UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ____________________________
Commission File Number: 1-5273-1
Sterling Bancorp
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(Exact name of registrant as specified in its charter)
New York 13-2565216
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
650 Fifth Avenue, New York, N.Y. 10019-6108
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-757-3300
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
as defined in Rule 12b-2 of the Exchange Act,
[X] Yes [ ] No
As of October 31, 2003 there were 14,934,922 shares of common stock,
$1.00 par value, outstanding.
STERLING BANCORP
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business 15
Results for Three Months 15
Results for Nine Months 17
Balance Sheet Analysis 19
Capital 23
Average Balance Sheets 24
Rate/Volume Analysis 26
Regulatory Capital and Ratios 28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 29
Interest Rate Sensitivity 32
Item 4. Controls and Procedures 33
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
EXHIBIT INDEX 36
Exhibit 11 Statement Re: Computation of Per Share Earnings 37
Exhibit 31 Certifications of the CEO and CFO pursuant to
Exchange Act Rule 13a-14(a) 38
Exhibit 32 Certifications of the CEO and CFO required by
Section 1350 of chapter 63 of title 18 of the
U.S. Code 40
2
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2003 2002
-------------- --------------
ASSETS
Cash and due from banks $ 46,207,355 $ 58,173,569
Interest-bearing deposits with other banks 2,446,910 2,872,710
Federal funds sold -- 5,000,000
Securities available for sale 161,499,825 128,465,512
Securities available for sale - pledged 113,101,504 90,969,577
Securities held to maturity 119,506,411 147,109,430
Securities held to maturity - pledged 189,318,858 222,229,901
-------------- --------------
Total investment securities 583,426,598 588,774,420
-------------- --------------
Loans held for sale 79,347,587 54,684,987
-------------- --------------
Loans held in portfolio, net of unearned discounts 876,779,095 791,315,047
Less allowance for loan losses 14,436,151 13,549,297
-------------- --------------
Loans, net 862,342,944 777,765,750
-------------- --------------
Customers' liability under acceptances 2,991,766 1,545,335
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 9,110,747 9,263,172
Other real estate 1,023,737 822,820
Accrued interest receivable 5,582,938 4,881,937
Bank owned life insurance 21,620,909 20,830,688
Other assets 20,785,217 15,347,734
-------------- --------------
$1,656,045,148 $1,561,121,562
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 399,934,027 $ 401,553,363
Interest-bearing deposits 695,330,792 645,539,745
-------------- --------------
Total deposits 1,095,264,819 l,047,093,108
Securities sold under agreements to repurchase - customers 79,563,532 60,925,635
Securities sold under agreements to repurchase - dealers 64,063,000 40,000,000
Commercial paper 22,758,875 29,318,920
Other short-term borrowings 33,142,159 37,030,404
Acceptances outstanding 2,991,766 1,545,335
Accrued expenses and other liabilities 77,315,678 75,427,836
Long-term debt - FHLB 115,000,000 115,000,000
Total liabilities -------------- --------------
1,490,099,829 1,406,341,238
-------------- --------------
Corporation obligated mandatorily
redeemable capital securities 25,000,000 25,000,000
-------------- --------------
Shareholders' equity
Preferred stock, $5 par value. Authorized
644,389 shares; Series D issued 226,026
and 232,206 shares, respectively 2,260,260 2,322,060
Common stock, $1 par value. Authorized
20,000,000 shares; issued 16,241,509
and 16,107,005 shares, respectively 16,241,509 16,107,005
Capital surplus 142,381,059 140,512,359
Retained earnings 14,218,650 3,783,539
Accumulated other comprehensive income, net of tax 738,604 1,330,239
-------------- --------------
175,840,082 164,055,202
Less
Common shares in treasury at cost, 1,306,587
and 1,261,061 shares, respectively 33,577,847 32,400,952
Unearned compensation 1,316,916 1,873,926
-------------- --------------
Total shareholders' equity 140,945,319 129,780,324
-------------- --------------
$1,656,045,148 $1,561,121,562
============== ==============
See Notes to Consolidated Financial Statements.
3
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans $ 15,877,296 $ 14,547,213 $ 46,018,048 $ 42,959,229
Investment securities
Available for sale 2,260,320 4,174,794 7,166,906 12,764,113
Held to maturity 4,201,130 4,942,536 14,830,069 14,742,343
Federal funds sold 5,282 44,352 45,184 225,341
Deposits with other banks 8,516 6,708 21,010 26,314
------------- ------------ ------------ ------------
Total interest income 22,352,544 23,715,603 68,081,217 70,717,340
------------- ------------ ------------ ------------
INTEREST EXPENSE
Deposits 2,168,483 3,110,679 6,679,403 9,743,232
Securities sold under agreements
to repurchase 339,686 285,533 1,022,538 1,064,734
Federal funds purchased 20,687 10,844 56,451 35,232
Commercial paper 65,653 156,643 191,722 515,699
Other short-term borrowings 85,754 135,132 416,363 372,880
Long-term debt 1,081,871 1,148,669 3,244,128 3,334,251
------------- ------------ ------------ ------------
Total interest expense 3,762,134 4,847,500 11,610,605 15,066,028
------------- ------------ ------------ ------------
Net interest income 18,590,410 18,868,103 56,470,612 55,651,312
Provision for loan losses 2,172,500 2,153,100 6,136,300 8,432,400
------------- ------------ ------------ ------------
Net interest income after provision
for loan losses 16,417,910 16,715,003 50,334,312 47,218,912
------------- ------------ ------------ ------------
NONINTEREST INCOME
Factoring income 1,630,993 1,807,632 4,394,174 4,736,535
Mortgage banking income 3,974,329 2,381,723 10,907,866 7,594,777
Service charges on deposit accounts 1,192,668 1,300,524 3,694,448 3,688,455
Trade finance income 631,816 797,794 1,793,460 1,875,722
Trust fees 138,891 124,334 469,339 475,994
Other service charges and fees 512,484 416,389 1,479,198 1,459,326
Bank owned life insurance income 252,241 298,185 790,221 814,366
Securities gains 101,225 24,947 297,583 869,290
Other income 300,626 141,854 478,581 426,155
------------- ------------ ------------ ------------
Total noninterest income 8,735,273 7,293,382 24,304,870 21,940,620
------------- ------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 8,870,906 8,253,632 25,917,144 24,334,467
Occupancy expenses, net 1,100,625 1,294,747 3,630,877 3,793,331
Equipment expenses 680,052 602,868 2,046,141 1,964,564
Advertising and marketing 864,385 895,641 2,514,768 2,522,137
Professional fees 837,434 848,642 2,463,423 2,337,445
Data processing fees 255,157 259,246 780,211 987,161
Stationery and printing 230,368 296,386 675,483 838,699
Communications 381,503 403,992 1,230,182 1,196,668
Mortgage tax expense 321,407 157,017 755,983 518,981
Capital securities costs 538,116 534,449 1,609,682 1,268,114
Other expenses 1,263,951 1,360,460 4,179,814 4,613,640
------------- ------------ ------------ ------------
Total noninterest expenses 15,343,904 14,907,080 45,803,708 44,375,207
------------- ------------ ------------ ------------
Income before income taxes 9,809,279 9,101,305 28,835,474 24,784,325
Provision for income taxes 3,694,566 3,556,613 11,014,336 8,742,723
------------- ------------ ------------ ------------
Net income $ 6,114,713 $ 5,544,692 $ 17,821,138 $ 16,041,602
============= ============ ============ ============
Average number of common
shares outstanding
Basic 14,908,734 14,878,820 14,867,562 14,978,045
Diluted 15,786,843 15,668,297 15,731,877 15,858,293
Earnings per average common share
Basic $ 0.41 $ 0.38 $ 1.19 $ 1.07
Diluted 0.39 0.36 1.13 1.01
Dividends per common share 0.19 0.18 0.57 0.54
See Notes to Consolidated Financial Statements.
4
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Income $ 6,114,713 $ 5,544,692 $ 17,821,138 $ 16,041,602
Other comprehensive income,
net of tax:
Unrealized holding (losses) gains
arising during the period (19,418) 1,664,427 (430,643) 3,335,346
Reclassification adjustment for
gains included in net income (54,762) (13,496) (160,992) (470,286)
------------ ------------ ------------ ------------
Comprehensive income $ 6,040,533 $ 7,195,623 $ 17,229,503 $ 18,906,662
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------ ------------
Preferred Stock
Balance at January 1 $ 2,322,060 $ 2,346,060
Conversions of Series D shares (61,800) (23,010)
------------ ------------
Balance at September 30 $ 2,260,260 $ 2,323,050
============ ============
Common Stock
Balance at January 1 $ 16,107,005 $ 13,817,856
Conversions of preferred shares into common shares 9,759 2,919
Options exercised 124,745 310,920
------------ ------------
Balance at September 30 $ 16,241,509 $ 14,131,695
============ ============
Capital Surplus
Balance at January 1 $140,512,359 $ 95,504,762
Conversions of preferred shares into common shares 52,041 20,091
Issuance of shares under incentive compensation plan - 386,400
Options exercised 1,849,017 3,851,051
Stock split paid - cash in lieu (32,358) -
------------ ------------
Balance at September 30 $142,381,059 $ 99,762,304
============ ============
Retained Earnings
Balance at January 1 $ 3,783,539 $ 32,419,767
Net Income 17,821,138 16,041,602
Cash dividends paid - common shares (7,291,756) (5,342,879)
- preferred shares (94,271) (84,627)
------------ ------------
Balance at September 30 $ 14,218,650 $ 43,033,863
============ ============
Accumulated Other Comprehensive Income
Balance at January 1 $ 1,330,239 $ 1,119,223
------------ ------------
Unrealized holding (losses) gains
arising during the period:
Before tax (796,012) 6,165,148
Tax effect 365,369 (2,829,802)
------------ ------------
Net of tax (430,643) 3,335,346
------------ ------------
Reclassification adjustment for gains
included in net income:
Before tax (297,583) (869,290)
Tax effect 136,591 399,004
------------ ------------
Net of tax (160,992) (470,286)
------------ ------------
Balance at September 30 $ 738,604 $ 3,984,283
============ ============
Treasury Stock
Balance at January 1 $(32,400,952) $(15,542,454)
Issuance of shares under incentive compensation plan - 1,267,200
Surrender of shares issued under incentive
compensation plan (920,888) (3,034,547)
Purchase of common shares (256,007) (15,125,672)
------------ ------------
Balance at September 30 $(33,577,847) $(32,435,473)
============ ============
Unearned Compensation
Balance at January 1 $ (1,873,926) $ (1,187,798)
Issuance of shares under incentive compensation plan - (1,653,600)
Amortization of unearned compensation 557,010 528,362
------------ ------------
Balance at September 30 $ (1,316,916) $ (2,313,036)
============ ============
Total Shareholders' Equity
Balance at January 1 $129,780,324 $128,477,416
Net changes during the period 11,164,995 9,270
------------ ------------
Balance at September 30 $140,945,319 $128,486,686
============ ============
See Notes to Consolidated Financial Statements.
6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------- -------------
Operating Activities
Net Income $ 17,821,138 $ 16,041,602
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 6,136,300 8,432,400
Depreciation and amortization of premises and equipment 1,272,483 1,263,032
Securities gains (297,583) (869,290)
Income from bank owned life insurance (790,221) (814,366)
Deferred income tax (benefit) provision (262,891) 435,151
Net change in loans held for sale (24,662,600) 15,509,693
Amortization of unearned compensation 557,010 528,362
Amortization of premiums on securities 1,905,331 1,042,469
Accretion of discounts on securities (968,109) (666,212)
(Increase) Decrease in accrued interest receivable (701,001) 120,319
Increase in accrued expenses and
other liabilities 1,887,842 7,413,628
Increase in other assets (4,708,668) (20,289,623)
Issuance cost for preferred securities,
net of amortization - (916,667)
Other, net (884,852) (3,355,789)
------------- -------------
Net cash (used in) provided by operating activities (3,695,821) 23,874,709
------------- -------------
Investing Activities
Purchase of premises and equipment (1,120,058) (1,972,995)
Decrease in interest-bearing deposits
with other banks 425,800 581,423
Decrease in Federal funds sold 5,000,000 10,000,000
Increase in other real estate (200,917) (189,484)
Net increase in loans held in portfolio (90,713,494) (44,761,376)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 214,664,362 69,589,504
Purchases of securities - held to maturity (155,024,448) (83,926,203)
Purchases of securities - available for sale (373,835,784) (163,152,563)
Proceeds from sales of securities - available for sale 9,767,421 39,923,354
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 308,043,037 127,859,277
------------- -------------
Net cash used in investing activities (82,994,081) (46,049,063)
------------- -------------
Financing Activities
Decrease in noninterest-bearing deposits (1,619,336) (30,060,270)
Increase in interest-bearing deposits 49,791,047 79,161,126
Net proceeds from issuance of Corporation Obligated
Mandatorily Redeemable Preferred Securities - 24,062,500
Increase (Decrease) in securities sold under agreements
to repurchase 42,700,897 (69,021,841)
(Decrease) Increase in commercial paper and
other short-term borrowings (10,448,290) 3,839,031
Purchase of treasury stock (256,007) (15,125,672)
Increase in other long-term debt - 29,650,000
Proceeds from exercise of stock options 1,973,762 4,161,971
Cash dividends paid on common and preferred stock (7,386,027) (5,427,506)
Cash paid in lieu of fractional shares in connection
with stock, split (32,358) --
------------- -------------
Net cash provided by financing activities 74,723,688 21,239,339
------------- -------------
Net decrease in cash and due from banks (11,966,214) (935,015)
Cash and due from banks - beginning of period 58,173,569 50,362,016
------------- -------------
Cash and due from banks - end of period $ 46,207,355 $ 49,427,001
============= =============
Supplemental disclosures :
Interest paid $ 12,080,996 $ 15,707,793
Income taxes paid 9,886,194 9,678,303
See Notes to Consolidated Financial Statements.
7
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements include the accounts of Sterling
Bancorp ("the parent company") and its subsidiaries, principally
Sterling National Bank and its subsidiaries ("the bank"), after
elimination of material intercompany transactions. The term "the
Company" refers to Sterling Bancorp and its subsidiaries. The
consolidated financial statements as of and for the interim periods
ended September 30, 2003 and 2002 are unaudited; however, in the
opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of such periods have been
made. Certain reclassifications have been made to the 2002 consolidated
financial statements to conform to the current presentation. The
interim consolidated financial statements should be read in conjunction
with the Company's annual report on Form 10-K for the year ended
December 31, 2002. The Company effected a stock split and paid stock
dividends as follows: a five-for-four stock split on September 10,2003;
a 20% stock dividend on December 9, 2002; a 10% stock dividend on
December 10, 2001; a 10% stock dividend on December 11, 2000; and a 5%
stock dividend on December 14, 1999. Fractional shares were cashed-out
and payments were made to shareholders in lieu of fractional shares.
All capital and share amounts as well as basic and diluted average
number of shares outstanding and earnings per average common share
information for all prior reporting periods have been restated to
reflect the effect of the stock split and stock dividends.
2. At September 30, 2003, the Company has a stock-based employee
compensation plan, which is described more fully in Note 15 of the
Company's annual report on Form 10-K for the year ended December 31,
2002. 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. No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. In
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 148, the following table illustrates the effect on net income and
earnings per average common share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to the stock-based employee compensation
plans.
Three Months Ended September 30, 2003 2002
-------------------------------- ------------- -------------
Net income available for
common shareholders $ 6,083,586 $ 5,516,619
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (311,675) (228,216)
------------- -------------
Pro forma, net income $ 5,771,911 $ 5,288,403
============= =============
Earnings per average common share:
Basic- as reported $ 0.41 $ 0.38
Basic- pro forma 0.39 0.36
Diluted- as reported 0.39 0.36
Diluted- pro forma 0.37 0.34
8
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2003 2002
------------------------------- -------------- --------------
Net income available for
common shareholders $ 17,726,867 $ 15,956,975
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (898,330) (646,906)
-------------- --------------
Pro forma, net income $ 16,828,537 $ 15,310,069
============== ==============
Earnings per average common share:
Basic- as reported $ 1.19 $ 1.07
Basic- pro forma 1.13 1.02
Diluted- as reported 1.13 1.01
Diluted- pro forma 1.07 0.97
3. The major components of domestic loans held for sale and loans held in
portfolio are as follows:
September 30,
---------------------------
2003 2002
------------ ------------
Loans held for sale
Real estate-mortgage $ 79,347,587 $ 33,093,148
============ ============
Loans held in portfolio
Commercial and industrial $545,054,019 $512,010,007
Lease financing 161,508,913 138,260,101
Real estate-mortgage 153,802,839 124,678,125
Real estate-construction 2,380,603 -
Installment 13,977,231 9,016,972
Loans to depository institutions 20,000,000 27,000,000
------------ ------------
Loans, gross 896,723,605 810,965,205
Less unearned discounts 19,944,510 15,768,137
------------ ------------
Loans, net of unearned discounts $876,779,095 $795,197,068
============ ============
4. The Company's outstanding Preferred Shares comprise 226,026 Series D
shares (of 300,000 Series D shares authorized). Each Series D share
(all of such shares are owned by the Company's Employee Stock Ownership
Trust) is entitled to dividends at the rate of $0.6125 per year, is
convertible into 1.9084 Common Shares, and is entitled to a liquidation
preference of $10 (together with accrued dividends). All preferred
shares are entitled to one vote per share (voting with the Common
Shares except as otherwise required by law).
9
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
5. The Financial Accounting Standards Board SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information,"established
standards for the way that public business enterprises report and
disclose selected information about operating segments in interim
financial statements issued to stockholders. The Company provides a
wide range of financial products and services, including commercial
loans, asset-based financing, accounts receivable management services,
trade financing, equipment leasing, corporate and consumer deposit
services, commercial and residential mortgage lending and brokerage,
trust and estate administration and investment management services. The
Company's primary source of earnings is net interest income, which
represents the difference between interest earned on interest-earning
assets and the interest incurred on interest-bearing liabilities. The
Company's 2003 year-to-date average interest-earning assets were 59.2%
loans (corporate lending was 71.1% and real estate lending was 26.2% of
total loans, respectively) and 40.8% investment securities and money
market investments. There are no industry concentrations exceeding 10%
of loans, gross, in the corporate loan portfolio. Approximately 76% 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.
The following tables provide certain information regarding the
Company's operating segments for the three and nine month periods ended
September 30, 2003 and 2002:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------- -------------- -------------- --------------
Three Months Ended September 30, 2003
-------------------------------------
Net interest income $ 8,678,941 $ 4,574,622 $ 4,905,056 $ 18,158,619
Noninterest income 3,285,616 4,038,713 428,095 7,752,424
Depreciation and amortization 65,875 81,167 - 147,042
Segment profit 4,440,415 3,446,438 5,446,923 13,333,776
Segment assets 703,324,770 240,461,682 680,766,352 1,624,552,804
Three Months Ended September 30, 2002
-------------------------------------
Net interest income $ 7,530,877 $ 3,436,493 $ 7,487,737 $ 18,455,107
Noninterest income 3,720,570 2,403,740 349,942 6,474,252
Depreciation and amortization 48,060 52,189 - 100,249
Segment profit 4,625,923 2,571,043 7,873,208 15,070,174
Segment assets 642,150,423 165,103,648 696,465,329 1,503,719,400
Nine Months Ended September 30, 2003
-------------------------------------
Net interest income $ 25,443,875 $ 12,502,274 $ 17,272,610 $ 55,218,759
Noninterest income 9,313,652 11,105,877 1,207,765 21,627,294
Depreciation and amortization 154,512 235,559 - 390,071
Segment profit 13,086,427 10,762,855 18,396,491 42,245,773
Segment assets 703,324,770 240,461,682 680,766,352 1,624,552,804
Nine Months Ended September 30, 2002
-------------------------------------
Net interest income $ 21,805,357 $ 10,068,686 $ 22,594,118 $ 54,468,161
Noninterest income 9,729,831 7,578,130 1,750,153 19,058,114
Depreciation and amortization 141,559 146,332 - 287,891
Segment profit 12,439,592 8,342,383 24,618,085 45,400,060
Segment assets 642,150,423 165,103,648 696,465,329 1,503,719,400
10
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table sets forth reconciliations of net interest income,
noninterest income, profits and assets of reportable operating segments to the
Company's consolidated totals:
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net interest income:
Total for reportable operating segments $ 18,158,619 $ 18,455,107 $ 55,218,759 $ 54,468,161
Other (1) 431,791 412,996 1,251,853 1,183,151
--------------- --------------- --------------- ---------------
Consolidated net interest income $ 18,590,410 $ 18,868,103 $ 56,470,612 $ 55,651,312
=============== =============== =============== ===============
Noninterest income:
Total for reportable operating segments $ 7,752,424 $ 6,474,252 $ 21,627,294 $ 19,058,114
Other (1) 982,849 819,130 2,677,576 2,882,506
--------------- --------------- --------------- ---------------
Consolidated noninterest income $ 8,735,273 $ 7,293,382 $ 24,304,870 $ 21,940,620
=============== =============== =============== ===============
Profit:
Total for reportable operating segments $ 13,333,776 $ 15,070,174 $ 42,245,773 $ 45,400,060
Other (1) (3,524,497) (5,968,869) (13,410,299) (20,615,735)
--------------- --------------- --------------- ---------------
Consolidated income before income taxes $ 9,809,279 $ 9,101,305 $ 28,835,474 $ 24,784,325
=============== =============== =============== ===============
Assets:
Total for reportable operating segments $ 1,624,552,804 $ 1,503,719,400 $ 1,624,552,804 $ 1,503,719,400
Other (1) 31,492,344 26,058,056 31,492,344 26,058,056
--------------- --------------- --------------- ---------------
Consolidated assets $ 1,656,045,148 $ 1,529,777,456 $ 1,656,045,148 $ 1,529,777,456
=============== =============== =============== ===============
(1) Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
11
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
6. The following information is provided in connection with the sales of
available for sale securities:
Three Months Ended September 30, 2003 2002
-------------------------------- --------------- ---------------
Proceeds $ 1,297,334 $ 354,838
Gross Gains 101,225 24,947
Gross Losses - -
Nine Months Ended September 30, 2003 2002
------------------------------- --------------- ---------------
Proceeds $ 9,767,421 $ 39,923,354
Gross Gains 297,583 869,290
Gross Losses - -
7. FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51", establishes accounting
guidance for consolidation of variable interest entities ("VIE") that
function to support the activities of the primary beneficiary. The
primary beneficiary of the VIE entity is the entity that absorbs a
majority of the VIE's expected losses, receives a majority of the VIE's
expected residual returns, or both, as a result of ownership,
controlling interest, contractual relationship or other business
relationships with a VIE. Prior to the implementation of FIN No.46,
VIE's were generally consolidated by an enterprise when the enterprise
had a controlling financial interest through ownership of a majority of
voting interest in the entity. The provisions of FIN No.46 were
effective immediately for all arrangements entered into after January
31, 2003, and are otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. In October 2003, the FASB
issued a staff position which delayed the effective date of FIN No. 46
for a public entity until the end of the first interim or annual period
ending after December 15, 2003 (as of December 31, 2003, for an entity
with a calendar year-end or quarter-end of December 31) provided that
the VIE was created before February 1, 2003 and the public entity has
not issued financial statements reporting that VIE in accordance with
FIN No.46 other than certain disclosures required by paragraph 26 of
FIN No.46.
In its current form, FIN No.46 may require the Company to
deconsolidate its investment in Sterling Bancorp Trust I in future
financial statements. The potential de-consolidation of subsidiary
trusts, like Sterling Bancorp Trust I, which the Company formed in
connection with the issuance of corporation obligated mandatorily
redeemable capital securities ("trust preferred securities") appears to
be an unintended consequence of FIN No. 46. It is currently unknown if,
or when, the Financial Accounting Standards Board will address this
issue. In July 2003, the Board of Governors of the Federal Reserve
System issued a supervisory letter instructing bank holding companies
to continue to include the trust preferred securities in their Tier I
capital for regulatory capital purposes until notice is given to the
contrary.
12
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Federal Reserve intends to review the regulatory implications of
any accounting treatment changes and, if necessary or warranted, provide further
appropriate guidance. There can be no assurance that the Federal Reserve will
continue to allow institutions to include trust preferred securities in Tier I
capital for regulatory capital purposes. As of September 30, 2003, assuming the
Company was not allowed to include the $25 million in trust preferred securities
issued by Sterling Bancorp Trust I in Tier I capital, the Company would still
exceed the regulatory required minimums for capital adequacy purposes (See
Regulatory Capital and Ratios on page 28). If the trust preferred securities
were no longer allowed to be included in Tier 1 capital, the Company would also
be permitted to redeem the capital securities, which bear interest at 8.375
percent, without penalty.
SFAS No.150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes standards for how
an issuer clarifies, measures and discloses in its financial statements certain
financial instruments with characteristics of both liabilities and equity. SFAS
No.150 requires that an issuer classify financial instruments that are within
its scope as liabilities, in most circumstances. Such financial instruments
include shares that are mandatorily redeemable. On November 5, 2003 the
implementation of SFAS No.150 with respect to the $25,000,000 of corporation
obligated mandatorily redeemable capital securities was postponed by FASB
for an indefinite period.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
consolidated results of operations and financial condition of Sterling Bancorp
("the parent company"), a financial holding company pursuant to an election made
under the Gramm-Leach-Bliley Act of 1999, and its wholly-owned subsidiaries
Sterling Banking Corporation, Sterling Financial Services Company, Inc.,
Sterling Bancorp Trust I, Sterling Real Estate Abstract Holding Company, Inc.,
and Sterling National Bank ("the bank"). The bank, which is the principal
subsidiary, owns all of the outstanding shares of Sterling Factors Corporation,
Sterling National Mortgage Company, Inc., Sterling National Servicing, Inc.,
Sterling Trade Services, Inc., and Sterling Holding Company of Virginia, Inc.
Sterling Real Estate Abstract Holding Company, Inc. owns 51% of the outstanding
common shares of SBC Abstract Company LLC. Sterling Trade Services, Inc. owns
all of the outstanding common shares of Sterling National Asia Limited, Hong
Kong. Sterling Holding Company of Virginia, Inc. owns all of the outstanding
common shares of Sterling Real Estate Holding Company, Inc. Throughout this
discussion and analysis, the term "the Company" refers to Sterling Bancorp and
its subsidiaries. This discussion and analysis should be read in conjunction
with the consolidated financial statements and supplemental data contained
elsewhere in this quarterly report as well as the Company's annual report on
Form 10-K for the year ended December 31, 2002. The Company effected a five -
for - four stock split on September 10, 2003; all capital and share amounts as
well as basic and diluted average number of shares outstanding and earnings per
share information for prior periods have been restated to reflect the effect of
the stock split.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein, 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" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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. It is possible that our actual results and financial position may differ,
possibly 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, possibly
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
Board of Governors of the Federal Reserve; changes, particularly declines, in
general
14
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.
BUSINESS
Sterling 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, equipment leasing, deposit services, trust and estate
administration and investment management services. The Company has operations in
the metropolitan New York area, North Carolina and other mid-Atlantic states,
and conducts business throughout the United States.
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. 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. At September 30, 2003, the bank's year-to-
date average earning assets represented approximately 97% of the Company's year-
to-date average earning assets. Loans represented 58% and investment securities
represented 41% of the bank's year-to-date average earning assets at September
30, 2003.
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.
Results for the Three Months Ended September 30, 2003 and 2002
--------------------------------------------------------------
OVERVIEW
The Company reported net income for the three months ended September 30, 2003 of
$6.1 million, representing $0.39 per share, calculated on a diluted basis,
compared to $5.5 million, or $0.36 per share, calculated on a diluted basis, for
the corresponding period in 2002. This increase reflects higher noninterest
income and lower noninterest expenses, which more than offset lower net interest
income.
Net interest income, on a tax equivalent basis, decreased to $18.8
million for the third quarter of 2003 compared to $19.1 million for the same
period
15
in 2002, primarily due to lower average yield on earning assets partially offset
by higher average earning assets outstanding. The net interest margin, on a tax
equivalent basis, was 5.16% for the third quarter of 2003 compared to 5.79% for
the corresponding 2002 period. The net interest margin was impacted by a
decrease of 107 basis points in the average yield on earning assets partially
offset by a decrease of 54 basis points in the average cost of funds.
Noninterest income increased to $8.7 million for the three months ended
September 30, 2003 compared to $7.3 million for the corresponding 2002 period
principally due to higher income from mortgage banking activities partially
offset by lower income generated for various other services.
INCOME STATEMENT ANALYSIS
Net Interest Income
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 and liabilities. The increases (decreases) in the components of interest
income and interest expense, expressed in terms of fluctuation in average volume
and rate are shown on page 26. Information as to the components of interest
income and interest expense and average rates is provided in the Average Balance
Sheets shown on page 24.
Net interest income, on a tax equivalent basis, for the three months
ended September 30, 2003 decreased to $18,831,000 from $19,117,000 for the
corresponding period in 2002.
Total interest income, on a tax equivalent basis, aggregated
$22,592,000 for the third quarter of 2003 down from $23,964,000 for the same
period of 2002. The tax equivalent yield on interest earning assets was 6.22%
for the three months ended September 30, 2003 compared to 7.29% for the
corresponding period in 2002. The decrease in interest income was due to a
decrease in income earned on the securities portfolio partially offset by
increased income on the loan portfolio. The decrease in yield on earning assets
was due to lower yields on both the loan and securities portfolios.
Interest earned on the loan portfolio amounted to $15,877,000 which was
up $1,330,000 when compared to a year ago. Average loan balances amounted to
$895,036,000 which were up $149,215,000 from an average of $745,821,000 in the
prior year period. The increase in the average loans, the result of the
continued implementation of business plans to increase funds employed in this
asset category, was primarily in the real estate and the lease finance segments
of the Company's loan portfolio. The decrease in the yield on the domestic loan
portfolio to 7.18% for the three months ended September 30, 2003 from 8.25% for
the corresponding 2002 period was primarily attributable to a lower rate
environment on average in the 2003 period and 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,
decreased to $6,701,000 for the three months ended September 30, 2003 from
$9,367,000 in the prior year period. Average outstandings decreased to
$558,579,000 from $593,295,000 in the prior year period. The yield on the
securities portfolio decreased to 4.83% for the three months ended September 30,
2003 from 6.31% for the corresponding 2002 period principally as the result of
higher prepayments from mortgage-backed securities and the reinvestment of a
portion of those funds into lower yielding securities at positive spreads over
funding costs.
16
Interest expense on deposits decreased $943,000 for the three months
ended September 30, 2003 to $2,168,000 from $3,111,000 for the corresponding
2002 period principally due to lower rates paid. Average rate paid on
interest-bearing deposits was 1.26% which was 53 basis points lower than the
prior year period. The decrease in average cost of deposits reflects the lower
interest rate environment during the 2003 period.
Noninterest Income
Noninterest income increased $1,442,000 for the third quarter of 2003 when
compared to the corresponding 2002 period primarily as a result of increased
income from mortgage banking activities partially offset by decreased income
from factoring, trade finance, and deposit services.
Noninterest Expenses
Noninterest expenses increased $437,000 for the third quarter of 2003 when
compared to the corresponding 2002 period due to increased salary expenses,
incurred to support growing levels of business activity and continued investment
in the business franchise and higher pension costs. Partially offsetting those
increases were lower expenses for occupancy.
Results for the Nine Months Ended September 30, 2003 and 2002
-----------------------------------------------------------------
OVERVIEW
The Company reported net income for the nine months ended September 30,2003 of
$17.8 million, representing $1.13 per share, calculated on a diluted basis,
compared to $16.0 million, or $1.01 per share calculated on a diluted basis, for
the corresponding period in 2002. This increase reflects continued growth in
both net interest income and noninterest income, which, together with a lower
provision for loan losses, more than offset increases in noninterest expenses
and the provision for income taxes.
Net interest income, on a tax equivalent basis, increased to $57.2
million for the first nine months of 2003 compared to $56.4 million for the
corresponding period in 2002, due to higher average earning assets outstanding
coupled with lower average cost of funding. The net interest margin, on a tax
equivalent basis, was 5.51% for the first nine months of 2003 compared to 5.81%
for the corresponding 2002 period. The net interest margin was impacted by a
decrease of 74 basis points in the average yield on earning assets partially
offset by a 56 basis point decrease in the average cost of funds.
Noninterest income rose to $24.3 million for the nine months ended
September 30,2003 compared to $21.9 million for the corresponding 2002 period
principally due to continued growth in fees from mortgage banking activities
partially offset by reductions in fees for various other services and in gains
on sales of available for sale securities.
The provision for loan losses was $6.1 million for the nine months
ended September 30, 2003 compared to $8.4 million for the corresponding 2002
period while the provision for income taxes increased to $11.0 million in the
2003 nine month period from $8.7 million in the corresponding 2002 period.
INCOME STATEMENT ANALYSIS
Net Interest Income
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
17
assets and liabilities. The increases (decreases) in the components of interest
income and interest expense, expressed in terms of fluctuation in average volume
and rate are shown on page 27. Information as to the components of interest
income and interest expense and average rates is provided in the Average Balance
Sheets shown on page 25.
Net interest income, on a tax equivalent basis, for the nine months
ended September 30,2003 increased $783,000 to $57,208,000 from $56,425,000 for
the corresponding period in 2002.
Total interest income, on a tax equivalent basis, aggregated
$68,818,000 down $2,673,000 for the first nine months of 2003 as compared to
$71,491,000 for the same period of 2002. The tax equivalent yield on
interest-earning assets was 6.64% for the first nine months of 2003 compared to
7.38% for the corresponding period in 2002. The decrease in interest income was
due to a decrease in income earned on the securities portfolio partially offset
by increased income on the loan portfolio. The decrease in yield on earning
assets was due to lower yields on both the loan and securities portfolios.
Interest earned on the loan portfolio amounted to $46,018,000 which was
up $3,059,000 compared to a year ago. Average loan balances amounted to
$844,335,000 which were up $115,930,000 from an average of $728,405,000 in the
prior year period. The increase in the average loans, the result of the
continued implementation of business plans to increase funds employed in this
asset category, was primarily in the real estate and the lease finance segments
of the Company's loan portfolio. The decrease in the yield on the domestic loan
portfolio to 7.68% for the nine months ended September 30, 2003 from 8.51% for
the corresponding 2002 period was primarily attributable to a lower rate
environment on average in the 2002 period and the mix of outstanding balance on
average among the components of the loan portfolio.
Interest earned on the securities portfolio, on a tax equivalent basis,
decreased to $22,734,000 for the nine months ended September 30, 2003 from
$28,281,000 in the prior year period. Average outstandings decreased to
$573,390,000 from $596,204,000 in the prior year period. The yield on the
securities portfolio decreased to 5.29% for the nine months ended September 30,
2003 from 6.33% for the corresponding 2002 period principally as the result of
higher prepayments from mortgage-backed securities and the reinvestment of a
portion of those funds into lower yielding securities at positive spreads over
funding costs.
Interest expense on deposits decreased $3,064,000 for the nine months
ended September 30, 2003 to $6,679,000 from $9,743,000 for the corresponding
2002 period principally due to lower rates paid. Average rate paid on
interest-bearing deposits was 1.33% which was 60 basis points lower than the
prior year period. The decrease in average cost of deposits reflects the lower
interest rate environment during the 2003 period.
Interest expense associated with borrowed funds decreased to $4,931,000
for the first nine months of 2003 from $5,323,000 in the comparable 2002 period
as the result of lower rates paid for borrowings partially offset by higher
average borrowed funds. The average amounts of borrowed funds was $284,126,000
for the first nine months of 2003 compared to $249,126,000 for the same 2002
period. Average rate paid for borrowings decreased to 2.32% for the first nine
months of 2003 from 2.85% for the corresponding year ago period. The decrease in
average costs of borrowings reflects the lower rate environment during the 2003
period.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "BALANCE SHEET ANALYSIS - Asset Quality" below) and growth in the loan
portfolios, the provision for loan losses for the first nine months of 2003 was
$6,136,000. The provision for the corresponding prior year period was
$8,432,000. During the prior year second quarter a $5.4 million loan to a
corporate borrower which had become the subject of an involuntary bankruptcy was
charged-off.
18
Noninterest Income
Noninterest income increased $2,364,000 for the first nine months of 2003 when
compared to the corresponding 2002 period primarily as a result of increased
income from mortgage banking activities. Partially offsetting those increases,
were reductions in income from various other services and from gains on sales of
available for sale securities.
Noninterest Expenses
Noninterest expenses increased $1,429,000 for the first nine months of 2003 when
compared to the corresponding 2002 period primarily due to increased salary
expenses, pension costs, and professional fees, incurred to support growing
levels of business activity and continued investment in the business franchise
coupled with higher capital securities costs. Partially offsetting those
increases were reductions in costs for occupancy, for data processing, for
stationery and printing, for capital securities and for various other operating
expenses.
Provision for Income Taxes
The provision for income taxes was $11,014,000 for the first nine months of 2003
compared to $8,743,000 for the corresponding 2002 period reflecting the increase
in pretax income in the current year period. A further contributing factor to
the variance in the provision was that New York State completed an examination
of Sterling's tax returns through 1998 and issued a no charge finding during the
second quarter of 2002. As a result, based on management's review of required
tax reserves with outside professionals, approximately $1.0 million in excess
reserves was adjusted through the provision in the 2002 quarter.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S. Government
corporation and agency guaranteed mortgage-backed securities and collateralized
mortgage obligations along with other debt and equity securities. At September
30, 2003, the Company's portfolio of securities totaled $583,427,000 of which
U.S. Government corporation and agency guaranteed mortgage-backed and
collateralized mortgage obligations securities having an average life of
approximately 2.6 years amounted to $514,168,000.
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. The following table presents information regarding
securities available for sale:
Gross Gross Gross
Amortized Unrealized Unrealized Market
September 30, 2003 Cost Gains Losses Value
------------------ ------------ ------------ ------------ ------------
U.S. Treasury securities $ 2,499,686 $ 24 $ 179 $ 2,499,531
Obligations of U.S. govern-
ment corporations and
agencies--mortgage-backed
securities 175,710,076 3,606,585 168,578 179,148,083
Obligations of U.S. govern-
ment corporations and
agencies--collateralized
mortgage obligations 28,019,116 58,933 633,025 27,445,024
Obligations of state and
political institutions 30,901,496 2,245,445 _ 33,146,941
Trust preferred securities 3,221,680 435,869 _ 3,657,549
Other debt securities 20,000,000 _ _ 20,000,000
Federal Reserve Bank and
other equity securities 8,686,142 18,408 349 8,704,201
------------ ------------ ------------ ------------
Total $269,038,196 $ 6,365,264 $ 802,131 $274,601,329
============ ============ ============ ============
19
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 in nature.
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 following table
presents information regarding securities held to maturity:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
September 30, 2003 Value Gains Losses Value
------------------ ------------ ------------ ------------ ------------
Obligations of U.S. govern-
ment corporations and
agencies -- mortgage-backed
securities $217,425,062 $ 6,779,332 $ 204,874 $223,999,520
Obligations of U.S. govern-
ment corporations and
agencies--collateralized
mortgage obligations 90,150,207 292,783 1,160,834 89,282,156
Debt securities issued by
Foreign governments 1,250,000 - - 1,250,000
------------ ------------ ------------ ------------
Total $308,825,269 $ 7,072,115 $ 1,365,708 $314,531,676
============ ============ ============ ============
Loan Portfolio
A key 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 and the
designation of lending limits for each borrower. The portfolio strategies seek
to avoid concentrations by industry or loan size in order to minimize credit
exposure and to originate loans in markets with which it is familiar.
The Company's commercial and industrial loan portfolio represents
approximately 57% of loans, net of unearned discounts. Loans in this category
are typically made to small and medium sized businesses and range between
$250,000 and $10 million. The primary source of repayment is from the borrower's
operating profits and cash flows. Based on underwriting standards, loans may be
secured in whole or in part by collateral such as accounts receivable,
inventory, marketable securities, other liquid collateral, equipment and/or
other assets. The Company's real estate loan portfolio, which represents
approximately 25% of loans, net of unearned discounts, is secured by mortgages
on real property located principally in the States of New York and Virginia. The
Company's leasing portfolio, which consists of finance leases for various types
of business equipment, represents approximately 15% of loans, net of unearned
discounts. The collateral securing any loan may vary in value based on market
conditions.
20
The following table sets forth the composition of the Company's loans
held for sale and loans held in portfolio:
September 30,
------------------------------------
2003 2002
---------------- ----------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- ----- -------- -----
Domestic
Commercial and industrial $544,409 56.9% $511,286 61.7%
Equipment lease financing 142,223 14.9 123,256 14.9
Real estate 235,526 24.6 157,753 19.0
Installment - individuals 13,969 1.5 8,995 1.1
Loans to depository institutions 20,000 2.1 27,000 3.3
-------- ----- -------- -----
Loans, net of unearned discounts $956,127 100.0% $828,290 100.0%
======== ===== ======== =====
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Company's portfolio of loans may be
increased. 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
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
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 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 of both 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 September 30, 2003, the ratio of the allowance to loans held in
portfolio, net of unearned discounts, was 1.65% and the allowance was
$14,436,000. At such date, the Company's non-accrual loans amounted to
$2,617,000; $802,000 of such loans were judged to be impaired within the scope
of SFAS No. 114 and required valuation allowances of $375,000. Based on the
foregoing, as well as management's judgment as to the current risks inherent in
the loan portfolio, the Company's allowance for loan losses was deemed adequate
to absorb all estimable losses on specifically known and other possible credit
risks associated with the portfolio as of September 30, 2003. 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 cause management to have serious doubts as to the ability of the
borrowers to continue to comply with the present repayment terms, aggregated
$941,000 at September 30, 2003.
21
Deposits
A significant source of funds for the Company continues to be deposits,
consisting of demand (noninterest-bearing), NOW, savings, money market and time
deposits (principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
September 30,
-----------------------------------------
2003 2002
------------------ -------------------
($ in thousands)
% of % of
Balances Total Balances Total
-------- ----- -------- -----
Domestic
Demand $ 399,934 36.5% $ 326,243 31.6%
NOW 116,601 10.6 114,107 11.0
Savings 27,264 2.5 24,997 2.4
Money market 175,345 16.0 175,990 17.0
Time deposits 373,121 34.1 389,688 37.7
---------- ----- ---------- ------
Total domestic deposits 1,092,265 99.7 1,031,025 99.7
Foreign
Time deposits 3,000 0.3 3,000 0.3
---------- ----- ---------- ------
Total deposits $1,095,265 100.0% $1,034,025 100.0%
========== ===== ========== ======
Fluctuations of balances in total or among categories at any date may 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 is
presented on pages 24 and 25.
22
CAPITAL
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against risk-
weighted assets, including off-balance sheet items. These regulations define the
elements of total capital into Tier 1 and Tier 2 components 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% to 5%) 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 is presented on page 28. In addition, the Company and the
bank are subject to the Federal Deposit Insurance Corporation Improvement Act of
1981 ("FDICIA") which imposes a number of mandatory supervisory measures. Among
other matters, FDICIA established five capital categories ranging from "well
capitalized" to "critically under capitalized." 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" institution must maintain minimum leverage, Tier 1 and Total
Capital ratios of 5%, 6% and 10%, respectively. At September 30, 2003, the
Company and the bank exceeded the requirements for "well capitalized"
institutions. Under the Gramm-Leach-Bliley Act of 1999, in order for the parent
company to maintain its status as a financial holding company, the bank must
remain "well capitalized."
23
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended September 30,
(dollars in thousands)
2003 2002
------------------------------------- -----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------------- -------- ------- ----------- -------- -------
ASSETS
Interest-bearing deposits
with other banks $ 4,244 $ 9 0.98% $ 3,067 $ 6 0.87%
Securities available for sale 171,712 1,917 4.58 246,248 3,817 6.20
Securities held to maturity 355,463 4,201 4.73 314,303 4,943 6.29
Securities tax-exempt [2] 31,404 583 7.37 32,744 607 7.35
Federal funds sold 2,065 5 1.00 10,185 44 1.70
Loans, net of unearned discounts [3] 895,036 15,877 7.18 745,821 14,547 8.25
--------------- ------- ----------- -------
TOTAL INTEREST-EARNING ASSETS 1,459,924 22,592 6.22% 1,352,368 23,964 7.29%
------- ==== ------- ====
Cash and due from banks 60,229 52,606
Allowance for loan losses (15,004) (12,961)
Goodwill 21,158 21,158
Other assets 62,482 55,046
--------------- -----------
TOTAL ASSETS $ 1,588,789 $ 1,468,217
=============== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 27,561 24 0.34% $ 24,380 39 0.63%
NOW 125,470 141 0.45 120,370 230 0.76
Money market 169,220 189 0.44 166,173 295 0.70
Time 356,358 1,803 2.01 374,160 2,533 2.69
Foreign
Time 3,000 11 1.30 3,000 14 1.80
--------------- ------- ----------- -------
Total interest-bearing deposits 681,609 2,168 1.26 688,083 3,111 1.79
--------------- ------- ----------- -------
Borrowings
Securities sold under agreements
to repurchase - customers 77,980 235 1.20 58,279 272 1.85
Securities sold under agreements
to repurchase - dealers 35,266 104 1.17 2,855 13 1.88
Federal funds purchased 7,228 21 1.14 2,304 11 1.87
Commercial paper 24,285 66 1.07 29,297 157 2.12
Other short-term debt 31,114 85 1.09 22,400 135 2.39
Long-term debt 115,000 1,082 3.76 125,000 1,148 3.67
--------------- ------- ----------- -------
Total borrowings 290,873 1,593 2.19 240,135 1,736 2.88
--------------- ------- ----------- -------
TOTAL INTEREST-BEARING LIABILITIES 972,482 3,761 1.54% 928,218 4,847 2.08%
------- ==== =========== ------- ====
Noninterest-bearing deposits 377,624 314,739
Other liabilities 77,606 76,096
--------------- -----------
Total liabilities 1,427,7l2 1,319,053
--------------- -----------
Corporation obligated mandatorily
redeemable capital securities 25,000 25,000
--------------- -----------
Shareholders' equity 136,077 124,164
--------------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,588,789 $ 1,468,217
=============== ===========
Net interest income/spread 18,831 4.68% 19,117 5.21%
==== ====
Net yield on interest-earning
assets (margin) 5.16% 5.79%
==== ====
Less: Tax equivalent adjustment 240 249
------- -------
Net interest income $18,591 $18,868
======= =======
[1] 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 bean made to 2002
amounts to conform to the current presentation.
[2] Interest on tax-exempt securities is presented on a tax equivalent basis.
[3] Includes loans held for sale and loans held in portfolio; all loans are
domestic. Nonaccrual loans are included in amounts outstanding and income
has been included to the extent collected.
24
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Nine Months Ended September 30,
(dollars in thousands)
2003 2002
---------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ -------- ------ ---------- -------- -------
ASSETS
Interest-bearing deposits
with other banks $ 3,679 $ 21 0.76% $ 3,405 $ 26 1.03%
Securities available for sale 162,294 6,110 5.02 252,417 11,655 6.16
Securities held to maturity 378,874 14,830 5.22 309,903 14,743 6.34
Securities tax-exempt [2] 32,222 1,794 7.44 33,884 1,883 7.43
Federal funds sold 5,044 45 1.18 17,791 225 1.67
Loans, net of unearned discounts [3] 844,335 46,018 7.68 728,405 42,959 8.51
------------ ------- ---------- --------
TOTAL INTEREST-EARNING ASSETS 1,426,448 68,818 6.64% 1,345,805 71,491 7.38%
------- ==== -------- ====
Cash and due from banks 57,391 49,899
Allowance for loan losses (14,579) (14,119)
Goodwill 21,158 21,158
Other assets 62,856 52,200
------------ ----------
TOTAL ASSETS $ 1,553,274 $1,454,943
============ ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 27,065 72 0.36% $ 26,072 123 0.63%
NOW 118,907 438 0.49 110,514 694 0.84
Money market 160,835 565 0.47 165,386 1,086 0.88
Time 361,343 5,571 2.06 369,001 7,795 2.82
Foreign
Time 3,000 33 1.48 2,999 45 2.00
------------ ------- ---------- --------
Total interest-bearing deposits 671,150 6,679 1.33 673,972 9,743 1.93
------------ ------- ---------- --------
Borrowings
Securities sold under agreements
to repurchase - customers 69,057 639 1.24 65,073 939 1.93
Securities sold under agreements
to repurchase - dealers 40,198 384 1.28 9,019 126 1.86
Federal funds purchased 6,154 56 1.21 2,486 35 1.87
Commercial paper 22,758 192 1.13 31,982 516 2.16
Other short-term debt 30,959 416 1.80 21,014 373 2.37
Long-term debt 115,000 3,244 3.76 119,552 3,334 3.72
------------ ------- ---------- --------
Total borrowings 284,126 4,931 2.32 249,126 5,323 2.85
------------ ------- ---------- --------
TOTAL INTEREST-BEARING LIABILITIES 955,276 11,610 1.62% 923,098 15,066 2.18%
------- ===== -------- =====
Noninterest-bearing deposits 360,793 309,486
Other liabilities 78,893 76,760
------------ ----------
Total liabilities 1,394,962 1,309,344
------------ ----------
Corporation obligated mandatorily
redeemable capital securities 25,000 19,780
------------ ----------
Shareholders' equity 133,312 125,819
------------ ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,553,274 $1,454,943
============ ==========
Net interest income/spread 57,208 5.02% 56,425 5.20%
===== =====
Net yield on interest-earning
assets (margin) 5.51% 5.81%
===== =====
Less: Tax equivalent adjustment 737 774
------- --------
Net interest income $56,471 $ 55,651
======= ========
[1] 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 2002
amounts to conform to the current presentation.
[2] Interest on tax-exempt securities is presented on a tax equivalent basis.
[3] Includes loans held for sale and loans held in portfolio; all loans are
domestic. Nonaccrual loans are included in amounts outstanding and income
has been included to the extent collected.
25
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/(Decrease)
Three Months Ended
September 30, 2003 to September 30, 2002
------------------------------------------------
Volume Rate Net [2]
---------- ---------- ----------
INTEREST INCOME
Interest-bearing deposits with other banks $ 2 $ 1 $ 3
---------- ---------- ----------
Securities available for sale (1,020) (880) (1,900)
Securities held to maturity 598 (1,340) (742)
Securities tax-exempt (26) 2 (24)
---------- ---------- ----------
Total investment securities (448) (2,218) (2,666)
---------- ---------- ----------
Federal funds sold (26) (13) (39)
Loans, net of unearned discounts [3] 3,247 (1,917) 1,330
---------- ---------- ----------
TOTAL INTEREST INCOME $ 2,775 $ (4,147) $ (1,372)
========== ========== ==========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 5 $ (20) $ (15)
NOW 10 (99) (89)
Money market 5 (111) (106)
Time (116) (614) (730)
Foreign
Time -- (3) (3)
---------- ---------- ----------
Total interest-bearing deposits (96) (847) (943)
---------- ---------- ----------
Borrowings
Securities sold under agreements
to repurchase - customers 75 (112) (37)
Securities sold under agreements
to repurchase - dealers 98 (7) 91
Federal funds purchased 15 (5) 10
Commercial paper (23) (68) (91)
Other short-term debt 40 (90) (50)
Long-term debt (94) 28 (66)
---------- ---------- ----------
Total borrowings 111 (254) (143)
---------- ---------- ----------
TOTAL INTEREST EXPENSE $ 15 $ (1,101) $ (1,086)
========== ========== ==========
NET INTEREST INCOME $ 2,760 $ (3,046) $ (286)
========== ========== ==========
[1] The above table is presented on a tax equivalent basis.
[2] Changes in interest income and interest expense due to a combination of
both volume and rate have been allocated to the change due to volume and
the change due to rate in proportion to the relationship of the change due
solely to each.
[3] Includes loans held for sale and loans held in portfolio; all loans are
domestic. Nonaccrual loans are included in amounts outstanding and income
has been included to the extent collected.
26
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/ (Decrease)
Nine Months Ended
September 30, 2003 to September 30, 2002
----------------------------------------
Volume Rate Net [2]
---------- ----------- ----------
INTEREST INCOME
Interest-bearing deposits with other banks $ 2 $ (7) $ (5)
---------- ---------- ----------
Securities available for sale (3,652) (1,893) (5,545)
Securities held to maturity 2,943 (2,856) 87
Securities tax-exempt (88) (1) (89)
---------- ---------- ----------
Total investment securities (797) (4,750) (5,547)
---------- ---------- ----------
Federal funds sold (128) (52) (180)
Loans, net of unearned discounts [3] 7,504 (4,445) 3,059
---------- ---------- ----------
TOTAL INTEREST INCOME $ 6,581 $ (9,254) $ (2,673)
========== ========== ==========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 5 $ (56) $ (51)
NOW 50 (306) (256)
Money market (29) (492) (521)
Time (159) (2,065) (2,224)
Foreign
Time - (12) (12)
---------- ---------- ----------
Total interest-bearing deposits (133) (2,931) (3,064)
---------- ---------- ----------
Borrowings
Securities sold under agreements
to repurchase - customers 55 (355) (300)
Securities sold under agreements
to repurchase - dealers 308 (50) 258
Federal funds purchased 36 (15) 21
Commercial paper (122) (202) (324)
Other short-term debt 148 (105) 43
Long-term debt (126) 36 (90)
---------- ---------- ----------
Total borrowings 299 (691) (392)
---------- ---------- ----------
TOTAL INTEREST EXPENSE $ 166 $ (3,622) $ (3,456)
========== ========== ==========
NET INTEREST INCOME $ 6,415 $ (5,632) $ 783
========== ========== ==========
[1] The above table is presented on a tax equivalent basis.
[2] Changes in interest income and interest expense due to a combination of both
volume and rate have been allocated to the change due to volume and the
change due to rate in proportion to the relationship of the change due
solely to each.
[3] Includes loans held for sale and loans held in portfolio; all loans are
domestic. Nonaccrual loans are included in amounts outstanding and income
has been included to the extent collected.
27
STERLING BANCORP AND SUBSIDIARIES
Regulatory Capital and Ratios
Ratios and Minimums
(dollars in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
----------------- ------------------ -----------------
As of September 30, 2003 Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------- ------- ----- -------- ----- -------- -----
Total Capital (to Risk Weighted Assets):
The Company $157,239 14.92% $ 84,320 8.00% $105,400 10.00%
The bank 125,886 12.45 80,886 8.00 101,108 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 144,048 13.67 42,160 4.00 63,240 6.00
The bank 113,229 11.20 40,443 4.00 60,665 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 144,048 9.19 62,705 4.00 78,382 5.00
The bank 113,229 7.42 61,000 4.00 76,250 5.00
As of December 31, 2002
----------------------------------------------
Total Capital (to Risk Weighted Assets):
The Company $144,054 15.34% $ 75,134 8.00% $93,917 10.00%
The bank 105,265 11.76 71,632 8.00 89,540 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 132,292 14.09 37,567 4.00 56,350 6.00
The bank 94,059 10.50 35,816 4.00 53,724 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 132,292 8.95 59,153 4.00 73,942 5.00
The bank 94,059 6.55 57,437 4.00 71,796 5.00
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of market risk, liquidity risk, capital 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 market
risk, liquidity and capital. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee ("ALCO"). ALCO, which is comprised of
members of senior management and the Board, 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 off-balance sheet 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 on- and
off-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 tools including traditional gap analysis and 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 an
institution's 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 an institution's net interest margin.
However, the traditional gap analysis does not assess the relative sensitivity
of assets and liabilities to changes in interest rates. 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 September 30, 2003, is presented
on page 32. The results of both the income simulation analysis and the gap
analysis, reveal that net interest income would increase during periods of
rising interest rates and decrease during periods of falling interest rates.
29
As part of its interest rate risk strategy, the Company uses certain
financial instruments (derivatives) to hedge the interest rate sensitivity of
assets with the corresponding amortization reflected in the yield of the related
on-balance sheet assets being hedged. The Company has written policy guidelines,
which have been approved by the Board of Directors based on recommendations of
the ALCO, governing the use of off-balance sheet 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.
The Company utilizes income simulation models to complement its
traditional gap analysis. While the ALCO 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 sensitivity or
volatility 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 is not 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 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
can project the impact of changes in interest rates on net interest margin. The
estimated effects of the Company's interest rate floors are included in the
results of the sensitivity analysis. The Company has established certain 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.
30
As of September 30, 2003, the model indicated the impact of a 200 basis point
parallel and pro rata rise in rates over twelve months would approximate a 3.15%
($2,398,000) increase in net interest income, while the impact of a 200 basis
point decline in rates over the same period would approximate a 5.94 %
($4,516,000) 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 make 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 internal/external
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.
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 throughout the Company. 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 have significant
unused borrowing capacity. Contingency plans exist and could be implemented on a
timely basis to minimize the impact of any dramatic change in market conditions.
The parent company generates income from its own operations. Its cash
requirements are supplemented from funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements.
The bank can supply funds to the parent company and its nonbank
subsidiaries subject to various legal restrictions. 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.
At September 30, 2003, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $22,846,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$40,026,000 and back-up credit lines with banks of $24,000,000. Since 1979, the
parent company has had no need to use available back-up lines of credit.
While the Company's past performance is no guarantee of the future,
management believes that the Company's funding sources (including dividends from
its subsidiaries) and the bank's funding sources will be adequate to meet their
liquidity and capital requirements in the future.
31
STERLING BANCORP AND SUBSIDIARIES
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. 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 $ 2,447 $ - $ - $ - $ - $ 2,447
Investment securities 22,701 1,946 46,524 503,552 8,704 583,427
Loans, net of unearned discounts
Commercial and industrial 536,223 2,258 6,563 9 (644) 544,409
Loans to depository
institutions 20,000 - - - - 20,000
Lease financing 757 8,590 145,595 6,567 (19,286) 142,223
Real estate 152,233 14,852 42,977 25,470 (6) 235,526
Installment 12,553 88 1,237 100 (9) 13,969
Noninterest-earning assets and
allowance for loan losses - - - - 114,044 114,044
------------ ------------ ------------ ------------ ------------ ------------
Total Assets 746,914 27,734 242,896 535,698 102,803 1,656,045
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings [1] - - 27,264 - - 27,264
NOW [1) - - 116,601 - - 116,601
Money market [1] 141,605 33,740 - - 175,345
Time - domestic 175,521 125,010 72,587 3 - 373,121
- foreign 1,355 1,645 - - - 3,000
Securities sold u/a/r - cust 79,020 543 - - - 79,563
Securities sold u/a/r - deal 64,063 - - - - 64,063
Federal funds purchased - - - - - -
Commercial paper 22,759 - - - - 22,759
Other short-term borrowings 3,142 30,000 - - - 33,142
Long-term borrowings - FHLB - - 15,000 100,000 - 115,000
Noninterest-bearing liabilities
and shareholders' equity - - - - 646,187 646,187
------------ ------------ ------------ ------------ ------------ ------------
Total Liabilities and
Shareholders' Equity 487,465 157,198 265,192 100,003 646,187 1,656,045
------------ ------------ ------------ ------------ ------------ ------------
Net Interest Rate
Sensitivity Gap $ 259,449 $ (129,464) $ (22,296) $ 435,695 $ (543,384) $ -
============ ============ ============ ============ ============ ============
Cumulative Gap
September 30, 2003 $ 259,449 $ 129,985 $ 107,689 $ 543,384 $ - $ -
============ ============ ============ ============ ============ ============
Cumulative Gap
September 30, 2002 $ 156,673 $ 81,862 $ (19,544) $ 464,151 $ - $ -
============ ============ ============ ============ ============ ============
Cumulative Gap
December 31, 2002 $ 260,814 $ 167,170 $ 98,271 $ 522,344 $ - $ -
============ ============ ============ ============ ============ ============
[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 run-off experience.
32
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of the Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities and Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective as of the
end of the period covered by this report. No changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934) occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 5. OTHER EVENTS
In this Form 10-Q, the consolidated balance sheet as of September 30, 2003, the
consolidated statements of income, average balance sheets and rate volume
analysis for the three month and nine month periods ended September 30, 2003,
together with management's discussion and analysis thereto, are different from
the Company's earnings press release issued on October 20, 2003 for the three
month and nine month periods ended September 30, 2003 due to the Financial
Accounting Standards Board decision on November 5, 2003 to indefinitely defer
the adoption of SFAS No. 150 with respect to certain mandatorily redeemable
capital securities. The revisions had no impact on the Company's financial
position or results of operations previously announced in its quarterly
earnings release.
33
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
11 Statement Re: Computation of Per Share Earnings
31 Certifications of the CEO and CFO pursuant to
Exchange Act Rule 13a-14(a)
32 Certifications of the CEO and CFO required by Section
1350 of chapter 63 of title 18 of the U.S. Code
(b) Reports on Form 8-K:
In a report on Form 8-K dated July 17, 2003 and filed on July
18, 2003, the Company reported, under Item 5. "Other Events"
and under Item 7. "Financial Statements, Pro Forma Financial
Information and Exhibits", the press release announcing the
results of operations for the quarter and six months ended
June 30, 2003.
In a report on Form 8-K dated July 22, 2003 and filed on July
22, 2003, the Company reported, under Item 5. "Other Events"
and under Item 7. "Financial Statements, Pro Forma Financial
Information and Exhibits", the press release announcing a
presentation on July 29, 2003 by John C. Millman, President of
Sterling Bancorp, as part of the Keefe, Bruyette & Woods, Inc.
Honor Roll and Fourth Annual Community Bank Investor
Conference.
In a report on Form 8-K dated August 20, 2003 and filed on
August 20, 2003, the company reported under Item 5. "Other
Events" and under Item 7. "Financial Statements Pro Forma
Financial Information and Exhibits", the press release
announcing that the Company's Chairman and Chief Executive
Officer would ring The Opening Bell (TM) at The New York Stock
Exchange on August 21, 2003.
In a report on Form 8-K/A dated August 21, 2003 and filed on
August 21, 2003, the Company reported under Item 5. "Other
Events" and under Item 7. "Financial Statements Pro Forma
Financial Information and Exhibits", the press release
announcing the declaration of a five - for - four stock split
distributed on September 10, 2003 to shareholders of record on
September 1, 2003. The Company also announced the declaration
of a quarterly cash dividend of $0.19 payable September 30,
2003 to shareholders of record on September 19, 2003.
34
SIGNATURES
Pursuant to the requirements 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
-------------------------
(Registrant)
Date 11/14/03 /s/ Louis J. Cappelli
-------- ------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 11/14/03 /s/ John W. Tietjen
-------- -----------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
35
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
------ ----------- ------------ -------- ---
11 Statement re: Computation X
of Per Share Earnings
31 Certifications of the CEO and CFO pursuant to X
Exchange Act Rule 13a-14(a)
32 Certifications of the CEO and CFO required by X
Section 1350 of chapter 63 of title 18 of the
U.S. Code
36