bancorp and its
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and selected financial data contained
elsewhere in this annual report. Certain reclassifications have been made to
prior years' financial data to conform to current financial statement
presentations as well as to reflect the effect of the 5% stock dividend effected
on December 12, 2005.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS
Certain statements contained or incorporated by reference in this annual report
on Form 10-K, including but not limited to, statements concerning future results
of operations or financial position, borrowing capacity and future liquidity,
future investment results, future credit exposure, future loan losses and plans
and objectives for future operations, and other statements contained herein
regarding matters that are not historical facts, are "forward-looking
statements" as defined in the Securities Exchange Act of 1934. These statements
are not historical facts but instead are subject to numerous assumptions, risks
and uncertainties, and represent only our belief regarding future events, many
of which, by their nature, are inherently uncertain and outside our control. Any
forward-looking statements we may make speak only as of the date on which such
statements are made. Our actual results and financial position may differ
materially from the anticipated results and financial condition indicated in or
implied by these forward-looking statements.
Factors that could cause our actual results to differ materially from those in
the forward-looking statements include, but are not limited to, the following:
inflation, interest rates, market, and monetary fluctuations; geopolitical
developments including acts of war and terrorism and their impact on economic
conditions; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
changes, particularly declines, in general economic conditions and in the local
economies in which the Company operates; the financial condition of the
Company's borrowers; competitive pressures on loan and deposit pricing and
demand; changes in technology and their impact on the marketing of new products
and services and the acceptance of these products and services by new and
existing customers; the willingness of customers to substitute competitors'
products and services for the Company's products and services; the impact of
changes in financial services laws and regulations (including laws concerning
taxes, banking, securities and insurance); changes in accounting principles,
policies and guidelines; the success of the Company at managing the risks
involved in the foregoing as well as other risks and uncertainties detailed from
time to time in press releases and other public filings. The foregoing list of
important factors is not exclusive, and we will not update any forward-looking
statement, whether written or oral, that may be made from time to time.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by the Company conform, in all
material respects, to accounting principles generally accepted in the United
States of America. In preparing the consolidated financial statements,
management has made estimates, judgments and assumptions that affect the
reported amount of assets and liabilities as of the date of the consolidated
statements of condition and results of operations for the periods indicated.
Actual results could differ significantly from those estimates.
The Company's accounting policies are fundamental to understanding management's
discussion and analysis of financial condition and results of operations. The
most significant accounting policies followed by the Company are presented in
Note 1 beginning on page 43. The accounting for factoring transactions also is
discussed under "Business Operations--The Bank--Commercial Lending. Asset-Based
Financing and Factoring/Accounts Receivable Management" on pages 1 and 2.
The Company has identified its policies on the allowance for loan losses and
income tax liabilities to be critical because management has to make subjective
and/or complex judgments about matters that are inherently uncertain and could
be subject to revision as new information becomes available. Additional
information on these policies can be found in Note 1 to the consolidated
financial statements.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The methodology used to determine the
allowance for loan losses is outlined in Note 1 to the consolidated financial
statements and a discussion of the factors driving changes in the amount of the
allowance for loan losses is included under the caption "Asset Quality"
beginning on page 26. The objectives of accounting for income taxes are to
PAGE 20
recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity's financial statements or tax returns.
Judgment is required in assessing the future tax consequences of events that
have been recognized in the Company's consolidated financial statements or tax
returns.
Fluctuations in the actual outcome of these future tax consequences could impact
the Company's consolidated financial condition or results of operations.
Additional discussion on the accounting for income taxes is presented in Notes
1, 17 and 25 of the Company's consolidated financial statements.
OVERVIEW
The Company provides a broad range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, factoring/accounts receivable management
services, deposit services, trade financing, equipment leasing, deposit
services, trust and estate administration, and investment management services.
The Company has operations in the metropolitan New York area, New Jersey,
Virginia and North Carolina, and conducts business throughout the United States.
The general state of the U.S. economy and, in particular, economic and market
conditions in the metropolitan New York area have a significant impact on loan
demand, the ability of borrowers to repay these loans and the value of any
collateral securing these loans and may also affect deposit levels. Accordingly,
future general economic conditions are a key uncertainty that management expects
will materially affect the Company's results of operations.
In 2005, the bank's average earning assets represented approximately 96% of the
Company's average earning assets. Loans represented 58% and investment
securities represented 41% of the bank's average earning assets in 2005.
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.
INCOME STATEMENT ANALYSIS
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. Net interest spread is the
difference between the average rate earned, on a tax-equivalent basis, on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The net yield on interest-earning assets ("net interest margin") is
calculated by dividing tax equivalent net interest income by average interest-
earning assets. Generally, the net interest margin will exceed the net interest
spread because a portion of interest-earning assets are funded by various
noninterest-bearing sources, principally noninterest-bearing deposits and
shareholders' equity. The increases (decreases) in the components of interest
income and interest expense, expressed in terms of fluctuation in average volume
and rate, are provided in the Rate/Volume Analysis shown on page 30. Information
as to the components of interest income and interest expense and average rates
is provided in the Average Balance Sheets shown on page 29.
COMPARISON OF THE YEARS 2005 AND 2004
The Company reported net income for the year ended December 31, 2005 of $24.0
million, representing $1.22 per share, calculated on a diluted basis, compared
to $24.6
PAGE 21
million, or $1.23 per share, calculated on a diluted basis, for the year 2004.
Net income benefitted from continued growth in net interest income and a lower
provision for loan losses which were more than offset by lower noninterest
income and by increases in noninterest expenses and in the provision for income
taxes.
Net Interest Income
Net interest income, on a tax-equivalent basis, increased to $84.6 million for
2005 from $79.0 million for 2004, due to higher average earning assets
outstanding coupled with higher average yield on loans partially offset by
higher balances for interest-bearing deposits coupled with higher rates paid on
interest-bearing deposit balances and borrowed funds. The net interest margin,
on a tax-equivalent basis, was 4.94% for 2005, compared to 5.02% for 2004. Net
interest margin was affected by the higher interest rate environment in 2005 and
by increases in average investment securities, loan outstandings and
noninterest-bearing deposits, substantially offset by the impact of higher
average interest-bearing deposits.
Total interest income, on a tax-equivalent basis, aggregated $113.8 million for
2005, up from $98.6 million for 2004. The tax-equivalent yield on
interest-earning assets was 6.64% for 2005 compared to 6.26% for 2004.
Interest earned on the loan portfolio amounted to $80.9 million for 2005, up
$15.2 million from a year ago. Average loan balances amounted to $1,054.2
million, an increase of $116.7 million from an average of $937.5 million in the
prior year. The increase in average loans (across virtually all segments of the
Company's loan portfolio), primarily due to the Company's business development
activities and the ongoing consolidation of banks in the Company's marketing
area, accounted for $8.9 million of the $15.2 million increase in interest
earned on loans. The increase in the yield on the domestic loan portfolio to
8.21% for 2005 from 7.56% for 2004 was primarily attributable to the mix of
average outstanding balances among the components of the loan portfolio and the
higher interest rate environment in 2005.
Interest earned on the securities portfolio, on a tax-equivalent basis,
decreased to $32.4 million for 2005 from $32.7 million in the prior year. The
decrease in yields on most of the securities portfolio reflects the impact of
the continued flattening of the yield curve. Average outstandings increased to
$713.6 million (40.1% of average earning assets for 2005) from $689.6 million
(42.0% of average earning assets) in the prior year. The average life of the
securities portfolio was approximately 4.4 years at December 31,2005, compared
to 4.0 years at December 31, 2004, reflecting the impact of purchases.
Total interest expense increased to $29.1 million for 2005 from $19.6 million
for 2004, primarily due to higher rates paid for interest-bearing deposits and
for borrowed funds and higher average balances for interest-bearing deposits.
Interest expense on deposits increased to $18.1 million for 2005 from $11.2
million for 2004, primarily due to the higher interest rate environment in 2005,
coupled with an increase in average balances, primarily for time deposits.
Average rate paid on interest-bearing deposits was 1.94% which was 60 basis
points higher than the prior year. Average interest-bearing deposit balances
increased to $936.7 million for the year 2005 from $831.0 million for 2004,
primarily as a result of the Company's branching initiatives and other business
development activities.
Interest expense on borrowings increased to $11.0 million for 2005 from $8.4
million for 2004, primarily due to the higher interest rate environment during
2005. The average rate paid on borrowed funds was 3.59% which was 80 basis
points higher than the prior year.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for loan losses for 2005 was $9.7
million compared to $10.0 million for 2004. Factors affecting the level of
provision for loan losses included growth in the loan portfolios, changes in
loan mix, general economic conditions and the amount of nonaccrual loans.
Noninterest Income
Noninterest income was $34.6 million for 2005, compared to $34.7 million for
2004. Noninterest income benefitted from higher revenues from mortgage banking
activities, bank owned life insurance and fees for deposit services. Those
increases were more than offset by lower gains on sales of securities, fees for
factoring services and other service charges and fees.
Noninterest Expenses
Noninterest expenses increased $5.6 million for 2005 compared to 2004. The
increase was primarily due to higher salaries and professional fees related to
compliance efforts and investments in the Sterling franchise, including the new
branches, with higher expenses related to salaries, employee benefits,
occupancy, equipment and marketing and advertising costs. These increases were
partially offset by a reversal during the third quarter of 2005 of $1.0 million
of litigation settlement costs originally charged to noninterest expenses in
2001. The increase in other expenses was principally due to
PAGE 22
increases in appraisal fees, credit reports, mortgage taxes, insurance and
interest on potential tax liability.
Provision for Income Taxes
The provision for income taxes for 2005 increased by $0.8 million from 2004. The
higher provision for taxes for 2005 was due in part to the slightly higher
income before income taxes for that year. In addition, based on management's in-
depth reviews of required tax reserves, including consultations with various
outside professionals, these reserves were reduced through the provision for the
fourth quarter of 2005 by approximately $1.1 million, whereas, in view of the
resolution of certain state tax issues for tax years 1999-2001, these reserves
were reduced through the provision for the second quarter of 2004 by
approximately $1.5 million.
COMPARISON OF THE YEARS 2004 AND 2003
The Company reported net income for the year ended December 31, 2004 of $24.6
million, representing $1.23 per share, calculated on a diluted basis, compared
to $23.9 million, or $1.20 per share calculated on a diluted basis, for 2003.
This increase reflected continued growth in both net interest income and
noninterest income and a lower provision for income taxes, which more than
offset increases in the provision for loan losses and noninterest expenses.
Net Interest Income
Net interest income, on a tax-equivalent basis, increased $4.0 million to $79.0
million for 2004 from $75.0 million for 2003, due to higher average earning
assets outstanding coupled with lower average cost of funding partially offset
by a lower yield on earning assets and higher average interest-bearing deposit
balances. The net interest margin, on a tax-equivalent basis, was 5.02% for 2004
compared to 5.33% for 2003. The decrease in the net interest margin was
primarily the result of changes in the mix of earning assets and of deposits,
partially offset by the higher rate environment in 2004.
Total interest income, on a tax-equivalent basis, aggregated $98.6 million for
2004 from $92.5 million for 2003. The tax-equivalent yield on interest-earning
assets was 6.26% in 2004 compared to 6.58% for 2003.
Interest earned on the loan portfolio amounted to $65.8 million for 2004, up
$4.2 million from 2003. Average loan balances amounted to $937.5 million, up
$80.2 million from an average of $857.3 million in the prior year. The increase
in the average loans (across virtually all segments of the Company's loan
portfolio), primarily due to the Company's business development activities and
the ongoing consolidation of banks in the Company's marketing area, accounted
for the increase in interest earned on loans. The decrease in the yield on the
domestic loan portfolio to 7.56% for 2004 from 7.68% for 2003 was primarily
attributable to changes in the mix of outstanding balances on average among the
components of the loan portfolio.
Interest earned on the securities portfolio, on a tax-equivalent basis,
increased to $32.7 million for 2004 from $30.8 million in the prior year.
Average outstandings increased to $689.6 million from $593.0 in the prior year.
The average life of the securities portfolio was approximately 4.0 years at
December 31, 2004 compared to 3.8 years at December 31, 2003, reflecting the
impact of purchases made primarily in the first and second quarters of 2004. The
decrease in yields on the securities portfolio reflects the impact of purchases
made during the lower rate environment on average in the first and second
quarters of 2004 and of the principal prepayments primarily in the second
quarter of 2004.
Total interest expense increased to $19.6 million for 2004 from $17.6 million
for 2003 primarily due to higher average balances for interest-bearing deposits.
Interest expense on deposits increased to $11.2 million for 2004 from $8.9
million for 2003 primarily due to an increase in average balances. Average
interest-bearing deposit balances increased to $831.0 million for 2004 from
$683.7 in 2003 primarily as a result of branching initiatives and other business
development activities. Average rate paid on interest-bearing deposits was 1.34%
which was 4 basis points higher than the prior year.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for loan losses for 2004 increased
to $10.0 million from $8.7 million for 2003. Factors affecting the level of
provision for loan losses included the growth in the loan portfolios, changes in
general economic conditions and the amount of nonaccrual loans.
Noninterest Income
Noninterest income increased to $34.7 million for 2004 from $32.7 million in
2003, primarily due to increased income from mortgage banking, principally the
result of a change in the mix of loans sold due to a broader array of loan
products and an increased focus on higher margin mortgage loans, and from
factoring activities, from bank owned life insurance and from gains on sales of
available for sale securities. Partially offsetting these increases were lower
revenues from fees for deposit, trade finance and various other services.
PAGE 23
Noninterest Expenses
Noninterest expenses increased $6.3 million in 2004 compared to 2003. The
increase was primarily due to investments in the Sterling franchise, including
the new branches, and regulatory compliance costs, with higher expenses related
to salaries and employee benefits, advertising and marketing, and professional
fees.
Provision for Income Taxes
The provision for income taxes decreased $2.0 million for 2004 compared to 2003.
The lower provision for taxes in 2004 was primarily due to the resolution,
during the second quarter of 2004, of certain state tax issues for tax years
1999-2001.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are composed principally of U.S. government
and U.S. government corporation and agency guaranteed mortgage-backed securities
along with other debt and equity securities. At December 31, 2005, the Company's
portfolio of securities totaled $715.3 million, of which U.S. government
corporation and agency guaranteed mortgage-backed securities and collateralized
mortgage obligations having an average life of approximately 4.9 years amounted
to $606.1 million. The Company has the intent and ability to hold to maturity
securities classified as "held to maturity." These securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts. The
gross unrealized gains and losses on "held to maturity" securities were $1.2
million and $10.8 million, respectively. Securities classified as "available for
sale" may be sold in the future, prior to maturity. These securities are carried
at market value. Net aggregate unrealized gains or losses on these securities
are included in a valuation allowance account and are shown net of taxes, as a
component of shareholders' equity. "Available for sale" securities included
gross unrealized gains of $0.6 million and gross unrealized losses of $4.7
million. Given the generally high credit quality of the portfolio, management
expects to realize all of its investment upon the maturity of such instruments,
and thus believes that any market value impairment is temporary.
Information regarding book values and range of maturities by type of security
and weighted average yields for totals of each category is presented in Note 4
beginning on page 49.
The following table sets forth the composition of the Company's investment
securities by type, with related carrying values at the end of each of the three
most recent fiscal years:
December 31, 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
% of % of % of
Balances Total Balances Total Balances Total
-------------------------------------------------------------
(dollars in thousands)
U.S. Treasury securities $ -- --% $ 2,492 0.37% $ 2,496 0.37%
Obligations of U.S. government corporations and agencies
mortgage-backed securities
CMOs (Federal National Mortgage Association) 22,871 3.20 35,255 5.18 32,075 4.70
CMOs (Federal Home Loan Mortgage Company) 48,687 6.80 68,882 10.13 83,799 12.27
Federal National Mortgage Association 299,372 41.85 194,469 28.59 264,314 38.69
Federal Home Loan Mortgage Company 215,528 30.13 236,796 34.82 178,156 26.08
Government National Mortgage Association 19,645 2.74 38,191 5.61 70,851 10.37
-------------------------------------------------------------
Total mortgage-backed securities 606,103 84.72 573,593 84.33 629,195 92.11
Federal Home Loan Bank 39,689 5.55 34,846 5.12 -- --
Federal Farm Credit Bank 29,795 4.17 29,902 4.40 -- --
-------------------------------------------------------------
Total obligations of U.S. government corporations and agencies 675,587 94.44 638,341 93.85 629,195 92.11
Obligations of state and political institutions 31,307 4.38 27,471 4.04 32,816 4.80
Trust preferred securities -- -- 3,023 0.44 3,654 0.53
Other debt securities -- -- -- -- 4,001 0.59
Federal Reserve Bank stock 1,131 0.16 1,131 0.16 1,131 0.16
Federal Home Loan Bank stock 5,950 0.83 6,188 0.91 8,250 1.21
Other securities 324 0.05 324 0.05 325 0.05
Debt securities issued by foreign governments 1,000 0.14 1,250 0.18 1,250 0.18
-------------------------------------------------------------
Total $ 715,299 100.00% $ 680,220 100.00% $ 683,118 100.00%
=============================================================
PAGE 24
Loan Portfolio
A management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness of and the
designation of lending limits for each borrower. The portfolio strategies
include seeking industry and loan size diversification in order to minimize
credit exposure and the origination of loans in markets with which the Company
is familiar.
The Company's commercial and industrial loan portfolio represents approximately
54% of all loans. Loans in this category are typically made to individuals,
small and medium-sized businesses and range between $250,000 and $15 million.
The Company's leasing portfolio, which consists of finance leases for various
types of business equipment, represents approximately 16% of all loans. The
leasing and commercial and industrial loan portfolios are included in corporate
lending for segment reporting purposes as presented in Note 21 beginning on page
70. The Company's real estate loan portfolio, which represents approximately 26%
of all loans, is secured by mortgages on real property located principally in
the states of New York, New Jersey, Virginia and North Carolina. Sources of
repayment are from the borrower's operating profits, cash flows and liquidation
of pledged collateral. Based on underwriting standards, loans and leases may be
secured whole or in part by collateral such as liquid assets, accounts
receivable, equipment, inventory, and real property. The collateral securing any
loan or lease may depend on the type of loan and may vary in value based on
market conditions.
The following table sets forth the composition of the Company's loans held for
sale and loans held in portfolio, net of unearned discounts, at the end of each
of the five most recent fiscal years:
December 31, 2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Balances Total Balances Total Balances Total Balances Total Balances Total
------------------------------------------------------------------------------------------------
(dollars in thousands)
Domestic
Commercial and industrial $ 632,358 54.06% $ 595,229 56.19% $ 563,799 59.91% $ 500,311 59.14% $ 519,557 64.25%
Lease financing 190,391 16.28 162,961 15.38 148,737 15.80 128,749 15.22 90,614 11.20
Real estate--residential mortgage 188,723 16.13 149,387 14.10 107,766 11.45 110,484 13.06 114,113 14.11
Real estate--commercial mortgage 110,871 9.48 113,933 10.76 94,145 10.01 74,928 8.86 46,899 5.80
Real estate--construction 2,309 0.20 2,320 0.22 2,368 0.25 2,400 0.28 -- --
Installment--individuals 13,125 1.12 15,515 1.46 14,298 1.52 9,128 1.08 8,504 1.05
Loans to depository institutions 32,000 2.73 20,000 1.89 10,000 1.06 20,000 2.36 29,000 3.59
------------------------------------------------------------------------------------------------
Total $1,169,777 100.00% $1,059,345 100.00% $ 941,113 100.00% $ 846,000 100.00% $ 808,687 100.00%
================================================================================================
The following table sets forth the maturities of the Company's commercial and
industrial loans, as of December 31, 2005:
Due One Due One Due After Total
Year to Five Five Gross
or Less Years Years Loans
-------------------------------------------------------------------------------
(in thousands)
Commercial and industrial $ 598,873 $ 27,813 $ 6,029 $ 632,715
============================================
All loans due after one year have predetermined interest rates.
PAGE 25
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk of loss inherent in the Company's portfolio of loans
may increase. While management endeavors to minimize this risk, it recognizes
that loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn depend
on current and expected economic conditions, the financial condition of
borrowers, the realization of collateral, and the credit management process.
The following table sets forth the amount of domestic nonaccrual and past due
loans of the Company at the end of each of the five most recent fiscal years;
there were no foreign loans accounted for on a nonaccrual basis and there were
no troubled debt restructurings for any types of loans. Loans contractually past
due 90 days or more as to principal or interest and still accruing are loans
that are both well-secured or guaranteed by financially responsible third
parties and are in the process of collection.
December 31, 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans
Commercial and industrial $ 958 $ 1,035 $ 2,022 $ 405 $ --
Lease financing 2,109 1,304 783 275 311
Real estate--residential mortgage 620 384 418 558 436
Real estate--commercial mortgage 120 320 71 391 956
Installment--individuals 397 72 49 155 45
---------------------------------------------------
Total nonaccrual loans 4,204 3,115 3,343 1,784 1,748
Past due 90 days or more (other than the above) 821 1,672 127 286 200
---------------------------------------------------
Total $ 5,025 $ 4,787 $ 3,470 $ 2,070 $ 1,948
===================================================
Interest income that would have been earned on
nonaccrual loans outstanding $ 334 $ 233 $ 196 $ 136 $ 153
===================================================
Applicable interest income actually realized on
nonaccrual loans outstanding $ 133 $ 133 $ 141 $ 83 $ 92
===================================================
Nonaccrual and past due loans as a
percentage of total gross loans 0.43% 0.45% 0.37% 0.25% 0.24%
===================================================
Management views the allowance for loan losses as a critical accounting policy
due to its subjectivity. The allowance for loan losses is maintained through the
provision for loan losses, which is a charge to operating earnings. The adequacy
of the provision and the resulting allowance for loan losses is determined by a
management evaluation process of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, an assessment of current and expected
economic conditions and changes in the size and character of the loan portfolio.
Other data utilized by management in determining the adequacy of the allowance
for loan losses includes, but is not limited to, the results of regulatory
reviews, the amount of, trend of and/or borrower characteristics on loans that
are identified as requiring special attention as part of the credit review
process, and peer group comparisons. The impact of this other data might result
in an allowance which will be greater than that indicated by the evaluation
process previously described. The allowance reflects management's evaluation
both of loans presenting identified loss potential and of the risk inherent in
various components of the portfolio, including loans identified as impaired as
required by SFAS No. 114.
Thus, an increase in the size of the portfolio or in any of its components could
necessitate an increase in the allowance even though there may not be a decline
in credit quality or an increase in potential problem loans. A significant
change in any of the evaluation factors described above could result in future
additions to the allowance. At December 31, 2005, the ratio of the allowance to
loans held in portfolio, net of unearned discounts, was 1.46% and the allowance
was $16.5 million. At such date,
PAGE 26
the Company's nonaccrual loans amounted to $4.2 million; $0.6 million of such
loans was judged to be impaired within the scope of SFAS No. 114. Nonaccrual
loans and loans 90 days past due and still accruing include leases, in the
amount of $0.2 million and $0.6 million, respectively, of telecommunications
equipment from a company that went into bankruptcy in July 2004. The service
provider to the lessees discontinued service, resulting in the failure of
certain lessees to make payments. While pursuing collection of the lease
payments, past due amounts accrue. Legal action is typically commenced against
lessees whose accounts are not paid within 180 days and are placed in nonaccrual
status. Lessees remain unconditionally obligated to make payments. All are
creditworthy and personally guaranteed; the reported delinquencies are not due
to credit issues. Based on the foregoing, as well as management's judgment as to
the current risks inherent in loans held in portfolio, the Company's allowance
for loan losses was deemed adequate as of December 31, 2005. Net losses within
loans held in portfolio are not statistically predictable and changes in
conditions in the next twelve months could result in future provisions for loan
losses varying from the level taken in 2005. Potential problem loans, which are
loans that are currently performing under present loan repayment terms but where
known information about possible credit problems of borrowers causes management
to have serious doubts as to the ability of the borrowers to continue to comply
with the present repayment terms, aggregated $1.8 million and $1.2 million at
December 31, 2005 and 2004, respectively.
The following table sets forth certain information with respect to the Company's
loan loss experience for each of the five most recent fiscal years:
December 31, 2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Average loans held in portfolio, net of
unearned discounts, during year $ 1,000,235 $ 891,107 $ 785,575 $ 708,656 $ 674,310
====================================================================
Allowance for loan losses:
Balance at beginning of year $ 16,328 $ 14,459 $ 13,549 $ 14,038 $ 12,675
--------------------------------------------------------------------
Charge-offs:
Commercial and industrial 6,093 6,116 6,571 10,205 4,899
Lease financing 3,732 2,447 1,155 930 1,528
Real estate--residential mortgage 13 8 547 856 269
Installment -- 9 38 58 103
--------------------------------------------------------------------
Total charge-offs 9,838 8,580 8,311 12,049 6,799
--------------------------------------------------------------------
Recoveries:
Commercial and industrial 343 917 552 871 589
Lease financing 76 44 25 69 84
Real estate--residential mortgage -- -- -- 16 --
Installment 39 43 61 69 88
--------------------------------------------------------------------
Total recoveries 458 1,004 638 1,025 761
--------------------------------------------------------------------
Subtract:
Net charge-offs 9,380 7,576 7,673 11,024 6,038
--------------------------------------------------------------------
Provision for loan losses 9,664 9,965 8,741 10,771 7,401
--------------------------------------------------------------------
Loss on transfers to other real estate owned 95 520 158 236 --
--------------------------------------------------------------------
Balance at end of year $ 16,517 $ 16,328 $ 14,459 $ 13,549 $ 14,038
====================================================================
Ratio of net charge-offs to average
loans held in portfolio, net of
unearned discounts, during year 0.94% 0.85% 0.98% 1.56% 0.90%
====================================================================
PAGE 27
The following table presents the Company's allocation of the allowance for loan
losses. This allocation is based on estimates by management and may vary from
year to year based on management's evaluation of the risk characteristics of the
loan portfolio. The amount allocated to a particular loan category of the
Company's loans held in portfolio may not necessarily be indicative of actual
future charge-offs in a loan category.
December 31, 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------------------------
(dollars in thousands)
Domestic
Commercial and industrial $ 9,425 1.49% $ 9,636 1.62% $ 8,637 1.53% $ 7,977 1.59% $ 9,438 1.82%
Loans to depository institutions 112 0.35 120 0.60 80 0.80 150 0.75 230 0.79
Lease financing 4,636 2.43 4,073 2.50 2,686 1.80 1,961 1.52 1,736 1.92
Real estate--residential mortgage 1,437 0.76 1,412 0.94 1,228 1.13 1,241 1.12 1,101 0.96
Real estate--commercial mortgage 509 0.45 772 0.67 1,082 1.14 759 1.01 512 1.09
Real estate--construction 10 0.43 15 0.65 24 1.01 23 0.96 -- --
Installment--individuals 110 0.45 100 0.64 14 0.10 10 0.11 10 0.12
Unallocated 278 -- 200 -- 708 -- 1,428 -- 1,011 --
------- ------- ------- ------- -------
Total $16,517 1.46% $16,328 1.60% $14,459 1.61% $13,549 1.71% $14,038 1.85%
========================================================================================
Deposits
A significant source of funds are customer deposits, consisting of demand
(noninterest-bearing), NOW, savings, money market and time deposits (principally
certificates of deposit).
The following table provides certain information with respect to the Company's
deposits at the end of each of the three most recent fiscal years:
December 31, 2005 2004 2003
---------------------------------------------------------------------------------------------------------
% of % of % of
Balances Total Balances Total Balances Total
-------------------------------------------------------------
(dollars in thousands)
Domestic
Demand $ 510,884 35.3% $ 511,307 38.0% $ 474,092 39.1%
NOW 208,217 14.4 136,616 10.2 134,122 11.1
Savings 25,296 1.7 28,168 2.1 30,105 2.5
Money Market 202,660 14.0 192,483 14.3 177,187 14.6
Time deposits by remaining maturity
Within 3 months 252,383 17.4 163,408 12.2 168,687 13.9
After 3 months but within 1 year 173,301 12.0 162,198 12.1 148,565 12.3
After 1 year but within 2 years 67,897 4.7 137,074 10.2 70,479 5.8
After 2 years but within 3 years 4,269 0.3 7,755 0.6 2,727 0.2
After 3 years but within 4 years 144 -- 1,449 0.1 2,021 0.2
After 4 years but within 5 years 233 -- 336 -- 748 0.1
After 5 years 20 -- 50 -- 8 --
-------------------------------------------------------------
Total domestic deposits 1,445,304 99.8 1,340,844 99.8 1,208,741 99.8
-------------------------------------------------------------
Foreign
Time deposits by remaining maturity
Within 3 months 1,645 0.1 1,645 0.1 1,645 0.1
After 3 months but within 1 year 1,377 0.1 1,362 0.1 1,355 0.1
-------------------------------------------------------------
Total foreign deposits 3,022 0.2 3,007 0.2 3,000 0.2
-------------------------------------------------------------
Total deposits $1,448,326 100.0% $1,343,851 100.0% $1,211,741 100.0%
=============================================================
Fluctuations of balances in total or among categories at any date can occur
based on the Company's mix of assets and liabilities as well as on customers'
balance sheet strategies. Historically, however, average balances for deposits
have been relatively stable. Information regarding these average balances for
the three most recent fiscal years is presented on page 29.
PAGE 28
Sterling Bancorp
CONSOLIDATED AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST EARNINGS[1]
Years Ended December 31, 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Interest-bearing deposits with other
banks $ 3,040 $ 65 1.96% $ 3,120 $ 21 0.70% $ 3,473 $ 25 0.73%
Investment securities
Available for sale 192,354 8,438 4.39 266,823 11,729 4.36 188,876 9,206 4.86
Held to maturity 495,187 22,181 4.48 392,869 18,829 4.79 372,213 19,269 5.18
Tax-exempt[2] 26,088 1,816 6.96 29,877 2,135 7.14 31,916 2,370 7.43
Federal funds sold 10,986 309 2.81 10,943 132 1.21 5,759 64 1.12
Loans, net of unearned discounts[3]
Domestic 1,054,183 80,943 8.21 937,502 65,779 7.56 857,354 61,622 7.68
-------------------- -------------------- --------------------
TOTAL INTEREST-EARNING ASSETS 1,781,838 113,752 6.64% 1,641,134 98,625 6.26% 1,459,591 92,556 6.58%
-------- ====== -------- ===== -------- ======
Cash and due from banks 64,141 60,281 58,350
Allowance for loan losses (17,250) (15,906) (14,720)
Goodwill 21,158 21,158 21,158
Other 81,214 71,053 63,244
---------- ---------- ----------
TOTAL ASSETS $1,931,101 $1,777,720 $1,587,623
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $ 28,150 113 0.40% $ 31,203 120 0.38% $ 27,554 98 0.35%
NOW 160,944 1,576 0.98 134,096 622 0.46 119,730 586 0.49
Money market 227,520 2,456 1.08 213,331 1,280 0.60 165,666 792 0.48
Time 517,038 13,957 2.70 449,319 9,118 2.03 367,798 7,370 2.00
Foreign
Time 3,013 33 1.09 3,001 33 1.09 3,000 41 1.38
-------------------- -------------------- --------------------
Total interest-bearing deposits 936,665 18,135 1.94 830,950 11,173 1.34 683,748 8,887 1.30
-------------------- -------------------- --------------------
Borrowings
Securities sold under agreements to
repurchase--customers 85,365 1,907 2.23 84,559 1,020 1.21 71,648 877 1.22
Securities sold under agreements to
repurchase--dealers 52,199 1,794 3.44 29,601 398 1.35 46,219 566 1.22
Federal funds purchased 17,992 647 3.60 9,946 146 1.47 5,463 65 1.20
Commercial paper 37,302 973 2.61 30,069 364 1.21 23,819 264 1.11
Other short-term debt 6,021 228 3.78 12,629 243 1.93 31,853 545 1.71
Long-term borrowings 106,514 5,425 5.09 135,774 6,239 4.62 139,870 6,387 4.57
-------------------- -------------------- --------------------
Total borrowings 305,393 10,974 3.59 302,578 8,410 2.79 318,872 8,704 2.73
-------------------- -------------------- --------------------
Total Interest-Bearing Liabilities 1,242,058 29,109 2.35% 1,133,528 19,583 1.73% 1,002,620 17,591 1.76%
====== ===== ======
Noninterest-bearing demand deposits 452,632 -- 415,664 -- 370,554 --
-------------------- -------------------- --------------------
Total including noninterest-bearing
demand deposits 1,694,690 29,109 1.72% 1,549,192 19,583 1.26% 1,373,174 17,591 1.28%
-------- ====== -------- ===== -------- ======
Other liabilities 86,575 85,992 80,299
---------- ---------- ----------
Total Liabilities 1,781,265 1,635,184 1,453,473
Shareholders' equity 149,836 142,536 134,150
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,931,101 $1,777,720 $1,587,623
========== ========== ==========
Net interest income/spread 84,643 4.29% 79,042 4.53% 74,965 4.82%
====== ===== ======
Net yield on interest-earning assets 4.94% 5.02% 5.33%
====== ===== ======
Less: Tax-equivalent adjustment 708 826 973
-------- -------- --------
Net interest income $ 83,935 $ 78,216 $ 73,992
======== ======== ========
[l] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages. Average rates are presented on a
tax-equivalent basis. Certain reclassifications have been made to prior
period amounts to conform to current presentation.
[2] Interest on tax-exempt securities included herein is presented on a
tax-equivalent basis.
[3] Includes loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent earned.
PAGE 29
Sterling Bancorp
CONSOLIDATED RATE/VOLUME ANALYSIS[1]
December 31, 2004 to December 31, 2003 to
Increase (Decrease) from Years Ended, December 31, 2005 December 31, 2004
--------------------------------------------------------------------------------------------------------------------
Volume Rate Total[2] Volume Rate Total[2]
--------------------------------------------------------------------
(in thousands)
INTEREST INCOME
Interest-bearing deposits with other banks $ (1) $ 45 $ 44 $ (3) $ (1) $ (4)
---------------------------------------------------------------------
Investment securities
Available for sale (3,369) 78 (3,291) 3,540 (1,017) 2,523
Held to maturity 4,625 (1,273) 3,352 1,078 (1,518) (440)
Tax-exempt (268) (51) (319) (150) (85) (235)
---------------------------------------------------------------------
Total 988 (1,246) (258) 4,468 (2,620) 1,848
---------------------------------------------------------------------
Federal funds sold 1 176 177 63 5 68
---------------------------------------------------------------------
Loans, net of unearned discounts[3]
Domestic 8,897 6,267 15,164 5,350 (1,193) 4,157
---------------------------------------------------------------------
TOTAL INTEREST INCOME $ 9,885 $ 5,242 $ 15,127 $ 9,878 $ (3,809) $ 6,069
=====================================================================
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ (13) $ 6 $ (7) $ 14 $ 8 $ 22
NOW 143 811 954 72 (36) 36
Money market 88 1,088 1,176 262 226 488
Time 1,502 3,337 4,839 1,638 110 1,748
Foreign
Time -- -- -- -- (8) (8)
---------------------------------------------------------------------
Total interest-bearing deposits 1,720 5,242 6,962 1,986 300 2,286
---------------------------------------------------------------------
Borrowings
Securities sold under agreements to
repurchase -- customers 7 880 887 150 (7) 143
Securities sold under agreements to
repurchase -- dealers 460 936 1,396 (222) 54 (168)
Federal funds purchased 179 322 501 63 18 81
Commercial paper 105 504 609 75 25 100
Other short-term debt (172) 157 (15) (364) 62 (302)
Long-term borrowings (1,426) 612 (814) (206) 58 (148)
---------------------------------------------------------------------
Total borrowings (847) 3,411 2,564 (504) 210 (294)
---------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 873 $ 8,653 $ 9,526 $ 1,482 $ 510 $ 1,992
=====================================================================
NET INTEREST INCOME $ 9,012 $ (3,411) $ 5,601 $ 8,396 $ (4,319) $ 4,077
=====================================================================
[1] Amounts are presented on a tax-equivalent basis.
[2] The change in interest income and interest expense due to both rate and
volume has been allocated to change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts of
the changes in each. The effect of the extra day in 2004 has been included
in the change in volume.
[3] Nonaccrual loans have been included in the amounts outstanding and income
has been included to the extent earned.
PAGE 30
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company unduly to interest
rate fluctuations.
The Company takes a coordinated approach to the management of its liquidity,
capital and interest rate risk. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee. This committee, which is comprised of
members of senior management, meets to review, among other things, economic
conditions, interest rates, yield curve, cash flow projections, expected
customer actions, liquidity levels, capital ratios and repricing characteristics
of assets, liabilities and financial instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates. Interest
rate sensitivity is the relationship between market interest rates and net
interest income due to the repricing characteristics of assets and liabilities.
The Company monitors the interest rate sensitivity of its balance sheet
positions by examining its near-term sensitivity and its longer-term gap
position. In its management of interest rate risk, the Company utilizes several
financial and statistical tools including traditional gap analysis and
sophisticated income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest rate sensitive assets exceed interest rate sensitive
liabilities generally will result in the net interest margin increasing in a
rising rate environment and decreasing in a falling rate environment. A negative
gap (liability sensitive) will generally have the opposite result on the net
interest margin. However, the traditional gap analysis does not assess the
relative sensitivity of assets and liabilities to changes in interest rates and
other factors that could have an impact on interest rate sensitivity or net
interest income. The Company utilizes the gap analysis to complement its income
simulations modeling, primarily focusing on the longer-term structure of the
balance sheet.
The Company's balance sheet structure is primarily short-term in nature with a
substantial portion of assets and liabilities repricing or maturing within one
year. The Company's gap analysis at December 31, 2005, presented on page 35,
indicates that net interest income would increase during periods of rising
interest rates and decrease during periods of falling interest rates, but, as
mentioned above, gap analysis may not be an accurate predictor of net interest
income.
As part of its interest rate risk strategy, the Company may use financial
instrument derivatives to hedge the interest rate sensitivity of assets. The
Company has written policy guidelines, approved by the Board of Directors,
governing the use of financial instruments, including approved counterparties,
risk limits and appropriate internal control procedures. The credit risk of
derivatives arises principally from the potential for a counterparty to fail to
meet its obligation to settle a contract on a timely basis.
During the third quarter of 2005, the Company entered into two interest rate
floor agreements with notional amounts of $50,000,000 each and maturities of
September 14, 2007 and September 14,2008, respectively. Interest rate floor
contracts require the counterparty to pay the Company at specified future dates
the amount, if any, by which the specified interest (prime rate) falls below the
fixed floor rates, applied to the notional amounts. The Company utilizes the
financial instruments to adjust its interest rate risk position without exposing
itself to principal risk and funding requirements. These financial instruments
are being used as part of the Company's interest rate risk management and not
for trading purposes. At December 31, 2005, all counterparties have investment
grade credit ratings from the major rating agencies. Each counterparty is
specifically approved for applicable credit exposure. During 2004, the Company
did not enter into any derivative contracts.
The interest rate floor contracts require the Company to pay a fee for the right
to receive a fixed interest payment. The Company paid up-front premiums of
$141,250. At December 31, 2005, there were no amounts receivable under these
contracts. At December 31, 2004, the Company was not a party to any derivative
contracts.
The interest rate floor agreements were not designated as hedges for accounting
purposes and therefore changes in the fair values of the instruments are
required to be recognized as
PAGE 31
income or expense in the Company's financial statements. At December 31, 2005
the aggregate fair value of the interest rate floors was $28,030; $113, 220 was
charged to "Other expenses."
The Company utilizes income simulation models to complement its traditional gap
analysis. While the Asset/Liability Committee routinely monitors simulated net
interest income sensitivity over a rolling two-year horizon, it also utilizes
additional tools to monitor potential longer-term interest rate risk. The income
simulation models measure the Company's net interest income volatility or
sensitivity to interest rate changes utilizing statistical techniques that allow
the Company to consider various factors which impact net interest income. These
factors include actual maturities, estimated cash flows, repricing
characteristics, deposits growth/retention and, most importantly, the relative
sensitivity of the Company's assets and liabilities to changes in market
interest rates. This relative sensitivity is important to consider as the
Company's core deposit base has not been subject to the same degree of interest
rate sensitivity as its assets. The core deposit costs are internally managed
and tend to exhibit less sensitivity to changes in interest rates than the
Company's adjustable rate assets whose yields are based on external indices and
generally change in concert with market interest rates.
The Company's interest rate sensitivity is determined by identifying the
probable impact of changes in market interest rates on the yields on the
Company's assets and the rates that would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
projects the impact of changes in interest rates on net interest margin. The
Company has established certain policy limits for the potential volatility of
its net interest margin assuming certain levels of changes in market interest
rates with the objective of maintaining a stable net interest margin under
various probable rate scenarios. Management generally has maintained a risk
position well within the policy limits. As of December 31, 2005, the model
indicated the impact of a 200 basis point parallel and pro rata rise in rates
over 12 months would approximate a 1.46% ($1.2 million) increase in net interest
income, while the impact of a 200 basis point decline in rates over the same
period would approximate a 2.3% ($1.9 million) decline from an unchanged rate
environment.
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot provide any assurances as to the
predictive nature of these assumptions, including how customer preferences or
competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals and
product preference changes, and other variables. Furthermore, the sensitivity
analysis does not reflect actions that the Asset/Liability Committee might take
in responding to or anticipating changes in interest rates.
The shape of the yield curve can cause downward pressure on net interest income.
In general, if and to the extent that the yield curve is flatter (i.e., the
differences between interest rates for different maturities are relatively
smaller) than previously anticipated, then the yield on the Company's
interest-earning assets and its cash flows will tend to be lower. Management
believes that a relatively flat yield curve could continue to adversely affect
the Company's results in 2006.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the bank levels. Liquid assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital markets funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits, which
historically have been relatively stable. The parent company and the bank
believe that they have significant unused borrowing capacity. Contingency plans
exist which we believe could be implemented on a timely basis to mitigate the
impact of any dramatic change in market conditions.
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements throughout its history.
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the
PAGE 32
Currency to an amount not to exceed the net profits as defined, for the year to
date combined with its retained net profits for the preceding two calendar
years.
At December 31, 2005, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $38.2 million. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating $33.4
million. The parent company also has back-up credit lines with banks of $24.0
million. Since 1979, the parent company has had no need to use available back-up
lines of credit.
The following table sets forth information regarding the Company's obligations
and commitments to make future payments under contracts as of December 31, 2005:
Payments Due by Period
-------------------------------------------------------
Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
--------------------------------------------------------------------------------------------
(in thousands)
Long-Term Debt $ 85,774 $ -- $ 35,774 $ -- $ 50,000
Operating Leases 26,299 3,450 6,804 5,191 10,854
-------------------------------------------------------
Total Contractual Cash Obligations $ 112,073 $ 3,450 $ 42,578 $ 5,191 $ 60,854
=======================================================
The following table sets forth information regarding the Company's obligations
under other commercial commitments as of December 31, 2005:
Amount of Commitment Expiration Per Period
-------------------------------------------------------
Other Commercial Less than 1-3 4-5 After 5
Commitments Total 1 Year Years Years Years
--------------------------------------------------------------------------------------------
(in thousands)
Residential Loans $ 17,565 $ 17,565 $ -- $ -- $ --
Commercial Loans 32,494 16,397 15,597 500 --
-------------------------------------------------------
Total Loan Commitments 50,059 33,962 15,597 500 --
Standby Letters of Credit 26,716 15,066 11,650 -- --
Other Commercial Commitments 16,124 15,731 -- -- 393
-------------------------------------------------------
Total Commercial Commitments $ 92,899 $ 64,759 $ 27,247 $ 500 $ 393
=======================================================
While the past performance is no guarantee of the future, management believes
that the parent company's funding sources (including dividends from all its
subsidiaries) and the bank's funding sources will be adequate to meet their
liquidity requirements in the future.
CAPITAL
The Company and the bank are subject to risk-based capital regulations which
quantitatively measure capital against risk-weighted assets, including certain
off-balance sheet items. These regulations define the elements of the Tier 1 and
Tier 2 components of Total Capital and establish minimum ratios of 4% for Tier 1
capital and 8% for Total Capital for capital adequacy purposes. Supplementing
these regulations is a leverage requirement. This requirement establishes a
minimum leverage ratio (at least 3% or 4%, depending upon an institution's
regulatory status), which is calculated by dividing Tier 1 capital by adjusted
quarterly average assets (after deducting goodwill). Information regarding the
Company's and the bank's risk-based capital at December 31, 2005 and December
31, 2004, is presented in Note 20 beginning on page 69. In addition, the bank is
subject to the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") which imposes a number of mandatory
supervisory measures. Among other matters, FDICIA established five capital
categories ranging from "well capitalized" to "critically undercapitalized."
Such classifications are used by regulatory agencies to determine a bank's
deposit insurance premium, approval of applications authorizing institutions to
increase their asset size or otherwise expand business activities or acquire
other institutions. Under FDICIA, a "well capitalized" bank must maintain
minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and l0%,
respectively. The Federal Reserve Board applies comparable tests for holding
companies such as the Company. At December 31, 2005, the Company and the bank
exceeded the requirements for "well capitalized" institutions.
PAGE 33
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements included herein have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP"). GAAP presently requires the Company to measure financial position and
operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not
considered. The primary effect of inflation on the operations of the Company is
reflected in increased operating costs. In management's opinion, changes in
interest rates affect the financial condition of a financial institution to a
far greater degree than changes in the inflation rate. While interest rates are
greatly influenced by changes in the inflation rate, they do not necessarily
change at the same rate or in the same magnitude as the inflation rate. Interest
rates are highly sensitive to many factors that are beyond the control of the
Company, including changes in the expected rate of inflation, the influence of
general and local economic conditions and the monetary and fiscal policies of
the United States government, its agencies and various other governmental
regulatory authorities, among other things, as further discussed in the next
section.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See "New Accounting Standards and Interpretations" in Note 1 of the Company's
consolidated financial statements for details of recently issued accounting
pronouncements and their expected impact on the Company's financial statements.
SUBSEQUENT EVENT
On March 14, 2006, the Company resolved certain state tax issues for tax years
1998-2004. As a result of this resolution, the Company expects to reduce its
existing tax reserves by approximately $1.7 million through the provision for
income taxes for the first quarter of 2006.
PAGE 34
Sterling Bancorp
CONSOLIDATED INTEREST RATE SENSITIVITY
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less, so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are classified based on the earliest repricing
period. Based on the interest rate sensitivity analysis shown below, the
Company's net interest income would increase during periods of rising interest
rates and decrease during periods of falling interest rates. Amounts are
presented in thousands.
Repricing Date
----------------------------------------------------------------------------
More than More than
3 Months 3 Months 1 Year to Over Nonrate
or Less to 1 Year 5 Years 5 Years Sensitive Total
----------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits with other
banks $ 1,212 $ -- $ -- $ -- $ -- $ 1,212
Investment securities 817 35,996 131,699 539,381 7,406 715,299
Loans, net of unearned discounts
Commercial and industrial 584,090 14,783 27,813 6,029 (357) 632,358
Loans to depository institutions 32,000 -- -- -- -- 32,000
Lease financing 2,639 8,453 190,693 16,916 (28,310) 190,391
Real estate 105,735 26,215 136,724 33,229 -- 301,903
Installment 13,125 -- -- -- -- 13,125
Noninterest-earning assets and
allowance for loan losses -- -- -- -- 169,754 169,754
----------------------------------------------------------------------------
Total Asset 739,618 85,447 486,929 595,555 148,493 2,056,042
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings[1] -- -- 25,296 -- -- 25,296
NOW[1] -- -- 208,217 -- -- 208,217
Money market[1] 166,037 -- 36,623 -- -- 202,660
Time--domestic 252,383 173,301 72,543 20 -- 498,247
--foreign 1,645 1,377 -- -- -- 3,022
Securities sold under agreements
to repurchase--customers 61,067 -- -- -- -- 61,067
Securities sold under agreements
to repurchase--dealers 88,729 -- -- -- -- 88,729
Federal funds purchased 55,000 -- -- -- -- 55,000
Commercial paper 38,191 -- -- -- -- 38,191
Other short-term borrowings 38,851 -- -- -- -- 38,851
Long-term borrowings -- -- 10,000 50,000 25,774 85,774
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 750,988 750,988
----------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity 701,903 174,678 352,679 50,020 776,762 2,056,042
----------------------------------------------------------------------------
Net Interest Rate Sensitivity Gap $ 37,715 $ (89,231) $ 134,250 $ 545,535 $ (628,269) $ --
============================================================================
Cumulative Gap at December 31, 2005 $ 37,715 $ (51,516) $ 82,734 $ 628,269 $ -- $ --
============================================================================
Cumulative Gap at December 31, 2004 $ 250,603 $ 160,810 $ 187,606 $ 663,246 $ -- $ --
============================================================================
Cumulative Gap at December 31, 2003 $ 230,662 $ 77,756 $ 46,397 $ 595,450 $ -- $ --
============================================================================
[1] Historically, balances in non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical repricing
practices and runoff experience.
PAGE 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 2005 and 2004
and for each of the years in the three-year period ended December 31, 2005, and
the statements of condition of Sterling National Bank as of December 31, 2005
and 2004, notes thereto and Report of Independent Registered Public Accounting
Firm thereon appear on pages 37-76.
PAGE 36
Sterling Bancorp
CONSOLIDATED BALANCE SHEETS
December 31, 2005 2004
------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 69,148,683 $ 48,842,418
Interest-bearing deposits with other banks 1,212,227 1,329,103
Securities available for sale (at estimated fair value;
pledged: $111,233,053 in 2005 and $64,933,098 in 2004) 201,259,112 233,762,171
Securities held to maturity (pledged: $301,246,338 in 2005 and
$122,309,904 in 2004) (estimated fair value: $504,514,084
in 2005 and $448,173,450 in 2004) 514,039,476 446,457,563
---------------------------------
Total investment securities 715,298,588 680,219,734
---------------------------------
Loans held for sale 40,977,538 37,058,673
Loans held in portfolio, net of unearned discounts 1,128,799,286 1,022,286,479
Less allowance for loan losses 16,517,330 16,328,528
---------------------------------
Loans, net 1,112,281,956 1,005,957,951
---------------------------------
Customers' liability under acceptances 589,667 628,965
Goodwill 21,158,440 21,158,440
Premises and equipment, net 10,903,870 10,674,708
Other real estate 859,541 766,620
Accrued interest receivable 6,116,107 5,604,781
Bank owned life insurance 26,964,575 26,553,145
Other assets 50,531,294 32,317,224
---------------------------------
$ 2,056,042,486 $ 1,871,111,762
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 510,883,966 $ 511,307,018
Interest-bearing deposits 937,442,174 832,544,097
---------------------------------
Total deposits 1,448,326,140 1,343,851,115
Securities sold under agreements to repurchase -- customers 61,067,073 55,934,170
Securities sold under agreements to repurchase -- dealers 88,729,000 33,882,000
Federal funds purchased 55,000,000 32,500,000
Commercial paper 38,191,016 25,991,038
Short-term borrowings -- FHLB 35,000,000 --
Short-term borrowings -- other 3,851,246 2,517,375
Acceptances outstanding 589,667 628,965
Accrued expenses and other liabilities 91,926,784 91,329,506
Long-term borrowings -- FHLB 60,000,000 110,000,000
Long-term borrowings -- subordinated debentures 25,774,000 25,774,000
---------------------------------
Total liabilities 1,908,454,926 1,722,408,169
---------------------------------
Shareholders' Equity
Common stock, $1 par value. Authorized 50,000,000 shares;
issued 21,066,916 and 20,785,515 shares, respectively 21,066,916 20,785,515
Capital surplus 166,313,566 144,405,751
Retained earnings 20,739,352 28,664,568
Accumulated other comprehensive loss (5,229,620) (1,921,060)
---------------------------------
202,890,214 191,934,774
Common stock in treasury at cost, 2,231,442 and 1,642,996 shares, respectively (55,280,647) (42,939,969)
Unearned compensation (22,007) (291,212)
---------------------------------
Total shareholders' equity 147,587,560 148,703,593
---------------------------------
$ 2,056,042,486 $ 1,871,111,762
=================================
See Notes to Consolidated Financial Statements.
PAGE 37
Sterling Bancorp
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2005 2004 2003
-----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 80,943,312 $ 65,778,789 $ 61,621,929
Investment securities
Available for sale 9,546,211 13,038,461 10,601,611
Held to maturity 22,180,396 18,828,800 19,269,037
Federal funds sold 308,766 132,405 64,435
Deposits with other banks 65,109 20,969 25,464
------------------------------------------
Total interest income 113,043,794 97,799,424 91,582,476
------------------------------------------
INTEREST EXPENSE
Deposits 18,134,850 11,173,017 8,887,090
Securities sold under agreements to repurchase -- customers 1,907,335 1,020,157 876,790
Securities sold under agreements to repurchase -- dealers 1,793,838 398,415 565,552
Federal funds purchased 647,027 146,109 65,407
Commercial paper 973,200 363,918 264,254
Short-term borrowings -- FHLB 202,837 234,333 525,733
Short-term borrowings -- other 24,887 9,159 18,989
Long-term borrowings -- FHLB 3,331,619 4,145,000 4,293,274
Long-term borrowings -- subordinated debentures 2,093,750 2,093,750 2,093,750
------------------------------------------
Total interest expense 29,109,343 19,583,858 17,590,839
------------------------------------------
Net interest income 83,934,451 78,215,566 73,991,637
Provision for loan losses 9,664,000 9,965,000 8,740,400
------------------------------------------
Net interest income after provision for loan losses 74,270,451 68,250,566 65,251,237
------------------------------------------
NONINTEREST INCOME
Factoring income 6,003,920 6,840,856 5,947,029
Mortgage banking income 16,433,355 15,300,971 14,606,494
Service charges on deposit accounts 5,385,532 4,722,011 4,905,900
Trade finance income 2,088,480 2,267,970 2,337,480
Trust fees 642,906 697,560 646,979
Other service charges and fees 1,366,380 1,843,603 1,922,590
Bank owned life insurance income 1,401,588 1,225,628 1,041,577
Securities gains 337,457 1,256,370 550,505
Other income 893,852 562,726 719,397
------------------------------------------
Total noninterest income 34,553,470 34,717,695 32,677,951
------------------------------------------
NONINTEREST EXPENSES
Salaries 32,081,713 30,103,160 27,022,023
Employee benefits 9,888,950 9,032,770 8,462,987
------------------------------------------
Total personnel expense 41,970,663 39,135,930 35,485,010
Occupancy expense, net 5,480,783 4,916,240 4,720,731
Equipment expense 3,233,808 3,063,136 2,854,169
Advertising and marketing 3,900,499 3,350,565 3,160,122
Professional fees 5,908,344 5,567,847 3,121,771
Data processing fees 1,186,205 1,124,441 1,012,309
Stationery and printing 850,703 801,625 903,915
Communications 1,609,285 1,530,476 1,580,678
Other expenses 7,070,093 6,122,393 6,435,872
------------------------------------------
Total noninterest expenses 71,210,383 65,612,653 59,274,577
------------------------------------------
Income before income taxes 37,613,538 37,355,608 38,654,611
Provision for income taxes 13,586,713 12,751,535 14,751,366
------------------------------------------
Net income $ 24,026,825 $ 24,604,073 $ 23,903,245
==========================================
Average number of common shares outstanding
Basic 19,164,498 19,146,561 18,819,849
Diluted 19,763,352 20,035,494 19,837,155
Earnings per average common share
Basic $ 1.25 $ 1.29 $ 1.26
Diluted 1.22 1.23 1.20
Dividends per common share .73 .63 .54
See Notes to Consolidated Financial Statements.
PAGE 38
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Years Ended December 31, 2005 2004 2003
------------------------------------------------------------------------------------------------------------
Net income $ 24,026,825 $ 24,604,073 $ 23,903,245
Other comprehensive (loss) income, net of tax:
Unrealized gains on securities:
Unrealized holding (losses) gains arising during the year (2,645,319) (886,698) (995,551)
Reclassification adjustment for gains included in net
income (181,582) (679,696) (297,823)
Minimum pension liability adjustment (481,659) 777,137 (501,359)
-------------------------------------------
Other comprehensive (loss) income (3,308,560) (789,257) (1,794,733)
-------------------------------------------
Comprehensive income $ 20,718,265 $ 23,814,816 $ 22,108,512
===========================================
See Notes to Consolidated Financial Statements.
PAGE 39
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2005 2004 2003
------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at beginning of year $ -- $ 2,244,320 $ 2,322,060
Conversions of Series B and D shares -- (2,244,320) (77,740)
-------------------------------------------
Balance at end of year $ -- $ -- $ 2,244,320
===========================================
COMMON STOCK
Balance at beginning of year $ 20,785,515 $ 20,180,958 $ 20,043,414
Conversions of preferred shares into common shares -- 428,304 12,799
Common shares issued under stock incentive plan 281,401 176,253 124,745
-------------------------------------------
Balance at end of year $ 21,066,916 $ 20,785,515 $ 20,180,958
===========================================
CAPITAL SURPLUS
Balance at beginning of year $144,405,751 $140,274,838 $137,967,380
Conversions of preferred shares into common shares -- 1,816,016 64,941
Common shares issued under stock incentive plan and related
tax benefits 4,016,084 2,340,933 2,274,875
Common shares issued in connection with stock dividend 17,891,731 -- --
Stock split--cash paid in lieu -- (26,036) (32,358)
------------------------------------------
Balance at end of year $166,313,566 $144,405,751 $140,274,838
==========================================
RETAINED EARNINGS
Balance at beginning of year $ 28,664,568 $ 16,166,517 $ 2,498,606
Net income 24,026,825 24,604,073 23,903,245
Cash dividends paid--common shares (14,035,197) (12,106,022) (10,110,315)
--preferred shares -- -- (125,019)
Common shares issued in connection with stock dividend (17,891,731) -- --
Stock dividend--cash in lieu (25,113) -- --
-------------------------------------------
Balance at end of year $ 20,739,352 $ 28,664,568 $ 16,166,517
===========================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of year $ (1,921,060) $ (1,131,803) $ 662,930
------------------------------------------
Unrealized holding (losses)/gains arising during the
period:
Before tax (5,038,117) (1,638,997) (1,840,208)
Tax effect 2,392,798 752,299 844,657
-------------------------------------------
Net of tax (2,645,319) (886,698) (995,551)
-------------------------------------------
Reclassification adjustment for gains included in net
income:
Before tax (337,457) (1,256,370) (550,505)
Tax effect 155,875 576,674 252,682
-------------------------------------------
Net of tax (181,582) (679,696) (297,823)
-------------------------------------------
Minimum pension liability adjustment:
Before tax (827,867) 1,436,482 (926,726)
Tax effect 346,208 (659,345) 425,367
-------------------------------------------
Net of tax (481,659) 777,137 (501,359)
-------------------------------------------
Balance at end of year $ (5,229,620) $ (1,921,060) $ (1,131,803)
===========================================
TREASURY STOCK
Balance at beginning of year $(42,939,969) $(33,577,847) $(32,400,952)
Purchase of common shares (10,507,293) (8,310,004) (256,007)
Surrender of shares issued under incentive compensation
plan (1,833,385) (1,052,118) (920,888)
-------------------------------------------
Balance at end of year $(55,280,647) $(42,939,969) $(33,577,847)
===========================================
UNEARNED COMPENSATION
Balance at beginning of year $ (291,212) $ (894,976) $ (1,873,926)
Amortization of unearned compensation 269,205 603,764 978,950
-------------------------------------------
Balance at end of year $ (22,007) $ (291,212) $ (894,976)
===========================================
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of year $148,703,593 $143,262,007 $129,219,512
Net changes during the year (1,116,033) 5,441,586 14,042,495
-------------------------------------------
Balance at end of year $147,587,560 $148,703,593 $143,262,007
===========================================
See Notes to Consolidated Financial Statements.
PAGE 40
Sterling Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,026,825 $ 24,604,073 $ 23,903,245
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 9,664,000 9,965,000 8,740,400
Depreciation and amortization of premises and equipment 2,006,561 1,839,782 1,750,153
Securities gains (337,457) (1,256,370) (550,505)
Income from bank owned life insurance (1,401,588) (1,225,628) (1,041,577)
Deferred income tax benefit (2,899,592) (729,908) (386,875)
Net change in loans held for sale (3,918,865) 3,497,707 14,128,607
Amortization of unearned compensation 269,205 603,764 978,950
Amortization of premiums on investment securities 969,000 1,456,202 2,341,462
Accretion of discounts on investment securities (613,712) (568,608) (1,112,329)
Increase in accrued interest receivable (511,326) (535,358) (187,486)
Increase in accrued expenses and other liabilities 597,278 12,724,867 1,361,655
Increase in other assets (10,364,621) (5,257,201) (5,812,233)
Other, net (3,218,157) (490,871) (1,219,208)
------------------------------------------------
Net cash provided by operating activities 14,267,551 44,627,451 42,894,259
------------------------------------------------
INVESTING ACTIVITIES
Purchase of premises and equipment (2,235,723) (3,288,307) (1,713,164)
Net decrease in interest-bearing deposits with other banks 116,876 327,235 1,216,372
Decrease in Federal funds sold -- -- 5,000,000
Net increase in loans held in portfolio (115,893,204) (129,825,687) (117,071,914)
(Increase) Decrease in other real estate (92,921) 63,236 (7,036)
Purchase of bank owned life insurance -- (4,000,000) --
Proceeds from sales of securities--available for sale 3,213,055 94,314,559 24,208,035
Proceeds from sales of securities--held to maturity 5,452,162 -- --
Proceeds from prepayments, redemptions or
maturities of securities--held to maturity 106,710,878 131,720,726 253,379,199
Purchases of securities--held to maturity (179,939,152) (208,471,931) (255,512,023)
Proceeds from prepayments, redemptions or
maturities--available for sale 68,110,833 123,946,777 367,057,916
Purchases of securities--available for sale (43,026,829) (141,857,433) (486,974,411)
------------------------------------------------
Net cash used in investing activities (157,584,025) (137,070,825) (210,417,026)
------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in noninterest-bearing deposits (423,052) 37,215,128 72,523,411
Net increase in interest-bearing deposits 104,898,077 94,895,167 92,109,185
Increase in Federal funds purchased 22,500,000 22,500,000 10,000,000
Net increase (decrease) in securities sold under agreements
to repurchase 59,979,903 (4,002,636) (7,106,829)
Net increase (decrease) in commercial paper and other
short-term borrowings 48,533,849 (57,162,001) 19,321,090
Decrease in long-term borrowings (50,000,000) -- (5,000,000)
Purchase of treasury shares (10,507,293) (8,310,004) (256,007)
Proceeds from exercise of stock options 2,701,565 4,334,474 1,973,762
Cash dividends paid on preferred and common shares (14,035,197) (12,106,022) (10,235,334)
Cash paid in lieu of fractional shares in connection with
stock dividend/split (25,113) (26,036) (32,358)
------------------------------------------------
Net cash provided by financing activities 163,622,739 77,338,070 173,296,920
------------------------------------------------
Net increase (decrease) in cash and due from banks 20,306,265 (15,105,304) 5,774,153
Cash and due from banks--beginning of year 48,842,418 63,947,722 58,173,569
------------------------------------------------
Cash and due from banks--end of year $ 69,148,683 $ 48,842,418 $ 63,947,722
================================================
Supplemental disclosure of cash flow information:
Interest paid $ 27,904,950 $ 19,199,800 $ 17,613,850
Income taxes paid 15,600,100 11,554,100 12,366,194
See Notes to Consolidated Financial Statements.
PAGE 41
Sterling National Bank
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 2005 2004
---------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 68,477,057 $ 47,910,092
Interest-bearing deposits with other banks 1,212,227 1,329,103
Securities available for sale (at estimated fair value;
pledged: $111,233,053 in 2005 and $64,933,098 in 2004) 201,195,458 233,697,551
Securities held to maturity (pledged: $301,246,338 in 2005 and
$122,309,904 in 2004) (estimated fair value: $504,514,084 in 2005
and $448,173,450 in 2004) 514,039,476 446,457,563
--------------------------------
Total investment securities 715,234,934 680,155,114
--------------------------------
Loans held for sale 40,977,538 37,058,673
Loans held in portfolio, net of unearned discounts 1,061,594,825 968,681,575
Less allowance for loan losses 15,689,302 16,063,068
--------------------------------
Loans, net 1,045,905,523 952,618,507
--------------------------------
Customers' liability under acceptances 589,667 628,965
Premises and equipment, net 10,855,714 10,645,195
Other real estate 859,541 766,620
Accrued interest receivable 6,114,700 5,603,374
Bank owned life insurance 26,964,575 26,553,145
Other assets 45,943,860 25,825,748
--------------------------------
$1,963,135,336 $1,789,094,536
================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest-bearing deposits $ 523,639,218 $ 526,366,101
Interest-bearing deposits 938,244,008 833,069,913
--------------------------------
Total deposits 1,461,883,226 1,359,436,014
Securities sold under agreements to repurchase--customers 61,067,073 55,934,170
Securities sold under agreements to repurchase--dealers 88,729,000 33,882,000
Federal funds purchased 55,000,000 32,500,000
Short-term borrowings--FHLB 35,000,000 --
Short-term borrowings--other 3,851,246 2,517,375
Acceptances outstanding 589,667 628,965
Accrued expenses and other liabilities 79,086,320 78,088,892
Long-term borrowings--FHLB 60,000,000 110,000,000
--------------------------------
Total liabilities 1,845,206,532 1,672,987,416
--------------------------------
Commitments and contingent liabilities
Shareholder's Equity
Common stock, $50 par value
Authorized and issued, 358,526 shares 17,926,300 17,926,300
Surplus 19,762,560 19,762,560
Undivided profits 82,221,088 77,573,022
Accumulated other comprehensive income:
Net unrealized appreciation on securities available for sale, net of tax (1,981,144) 845,238
--------------------------------
Total shareholder's equity 117,928,804 116,107,120
--------------------------------
$1,963,135,336 $1,789,094,536
================================
See Notes to Consolidated Financial Statements.
PAGE 42
Sterling Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sterling Bancorp (the "parent company") is a financial holding company, pursuant
to an election made under the Gramm-Leach-Bliley Act of 1999. Throughout the
notes, the term the "Company" refers to Sterling Bancorp and its subsidiaries.
The Company provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, factoring/accounts receivable management
services, trade financing, leasing, deposit services, trust and estate
administration and investment management services. The Company has operations
principally in New York and conducts business throughout the United States.
The following summarizes the significant accounting policies of the Company.
Basis of Presentation
The consolidated financial statements include the accounts of the parent company
and its subsidiaries, principally Sterling National Bank (the "bank"), after
elimination of intercompany transactions.
The Company determines whether it has a controlling financial interest in an
entity by first evaluating whether the entity is a voting interest entity or a
variable interest entity under accounting principles generally accepted in the
United States. Voting interest entities are entities in which the total equity
investment at risk is sufficient to enable the entity to finance itself
independently and provides the equity holders with the obligation to absorb
losses, the right to receive residual returns and the right to make decisions
about the entity's activities. As defined in applicable accounting standards,
variable interest entities ("VIEs") are entities that lack one or more of the
characteristics of a voting interest entity. A controlling financial interest in
an entity is present when an enterprise has a variable interest, or a
combination of variable interests, that will absorb a majority of the entity's
expected losses, receive a majority of the entity's expected residual returns,
or both. The enterprise with a controlling financial interest, known as the
primary beneficiary, consolidates the VIE. The Company's wholly owned
subsidiary, Sterling Bancorp Trust I is a VIE for which the Company is not the
primary beneficiary. Accordingly, the accounts of this entity are not included
in the Company's consolidated financial statements.
The parent company effected a 5% stock dividend on December 12, 2005. All
capital and share amounts as well as basic and diluted average number of shares
outstanding and earnings per share information for all prior reporting periods
have been restated.
General Accounting Policies
The Company follows accounting principles generally accepted in the United
States of America ("U.S. GAAP") and prevailing practices within the banking
industry. The preparation of financial statements in accordance with U.S. GAAP
requires management to make assumptions and estimates that impact the amounts
reported in those statements and are, by their nature, subject to change in the
future as additional information becomes available or as circumstances vary.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current presentation.
New Accounting Standards and Interpretations
Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting
Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB
Statement No. 3" ("SFAS No. 154") establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to a newly adopted accounting principle. Previously, most changes in accounting
principle were recognized by including the cumulative effect of changing to the
new accounting principle in net income of the period of the change. Under SFAS
No. 154, retrospective application requires (i) the cumulative effect of the
change to the new accounting principle on periods prior to those presented to be
reflected in the carrying amounts of assets and liabilities as of the beginning
of the first period presented, (ii) an offsetting adjustment, if any, to be made
to the opening balance of retained earnings (or other appropriate components of
equity) for that period, and (iii) financial statements for each individual
prior period presented to be adjusted to reflect the direct-period-specific
effects of applying the new accounting principle. Special retroactive
application rules apply in situations where it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
Indirect effects of a change in accounting principle are required to be reported
in the period in which the accounting change is made. SFAS No. 154 carries
forward the guidance in Accounting Principles Board ("APB") Opinion 20
"Accounting Changes," requiring justification of a change in accounting
principle on the basis of preferability. SFAS No. 154 also carries forward
without change the guidance contained in APB Opinion 20, for reporting the
correction of an error in previously issued financial statements and for a
change in an accounting estimate. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not expect SFAS No. 154 will significantly impact its
financial statements upon its adoption on January 1, 2006.
PAGE 43
SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R") establishes
standards for the accounting for transactions in which an entity (i) exchanges
its equity instruments for goods or services, or (ii) incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of the equity
instruments. SFAS No. 123R eliminates the ability to account for stock-based
compensation using APB 25 and requires that such transactions be recognized as
compensation cost in the income statement based on their fair values on the
measurement date, which is generally the date of grant. SFAS No. 123R was to be
effective for the Company on July 1, 2005; however, the Securities and Exchange
Commission ("SEC") delayed the required implementation date until January 1,
2006. The Company will transition to fair-value based accounting for stock-based
compensation using a modified version of prospective application ("modified
prospective application"). Under modified prospective application, as it is
applicable to the Company, SFAS No. 123R applies to new awards and to awards
modified, repurchased, or cancelled after January 1, 2006. At December 31, 2005,
there were no significant outstanding awards for which the requisite service has
not been rendered. See "Stock Incentive Plan" below for further discussion. The
SEC issued Staff Accounting Bulletin ("SAB") No. 107 ("SAB No. 107") regarding
the Staff's interpretation of SFAS No. 123R. The interpretation provides the
Staff's views regarding interactions between SFAS No. 123R and certain SEC rules
and regulations and provides interpretations of the valuation of share-based
payments for public companies. The interpretive guidance is intended to assist
companies in applying the provisions of SFAS No. 123R and investors and users of
the financial statements in analyzing the information provided. The Company will
follow the guidance prescribed in SAB No. 107 in connection with its adoption of
SFAS No. 123R.
Financial Accounting Standards Board ("FASB") Staff Position ("FSP") No. 115-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("FSP No. 115-1") provides guidance for determining when an
investment is considered impaired, whether impairment is other-than-temporary,
and measurement of an impairment loss. An investment is considered impaired if
the fair value of the investment is less than its cost. If, after consideration
of all available evidence to evaluate the realizable value of its investment
impairment is determined to be other-than-temporary, then an impairment loss
should be recognized equal to the difference between the investment's cost and
its fair value. FSP No. 115-1 nullifies certain provisions of Emerging Issues
Task Force ("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-1"), while
retaining the disclosure requirements of EITF 03-1 which were adopted in 2003.
FSP No. 115-1 is effective for reporting periods beginning after December 15,
2005. The Company does not expect FSP No. 115-1 will significantly impact its
financial statements upon its adoption on January 1, 2006.
Statement of Position ("SOP") No. 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer" ("SOP No. 03-3") addresses accounting for
differences between the contractual cash flows of certain loans and debt
securities and the cash flows expected to be collected when loans or debt
securities are acquired in a transfer and those cash flows differences are
attributable, at least in part, to credit quality. As such, SOP No. 03-3 applies
to loans and debt securities acquired individually, in pools or as part of a
business combination and does not apply to originated loans. The application of
SOP No. 03-3 limits the interest income, including accretion of purchase price
discounts, that may be recognized for certain loans and debt securities.
Additionally, SOP No. 03-3 does not allow the excess of contractual cash flows
over cash flows expected to be collected to be recognized as an adjustment of
yield, loss accrual or valuation allowance, such as the allowance for possible
loan losses. SOP No. 03-3 requires that increases in expected cash flows
subsequent to the initial investment be recognized prospectively through
adjustment of the yield on the loan or debt security over its remaining life.
Decreases in expected cash flows should be recognized as impairment. In the case
of loans acquired in a business combination where the loans show signs of credit
deterioration, SOP No. 03-3 represents a significant change from current
purchase accounting practice whereby the acquiree's allowance for loan losses is
typically added to the acquirer's allowance for loan losses. The adoption of SOP
No. 03-3 on January 1, 2005 did not have a material impact on the Company's
financial statements.
Investment Securities
Securities are designated as available for sale or held to maturity at the time
of acquisition. Securities that the Company will hold for indefinite periods of
time and that might be sold in the future as part of efforts to manage interest
rate risk or in response to changes in interest rates, changes in prepayment
risk, changes in market conditions or changes in economic factors are classified
as available for sale and carried at estimated market values. Net aggregate
unrealized gains or losses are included in a valuation allowance account and are
reported, net of taxes, as a component of shareholders' equity. Securities that
the Company has the positive intent and ability to hold to maturity are
designated as held to maturity and are carried at amortized cost, adjusted for
amortization of premiums and
PAGE 44
accretion of discounts over the period to maturity. Interest income includes the
amortization of purchase premiums and discounts. Gains and losses realized on
sales of securities are determined on the specific identification method and are
reported in noninterest income as net securities gains.
Securities pledged as collateral are reported separately in the consolidated
balance sheets if the secured party has the right by contract or custom to sell
or repledge the collateral. Securities are pledged by the Company to secure
trust and public deposits, securities sold under agreements to repurchase,
advances from the Federal Home Loan Bank of New York and for other purposes
required or permitted by law.
A periodic review is conducted by management to determine if the decline in the
fair value of any security appears to be other than temporary. Factors
considered in determining whether the decline is other-than-temporary include,
but are not limited to: the length of time and the extent to which fair value
has been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a period
of time sufficient to allow for any anticipated recovery. If the decline is
deemed to be other than temporary, the security is written down to a new cost
basis and the resulting loss is reported in non-interest income.
Loans
Loans (including factored accounts receivable), other than those held for sale,
are reported at their principal amount outstanding, net of unearned discounts
and unamortized nonrefundable fees and direct costs associated with their
origination or acquisition. Interest earned on loans without discounts is
credited to income based on loan principal amounts outstanding at appropriate
interest rates. Material origination and other nonrefundable fees net of direct
costs and discounts on loans (excluding factored accounts receivable) are
credited to income over the terms of the loans using a method that results in an
approximately constant effective yield. Nonrefundable fees on the purchase of
accounts receivable are credited to "Factoring income" at the time of purchase,
which, based on our analysis, does not produce results that are materially
different from the results under the amortization method specified in SFAS No.
91.
Mortgage loans held for sale, including deferred fees and costs, are reported at
the lower of cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
loan basis, and are included under the caption "Loans held for sale" in the
Consolidated Balance Sheets. Net unrealized losses, if any, are recognized in a
valuation allowance by a charge to income. Mortgage loans are sold, including
servicing rights, without recourse. Gains or losses resulting from sales of
mortgage loans, net of unamortized deferred fees and costs, are recognized when
the proceeds are received from investors and are included under the caption
"Mortgage banking income" in the Consolidated Statements of Income. In
connection with its mortgage banking activities, the Company had commitments to
fund loans held-for-sale and commitments to sell loans which are considered
derivative instruments under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The fair values of these free-standing
derivative instruments were immaterial at December 31, 2005 and 2004,
respectively.
Nonaccrual loans are those on which the accrual of interest has ceased. Loans,
including loans that are individually identified as being impaired under SFAS
No. 114, are generally placed on nonaccrual status immediately if, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more and collateral, if any, is insufficient to cover
principal and interest. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income. Interest income
is recognized on nonaccrual loans only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses, which is available for losses incurred in the
loan portfolio, is increased by a provision charged to expense and decreased by
charge-offs, net of recoveries.
Under the provisions of SFAS No. 114 and SFAS No. 118, individually identified
impaired loans are measured based on the present value of payments expected to
be received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices; or,
for loans that are solely dependent on the collateral for repayment, measurement
may be based on the fair value of the collateral. Loans that are to be
foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds fair value, a valuation
allowance is required as a component of the allowance for loan losses. Changes
to the valuation allowance are recorded as a component of the provision for loan
losses.
The adequacy of the allowance for loan losses is reviewed regularly by
management. The allowance for loan losses is maintained through the provision
for loan losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for loan losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that
PAGE 45
may affect the borrower's ability to repay, review of overall portfolio quality
through an analysis of current charge-offs, delinquency and nonperforming loan
data, estimates of the value of any underlying collateral, review of regulatory
examinations, an assessment of current and expected economic conditions and
changes in the size and character of the loan portfolio. The allowance reflects
management's evaluation both of loans presenting identified loss potential and
of the risk inherent in various components of the portfolio, including loans
identified as impaired as required by SFAS No. 114. Thus, an increase in the
size of the portfolio or in any of its components could necessitate an increase
in the allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance.
Goodwill
Goodwill reflected in the consolidated balance sheets arose from the parent
company's acquisition of the bank, under the purchase method of accounting in
1968. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). Under the provisions of SFAS No. 142,
goodwill is deemed to have an indefinite useful life and the Company is required
to complete an annual assessment by segment for any impairment of goodwill,
which would be treated as an expense in the income statement. There was no
impairment expense recorded in 2005, 2004 or 2003. Prior to the adoption of SFAS
No. 142, the Company was not amortizing goodwill.
Goodwill is tested for impairment using a two-step approach that involves the
identification of "reporting units" and the estimation of their respective fair
values. An impairment loss would be recognized as a charge to expense for any
excess of the goodwill carrying amount over implied fair value.
Premises and Equipment
Premises and equipment, excluding land, are stated at cost less accumulated
depreciation or amortization as applicable. Land is reported at cost.
Depreciation is computed on a straight-line basis and is charged to noninterest
expense over the estimated useful lives of the related assets. Amortization of
leasehold improvements is charged to noninterest expense over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Maintenance, repairs and minor improvements are charged to
noninterest expenses as incurred.
Bank Owned Life Insurance
The bank invested in Bank Owned Life Insurance ("BOLI") policies to fund certain
future employee benefit costs. The cash surrender value of the BOLI policies is
recorded in the Consolidated Balance Sheets under the caption "Bank owned life
insurance." Changes in the cash surrender value are recorded in the Consolidated
Statements of Income under the caption "Bank owned life insurance income."
Repurchase Agreements
The Company also sells certain securities under agreements to repurchase. The
agreements are treated as collateralized financing transactions and the
obligations to repurchase securities sold are reflected as a liability in the
accompanying consolidated balance sheets. The carrying value of the securities
underlying the agreements remain reflected as an asset.
Derivative Financial Instruments
The Company's hedging policies permit the use of various derivative financial
instruments to manage interest rate risk or to hedge specified assets and
liabilities. All derivatives are recorded at fair value on the Company's balance
sheet. To qualify for hedge accounting, derivatives must be highly effective at
reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the derivative contract. The Company
considers a hedge to be highly effective if the change in fair value of the
derivative hedging instrument is within 80% to 120% of the opposite change in
the fair value of the hedged item attributable to the hedged risk. If derivative
instruments are designated as hedges of fair values, and such hedges are highly
effective, both the change in the fair value of the hedge and the hedged item
are included in current earnings. Fair value adjustments related to cash flow
hedges are recorded in other comprehensive income and are reclassified to
earnings when the hedged transaction is reflected in earnings. Ineffective
portions of hedges are reflected in earnings as they occur. Actual cash receipts
and/or payments and related accruals on derivatives related to hedges are
recorded as adjustments to the interest income or interest expense associated
with the hedged item. During the life of the hedge, the Company formally
assesses whether derivatives designated as hedging instruments continue to be
highly effective in offsetting changes in the fair value or cash flows of hedged
items. If it is determined that a hedge has ceased to be highly effective, the
Company will discontinue hedge accounting prospectively. At such time, previous
adjustments to the carrying value of the hedged item are reversed into current
earnings and the derivative instrument is reclassified to a trading position
recorded at fair value. Changes in the fair value of derivative financial
instruments not designated as hedges for accounting purposes are reflected in
income or expense at measurement dates. At December 31, 2005, the Company was a
party to interest rate floor contracts with a notional amount of $50,000,000 and
a fair value of $28,030.
PAGE 46
The Company may be required to recognize certain contracts and commitments as
derivatives when the characteristics of those contracts and commitments meet the
definition of a derivative.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Deferred income tax expense (benefit) is determined by recognizing
deferred tax assets and liabilities for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The realization of
deferred tax assets is assessed and a valuation allowance provided for that
portion of the assets for which it is more likely than not that it will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates and will be adjusted for the effects of future changes in tax laws or
rates, if any.
For income tax purposes, the parent company files: a consolidated Federal income
tax return; combined New York City and New York State income tax returns; and
separate state income tax returns for its out-of-state subsidiaries. The parent
company, under tax sharing agreements, either pays or collects on account of
current income taxes to or from its subsidiaries.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
Stock Incentive Plan
At December 31, 2005, the Company had a stock-based employee compensation plan,
which is described more fully in Note 15. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. All
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant and, therefore, no option
related stock-based employee compensation cost is reflected in net income.
Stock-based employee compensation cost related to restricted stock is included
in compensation expense as discussed more fully in Note 14. In accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
the stock-based employee compensation plans.
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------
Net income available for common
shareholders $ 24,026,825 $ 24,604,073 $23,778,226
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (1,134,612) (236,349) (422,709)
----------------------------------------
Pro forma net income $ 22,892,213 $ 24,367,724 $23,355,517
========================================
Earnings per share:
Basic--as reported $ 1.25 $ 1.29 $ 1.26
Basic--pro forma 1.19 1.27 1.24
Diluted--as reported 1.22 1.23 1.20
Diluted--pro forma 1.16 1.22 1.18
Employee stock options generally expire ten years from the date of grant and
become non-forfeitable one year from date of grant, although if necessary to
qualify to the maximum extent possible as incentive stock options, these options
become exercisable in annual installments. Director nonqualified stock options
generally expire five years from the date of grant and become non-forfeitable
and become exercisable in four annual installments starting one year from date
of grant. Stock-based compensation is recognized over the period from date of
grant to the date on which the options become non-forfeitable.
On December 15, 2005, the Compensation Committee of the Board of Directors
approved the accelerated vesting and exercisability of all unvested and
unexercisable stock options to purchase common shares of the Company held by
directors or officers on December 19, 2005. Management proposed the acceleration
of vesting to eliminate the impact of adopting SFAS No. 123R on the consolidated
financial statements insofar as existing options are concerned. As a result,
options to purchase 223,913 common shares, which would otherwise have vested and
become exercisable from time to time over the next four years, became fully
vested and immediately exercisable as of December 19, 2005. The number of shares
and exercise prices of the options
PAGE 47
subject to acceleration are unchanged. The accelerated options have exercise
prices between $15.82 and $26.94 per share, with a total weighted average
exercise price per share of $22.70. The accelerated options include 170,093
out-of-the money options and 53,820 in-the-money-options. The stock-based
compensation expense presented in the table above reflects the impact of the
accelerated vesting and exercisability of these options.
In order to limit unintended personal benefits to officers and directors, the
Compensation Committee imposed transfer restrictions on any shares received by
an optionee upon exercise of an accelerated option before the earliest date on
which, without giving effect to such acceleration, such option would nonetheless
have been vested and exercisable in respect of such shares (assuming the
optionee remained an employee or member of the Board of Directors, as
applicable). Such transfer restrictions will expire on the earlier of such
earliest date or the date of the optionee's death.
The Company expects to adopt the provisions of SFAS No. 123R, on January 1,
2006. Among other things, SFAS No. 123R eliminates the ability to account for
stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the date of the grant. See "New Accounting Standards and
Interpretations" on page 43 for additional information. The Company estimates
that accelerating the vesting and exercisability of the 223,913 options
discussed above will eliminate approximately $0.7 million of non-cash
compensation expense that would otherwise have been recorded in the Company's
income statements for future periods upon its adoption, as of January 1, 2006,
of SFAS No. 123R.
Earnings Per Average Common Share
Basic earnings per share are computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
NOTE 2.
CASH AND DUE FROM BANKS
The bank is required to maintain average reserves, net of vault cash, on deposit
with the Federal Reserve Bank of New York against outstanding domestic deposits
and certain other liabilities. The required reserves, which are reported in cash
and due from banks, were $29,645,000 and $21,580,000 at December 31, 2005 and
2004, respectively. Average required reserves during 2005 and 2004 were
$27,032,000 and $23,855,000, respectively.
NOTE 3.
MONEY MARKET INVESTMENTS
The Company's money market investments include interest-bearing deposits with
other banks and Federal funds sold. The following table presents information
regarding money market investments.
Years Ended December 31, 2005 2004 2003
-----------------------------------------------------------------------------------------------
Interest-bearing deposits with other banks
At December 31 --Balance $ 1,212,227 $ 1,329,103 $ 1,656,338
--Average interest rate 3.11% 1.34% 1.00%
--Average original maturity 66 Days 74 Days 72 Days
During the year --Maximum month-end balance 5,209,048 6,516,030 3,311,594
--Daily average balance 3,040,000 3,120,000 3,473,000
--Average interest rate earned 1.96% 0.70% 0.73%
--Range of interest rates earned 1.00-4.06% 0.35-2.15% 0.29-1.50%
=========================================
Federal funds sold
At December 31 --Balance $ -- $ -- $ --
--Average interest rate -- -- --
--Average original maturity -- -- --
During the year --Maximum month-end balance 40,000,000 75,000,000 10,000,000
--Daily average balance 10,986,000 10,943,000 5,759,000
--Average interest rate earned 2.81% 1.21% 1.12%
--Range of interest rates earned 2.19-3.94% 0.875-1.8125% 0.875-1.375%
=========================================
PAGE 48
NOTE 4.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities available for sale are
as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2005 Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ -- $ -- $ -- $ --
Obligations of U.S. government corporations and
agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Association) 9,194,237 -- 495,517 8,698,720
CMOs (Federal Home Loan Mortgage Company) 24,006,876 -- 1,028,095 22,978,781
Federal National Mortgage Association 52,327,699 58,199 1,302,807 51,083,091
Federal Home Loan Mortgage Company 50,793,291 10,574 1,276,388 49,527,477
Government National Mortgage Association 5,552,269 211,412 5,884 5,757,797
---------------------------------------------------------
Total mortgage-backed securities 141,874,372 280,185 4,108,691 138,045,866
Federal Home Loan Bank 14,997,407 -- 291,157 14,706,250
Federal Farm Credit Bank 10,000,000 -- 204,688 9,795,312
---------------------------------------------------------
Total obligations of U.S. government
corporations and agencies 166,871,779 280,185 4,604,536 162,547,428
Obligations of state and political institutions 31,160,954 274,450 128,375 31,307,029
Federal Reserve Bank stock 1,130,700 -- -- 1,130,700
Federal Home Loan Bank stock 5,950,300 -- -- 5,950,300
Other securities 304,442 19,213 -- 323,655
---------------------------------------------------------
Total $ 205,418,175 $ 573,848 $ 4,732,911 $ 201,259,112
=========================================================
December 31, 2004
---------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 2,491,701 $ 190 $ 329 $ 2,491,562
Obligations of U.S. government corporations and
agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Association) 11,958,409 -- 260,570 11,697,839
CMOs (Federal Home Loan Mortgage Company) 32,135,043 24,621 910,900 31,248,764
Federal National Mortgage Association 54,953,012 421,190 430,085 54,944,117
Federal Home Loan Mortgage Company 61,618,287 278,701 259,853 61,637,135
Government National Mortgage Association 8,439,652 436,276 6,485 8,869,443
---------------------------------------------------------
Total mortgage-backed securities 169,104,403 1,160,788 1,867,893 168,397,298
Federal Home Loan Bank 14,995,051 -- 160,676 14,834,375
Federal Farm Credit Bank 10,000,000 -- 98,437 9,901,563
---------------------------------------------------------
Total obligations of U.S. government
corporations and agencies 194,099,454 1,160,788 2,127,006 193,133,236
Obligations of state and political institutions 26,588,493 882,414 -- 27,470,907
Trust preferred securities 2,735,973 287,073 -- 3,023,046
Federal Reserve Bank stock 1,130,700 -- -- 1,130,700
Federal Home Loan Bank stock 6,188,100 -- -- 6,188,100
Other securities 304,442 20,178 -- 324,620
---------------------------------------------------------
Total $ 233,538,863 $ 2,350,643 $ 2,127,335 $ 233,762,171
=========================================================
PAGE 49
The carrying value and estimated fair value of securities held to maturity are
as follows:
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
December 31, 2005 Value Gains Losses Value
------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Company) $ 14,171,765 $ -- $ 437,151 $ 13,734,614
CMOs (Federal Home Loan Mortgage Company) 25,707,668 -- 946,929 24,760,739
Federal National Mortgage Association 248,288,506 620,057 4,304,167 244,604,396
Federal Home Loan Mortgage Company 166,001,415 130,276 4,326,184 161,805,507
Government National Mortgage Association 13,887,164 477,422 532 14,364,054
-------------------------------------------------------
Total mortgage-backed securities 468,056,518 1,227,755 10,014,963 459,269,310
Federal Home Loan Bank 24,982,958 -- 311,083 24,671,875
Federal Farm Credit Bank 20,000,000 -- 426,563 19,573,437
-------------------------------------------------------
Total obligations of U.S. government corporations
and agencies 513,039,476 1,227,755 10,752,609 503,514,622
Debt securities issued by foreign governments 1,000,000 -- 538 999,462
-------------------------------------------------------
Total $ 514,039,476 $1,227,755 $ 10,753,147 $504,514,084
=======================================================
December 31, 2004
------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Company) $ 23,556,563 $ -- $ 425,020 $ 23,131,543
CMOs (Federal Home Loan Mortgage Company) 37,634,129 138,988 543,881 37,229,236
Federal National Mortgage Association 139,525,293 2,141,081 466,093 141,200,281
Federal Home Loan Mortgage Company 175,158,128 697,426 983,644 174,871,910
Government National Mortgage Association 29,321,783 1,371,199 940 30,692,042
-------------------------------------------------------
Total mortgage-backed securities 405,195,896 4,348,694 2,419,578 407,125,012
Federal Home Loan Bank 20,011,667 -- 124,167 19,887,500
Federal Farm Credit Bank 20,000,000 -- 89,062 19,910,938
-------------------------------------------------------
Total obligations of U.S. government corporations and
agencies 445,207,563 4,348,694 2,632,807 446,923,450
Debt securities issued by foreign governments 1,250,000 -- -- 1,250,000
-------------------------------------------------------
Total $ 446,457,563 $4,348,694 $ 2,632,807 $448,173,450
=======================================================
PAGE 50
The following table presents 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
December 31, 2005 Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ -- $ -- $ -- $ -- $ -- $ --
Obligations of U.S. government corporations and
agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Company) -- -- 8,698,720 495,517 8,698,720 495,517
CMOs (Federal Home Loan Mortgage Company) -- -- 22,978,781 1,028,095 22,978,781 1,028,095
Federal National Mortgage Association 21,326,935 511,093 20,530,474 791,714 41,857,409 1,302,807
Federal Home Loan Mortgage Company 21,010,196 378,961 28,089,085 897,427 49,099,281 1,276,388
Government National Mortgage Association -- -- 253,618 5,884 253,618 5,884
-----------------------------------------------------------------------------------
Total mortgage-backed securities 42,337,131 890,054 80,550,678 3,218,637 122,887,809 4,108,691
Federal Home Loan Bank -- -- 14,706,250 291,157 14,706,250 291,157
Federal Farm Credit Bank -- -- 9,795,312 204,688 9,795,312 204,688
Total obligations of U.S. government -----------------------------------------------------------------------------------
corporations and agencies 42,337,131 890,054 105,052,240 3,714,482 147,389,371 4,604,536
Obligations of state and political institutions 10,239,490 128,375 -- -- 10,239,490 128,375
-----------------------------------------------------------------------------------
Total $ 52,576,621 $ 1,018,429 $105,052,240 $ 3,714,482 $157,628,861 $ 4,732,911
===================================================================================
December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 995,312 $ 329 $ -- $ -- $ 995,312 $ 329
Obligations of U.S. government corporations and
agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Company) -- 11,697,839 260,569 11,697,839 260,569
CMOs (Federal Home Loan Mortgage Company) 21,665,399 593,866 5,484,173 317,035 27,149,572 910,901
Federal National Mortgage Association 22,001,096 286,100 8,587,416 143,985 30,588,512 430,085
Federal Home Loan Mortgage Company 38,960,235 259,852 -- -- 38,960,235 259,852
Government National Mortgage Association 11,405 172 330,454 6,314 341,859 6,486
-----------------------------------------------------------------------------------
Total mortgage-backed securities 82,638,135 1,139,990 26,099,882 727,903 108,738,017 1,867,893
Federal Home Loan Bank 14,834,375 160,675 -- -- 14,834,375 160,675
Federal Farm Credit Bank 9,901,563 98,438 -- -- 9,901,563 98,438
-----------------------------------------------------------------------------------
Total obligations of U.S. government
corporations and agencies 107,374,073 1,399,103 26,099,882 727,903 133,473,955 2,127,006
-----------------------------------------------------------------------------------
Total $ 108,369,385 $ 1,399,432 $ 26,099,882 $ 727,903 $134,469,267 $ 2,127,335
===================================================================================
PAGE 51
The following table presents 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
December 31, 2005 Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and
agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Company) $ 7,803,438 $ 155,482 $ 5,931,176 $ 281,669 $ 13,734,614 $ 437,151
CMOs (Federal Home Loan Mortgage Company) 7,695,574 201,759 17,065,165 745,170 24,760,739 946,929
Federal National Mortgage Association 155,687,506 2,768,570 41,480,116 1,535,597 197,167,622 4,304,167
Federal Home Loan Mortgage Company 90,035,855 1,775,584 66,901,714 2,550,600 156,937,569 4,326,184
Government National Mortgage Association 94,557 301 5,743 231 100,300 532
-----------------------------------------------------------------------------------
Total mortgage-backed securities 261,316,930 4,901,696 131,383,914 5,113,267 392,700,844 10,014,963
Federal Home Loan Bank 4,960,938 28,116 19,710,937 282,967 24,671,875 311,083
Federal Farm Credit Bank -- -- 19,573,437 426,563 19,573,437 426,563
-----------------------------------------------------------------------------------
Total obligations of U.S. government
corporations and agencies 266,277,868 4,929,812 170,668,288 5,822,797 436,946,156 10,752,609
Debt securities issued by foreign governments 249,463 538 -- -- 249,463 538
-----------------------------------------------------------------------------------
Total $ 266,527,331 $ 4,930,350 $170,668,288 $ 5,822,797 $437,195,619 $10,753,147
===================================================================================
December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and
agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Company) $ 13,410,270 $ 175,114 $ 9,721,274 $ 83,198 $ 23,131,544 $ 258,312
CMOs (Federal Home Loan Mortgage Company) 10,513,152 169,593 16,516,039 540,996 27,029,191 710,589
Federal National Mortgage Association 48,520,182 466,094 -- -- 48,520,182 466,094
Federal Home Loan Mortgage Company 77,786,990 983,177 14,469 466 77,801,459 983,643
Government National Mortgage Association 35,483 712 4,964 228 40,447 940
-----------------------------------------------------------------------------------
Total mortgage-backed securities 150,266,077 1,794,690 26,256,746 624,888 176,522,823 2,419,578
Federal Home Loan Bank 19,887,501 124,167 -- -- 19,887,501 124,167
Federal Farm Credit Bank 19,910,937 89,062 -- -- 19,910,937 89,062
-----------------------------------------------------------------------------------
Total $ 190,064,515 $ 2,007,919 $ 26,256,746 $ 624,888 $216,321,261 $ 2,632,807
===================================================================================
The Company invests principally in U.S. Treasury, U.S. government corporation
and agency obligations and A-rated or better investments. The fair value of
these investments fluctuates based on several factors, including credit quality
and general interest rate changes. The Company has made an evaluation that it
has the ability to hold its investments until maturity and therefore, realize
the full carrying value of its investment.
PAGE 52
The following tables present information regarding securities available for sale
and securities held to maturity at December 31, 2005, 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. The average yield is based on the ratio of actual income
divided by the average outstanding balances during the year. The average yield
on obligations of state and political subdivisions and Federal Reserve Bank
securities is stated on a tax-equivalent basis.
Estimated
Amortized Fair Average
Available for sale Cost Value Yield
------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Association) $ 9,194,237 $ 8,698,720 4.58%
CMOs (Federal Home Loan Mortgage Company) 24,006,876 22,978,781 4.58
Federal National Mortgage Association 52,327,699 51,083,091 4.73
Federal Home Loan Mortgage Company 50,793,291 49,527,477 4.51
Government National Mortgage Association 5,552,269 5,757,797 6.22
---------------------------
Total mortgage-backed securities 141,874,372 138,045,866 4.68
Federal Home Loan Bank
Due within 1 year 5,000,000 4,925,000 2.61
Due after 1 year but within 5 years 9,997,407 9,781,250 2.73
Federal Farm Credit Bank
Due after 1 year but within 5 years 10,000,000 9,795,312 2.78
---------------------------
Total obligations of U.S. government corporations and agencies 166,871,779 162,547,428 4.38
Federal Reserve Bank stock 1,130,700 1,130,700 6.00
Federal Home Loan Bank stock 5,950,300 5,950,300 4.61
Other securities 304,442 323,655 1.81
---------------------------
Total 174,257,221 169,952,083 4.39
---------------------------
Obligations of state and political institutions
Due within 1 year 11,273,376 11,346,082 7.29
Due after 1 year but within 5 years 7,897,753 8,033,291 7.42
Due after 5 years 11,989,825 11,927,656 6.29
---------------------------
Total obligations of state and political institutions 31,160,954 31,307,029 6.96
---------------------------
Total available for sale $205,418,175 $201,259,112 4.79
===========================
PAGE 53
Carrying Estimated Average
Held to maturity Value Fair Value Yield
------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
Mortgage-backed securities
CMOs (Federal National Mortgage Company) $ 14,171,765 $ 13,734,614 4.43%
CMOs (Federal Home Loan Mortgage Company) 25,707,668 24,760,739 4.55
Federal National Mortgage Association 248,288,506 244,604,396 4.61
Federal Home Loan Mortgage Company 166,001,415 161,805,507 4.33
Government National Mortgage Association 13,887,164 14,364,054 6.23
---------------------------
Total mortgage-backed securities 468,056,518 459,269,310 4.56
Federal Home Loan Bank
Due within 1 year 15,004,894 14,793,750 2.68
Due after 1 year but within 5 years 9,978,064 9,878,125 4.00
Federal Farm Credit Bank
Due within 1 year 5,000,000 4,931,250 3.30
Due after 1 year but within 5 years 15,000,000 14,642,187 3.20
---------------------------
Total obligations of U.S. government corporations and agencies 513,039,476 503,514,622 4.44
Debt securities issued by foreign governments
Due after 1 year but within 5 years 1,000,000 999,462 6.52
---------------------------
Total $514,039,476 $504,514,084 4.48
===========================
Information regarding securities sales from the available for sale portfolio is
as follows:
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------
Proceeds $3,213,055 $94,314,558 $24,208,035
Gross gains 209,653 1,256,370 550,505
During 2005, as permitted under the provisions of SFAS No. 115, the Company sold
approximately $5,303,000 (par amount) of held to maturity securities because
over 85% of the original principal on these securities had been paid by the sale
date. The proceeds from the sale were $5,452,162 and the gain was $127,804.
There were no sales of held to maturity securities in 2004 and 2003.
Investment securities are pledged to secure trust and public deposits,
securities sold under agreements to repurchase, advances from the Federal Home
Loan Bank of New York and for other purposes required or permitted by law.
PAGE 54
NOTE 5.
LOANS
The major components of domestic loans held for sale and loans held in portfolio
are as follows:
December 31, 2005 2004
--------------------------------------------------------------------------------------
Loans held for sale
Real estate--residential mortgage $ 40,977,538 $ 37,058,673
===============================
Loans held in portfolio
Commercial and industrial $ 632,714,079 $ 595,689,717
Lease financing 218,700,981 185,861,868
Real estate--residential mortgage 147,745,576 112,329,106
Real estate--commercial mortgage 110,871,291 113,932,907
Real estate--construction 2,309,103 2,319,808
Installment 13,125,085 15,516,290
Loans to depository institutions 32,000,000 20,000,000
-------------------------------
Loans held in portfolio, gross 1,157,466,115 1,045,649,696
Less unearned discounts 28,666,829 23,363,217
-------------------------------
Loans held in portfolio, net of unearned discounts $1,128,799,286 $1,022,286,479
===============================
There are no industry concentrations (exceeding 10% of loans, gross) in the
commercial and industrial loan portfolio. Approximately 68% of loans are to
borrowers located in the metropolitan New York area.
Nonaccrual loans at December 31, 2005 and 2004 totaled $4,204,000 and
$3,115,000, respectively. There were no reduced rate loans at December 31, 2005
or 2004. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 2005, 2004 and 2003 in accordance with their
original terms is estimated to be $334,000, $233,000 and $196,000, respectively,
for the years then ended. Applicable interest income actually realized was
$133,000, $133,000 and $141,000, respectively, for the aforementioned years, and
there were no commitments to lend additional funds on nonaccrual loans.
Loans are made at normal lending limits and credit terms to officers or
directors (including their immediate families) of the Company or for the benefit
of corporations in which they have a beneficial interest. There were no
outstanding balances on such loans in excess of $60,000 to any individual or
entity at December 31, 2005 or 2004.
NOTE 6.
ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, 2005 2004 2003
----------------------------------------------------------------------------------------------------
Balance at beginning of year $ 16,328,528 $ 14,458,951 $ 13,549,297
Provision for loan losses 9,664,000 9,965,000 8,740,400
---------------------------------------------
25,992,528 24,423,951 22,289,697
---------------------------------------------
Less charge-offs, net of recoveries:
Charge-offs 9,838,412 8,579,538 8,310,703
Recoveries (458,015) (1,003,883) (637,556)
---------------------------------------------
Net charge-offs 9,380,397 7,575,655 7,673,147
---------------------------------------------
Less losses on transfers to other real estate owned 94,801 519,768 157,599
---------------------------------------------
Balance at end of year $ 16,517,330 $ 16,328,528 $ 14,458,951
=============================================
The Company follows SFAS No. 114, which establishes rules for calculating
certain components of the allowance for loan losses. As of December 31, 2005,
2004 and 2003, $623,000, $1,319,000 and $2,022,000, respectively, of loans were
judged to be impaired within the scope of SFAS No. 114 and carried on a
cash-basis. The average recorded investment in impaired loans during the years
ended December 31, 2005, 2004 and 2003, was approximately $989,000, $1,295,000
and $970,000, respectively. The application of SFAS No. 114 indicated that these
loans required valuation allowances totaling $265,000, $340,000 and $890,000 at
December 31, 2005, 2004 and 2003, respectively, which are included within the
overall allowance for loan
PAGE 55
losses. The interest income that would have been earned on impaired loans
outstanding at December 31, 2005, 2004 and 2003 in accordance with their
original terms is estimated to be $8,000, $65,000 and $108,000, respectively,
for the years then ended. Applicable interest income actually realized was
$53,000, $59,000 and $91,000, respectively, for the aforementioned years, and
there were no commitments to lend additional funds on impaired loans.
NOTE 7.
INTEREST-BEARING DEPOSITS
The following table presents certain information for interest expense on
deposits:
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------------------------------
Interest expense
Interest-bearing deposits in domestic offices
Savings $ 113,351 $ 119,601 $ 97,501
NOW 1,576,286 622,279 585,954
Money Market 2,455,378 1,280,313 791,810
Time
Three months or less 6,304,214 3,637,361 3,697,126
More than three months through twelve months 5,268,657 3,232,313 2,232,482
More than twelve months through twenty-three months 1,844,937 1,808,934 921,720
More than twenty-four months through thirty-five months 117,490 120,936 192,537
More than thirty-six months through forty-seven months 31,160 37,368 47,505
More than forty-eight months through sixty months 389,585 274,683 277,596
More than sixty months 929 6,580 1,559
---------------------------------------
18,101,987 11,140,368 8,845,790
Interest-bearing deposits in foreign offices
Time
Three months or less 17,889 16,315 20,048
More than three months through twelve months 14,974 16,334 21,252
---------------------------------------
Total $18,134,850 $11,173,017 $ 8,887,090
=======================================
Foreign deposits totaled $3,022,000 and $3,007,000 at December 31, 2005 and
2004, respectively.
The aggregate of time certificates of deposit and other time deposits in
denominations of $100,000 or more was $361,445,738 and $298,331,288 at December
31, 2005 and 2004, respectively.
The aggregate of time certificates of deposit and other time deposits by
remaining maturity range is presented below:
December 31, 2005 2004 2003
---------------------------------------------------------------------------------------------------------
Domestic
Three months or less $252,383,369 $163,407,607 $168,686,490
More than three months through six months 80,472,379 81,769,015 55,924,655
More than six months through twelve months 92,828,189 80,428,856 92,641,396
More than twelve months through twenty-three months 67,897,087 137,074,627 70,478,871
More than twenty-four months through thirty-five months 4,268,663 7,755,291 2,726,759
More than thirty-six months through forty-seven months 143,925 1,448,990 2,020,961
More than forty-eight months through sixty months 233,220 335,723 748,329
More than sixty months 19,797 50,000 7,649
------------------------------------------
498,246,629 472,270,109 393,235,110
------------------------------------------
Foreign
Three months or less 1,645,037 1,645,000 1,645,000
More than three months through six months 1,376,991 1,362,063 1,355,000
------------------------------------------
3,022,028 3,007,063 3,000,000
------------------------------------------
Total $501,268,657 $475,277,172 $396,235,110
==========================================
PAGE 56
Interest expense related to the aggregate of time certificates of deposit and
other time deposits is presented below:
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------
Interest expense
Domestic $13,956,972 $ 9,118,175 $ 7,370,525
Foreign 32,863 32,649 41,300
---------------------------------------
Total $13,989,835 $ 9,150,824 $ 7,411,825
=======================================
NOTE 8.
SHORT-TERM BORROWINGS
The following table presents information regarding Federal funds purchased,
securities sold under agreements to repurchase--customers and dealers, and
commercial paper:
Years Ended December 31, 2005 2004 2003
-----------------------------------------------------------------------------------------------------------
Federal funds purchased
At December 31 --Balance $ 55,000,000 $ 32,500,000 $ 10,000,000
--Average interest rate 4.20% 2.31% 1.00%
--Average original maturity 1 Day 1 Day 1 Day
During the year--Maximum month-end balance 55,300,000 35,000,000 25,000,000
--Daily average balance 17,992,000 9,946,000 5,463,000
--Average interest rate paid 3.60% 1.47% 1.20%
--Range of interest rates paid 2.25-4.50% 0.9375-2.50% 1.00-1.50%
=============================================
Securities sold under agreements to repurchase--customers
At December 31 --Balance $ 61,067,073 $ 55,934,170 $ 42,490,862
--Average interest rate 2.81% 1.29% 1.06%
--Average original maturity 14 Days 22 Days 43 Days
During the year--Maximum month-end balance 88,845,220 103,595,822 82,006,437
--Daily average balance 85,365,000 84,559,000 71,648,000
--Average interest rate paid 2.23% 1.21% 1.22%
--Range of interest rates paid 1.50-4.25% 1.00-2.40% 0.95-1.25%
=============================================
Securities sold under agreements to repurchase--dealers
At December 31 --Balance $ 88,729,000 $ 33,882,000 $ 51,327,944
--Average interest rate 4.40% 2.45% 1.16%
--Average original maturity 23 Days 23 Days 26 Days
During the year--Maximum month-end balance 88,729,000 68,252,000 78,274,000
--Daily average balance 52,199,000 29,601,000 46,219,000
--Average interest rate paid 3.44% 1.35% 1.22%
--Range of interest rates paid 2.40-4.45% 1.08-2.45% 1.00-1.36%
=============================================
Commercial paper
At December 31 --Balance $ 38,191,016 $ 25,991,038 $ 28,799,055
--Average interest rate 3.22% 1.37% 1.00%
--Average original maturity 41 Days 63 Days 49 Days
During the year--Maximum month-end balance 42,323,187 36,200,700 28,799,055
--Daily average balance 37,302,000 30,069,000 23,819,000
--Average interest rate paid 2.61% 1.21% 1.11%
--Range of interest rates paid 1.25-4.15% 0.95-1.60% 0.65-2.25%
=============================================
PAGE 57
The parent company has agreements with its line banks for back-up lines of
credit for which it pays a fee at the annual rate of 1/4 of 1% times the line of
credit extended. At December 31, 2005, these back-up bank lines of credit
totaled $24,000,000; no lines were used at any time during 2005, 2004 or 2003.
Other short-term borrowings include advances from the Federal Home Loan Bank of
New York ("FHLB") due within one year and treasury tax and loan funds. At
December 31, 2005, FHLB borrowings included an advance of $35,000,000 payable on
January 3, 2006 at a rate of 4.32%. At December 31, 2004, there were no
borrowings from the FHLB.
NOTE 9.
LONG-TERM BORROWINGS
These borrowings represent advances from the FHLB and junior subordinated debt
securities issued by the parent company.
The following table presents information regarding fixed rate FHLB advances:
December 31,
Advance Interest Maturity Initial --------------------------
Type Rate Date Call Date 2005 2004
-------------------------------------------------------------------------------
Callable 5.13% 2/20/08 2/20/01 $10,000,000 $ 10,000,000
Callable 4.26 2/14/11 8/13/01 10,000,000 10,000,000
Callable 4.36 2/14/11 2/13/02 10,000,000 10,000,000
Callable 4.70 2/22/11 2/20/03 10,000,000 10,000,000
Callable 3.17 10/24/11 10/22/03 -- 10,000,000
Callable 2.52 11/14/11 11/14/03 -- 10,000,000
Callable 3.66 10/24/11 10/22/04 -- 10,000,000
Callable 3.62 10/17/11 10/15/04 10,000,000 10,000,000
Callable 4.28 10/17/11 10/15/06 10,000,000 10,000,000
Callable 3.33 1/17/12 1/16/04 -- 10,000,000
Callable 2.42 1/17/12 1/16/03 -- 10,000,000
--------------------------
Total $60,000,000 $110,000,000
==========================
Weighted-average interest rate 4.39% 3.77%
Under the terms of a collateral agreement with the FHLB, advances are secured by
stock in the FHLB and by certain qualifying assets (primarily mortgage-backed
securities) having market values at least equal to 110% of the advances
outstanding. After the initial call date, each callable advance is callable by
the FHLB quarterly from the initial call date, at par.
In February 2002, the parent company completed its issuance of trust capital
securities ("capital securities") that raised $25,000,000 ($24,062,500 net
proceeds after issuance costs). The 8.375% capital securities, due March 31,
2032, were issued by Sterling Bancorp Trust I (the "trust"), a wholly-owned
non-consolidated statutory business trust. The trust was formed with initial
capitalization of common stock and for the exclusive purpose of issuing the
capital securities. The trust used the proceeds from the issuance of the capital
securities to acquire $25,774,000 junior subordinated debt securities that pay
interest at 8.375% ("debt securities") issued by the parent company. The debt
securities are due concurrently with the capital securities which may not be
redeemed, except under limited circumstances until March 31, 2007, and
thereafter at a price equal to their principal amount plus interest accrued to
the date of redemption. The Company may also reduce outstanding capital
securities through open market purchases. Dividends and interest are paid
quarterly.
PAGE 58
The parent company has the right to defer payments of interest on the debt
securities at any time or from time to time for a period of up to 20 consecutive
quarterly periods with respect to each deferral period. Under the terms of the
debt securities, in the event that under certain circumstances there is an event
of default under the debt securities or the parent company has elected to defer
interest on the debt securities, the parent company may not, with certain
exceptions, declare or pay any dividends or distributions on its capital stock
or purchase or acquire any of its capital stock.
Payments of distribution on the capital securities and payments on redemption of
the capital securities are guaranteed by the parent company on a limited basis.
The parent company also entered into an agreement as to expenses and liabilities
pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses
or liabilities of the trust other than those arising under the capital
securities. The obligations of the parent company under the debt securities, the
related indenture, the trust agreement establishing the trust, the guarantee and
the agreement as to expenses and liabilities, in the aggregate, constitute a
full and unconditional guarantee by the parent company of the trust's
obligations under the capital securities.
Notwithstanding that the accounts of the trust are not included in the Company's
consolidated financial statements, the $25 million in capital securities issued
by the trust are included in the Tier 1 capital of the parent company for
regulatory capital purposes as allowed by the Federal Reserve Board. In March
2005, the Federal Reserve Board adopted a rule that would continue to allow the
inclusion of capital securities issued by unconsolidated subsidiary trusts in
Tier 1 capital, but with stricter quantitative limits. Under the final rule,
after a five-year transition period, the aggregate amount of capital securities
and certain other capital elements would be limited to 25% of Tier 1 capital,
net of goodwill less any associated deferred tax liability. Based on the final
rule, the parent company expects to include all of its $25 million in capital
securities in Tier 1 capital.
NOTE 10.
PREFERRED STOCK
The parent company is authorized to issue up to 644,389 shares of preferred
stock, $5 par value, in one or more series. Since February 2004, no shares of
preferred stock have been outstanding, and none of the authorized preferred
stock has been designated as to series.
During 1993, the parent company issued 250,000 shares of Series D convertible
preferred stock to the trustee acting on behalf of the Company's Employee Stock
Ownership Plan (the "ESOP"). As of December 31, 2003, each Series D share was
convertible into 1.9084 common shares of the parent company. The Series D shares
were entitled to receive cash dividends in the amount of $.6125 per annum
(subject to adjustment), payable quarterly. Participants in the ESOP were
entitled to vote in accordance with the terms of the ESOP and vote together as
one class with the holders of the common shares. The holders of Series D shares
were entitled to receive $10 per share and certain other preferences on
liquidation, dissolution or winding up. During February 2004, all 224,432
outstanding Series D shares were retired upon their conversion into common
shares. See Note 15 on page 63 for a discussion of the ESOP.
NOTE 11.
COMMON STOCK
December 31, 2005 2004
-------------------------------------------------------------------------------
Number of shares outstanding 18,835,474 19,142,519
=======================
Number of shareholders 1,648 1,664
=======================
PAGE 59
NOTE 12.
OTHER COMPREHENSIVE INCOME
The following table presents the components of accumulated other comprehensive
(loss) income as of December 31, 2005 and 2004 included in shareholders' equity:
Pre-tax Tax After-tax
Amount Effect Amount
-------------------------------------------------------------------------------------
December 31, 2005
Net unrealized (loss) on securities $ (3,878,545) $ 1,907,799 $ (1,970,746)
Minimum pension liability (5,961,352) 2,702,478 (3,258,874)
---------------------------------------------
Total $ (9,839,897) $ 4,610,277 $ (5,229,620)
=============================================
December 31, 2004
Net unrealized gain on securities $ 1,497,029 $ (640,874) $ 856,155
Minimum pension liability (5,133,485) 2,356,270 (2,777,215)
---------------------------------------------
Total $ (3,636,456) $ 1,715,396 $ (1,921,060)
=============================================
NOTE 13.
RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends in any year without the approval of the
Comptroller of the Currency to an amount not to exceed the net profits (as
defined) for that year to date combined with its retained net profits for the
preceding two calendar years. In addition, from time to time dividends are paid
to the parent company by the finance subsidiaries from their retained earnings
without regulatory restrictions.
NOTE 14.
STOCK INCENTIVE PLAN
In April 1992, shareholders approved a Stock Incentive Plan ("the plan")
covering up to 100,000 common shares of the parent company. Under the plan, key
employees of the parent company and its subsidiaries could be granted awards in
the form of incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights ("SARs"), restricted stock or a combination
of these. The plan is administered by a committee of the Board of Directors.
Since the inception of the plan, shareholders have approved amendments
increasing the number of shares covered under the plan; the total number of
shares authorized by shareholders through December 31, 2005 was 2,650,000. The
plan provides for proportional adjustment to the number of shares covered by the
plan and by outstanding awards, and in the exercise price of outstanding stock
options, to reflect, among other things, stock splits and stock dividends. After
giving effect to stock option and restricted stock awards granted and the effect
of the 5% stock dividend effected December 12, 2005, the six-for-five stock
split in the form of a stock dividend effected in December 2004, the
five-for-four stock split in the form of a stock dividend effected September 10,
2003, the 20% stock dividend paid in December 2002, the 10% stock dividends paid
in December 2001 and December 2000, and the 5% stock dividend paid in December
1999, shares available for grant were 504,287, 610,931 and 669,971 at December
31, 2005, 2004 and 2003, respectively.
PAGE 60
Stock Options
The following tables present information on the qualified and non-qualified
stock options outstanding (after the effect of the 5% stock dividend effected
December 12, 2005, the six-for-five stock split effected in December 2004, the
five-for-four stock split effected September 10, 2003, the 20% stock dividend
paid in December 2002, the 10% stock dividends paid in December 2001 and
December 2000 and the 5% stock dividend paid in December 1999) as of December
31, 2005, 2004 and 2003 and changes during the years then ended:
2005 2004 2003
--------------------------------------------------------------------------------------------
Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Qualified Stock Options Options Exercise Price Options Exercise Price Options Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 750,808 $ 10.07 857,821 $ 9.90 999,304 $ 9.90
Granted -- -- --
Exercised (68,693) 9.32 (107,013) 8.68 (141,483) 9.90
Reclassified(1) (112,021) 9.59 -- --
Forfeited -- -- --
---------- --------- ----------
Outstanding at end of year 570,094 $ 10.26 750,808 $ 10.07 857,821 $ 9.90
============================================================================================
Options exercisable at end of
year 570,094 366,346 362,127
========== ========= ==========
Weighted-average fair value of
options granted during the year $ -- $ -- $ --
========== ========= ==========
2005 2004 2003
--------------------------------------------------------------------------------------------
Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Non-Qualified Stock Options Options Exercise Price Options Exercise Price Options Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of
year 1,363,272 $ 11.30 1,392,786 $ 10.48 1,381,982 $ 10.12
Granted 137,025 25.35 74,391 21.77 65,091 18.23
Exercised (226,813) 9.10 (103,905) 7.78 (54,287) 10.68
Reclassified (1) 112,021 9.59 -- --
Forfeited (25,048) 24.99 -- --
---------- --------- ----------
Outstanding at end of year 1,360,457 $ 12.69 1,363,272 $ 11.30 1,392,786 $ 10.48
============================================================================================
Options exercisable at end of
year 1,360,457 1,167,231 1,151,843
========== ========= ==========
Weighted-average fair value of $ 3.50 $ 4.15 $ 2.98
options granted during the year ========== ========= ==========
(1) As a result of retirements and terminations. Since these provisions were
included in the original terms of the awards, these reclassifications are
not considered modifications.
The following table presents information regarding qualified and non-qualified
stock options outstanding at December 31, 2005:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/05 Contractual Life Price at 12/31/05 Price
-----------------------------------------------------------------------------------------------------------------------------------
Qualified $ 6.48-14.60 570,094 3.92 years $10.26 570,094 $10.26
Non-Qualified 6.48-26.94 1,360,457 3.31 years 12.69 1,360,457 12.69
Director NQSOs expire five years from the date of the grant and become
exercisable in four annual installments, starting one year from the date of the
grant, or upon the earlier death or disability of the grantee. Employee stock
options generally expire ten years from the date of the grant and vest one year
from the date of grant, although, if necessary to qualify to the maximum extent
possible as ISOs, these options become exercisable in annual installments.
Employee stock options which become exercisable over a period of more than one
year are generally subject to earlier exercisability upon the termination of the
grantee's employment for any reason more than one year following grant. Amounts
received upon exercise of options are recorded as common stock and capital
surplus. The tax benefit received by the Company upon exercise of a NQSO is
credited to capital surplus.
PAGE 61
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement encourages, but does not require, companies to use
a fair value-based method of accounting for stock-based employee compensation
plans, including stock options and stock appreciation rights. Under this method,
compensation expense is measured as of the date the awards are granted based on
the estimated fair value of the awards, and the expense is generally recognized
over the vesting period. If a company elects to continue using the intrinsic
value-based method under APB Opinion No. 25, pro forma disclosures of net income
and net income per share are required as if the fair value-based method had been
applied. Under the intrinsic method, compensation expense is the excess, if any,
of the market price of the stock as of the grant date over the amount employees
must pay to acquire the stock or over the price established for determining
appreciation. Under the Company's current compensation policies, there is no
such excess on the date of grant and therefore, no compensation expense is
recorded.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes option-pricing model with the following assumptions:
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------
Dividend yield 3.31% 2.86% 2.53%
Volatility 25% 25% 25%
Expected term
Qualified N/A N/A N/A
Non-Qualified (Directors) 4 years 4 years 4 years
Non-Qualified (Officers) 5 years N/A N/A
Risk-free interest rate 4.59% 3.92% 2.79%
The Company has elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock incentive plan. Accordingly, no
compensation expense related to options granted pursuant to the plan has been
recognized in the consolidated statements of income. Had compensation expense
been determined based on the estimated fair value of the awards at the grant
dates, the Company's net income and earnings per share would have been reduced
to the pro forma amounts as shown under the caption "Stock Incentive Plan" in
Note 1 beginning on page 43.
The Corporation expects to adopt the provisions of SFAS No. 123R on January 1,
2006. Among other things, SFAS No. 123R eliminates the ability to account for
stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the date of the grant. See "New Accounting Standards and
Interpretations" in Note 1.
Restricted Stock
On February 11, 2000, 92,500 shares of restricted stock were awarded from
Treasury shares. The fair value was $15.8125 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year; the initial
awards vested on February 11, 2000.
On February 6, 2002, 60,000 shares of restricted stock were awarded from
Treasury shares. The fair value was $27.56 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year.
The plan calls for the forfeiture of non-vested shares which are restored to the
Treasury and become available for future awards. During 2005, 2004 and 2003,
there were no shares forfeited. Unearned compensation resulting from these
awards is amortized as a charge to compensation expense over a four-year period;
such charges were $269,205, $603,764 and $742,680 in 2005, 2004 and 2003,
respectively. The balance of unearned compensation is shown as a reduction of
shareholders' equity. For income tax purposes, the Company is entitled to a
deduction in an amount equal to the average market value of the shares on
vesting date and dividends paid on shares for which restrictions have not
lapsed.
PAGE 62
NOTE 15.
EMPLOYEE STOCK OWNERSHIP PLAN
On March 5, 1993, the Company established an Employee Stock Ownership Plan (the
"ESOP"}. This plan covers substantially all employees with one or more years of
service of at least 1,000 hours who are at least 21 years of age. During 1993,
the parent company issued 250,000 shares of Series D preferred stock at a price
of $10.00 per share to the Company's ESOP trust. The ESOP trust borrowed
$2,500,000 from the bank to pay for the shares. The ESOP loan is at a fixed
interest rate for a term of ten years with quarterly payments of interest.
Quarterly principal payments at an annual rate of $250,000 and $350,000
commenced on March 31, 1996 and March 31, 1999, respectively. The bank
match-funded the ESOP loan with collateralized advances from the Federal Home
Loan Bank of New York. The ESOP shares, pledged as collateral for the ESOP loan,
are held in a suspense account and released for allocation among the
participants as principal and interest on the ESOP loan is repaid. Under the
terms of the ESOP, participants may vote both allocated and unallocated shares.
The Company makes quarterly contributions to the ESOP equal to the debt service
on the ESOP loan less dividends paid on the ESOP shares. All dividends paid are
used for debt service. ESOP shares released from the suspense account are
allocated among the participants on the basis of salary in the year of
allocation. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
Accordingly, the Company initially recorded a deduction from shareholders'
equity equal to the purchase price of the shares reflecting such amount as
unearned compensation. The consolidated balance sheets report as unearned
compensation the remaining shares pledged as collateral. The unearned
compensation is reduced as payments are made on the loan and, as shares are
released from the suspense account, the Company recognizes compensation expense
equal to the current market price of the common shares into which the preferred
shares are convertible, and the shares become outstanding for earnings per share
computations. Dividends on unallocated ESOP shares are recorded as a reduction
of accrued interest payable; dividends on allocated ESOP shares are recorded as
a reduction of retained earnings.
Compensation expense was $0, $0 and $236,270 for 2005, 2004 and 2003,
respectively, with a corresponding reduction in unearned compensation. As of
December 31, 2005, 250,000 shares had been allocated; there were no unreleased
shares ("unallocated"). The ESOP was terminated effective February 19, 2004. The
following table presents interest paid on the ESOP loan and dividends paid on
the Series D preferred shares:
Years Ended December 31, 2005 2004 2003
-------------------------------------------------------------------------------
Interest paid $ -- $ -- $ 16,224
Dividends paid -- -- 139,491
Contributions -- -- 366,224
NOTE 16.
EMPLOYEE BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan that covers the
majority of employees with one or more years of service of at least 1,000 hours
who are at least 21 years of age. The benefits are based upon years of credited
service, primary social security benefits and a participant's highest average
compensation as defined. The funding requirements for the plan are determined
annually based upon the amount needed to satisfy the Employee Retirement Income
Security Act of 1974 funding standards. The Company also has a supplemental
non-qualified, non-funded retirement plan which is designed to supplement the
pension plan for key officers.
PAGE 63
The following tables set forth the disclosures required for pension benefits:
At or For the Years Ended December 31, 2005 2004
-----------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year (PBO) $ 35,763,457 $ 33,745,854
Service cost 1,639,935 1,562,914
Interest cost 2,208,395 1,986,363
Amendments -- --
Actuarial loss 2,513,660 2,261,865
Settlement -- (3,000,000)
Benefits paid (1,175,226) (793,539)
-----------------------------
Benefit obligation at end of year $ 40,950,221 $ 35,763,457
=============================
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year $ 21,112,978 $ 19,641,142
Actual return on plan assets (155,971) 943,287
Employer contributions 6,134,793 1,322,088
Benefits paid (1,175,226) (793,539)
-----------------------------
Fair value of assets at end of year $ 25,916,574 $ 21,112,978
=============================
Funded status $(15,033,647) $(14,650,479)
Unrecognized prior service cost 484,251 570,434
Unrecognized net actuarial loss 16,129,643 12,657,923
-----------------------------
Net amount recognized $ 1,580,247 $ (1,422,122)
=============================
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ 9,202,541 $ 4,579,413
Accrued benefit liability (13,758,390) (11,135,020)
Intangible asset 174,744 --
Accumulated other comprehensive loss (pre-tax) 5,961,352 5,133,485
-----------------------------
Net amount recognized $ 1,580,247 $ (1,422,122)
=============================
Rate of Compensation
Discount Rate Increase
------------- --------------------
2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE THE BENEFIT OBLIGATION:
Defined benefit pension plan 5.75% 6.00% 3.00% 3.00%
Supplemental retirement plan 5.75 6.00 3.00 3.00
Years Ended December 31, 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC COST
Service cost $ 1,639,935 $ 1,562,914 $ 1,304,504
Interest cost 2,208,395 1,986,363 2,038,372
Expected return on plan assets (1,885,206) (1,678,674) (1,577,285)
Amortization of prior service cost 77,322 77,322 77,323
Recognized actuarial loss 1,022,125 873,768 910,874
------------------------------------------
Net periodic benefit cost 3,062,571 2,821,693 2,753,788
Additional settlement gain recognized pursuant to SFAS No. 88 -- (1,331,190) --
------------------------------------------
Total $ 3,062,571 $ 1,490,503 $ 2,753,788
==========================================
PAGE 64
Expected Return Rate of Compen-
Discount Rate on Plan Assets sation Increase
------------- --------------- ----------------
2005 2004 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC COST:
Defined benefit pension plan 6.00% 6.25% 8.50% 8.50% 3.00% 3.00%
Supplemental retirement plan 6.00 6.25 N/A N/A 3.00 3.00
To determine the expected return on plan assets, we consider historical return
information on plan assets, the mix of investments that comprise plan assets and
the actual income derived from plan assets.
The accumulated benefit obligation for the defined benefit pension plan at
December 31, 2005 and 2004 was $24,416,499 and $20,932,859, respectively.
The tables presented on the previous page and above include the supplemental
retirement plan which is an unfunded plan. The following information is
presented regarding the supplemental retirement plan:
December 31, 2005 2004
--------------------------------------------------------------------------------
Projected benefit obligation $ 14,098,505 $ 11,891,590
Accumulated benefit obligation 13,758,390 11,353,404
The following table sets forth information regarding the assets of the defined
benefit pension plan.
December 31, 2005 2004
-------------------------------------------------------------------------------
U.S. government corporation and agency debt obligation 21% 25%
Corporate debt obligation 16 19
Common equity securities 42 53
Other 21 3
------------
Total 100% 100%
============
The defined benefit pension plan owns common stock of Sterling Bancorp which is
included in common equity securities above. At December 31, 2005, the value of
Sterling Bancorp common stock was $1,362,988 and represented approximately 5% of
plan assets. At December 31, 2004, the value of Sterling Bancorp common stock
was $1,858,669 and represented 9% of plan assets.
The overall strategy of the Pension Plan Investment Policy is to have a diverse
portfolio that reasonably spans established risk/return levels and preserves
liquidity. The strategy allows for a moderate risk approach in order to achieve
greater long-term asset growth. The asset mix can vary but is targeted at 50%
equity securities, inclusive of up to 10% in Sterling Bancorp common stock, 25%
in corporate obligations and 25% in federal and agency obligations. The money
market position will vary but will generally be held under 5%. The Plan's
allocation to common stock, excluding shares of Sterling Bancorp, will represent
investment in those companies from time to time comprising the growth and value
Model Portfolio as advised by the trustee's investment advisor.
The Company expects to contribute approximately $1,000,000 to the defined
benefit pension plan in 2006.
The following table presents benefit payments expected to be paid, which include
the effect of expected future service for the years indicated.
Defined Supplemental Total Benefit
Year(s) Benefit Plan Retirement Plan Payments
-------------------------------------------------------------------------------
2006 $ 824,036 $ 10,413,306 $ 11,237,342
2007 981,615 274,866 1,256,481
2008 1,092,010 1,327,173 2,419,183
2009 1,239,241 1,506,364 2,745,605
2010 1,393,282 306,049 1,699,331
Years 2011-2015 9,593,005 1,467,830 11,060,835
PAGE 65
The cash flows shown above are based on the assumptions used in the annual
actuarial valuations of the Defined Benefit Plan. The Supplemental Retirement
Plan column is computed assuming that any executive who has reached the age upon
which full retirement is assumed for actuarial purposes, actually retires in the
current year. However, if such an executive does not actually retire in the
current year, the obligation will be deferred until a later year. We are not
aware of any senior executives who have near-term plans to retire.
The Company currently provides life insurance benefits to certain officers. The
coverage provided depends upon years of service with the Company and the
employee's date of retirement. The Company's plan for its postretirement benefit
obligation is unfunded. The Company's postretirement obligations are not
material. Net postretirement benefit cost was $90,000, $90,000 and $80,000 for
2005, 2004 and 2003, respectively.
NOTE 17.
INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
Years Ended December 31, 2005 2004 2003
----------------------------------------------------------------------------------------------------------
FEDERAL
Current $ 15,309,478 $ 13,469,896 $ 12,302,412
Deferred (3,674,397) (509,086) (361,058)
--------------------------------------------
Total $ 11,635,081 $ l2,960,810 $ 11,941,354
============================================
STATE AND LOCAL
Current $ 1,176,827 $ 11,547 $ 2,835,829
Deferred 774,805 (220,822) (25,817)
--------------------------------------------
Total $ 1,951,632 $ (209,275) $ 2,810,012
============================================
TOTAL
Current $ 16,486,305 $ 13,481,443 $ 15,138,241
Deferred (2,899,592) (729,908) (386,875)
--------------------------------------------
Total $ 13,586,713 $ 12,751,535 $ 14,751,366
============================================
Reconciliations of income tax provisions with taxes computed at Federal
statutory rates are as follows:
Years Ended December 31, 2005 2004 2003
---------------------------------------------------------------------------------------------------------
Federal statutory rate 35% 35% 35%
-------------------------------------------
Computed tax $ 13,164,738 $ 13,074,462 $ 13,529,115
Increase (Decrease) in tax resulting from:
State and local taxes, net of Federal income tax benefit 918,478 (136,029) 1,826,508
Tax-exempt income (878,404) (862,029) (828,518)
Other permanent items 381,901 675,131 224,261
-------------------------------------------
Total $ 13,586,713 $ 12,751,535 $ 14,751,366
===========================================
PAGE 66
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31, 2005 2004
---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Difference between financial statement provision for loan losses and tax bad debt deduction $ 7,465,004 $ 7,542,350
Deferred compensation 3,616,161 3,399,963
Other 6,523,805 975,857
---------------------------
Total deferred tax assets 17,604,970 11,918,170
---------------------------
Deferred tax liabilities
Difference between tax and net book values of fixed assets 1,049,722 269,885
Pension and benefit plans 4,159,279 2,115,279
Other 1,807,707 1,514,292
---------------------------
Total deferred tax liabilities 7,016,708 3,899,456
---------------------------
Net deferred tax asset 10,588,262 8,018,714
SFAS No. 115 deferred tax asset (liability) 1,822,286 (726,388)
Minimum pension liability adjustment 2,702,478 2,356,270
---------------------------
$15,113,026 $ 9,648,596
===========================
Based on management's consideration of historical and anticipated future pre-tax
income, as well as the reversal period for the items giving rise to the deferred
tax assets and liabilities, a valuation allowance for deferred assets was not
considered necessary at December 31, 2005.
The current tax liability as of December 31, 2005 and 2004 was approximately
$7,987,000 and $8,831,000, respectively.
NOTE 18.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income less dividends on allocated Series
D convertible preferred shares held on behalf of the Employee Stock Ownership
Plan ("basic net income"), by the weighted-average common shares outstanding
during the year.
Diluted EPS is computed by dividing basic net income by the weighted-average
common shares and common equivalent shares outstanding during the year. The
common equivalent shares outstanding include the weighted-average number of
Series D convertible preferred shares (held on behalf of the Employee Stock
Ownership Plan) and the dilutive effect of unexercised stock options using the
treasury stock method. When applying the treasury stock method, the average
price of the Company's common stock is utilized.
The following table provides a reconciliation of basic and diluted EPS as
required by SFAS No. 128:
For the Year Ended 12/31/05 For the Year Ended 12/31/04 For the Year Ended 12/31/03
-------------------------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Net income $24,026,825 $24,604,073 $23,903,245
Less preferred
dividends -- -- 125,019
----------- ----------- -----------
Net income available
for common
shareholders 24,026,825 19,164,498 $1.25 24,604,073 19,146,561 $1.29 23,778,226 18,819,849 $1.26
===== ===== =====
DILUTED EPS
Options [1] 598,854 854,405 788,935
Convertible
preferred stock -- 34,528 228,371
----------- ------------ ----------- ------------ ----------- ------------
Net income available
for common
shareholders plus
assumed conversions $24,026,825 19,763,352 $1.22 $24,604,073 20,035,494 $1.23 $23,778,226 19,837,155 $1.20
=============================================================================================================
[1] Options issued with exercise prices greater than the average market price
of the common shares for each of the years ended December 31, 2005, 2004
and 2003 have not been included in computation of diluted EPS for those
respective years. As of December 31, 2005, 121,275 options to purchase
shares at prices between $21.93 and $26.94 were not included; as of
December 31, 2004 and 2003, there were no options excluded.
PAGE 67
NOTE 19.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose the "fair value" of certain financial instruments for
which it is practical to estimate "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 and interest rates, all of which are subject to
change. With the exception of investment securities and 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.
The following disclosures represent the Company's best estimate of the "fair
value" of financial instruments.
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks, interest-bearing deposits with
other banks, Federal funds sold, customers' liabilities under acceptances,
accrued interest receivable, Federal funds purchased and securities sold under
agreements to repurchase, commercial paper, other short-term borrowings,
acceptances outstanding, and other liabilities and accrued expenses, as a result
of their short-term nature, is considered to approximate fair value.
Investment Securities
For investment securities, fair value has been based upon current market
quotations, where available. If quoted market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
Loans Held in Portfolio
The fair value of loans held in portfolio which reprice within 90 days
reflecting changes in the base rate approximate their carrying amount. For other
loans held in portfolio, the estimated 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 estimated 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 estimated fair value represents book value less a credit
risk adjustment based on the Company's historical credit loss experience.
Deposits
SFAS No. 107 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 is
clearly greater than that prescribed by SFAS No. 107.
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.
Long-Term Debt
For long-term borrowings, the estimated fair value is calculated based on
discounted cash flow analyses, using interest rates currently being quoted for
similar characteristics and maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees
The notional amount of commitments to extend credit, standby letters of credit,
and financial guarantees, is 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 notional value of the
commitment.
PAGE 68
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
December 31, 2005 2004
--------------------------------------------------------------------------------------------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
--------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ 69,148,683 $ 69,148,683 $ 48,842,418 $ 48,842,418
Interest-bearing deposits with other banks 1,212,227 1,212,227 1,329,103 1,329,103
Investment securities 715,298,588 705,773,672 680,219,734 681,935,621
Loans held for sale 40,977,538 40,977,538 37,058,673 37,058,673
Loans held in portfolio, net 1,128,799,286 1,113,391,853 1,005,957,951 1,007,217,410
Customers' liability under acceptances 589,667 589,667 628,965 628,965
Accrued interest receivable 6,116,107 6,116,107 5,604,781 5,604,781
FINANCIAL LIABILITIES
Demand, NOW, savings and money market deposits 961,278,628 961,278,628 868,573,943 868,573,943
Time deposits 487,047,512 484,903,529 475,277,172 474,670,243
Securities sold under agreements to repurchase 149,796,073 149,796,073 89,816,170 89,816,170
Federal funds purchased 55,000,000 55,000,000 32,500,000 32,500,000
Commercial paper 38,191,016 38,191,016 25,991,038 25,991,038
Other short-term borrowings 38,851,246 38,851,246 2,517,375 2,517,375
Acceptances outstanding 589,667 589,667 628,965 628,965
Accrued expenses and other liabilities 91,926,784 91,926,784 91,329,506 91,329,506
Long-term borrowings 85,774,000 86,224,314 135,774,000 138,848,059
NOTE 20.
CAPITAL MATTERS
The Company and the bank are subject to risk-based capital regulations which
quantitatively measure capital against risk-weighted assets, including certain
off-balance sheet items. These regulations define the elements of the Tier 1 and
Tier 2 components of Total Capital and establish minimum ratios of 4% for Tier 1
capital and 8% for Total Capital for capital adequacy purposes. Supplementing
these regulations, is a leverage requirement. This requirement establishes a
minimum leverage ratio (at least 3% or 4%, depending upon an institution's
regulatory status), which is calculated by dividing Tier 1 capital by adjusted
quarterly average assets (after deducting goodwill). In addition, the bank is
subject to the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDICIA") which imposes a number of mandatory
supervisory measures. Among other matters, the FDICIA established five capital
categories ranging from "well capitalized" to "critically undercapitalized."
Such classifications are used by regulatory agencies to determine a bank's
deposit insurance premium, approval of applications authorizing institutions to
increase their asset size or otherwise expand business activities or acquire
other institutions. Under the FDICIA a "well capitalized" bank must maintain
minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and 10%,
respectively. The Federal Reserve Board applies comparable tests for holding
companies such as the Company. At December 31, 2005, the Company and the bank
exceeded the requirements for "well capitalized" institutions.
PAGE 69
The following tables present information regarding the Company's and the bank's
regulatory capital ratios:
Actual For Capital Adequacy Minimum To Be Well Capitalized
------------------------------------------------------------------------
As of December 31, 2005 Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Total Capital (to Risk-Weighted Assets):
The Company $172,946 13.28% $104,219 8.00% $130,274 10.00%
The bank 135,307 10.99 98,520 8.00 123,150 10.00
Tier 1 Capital (to Risk-Weighted Assets):
The Company 156,659 12.03 52,110 4.00 78,165 6.00
The bank 119,910 9.74 49,260 4.00 73,890 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 156,659 7.96 78,680 4.00 98,350 5.00
The bank 119,910 6.33 75,722 4.00 94,653 5.00
As of December 31, 2004
------------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk-Weighted Assets):
The Company $169,226 14.35% $ 94,334 8.00% $117,917 10.00%
The bank 129,267 11.56 89,466 8.00 111,832 10.00
Tier 1 Capital (to Risk-Weighted Assets):
The Company 154,467 13.10 47,167 4.00 70,750 6.00
The bank 115,262 10.31 44,733 4.00 67,099 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 154,467 8.49 72,792 4.00 90,990 5.00
The bank 115,262 6.56 70,270 4.00 87,837 5.00
NOTE 21.
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way information about operating
segments is reported in annual financial statements and establishes standards
for related disclosures about an enterprise's products and services, geographic
areas, and major customers.
The Company provides a broad range of financial products and services, including
commercial loans, commercial and residential mortgage lending and brokerage,
asset-based financing, factoring/accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposit services, trust and
estate administration and investment management services. The Company's primary
source of earnings is net interest income, which represents the difference
between interest earned on interest-earning assets and the interest incurred on
interest-bearing liabilities. The Company's 2005 average interest-earning assets
were 59.2% loans (corporate lending was 66.9% and real estate lending was 29.5%
of total loans, respectively) and 40.0% investment securities and money market
investments. There were no industry concentrations (exceeding 10% of loans,
gross) in the corporate loan portfolio. Approximately 68% of loans are to
borrowers located in the metropolitan New York area. In order to comply with the
provisions of SFAS No. 131, the Company has determined that it has three
reportable operating segments: corporate lending, real estate lending and
company-wide treasury.
PAGE 70
The following table provides certain information regarding the Company's
operating segments:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------------------------------------------------------------------------------------
Year Ended December 31, 2005
----------------------------
Net interest income $ 39,809,343 $ 21,740,851 $ 21,461,800 $ 83,011,994
Noninterest income 12,965,600 16,809,178 2,195,149 31,969,927
Depreciation and amortization 403,932 403,086 2,454 809,472
Segment profit 20,392,761 20,031,035 22,929,744 63,353,540
Segment assets 810,867,441 351,195,939 864,164,967 2,026,228,347
Year Ended December 31, 2004
----------------------------
Net interest income $ 36,784,854 $ 16,736,564 $ 23,925,710 $ 77,447,128
Noninterest income 13,213,656 15,640,862 2,782,500 31,637,018
Depreciation and amortization 324,938 404,384 1,229 730,551
Segment profit 18,869,902 17,150,037 26,273,128 62,293,067
Segment assets 721,936,005 313,730,365 812,113,123 1,847,779,493
Year Ended December 31, 2003
----------------------------
Net interest income $ 35,487,523 $ 16,365,324 $ 21,408,591 $ 73,261,438
Noninterest income 12,468,121 14,944,227 1,806,010 29,218,358
Depreciation and amortization 232,527 317,086 -- 549,613
Segment profit 20,534,329 15,718,397 22,692,790 58,945,516
Segment assets 740,746,556 209,425,056 790,327,841 1,740,499,453
The following table sets forth reconciliations of net interest income,
noninterest income, profits and assets for reportable operating segments to the
Company's consolidated totals:
Years Ended December 31, 2005 2004 2003
-------------------------------------------------------------------------------------------------
Net interest income:
Total for reportable operating segments $ 83,011,994 $ 77,447,128 $ 73,261,438
Other[l] 922,457 768,438 730,199
----------------------------------------------------
Consolidated net interest income $ 83,934,451 $ 78,215,566 $ 73,991,637
====================================================
Noninterest income:
Total for reportable operating segments $ 31,969,927 $ 31,637,018 $ 29,218,358
Other[l] 2,583,543 3,080,677 3,459,593
----------------------------------------------------
Consolidated noninterest income $ 34,553,470 $ 34,717,695 $ 32,677,951
====================================================
Profit:
Total for reportable operating segments $ 63,353,540 $ 62,293,067 $ 58,945,516
Other[l] (25,740,002) (24,937,459) (20,290,905)
----------------------------------------------------
Consolidated income before income taxes $ 37,613,538 $ 37,355,608 $ 38,654,611
====================================================
Assets:
Total for reportable operating segments $ 2,026,228,347 $ 1,847,779,493 $ 1,740,499,453
Other[l] 29,814,139 23,332,269 19,324,804
----------------------------------------------------
Consolidated assets $ 2,056,042,486 $ 1,871,111,762 $ 1,759,824,257
====================================================
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
PAGE 71
NOTE 22.
PARENT COMPANY
CONDENSED BALANCE SHEETS
December 31, 2005 2004
--------------------------------------------------------------------------------
ASSETS
Cash and due from banks
Banking subsidiary $ 8,701,981 $ 10,463,497
Other banks 34,980 25,000
Interest-bearing deposits--banking subsidiary 641,990 390,309
Investment in subsidiaries
Banking subsidiary
(including goodwill of $21,158,440) 139,087,242 137,265,560
Other subsidiaries 6,698,677 6,180,911
Due from subsidiaries
Other subsidiaries 66,318,091 54,002,677
Other assets 6,200,796 5,632,504
----------------------------
$227,683,757 $213,960,458
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper $ 38,191,016 $ 25,991,038
Due to subsidiaries
Other subsidiaries 994,937 993,228
Accrued expenses and other liabilities 15,136,244 12,498,599
Junior subordinated debt (see Note 9) 25,774,000 25,774,000
Shareholders' equity 147,587,560 148,703,593
----------------------------
$227,683,757 $213,960,458
============================
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------
INCOME
Dividends and interest from
Banking subsidiary $ 22,588,819 $ 20,086,143 $ 10,063,062
Other subsidiaries 1,270,190 434,499 630,686
Other income 24,050 2,422 71,879
-------------------------------------------
Total income 23,883,059 20,523,064 10,765,627
-------------------------------------------
EXPENSE
Interest expense 3,138,978 2,511,309 2,409,339
Other expenses 4,865,828 2,413,799 2,361,701
-------------------------------------------
Total expense 8,004,806 4,925,108 4,771,040
-------------------------------------------
Income before income taxes
and equity in undistributed
net income of subsidiaries 15,878,253 15,597,956 5,994,587
Benefit for income taxes (2,982,742) (2,039,767) (1,790,670)
-------------------------------------------
18,860,995 17,637,723 7,785,257
Equity in undistributed net
income of
Banking subsidiary 4,648,066 6,836,107 15,775,343
Other subsidiaries 517,764 130,243 342,645
-------------------------------------------
Net income $ 24,026,825 $ 24,604,073 $ 23,903,245
===========================================
PAGE 72
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,026,825 $ 24,604,073 $ 23,903,245
Adjustments to reconcile net income to
net cash provided by
(used in) operating activities:
Amortization of unearned compensation 269,205 603,764 978,950
Increase (Decrease) in accrued expenses and other liabilities 2,637,645 (78,139) 3,037,735
Increase (Decrease) in due to subsidiaries, net 1,709 974 (676,989)
(Increase) Decrease in due from subsidiaries, net (12,315,414) (15,654,499) 3,608,472
Equity in undistributed net income of subsidiaries (5,165,830) (6,966,350) (16,117,988)
(Increase) Decrease in other assets (568,292) 348,922 (3,564,111)
Other, net (719,643) (2,038,019) (285,122)
-------------------------------------------
Net cash provided by operating activities 8,166,205 820,726 10,884,192
-------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits -- banking
subsidiary (251,681) 7,141,314 17,135,104
Capital contributed to subsidiaries -- -- (50,000)
-------------------------------------------
Net cash (used in) provided by investing activities (251,681) 7,141,314 17,085,104
-------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in commercial paper 12,199,978 (2,808,017) (519,865)
Cash dividends paid on preferred and common shares (14,035,197) (12,106,022) (10,235,334)
Proceeds from exercise of stock options 2,701,565 4,334,474 1,973,762
Purchase of treasury shares (10,507,293) (8,310,004) (256,007)
Decrease in other short-term borrowings -- -- (350,000)
Cash paid in lieu of fractional shares in connection with stock
dividend/split (25,113) (26,036) (32,358)
-------------------------------------------
Net cash used in financing activities (9,666,060) (18,915,605) (9,419,802)
-------------------------------------------
Net (decrease) increase in cash and due from banks (1,751,536) (10,953,565) 18,549,494
Cash and due from banks -- beginning of year 10,488,497 21,442,062 2,892,568
-------------------------------------------
Cash and due from banks -- end of year $ 8,736,961 $ 10,488,497 $ 21,442,062
===========================================
Supplemental disclosure of cash flow information:
Interest paid $ 3,057,648 $ 2,508,928 $ 2,415,336
Income taxes paid 15,305,000 11,435,000 12,006,594
PAGE 73
NOTE 23.
COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $4,104,536, $3,325,473 and $3,642,155 for the years ended
December 31, 2005, 2004 and 2003, respectively, which are net of rental income
for a sublease of $177,303, $172,930 and $149,600 for the years ended December
31, 2005, 2004 and 2003, respectively.
The future minimum rental commitments as of December 31, 2005 under
noncancelable leases follow:
Rental
Year(s) Commitments
-------------------------------------------------------------------------------
2006 $ 3,449,969
2007 3,399,260
2008 3,405,125
2009 3,052,587
2010 and thereafter 12,992,217
------------
Total $ 26,299,158
============
Certain leases included above have escalation clauses and/or provide that the
Company pay maintenance, electric, taxes and other operating expenses applicable
to the leased property.
In the normal course of business, there are various commitments and contingent
liabilities outstanding which are properly not recorded on the balance sheet.
Management does not anticipate that losses, if any, as a result of these
transactions would materially affect the financial position of the Company.
Loan commitments, substantially all of which have an original maturity of one
year or less, were approximately $50,059,000 as of December 31, 2005. These
commitments are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements because
some of the commitments are expected to expire without being drawn upon. The
bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, by the bank upon extension
of credit is based on management's credit evaluation of the borrower. Collateral
held varies but may include cash, U.S. Treasury and other marketable securities,
accounts receivable, inventory and property, plant and equipment.
Standby letters of credit and financial guarantees, substantially all of which
are within the scope of FIN No. 45, are written conditional commitments issued
by the bank to guarantee the performance of a customer to a third party. At
December 31, 2005, these commitments totaled $26,715,768 of which $15,066,251
expire within one year and $11,649,617 within two years. Approximately 71% of
the commitments are automatically renewable for a period of one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The bank holds cash or cash
equivalents and marketable securities as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 2005 ranged from 0% to 100%; the average
amount collateralized was approximately 86%.
In the normal course of business there are various legal proceedings pending
against the Company. Management, after consulting with counsel, is of the
opinion that there should be no material liability with respect to such
proceedings, and accordingly no provision has been made in the accompanying
consolidated financial statements.
PAGE 74
NOTE 24.
QUARTERLY DATA (UNAUDITED)
2005 Quarter Mar 31 Jun 30 Sept 30 Dec 31
---------------------------------------------------------------------------------------------
Total interest income $26,204,326 $ 27,805,697 $29,234,054 $29,799,717
Total interest expense 5,702,046 6,740,379 7,881,261 8,785,657
Net interest income 20,502,280 21,065,318 21,352,793 21,014,060
Provision for loan losses 2,648,500 2,005,500 2,508,000 2,502,000
Net securities gains 196,680 -- -- 140,777
Noninterest income, excluding securities
gains 7,799,520 9,313,554 9,352,599 7,750,340
Noninterest expenses 16,976,428 18,190,666 18,065,223 17,978,066
Income before income taxes 8,873,552 10,182,706 10,132,169 8,425,111
Net income 5,766,723 6,056,153 6,273,949 5,930,000
Earnings per average common share:
Basic .30 .32 .32 .31
Diluted .29 .31 .31 .31
Common stock closing price:
High 27.086 23.495 22.276 21.619
Low 22.238 19.952 19.286 18.343
Quarter-end 23.114 20.333 21.438 19.730
2004 Quarter Mar 31 Jun 30 Sept 30 Dec 31
---------------------------------------------------------------------------------------------
Total interest income $23,534,674 $ 23,552,184 $24,812,419 $25,900,147
Total interest expense 4,539,315 4,518,928 5,049,666 5,475,949
Net interest income 18,995,359 19,033,256 19,762,753 20,424,198
Provision for loan losses 2,426,500 2,470,500 2,338,500 2,729,500
Net securities gains 536,304 148,500 285,918 285,648
Noninterest income, excluding securities
gains 7,687,805 8,398,106 8,888,910 8,486,504
Noninterest expenses 15,949,230 16,191,237 16,493,583 16,978,603
Income before income taxes 8,843,738 8,918,125 10,105,498 9,488,247
Net income 5,206,934 6,564,601 6,550,174 6,282,364
Earnings per average common share:
Basic .27 .34 .35 .33
Diluted .26 .33 .32 .32
Common stock closing price:
High 24.921 23.897 23.294 26.905
Low 21.50 21.135 19.968 21.452
Quarter-end 23.135 21.921 21.468 26.905
NOTE 25.
SUBSEQUENT EVENT
On March 14, 2006, the Company resolved certain state tax issues for tax years
1998-2004. As a result of this resolution, the Company expects to reduce its
existing tax reserves by approximately $1.7 million through the provision for
income taxes for the first quarter of 2006.
PAGE 75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[KPMG LOGO]
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling Bancorp
and subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2005, and the consolidated statements of condition of Sterling National Bank and
subsidiaries as of December 31, 2005 and 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling Bancorp and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, and the financial position of Sterling National Bank
and subsidiaries as of December 31, 2005 and 2004, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Sterling
Bancorp and subsidiaries' internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2006, expressed an unqualified
opinion on management's assessment of, and the effective operation of, internal
control over financial reporting.
/s/ KPMG LLP
New York, New York
March 15, 2006
PAGE 76
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
As required under the Securities Exchange Act of 1934, the Company's management,
with the participation of the Company's principal executive and principal
financial officers, evaluated the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this annual report on Form 10-K. Based on this
evaluation the Company's management, including the Chief Executive Officer and
Chief Financial Officer, concluded that, as of December 31, 2005, the Company's
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
(b) Management's annual report on internal control over financial reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control system was designed to provide reasonable assurance to the Company's
management and Board of Directors regarding the preparation and fair
presentation of published financial statements.
Any system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effective-
ness may vary over time. Accordingly, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changed conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
The management of the Company assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. In making its
assessment of internal control over financial reporting, management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework. Based on this
assessment, the Company's management concluded that, as of December 31, 2005,
the Company's internal control over financial reporting is effective.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been audited by KPMG LLP, as
stated in their report, which is included below.
PAGE 77
PART II (continued)
(c) Report of independent registered public accounting firm
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited management's assessment, included in the accompanying
Management's annual report on internal control over financial reporting (Item
9A(b)), that Sterling Bancorp and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of inter-
nal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also, in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the accompanying consolidated
balance sheets of Sterling Bancorp and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2005, and the consolidated statements of
condition of Sterling National Bank and subsidiaries as of December 31, 2005 and
2004, and our report dated March 15, 2006 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
New York, New York
March 15, 2006
PAGE 78
(d) Changes in internal control over financial reporting
No change in the Company's internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the
fiscal quarter ended December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PAGE 79
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers required by Item 401 of Regulation S-K
is furnished in a separate disclosure on page 17 at the end of Part I of this
report. The other information required by Item 10 will be in the parent
company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 within 120 days after December 31,
2005 and is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be in the parent company's definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after December 31, 2005 and is incorporated
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See the information appearing in Notes 14 and 15 of the Company's consolidated
financial statements beginning on page 60.
The following table provides information as of December 31, 2005, regarding
securities issued to all of the Company's employees under equity compensation
plans that were in effect during the fiscal year ended December 31, 2005, and
other equity compensation plan information.
EQUITY COMPENSATION PLAN INFORMATION
Number of Securities
Remaining Available
Number of Securities for Future Issuance under
to be Issued Weighted Average Equity Compensation
upon Exercise of Exercise Price of Plans (excluding
Outstanding Options, Outstanding Options, securities reflected
Warrants and Rights Warrants and Rights in column (a))
Plan Category (a) (b) (c)
---------------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans approved by security holders 1,930,551(1) $ 11.99(1) 504,287(1)
Equity Compensation Plans not approved by security holders -- -- --
---------------------------------------------------------------------------------------------------------------------------------
TOTAL 1,930,551 $ 11.99 504,287
=================================================================================================================================
[1] Adjusted to reflect the 5% stock dividend effected on December 12, 2005.
The other information required by Item 12 will be in the parent company's
definitive proxy statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 within 120 days after December 31, 2005 and is
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be in the parent company's definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after December 31, 2005 and is incorporated
by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 will be in the parent company's definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after December 31, 2005 and is incorporated
by reference.
PAGE 80
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The documents filed as a part of this report are listed below:
1. Financial Statements
Sterling Bancorp
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Income for the Years Ended December 31, 2005,
2004 and 2003
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years Ended December 31,
2005, 2004 and 2003
Sterling National Bank
Consolidated Statements of Condition as of December 31, 2005 and 2004
2. Financial Statement Schedules
None
3. Exhibits
3. (i) Restated Certificate of Incorporation filed with the State
of New York Department of State, October 28, 2004 (Filed as
Exhibit 3(i) to the Registrant's Form 10-Q for the quarter
ended September 30, 2004 and incorporated herein by
reference).
(ii) By-Laws as in effect on August 5, 2004 (Filed as Exhibit 3(ii)
(A) to the Registrant's Form 10-Q for the quarter ended June
30, 2004 and incorporated herein by reference).
4. (a) Pursuant to Regulation S-K, Item 601(b) (4) (iii)(A), no
instrument which defines the rights of holders of long-term
debt of the Registrant or any of its consolidated subsidiaries
is filed herewith. Pursuant to this regulation, the Registrant
hereby agrees to furnish a copy of any such instrument to the
SEC upon request.
(b) Shareholder Protection Rights Agreement, dated as of May 21,
1998, between the Registrant and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent (Filed as Exhibit 4.1 to the
Registrant's Form 8-A dated June 15, 1998 and incorporated
herein by reference).
10.(i)(A) Sterling Bancorp Stock Incentive Plan (Amended and
Restated as of May 20, 2004) (Filed as Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference).
(i)(B) Form of Award Letter for Non-Employee Directors (Filed as
Exhibit 10 to the Registrant's Form 10-Q for the quarter ended
September 30, 2004 and incorporated herein by reference).
(i)(C) Form of Award Letter for Officers (Filed as Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference).
(i)(D) Form of Nonqualified Stock Option Award (Filed as Exhibit
10(A) to the Registrant's Form 8-K dated March 18, 2005 and
filed on March 24, 2005 and incorporated herein by reference).
(ii)(A) Sterling Bancorp Key Executive Incentive Bonus Plan (Filed
as Exhibit C to the Registrant's definitive Proxy Statement,
dated March 13, 2001, filed on March 16, 2001 and incorporated
herein by reference).
(iii)(A) Amended and Restated Employment Agreements dated March 22,
2002 for Louis J. Cappelli and John C. Millman (Filed as
Exhibits 10(i)(a) and 10(i)(b), respectively, to the
Registrant's Form 10-Q for the quarter ended March 31, 2002
and incorporated by reference herein).
(iii)(B) Amendments to Employment Agreements dated February 26, 2003
for Louis J. Cappelli and John C. Millman (Filed as Exhibits
3.10(xiv)(a) and 3.10(xiv)(b), respectively, to the
Registrant's Form 10-K for the fiscal year ended December 31,
2002 and incorporated herein by reference).
(iii)(C) Amendments to Employment Agreements dated February 24, 2004
for Louis J. Cappelli and John C. Millman (Filed as Exhibits
10(xv)(a) and 10(xv)(b), respectively, to the Registrant's
Form 10-K dated December 31,
PAGE 81
PART IV (continued)
2003 and filed on March 12, 2004 and incorporated herein by
reference).
(iii)(D) Amendments to Employment Agreements dated March 18, 2005
for Louis J. Cappelli and John C. Millman (Filed as Exhibits
10(B) and 10(C), respectively, to the Registrant's Form 8-K
dated March 18, 2005 and filed on March 24, 2005 and
incorporated herein by reference).
(iii)(E) Amendments to Employment Agreements dated March 15, 2006:
(a) For Louis J. Cappelli
(b) For John C. Millman.
(iv)(A) Form of Change of Control Severance Agreement entered into May
21, 1999 between the Registrant and each of six executives
(Filed as Exhibit 10(ii) to the Registrant's Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by
reference).
(iv)(B) Amendment to Form of Change of Control Severance Agreement
dated February 6, 2002 entered into between the Registrant and
each of four executives (Filed as Exhibit 10(ii) to the
Registrant's Form 10-Q for the quarter ended March 31, 2002
and incorporated herein by reference).
(iv)(C) Form of Change of Control Severance Agreement dated April 3,
2002 entered into between the Registrant and one executive
(Filed as Exhibit 10(i) to the Registrant's Form 10-Q for the
quarter ended June 30, 2002 and incorporated herein by
reference).
(iv)(D) Form of Change of Control Severance Agreement dated June 8,
2004 entered into between the Registrant and one executive
(Filed as Exhibit 10(i) to the Registrant's Form 10-Q for the
quarter ended June 30, 2004 and incorporated herein by
reference).
11. Statement re: Computation of Per Share Earnings.
12. Statement re: Computation of Ratios.
21. Subsidiaries of the Registrant.
23. Consent of KPMG LLP Independent Registered Public Accounting
Firm.
31. Rule 13a-14(a) Certifications.
32. Section 1350 Certifications.
PAGE 82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STERLING BANCORP
/s/ Louis J. Cappelli
-------------------------------------------------------
Louis J. Cappelli, Chairman and Chief Executive Officer
(Principal Executive Officer)
March 15, 2006
-------------
Date
/s/ John W. Tietjen
--------------------------------------------
John W. Tietjen, Executive Vice President
(Principal Financial and Accounting Officer)
March 15, 2006
--------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 15, 2006 /s/ Louis J. Cappelli
--------------- --------------------------------------------
(Date) Louis J. Cappelli
Director, Chairman and
Chief Executive Officer
(Principal Executive Officer)
March 15, 2006 /s/ John. W. Tietjen
--------------- --------------------------------------------
(Date) John. W. Tietjen
Executive Vice President
(Principal Financial and Accounting Officer)
March 15, 2006 /s/ John C. Millman
--------------- --------------------------------------------
(Date) John C. Millman
Director
March 15, 2006 /s/ Joseph M. Adamko
--------------- --------------------------------------------
(Date) Joseph M. Adamko
Director
March 15, 2006 /s/ Walter Feldesman
--------------- --------------------------------------------
(Date) Walter Feldesman
Director
March 15, 2006 /s/ Henry J. Humphreys
--------------- --------------------------------------------
(Date) Henry J. Humphreys
Director
March 15, 2006 /s/ Eugene T. Rossides
--------------- --------------------------------------------
(Date) Eugene T. Rossides
Director
PAGE 83