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, 2004
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
(Exact name of registrant as specified in its charter)
New York 13-2565216
(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, 2004 there were 15,177,080 shares of common stock,
$1.00 par value, outstanding.
STERLING BANCORP
PART I FINANCIAL INFORMATION Page
----
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
Overview 13
Income Statement Analysis 14
Balance Sheet Analysis 18
Capital 22
Cautionary Statement Regarding Forward-Looking Statements 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 33
Item 4. Controls and Procedures 34
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 37
EXHIBIT INDEX
Exhibit 3(i) Restated Certificate of Incorporation
filed with the State of New York
Department of State, October 28, 2004 39
Exhibit 3(ii) The By-Laws as in effect on August 5, 2004
(Filed as Exhibit 3(ii)(A) to the Registrant's
Form 10-Q for the quarter ended June 30, 2004
and incorporated herein by reference)
Exhibit 10 Sterling Bancorp Stock Incentive Plan
(Amended and Restated as of May 20, 2004) 49
Form of Award Letter for Non-Employee Directors 68
Form of Award Letter for Officers 69
Exhibit 11 Statement Re: Computation of Per Share
Earnings 71
Exhibit 31 Certifications of the CEO and CFO pursuant to
Exchange Act Rule 13a-14(a) 72
Exhibit 32 Certifications of the CEO and CFO
required by Section 1350 of Chapter 63
of Title 18 of the U.S. Code 74
2
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
ASSETS 2004 2003
--------------- ---------------
Cash and due from banks $ 53,264,489 $ 63,947,722
Interest-bearing deposits with other banks 2,669,514 1,656,338
Securities available for sale 160,946,796 195,477,473
Securities available for sale - pledged 121,490,565 117,250,082
Securities held to maturity 258,309,947 203,480,172
Securities held to maturity - pledged 129,372,694 166,910,347
--------------- ---------------
Total investment securities 670,120,002 683,118,074
--------------- ---------------
Loans held for sale 38,810,366 40,556,380
--------------- ---------------
Loans held in portfolio, net of unearned discounts 968,073,110 900,556,215
Less allowance for loan losses 15,602,478 14,458,951
--------------- ---------------
Loans, net 952,470,632 886,097,264
--------------- ---------------
Customers' liability under acceptances 902,538 953,571
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 9,987,174 9,226,183
Other real estate 1,019,095 829,856
Accrued interest receivable 5,140,340 5,069,423
Bank owned life insurance 22,302,781 21,872,266
Other assets 32,033,865 24,260,063
--------------- ---------------
$ 1,809,879,236 $ 1,758,745,580
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 424,534,758 $ 474,091,890
Interest-bearing deposits 874,834,879 737,648,930
--------------- ---------------
Total deposits 1,299,369,637 1,211,740,820
Securities sold under agreements to repurchase - customers 103,595,822 42,490,862
Securities sold under agreements to repurchase - dealers -- 51,327,944
Federal funds purchased -- 10,000,000
Commercial paper 34,953,800 28,799,055
Other short-term borrowings 1,107,981 56,871,359
Acceptances outstanding 902,538 953,571
Accrued expenses and other liabilities 88,429,678 77,602,887
Long-term debt 135,774,000 135,774,000
--------------- ---------------
Total liabilities 1,664,133,456 1,615,560,498
--------------- ---------------
Shareholders' equity
Preferred stock, $5 par value. Authorized
644,389 shares; Series D issued 0
and 224,432 shares,respectively -- 2,244,320
Common stock, $1 par value. Authorized 50,000,000 and
20,000,000 shares, respectively; issued 16,795,983
and 16,244,549 shares, respectively 16,795,983 16,244,549
Capital surplus 145,428,914 142,393,959
Retained earnings 29,011,473 17,751,859
Accumulated other comprehensive loss, net of tax (2,820,786) (976,782)
--------------- ---------------
188,415,584 177,657,905
Less
Common shares in treasury at cost, 1,618,903
and 1,306,587 shares, respectively 42,297,109 33,577,847
Unearned compensation 372,695 894,976
--------------- ---------------
Total shareholders' equity 145,745,780 143,185,082
--------------- ---------------
$ 1,809,879,236 $ 1,758,745,580
=============== ===============
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,
2004 2003 2004 2003
----------- ----------- ----------- -----------
INTEREST INCOME
Loans $16,897,670 $15,877,296 $47,392,037 $46,018,048
Investment securities
Available for sale 3,211,403 2,260,320 10,357,118 7,166,906
Held to maturity 4,624,665 4,201,130 14,008,129 14,830,069
Federal funds sold 72,779 5,282 128,915 45,184
Deposits with other banks 5,902 8,516 13,078 21,010
----------- ----------- ----------- -----------
Total interest income 24,812,419 22,352,544 71,899,277 68,081,217
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 3,015,262 2,168,483 7,862,397 6,679,403
Securities sold under agreements
to repurchase 325,203 339,686 1,006,563 1,022,538
Federal funds purchased 9,041 20,687 72,484 56,451
Commercial paper 106,502 65,653 247,861 191,722
Other short-term borrowings 33,970 85,754 239,541 416,363
Long-term debt 1,559,688 1,605,309 4,679,063 4,814,441
----------- ----------- ----------- -----------
Total interest expense 5,049,666 4,285,572 14,107,909 13,180,918
----------- ----------- ----------- -----------
Net interest income 19,762,753 18,066,972 57,791,368 54,900,299
Provision for loan losses 2,338,500 2,172,500 7,235,500 6,136,300
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 17,424,253 15,894,472 50,555,868 48,763,999
----------- ----------- ----------- -----------
NONINTEREST INCOME
Factoring income 1,915,761 1,630,993 5,110,102 4,394,174
Mortgage banking income 3,846,269 3,974,329 11,392,079 10,907,866
Service charges on deposit accounts 1,258,129 1,192,668 3,480,649 3,694,448
Trade finance income 688,276 631,816 1,699,083 1,793,460
Trust fees 160,311 138,891 508,046 469,339
Other service charges and fees 394,754 512,484 1,349,983 1,479,198
Bank owned life insurance income 498,530 252,241 975,264 790,221
Securities gains 285,918 101,225 970,722 297,583
Other income 126,880 300,626 638,309 478,581
----------- ----------- ----------- -----------
Total noninterest income 9,174,828 8,735,273 26,124,237 24,304,870
----------- ----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 10,053,582 8,870,906 28,140,886 25,917,144
Occupancy expenses, net 1,336,548 1,100,625 3,647,442 3,630,877
Equipment expenses 755,738 680,052 2,169,997 2,046,141
Advertising and marketing 974,755 864,385 2,992,678 2,514,768
Professional fees 952,253 837,434 2,939,885 2,463,423
Data processing fees 272,292 255,157 860,235 780,211
Stationery and printing 141,816 230,368 602,821 675,483
Communications 363,698 381,503 1,161,891 1,230,182
Mortgage tax expense 131,247 321,407 493,628 755,983
Other expenses 1,333,637 1,278,629 4,063,563 4,219,183
----------- ----------- ----------- -----------
Total noninterest expenses 16,315,566 14,820,466 47,073,026 44,233,395
----------- ----------- ----------- -----------
Income before income taxes 10,283,515 9,809,279 29,607,079 28,835,474
Provision for income taxes 3,545,581 3,694,566 9,689,037 11,014,336
----------- ----------- ----------- -----------
Net income $ 6,737,934 $ 6,114,713 $19,918,042 $17,821,138
=========== =========== =========== ===========
Average number of common
shares outstanding
Basic 15,175,955 14,908,734 15,217,170 14,867,562
Diluted 15,866,897 15,786,843 15,966,159 15,731,877
Earnings per average common share
Basic $ 0.44 $ 0.41 $ 1.31 $ 1.19
Diluted 0.43 0.39 1.25 1.13
Dividends per common share 0.19 0.19 0.57 0.49
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,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Income $ 6,737,934 $ 6,114,713 $ 19,918,042 $ 17,821,138
Other comprehensive income,
net of tax:
Unrealized holding gains (losses)
arising during the period 2,347,046 (19,418) (1,206,796) (430,643)
Reclassification adjustment for
gains included in net income (154,681) (54,762) (525,160) (160,992)
Unrealized gains
on supplemental pension 252,350 -- 252,350 --
Minimum pension liability adjustment -- -- (364,398) --
------------ ------------ ------------ ------------
Comprehensive income $ 9,182,649 $ 6,040,533 $ 18,074,038 $ 17,229,503
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Nine Months Ended
September 30,
2004 2003
------------- -------------
Preferred Stock
Balance at January 1 $ 2,244,320 $ 2,322,060
Conversions of Series D shares (2,244,320) (61,800)
------------- -------------
Balance at September 30 $ -- $ 2,260,260
============= =============
Common Stock
Balance at January 1 $ 16,244,549 $ 16,107,005
Conversions of preferred shares into common shares 428,304 9,759
Options exercised 123,130 124,745
------------- -------------
Balance at September 30 $ 16,795,983 $ 16,241,509
============= =============
Capital Surplus
Balance at January 1 $ 142,393,959 $ 140,512,359
Conversions of preferred shares into common shares 1,816,016 52,041
Options exercised 1,218,939 1,849,017
Stock splt paid - cash in lieu -- (32,358)
------------- -------------
Balance at September 30 $ 145,428,914 $ 142,381,059
============= =============
Retained Earnings
Balance at January 1 $ 17,751,859 $ 3,783,539
Net Income 19,918,042 17,821,138
Cash dividends paid - common shares (8,658,428) (7,291,756)
- preferred shares -- (94,271)
------------- -------------
Balance at September 30 $ 29,011,473 $ 14,218,650
============= =============
Accumulated Other Comprehensive Income
Balance at January 1 $ (976,782) $ 1,330,239
------------- -------------
Unrealized holding gains/(losses) arising during the period:
Before tax (2,230,677) (796,012)
Tax effect 1,023,881 365,369
------------- -------------
Net of tax (1,206,796) (430,643)
------------- -------------
Reclassification adjustment for gains:
included in net income:
Before tax (970,722) (297,583)
Tax effect 445,562 136,591
------------- -------------
Net of tax (525,160) (160,992)
------------- -------------
Unrealized gains/(losses) in supplemental pension:
Before tax 466,451 --
Tax effect (214,101) --
------------- -------------
Net of tax 252,350 --
------------- -------------
Minimum pension liability adjustment:
Before tax (673,563) --
Tax effect 309,165 --
------------- -------------
Net of tax (364,398) --
------------- -------------
Balance at September 30 $ (2,820,786) $ 738,604
============= =============
Treasury Stock
Balance at January 1 $ (33,577,847) $ (32,400,952)
Purchase of common shares (8,310,004) (256,007)
Surrender of shares issued under
incentive compensation plan (409,258) (920,888)
------------- -------------
Balance at September 30 $ (42,297,109) $ (33,577,847)
============= =============
Unearned Compensation
Balance at January 1 $ (894,976) $ (1,873,926)
Amortization of unearned compensation 522,281 557,010
------------- -------------
Balance at September 30 $ (372,695) $ (1,316,916)
============= =============
Total Shareholders' Equity
Balance at January 1 $ 143,185,082 $ 129,780,324
Net changes during the period 2,560,698 11,164,995
------------- -------------
Balance at September 30 $ 145,745,780 $ 140,945,319
============= =============
See Notes to Consolidated Financial Statements.
6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2004 2003
------------- -------------
Operating Activities
Net Income $ 19,918,042 $ 17,821,138
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 7,235,500 6,136,300
Depreciation and amortization of premises and equipment 1,318,157 1,272,483
Securities gains (970,722) (297,583)
Income from bank owned life insurance (975,264) (790,221)
Deferred income tax benefit (447,226) (262,891)
Net change in loans held for sale 1,746,014 (24,662,600)
Amortization of unearned compensation 522,281 557,010
Amortization of premiums on securities 1,198,486 1,905,331
Accretion of discounts on securities (394,808) (968,109)
Increase in accrued interest receivable (70,917) (701,001)
Increase (decrease) in accrued expenses and
other liabilities 10,826,791 1,887,842
Increase in other assets (5,857,132) (4,708,668)
Other, net 23,444 (884,852)
------------- -------------
Net cash provided by (used in) operating activities 34,072,646 (3,695,821)
------------- -------------
Investing Activities
Purchase of premises and equipment (2,079,148) (1,120,058)
(Increase) Decrease in interest-bearing deposits
with other banks (1,013,176) 425,800
Decrease in Federal funds sold -- 5,000,000
Net increase in loans held in portfolio (73,608,868) (90,713,494)
Increase in other real estate (189,239) (200,917)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 105,510,986 214,664,362
Purchases of securities - held to maturity (123,394,828) (155,024,448)
Proceeds from sales of securities - available for sale 73,254,718 9,767,421
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 84,957,982 308,043,037
Purchases of securities - available for sale (130,365,143) (373,835,784)
------------- -------------
Net cash used in investing activities (66,926,716) (82,994,081)
------------- -------------
Financing Activities
Decrease in noninterest-bearing deposits (49,557,132) (1,619,336)
Increase in interest-bearing deposits 137,185,949 49,791,047
Decrease in Federal funds purchased (10,000,000) --
Net increase in securities sold under agreements
to repurchase 9,777,016 42,700,897
Decrease in commercial paper and
other short-term borrowings (49,608,633) (10,448,290)
Purchase of treasury stock (8,310,004) (256,007)
Proceeds from exercise of stock options 1,342,069 1,973,762
Cash dividends paid on common and preferred stock (8,658,428) (7,386,027)
Cash paid in lieu of fractional shares in connection
with stock split (32,358)
------------- -------------
Net cash provided by financing activities 22,170,837 74,723,688
------------- -------------
Net increase (decrease) in cash and due from banks (10,683,233) (11,966,214)
Cash and due from banks - beginning of period 63,947,722 58,173,569
------------- -------------
Cash and due from banks - end of period $ 53,264,489 $ 46,207,355
============= =============
Supplemental disclosures:
Interest paid $ 13,800,992 $ 12,080,996
Income taxes paid 10,869,100 9,886,194
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, 2004 and
2003 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 prior period amounts 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, 2003. The Company effected a five-for-four stock split
on September 10,2003 and paid stock dividends as follows: 20% on December
9, 2002; 10% on December 10, 2001; 10% on December 11, 2000; and 5% 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, 2004, the Company has a stock-based employee compensation
plan, which is described more fully in Note 15 to the consolidated
financial statements in the Company's annual report on Form 10-K for the
year ended December 31, 2003. 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, 2004 2003
-------------------------------- ---------- ----------
Net income available for
common shareholders $6,737,934 $6,083,586
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (136,389) (311,674)
---------- ----------
Pro forma, net income $6,601,545 $5,771,912
========== ==========
Earnings per average common share:
Basic- as reported $ 0.44 $ 0.41
Basic- pro forma 0.43 0.39
Diluted- as reported 0.43 0.39
Diluted- pro forma 0.42 0.37
8
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2004 2003
------------------------------- ----------- -----------
Net income available for
common shareholders $19,918,042 $17,726,867
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (396,588) (898,330)
----------- -----------
Pro forma, net income $19,521,454 $16,828,537
=========== ===========
Earnings per average common share:
Basic- as reported $ 1.31 $ 1.19
Basic- pro forma 1.28 1.13
Diluted- as reported 1.25 1.13
Diluted- pro forma 1.22 1.07
3. The major components of domestic loans held for sale and loans held in
portfolio are as follows:
September 30,
------------------------------
2004 2003
------------ ------------
Loans held for sale
Real estate-mortgage $ 38,810,366 $ 79,347,587
============ ============
Loans held in portfolio
Commercial and industrial $585,288,435 $545,054,019
Lease financing 181,671,932 161,508,913
Real estate-mortgage 206,546,866 153,802,839
Real estate-construction 2,329,491 2,380,603
Installment 15,270,005 13,977,231
Loans to depository institutions -- 20,000,000
------------ ------------
Loans, gross 991,106,729 896,723,605
Less unearned discounts 23,033,619 19,944,510
------------ ------------
Loans, net of unearned discounts $968,073,110 $876,779,095
============ ============
4. 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 provided to stockholders. In
order to comply with SFAS No. 131, the Company has determined that it has
three reportable operating segments: corporate lending, real estate
lending and company-wide treasury.
The Company provides a broad range of financial products and services,
including commercial loans, asset-based financing, factoring and accounts
receivable management services, trade financing, equipment leasing,
corporate and consumer deposit services, commercial and residential
mortgage lending and brokerage, trust and estate administration and
investment management services. The Company's primary source of
9
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 2004 year-to-date average
interest-earning assets were 55.8% loans (corporate lending was 72.5% and
real estate lending was 24.6% of total loans, respectively) and 43.1%
investment securities and money market investments. There are no industry
concentrations exceeding 10% of loans, gross, in the corporate loan
portfolio. Approximately 66% of loans are to borrowers located in the
metropolitan New York area.
The following tables provide certain information regarding the Company's
operating segments for the three-and nine-month periods ended September 30, 2004
and 2003:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------- -------------- -------------- --------------
Three Months Ended September 30, 2004
-------------------------------------
Net interest income $ 9,186,653 $ 4,125,387 $ 5,958,732 $ 19,270,772
Noninterest income 3,587,898 3,929,044 821,997 8,338,939
Depreciation and amortization 80,415 102,964 920 184,299
Segment income before taxes 4,523,469 4,109,381 7,550,219 16,183,069
Segment assets 703,541,000 286,075,699 779,290,347 1,768,907,046
Three Months Ended September 30, 2003
-------------------------------------
Net interest income $ 8,678,941 $ 4,574,622 $ 4,381,618 $ 17,635,181
Noninterest income 3,285,616 4,038,713 428,095 7,752,424
Depreciation and amortization 65,875 81,167 -- 147,042
Segment income before taxes 4,440,415 3,446,438 5,446,923 13,333,776
Segment assets 703,324,770 240,461,682 681,588,969 1,625,375,421
Nine Months Ended September 30, 2004
------------------------------------
Net interest income $ 26,222,249 $ 11,788,083 $ 18,408,890 $ 56,419,222
Noninterest income 9,762,453 11,606,416 2,031,718 23,400,587
Depreciation and amortization 221,579 302,679 920 525,178
Segment income before taxes 11,415,455 12,201,185 22,794,965 46,411,605
Segment assets 703,541,000 286,075,699 779,290,347 1,768,907,046
Nine Months Ended September 30, 2003
------------------------------------
Net interest income $ 25,443,875 $ 12,502,274 $ 15,702,297 $ 53,648,446
Noninterest income 9,313,652 11,105,877 1,207,765 21,627,294
Depreciation and amortization 154,512 235,559 -- 390,071
Segment income before taxes 13,086,427 10,762,855 18,396,491 42,245,773
Segment assets 703,324,770 240,461,682 681,588,969 1,625,375,421
10
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,
------------------------------------- -------------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net interest income:
Total for reportable operating segments $ 19,270,772 $ 17,635,181 $ 56,419,222 $ 53,648,446
Other [1] 491,981 431,791 1,372,146 1,251,853
--------------- --------------- --------------- ---------------
Consolidated net interest income $ 19,762,753 $ 18,066,972 $ 57,791,368 $ 54,900,299
=============== =============== =============== ===============
Noninterest income:
Total for reportable operating segments $ 8,338,939 $ 7,752,424 $ 23,400,587 $ 21,627,294
Other [1] 835,889 982,849 2,723,650 2,677,576
--------------- --------------- --------------- ---------------
Consolidated noninterest income $ 9,174,828 $ 8,735,273 $ 26,124,237 $ 24,304,870
=============== =============== =============== ===============
Income before taxes:
Total for reportable operating segments $ 16,183,069 $ 13,333,776 $ 46,411,605 $ 42,245,773
Other [1] (5,899,554) (3,524,497) (16,804,526) (13,410,299)
--------------- --------------- --------------- ---------------
Consolidated income before income taxes $ 10,283,515 $ 9,809,279 $ 29,607,079 $ 28,835,474
=============== =============== =============== ===============
Assets:
Total for reportable operating segments $ 1,768,907,046 $ 1,625,375,421 $ 1,768,907,046 $ 1,625,375,421
Other [1] 40,972,190 31,492,344 40,972,190 31,492,344
--------------- --------------- --------------- ---------------
Consolidated assets $ 1,809,879,236 $ 1,656,867,765 $ 1,809,879,236 $ 1,656,867,765
=============== =============== =============== ===============
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
5. On December 31, 2003, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 46R ("FIN 46R") "Consolidation of
Variable Interest Entities," which clarified certain provisions of a
previously released interpretation. Under the provisions of FIN 46R,
Sterling deconsolidated the issuer trust and accounts for its investment
in the trust as an asset, its junior subordinated debentures as long-term
debt and the interest paid on those debentures as interest expense. As a
result of the adoption of FIN 46R, the Company's prior period
presentations have been restated to conform to the current presentation.
Based on proposed Federal Reserve guidance, the Company does not expect
the change in accounting treatment to affect the Tier I regulatory
classification of the Company's outstanding trust preferred securities.
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, 2004 2003
-------------------------------- ----------- -----------
Proceeds $26,149,573 $ 1,297,334
Gross Gains 285,918 101,225
Gross Losses -- --
Nine Months Ended September 30, 2004 2003
-------------------------------- ----------- -----------
Proceeds $73,254,718 $ 9,767,421
Gross Gains 970,722 297,583
Gross Losses -- --
7. In February 2004, 224,432 Series D preferred shares were converted into
428,304 common shares.
8. The following tables set forth the disclosures required for net periodic
benefit cost and net benefit cost:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
COMPONENTS OF NET PERIODIC COST
Service Cost $ 388,090 $ 356,971 $ 1,191,131 $ 955,536
Interest Cost 492,931 566,594 1,507,418 1,491,497
Expected return on plan assets (417,379) (419,825) (1,292,898) (1,157,473)
Amortization of prior service cost 19,331 19,331 57,993 57,993
Recognized actuarial loss 216,556 261,705 643,647 664,961
----------- ----------- ----------- -----------
Net periodic benefit cost 699,529 784,776 2,107,291 2,012,514
Settlement gain -- -- (1,331,190) --
----------- ----------- ----------- -----------
Net benefit cost $ 699,529 $ 784,776 $ 776,101 $ 2,012,514
=========== =========== =========== ===========
The Company contributed $1,322,088 as of September 30, 2004.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following commentary presents management's discussion and analysis of the
financial condition and results of operations of Sterling Bancorp ("the parent
company"), a financial holding company under the Gramm-Leach-Bliley Act of 1999,
and its subsidiaries, principally Sterling National Bank ("the bank").
Throughout this discussion and analysis, the term "the Company" refers to
Sterling Bancorp and its subsidiaries. This discussion and analysis should be
read in conjunction with the consolidated financial statements and supplemental
data contained elsewhere in this quarterly report and the Company's annual
report on Form 10-K for the year ended December 31, 2003. Certain
reclassifications have been made to prior years' financial data to conform to
current financial statement presentations.
OVERVIEW
The Company provides a broad range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, factoring/accounts receivable management
services, deposit services, trade financing, equipment leasing, trust and estate
administration, and investment management services. The Company has operations
in New York, Virginia and North Carolina and conducts business throughout the
United States. The economic conditions in these areas and throughout the United
States have a significant impact on loan demand, the ability of borrowers to
repay these loans and the value of any collateral securing these loans.
For the three months ended September 30, 2004, the bank's average earning assets
represented approximately 96.7% of the Company's average earning assets. Loans
represented 56.0% and investment securities represented 42.6% of the bank's
average earning assets for the third quarter of 2004.
For the nine months ended September 30, 2004, the bank's average earning assets
represented approximately 97.2% of the Company's average earning assets. Loans
represented 54.6% and investment securities represented 44.3% of the bank's
average earning assets for the first nine months of 2004.
The Company's primary source of earnings is net interest income, and its
principal market risk exposure is interest rate risk. The Company is not able to
predict market interest rate fluctuations, and its asset-liability management
strategy may not prevent interest rate changes from having a material adverse
effect on the Company's results of operations and financial condition.
Although management endeavors to minimize the credit risk inherent in the
Company's loan portfolio, it must necessarily make various assumptions and
judgments about the collectibility of the loan portfolio based on its
13
experience and evaluation of economic conditions. If such assumptions or
judgments prove to be incorrect, the current allowance for loan losses may not
be sufficient to cover loan losses and additions to the allowance may be
necessary, which would have a negative impact on net income.
There is intense competition in all areas in which the Company conducts its
business. The Company competes with banks and other financial institutions,
including savings and loan associations, savings banks, finance companies and
credit unions. Many of these competitors have substantially greater resources
and lending limits and provide a wider array of banking services. To a limited
extent, the Company also competes with other providers of financial services,
such as money market mutual funds, brokerage firms, consumer finance companies
and insurance companies. Competition is based on a number of factors, including
prices, interest rates, service, availability of products, and geographic
location.
The Company regularly evaluates acquisition opportunities and conducts due
diligence activities in connection with possible acquisitions. As a result,
acquisition discussions, and in some cases negotiations, regularly take place
and future acquisitions could occur.
INCOME STATEMENT ANALYSIS
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. Net interest spread is the
difference between the average rate earned, on a tax-equivalent basis, on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The net yield on interest-earning assets ("net interest margin") is
calculated by dividing tax equivalent net interest income by average
interest-earnings assets. Generally, the net interest margin will exceed the net
interest spread because a portion of interest-earning assets are funded by
various noninterest-bearing sources, principally noninterest-bearing deposits
and shareholders' equity. The increases (decreases) in the components of
interest income and interest expense, expressed in terms of fluctuation in
average volume and rate, are provided in the Rate/Volume Analysis shown on pages
26 and 27. Information as to the components of interest income and interest
expense and average rates is provided in the Average Balance Sheets shown on
pages 24 and 25.
Comparisons of the Three Months Ended September 30, 2004 and 2003
The Company reported net income for the three months ended September 30, 2004 of
$6.7 million, representing $0.43 per share, calculated on a diluted basis,
compared to $6.1 million, or $0.39 per share calculated on a diluted basis, for
the third quarter of 2003. This increase reflects continued growth in both net
interest income and noninterest income and a lower provision for income taxes,
which more than offset increases in the provision for loan losses and
noninterest expenses.
14
Net Interest Income
Net interest income on a tax-equivalent basis, increased to $20.0 million for
the third quarter of 2004 from $18.3 million for the corresponding 2003 period,
due to higher average earning assets outstanding coupled with lower average cost
of funding partially offset by a lower yield on earning assets and higher
average interest-bearing deposit balances. The net interest margin, on a tax
equivalent basis, was 4.84% for the third quarter of 2004 compared to 5.02% for
2003. The decrease in the net interest margin was primarily the result of the
impact of changes in the mix of earning assets, partially offset by the impact
of the higher interest rate environment in the third quarter of 2004.
Total interest income, on a tax-equivalent basis, aggregated $25.0 million for
the third quarter of 2004, up from $22.6 million for the corresponding 2003
period. The tax-equivalent yield on interest-earning assets was 6.11% for the
third quarter of 2004 compared to 6.22% for the 2003 period.
Interest earned on the loan portfolio increased to $16.9 million for the third
quarter of 2004, from $15.9 million for the third quarter of 2003. Average loan
balances, which represented 57.4% of average earning assets for the third
quarter of 2004, amounted to $951.9 million, an increase of $56.9 million from
an average of $895.0 million (61.3% of average earning assets) in the
corresponding prior year period. The increase in the average loans (across
virtually all segments of the Company's loan portfolio), primarily due to the
Company's business development activities and the ongoing consolidation of banks
in the Company's marketing area, accounted for the increase in interest earned
on loans. The increase in the yield on the loan portfolio to 7.31% for the third
quarter of 2004 from 7.18% for the third quarter of 2003 was primarily
attributable to the mix of outstanding balances on average among the components
of the loan portfolio and the higher interest rate environment in 2004.
Interest earned on the securities portfolio, on a tax-equivalent basis,
increased to $8.0 million for the third quarter of 2004 from $6.7 million in the
prior year period. Average outstandings increased to $682.7 million (41.2% of
average earning assets for the third quarter of 2004) from $558.6 million (38.3%
of average earning assets) in the prior year period. The average life of the
securities portfolio was approximately 4.2 years at September 30, 2004 compared
to 2.8 years at September 30, 2003, reflecting the impact of purchases made
primarily in the fourth quarter of 2003 and the first and second quarters of
2004. The decrease in yields on the securities portfolio reflects the impact of
purchases made during the lower rate environment on average in the first and
second quarters of 2004 and of the principal prepayments primarily in the fourth
quarter of 2003 and the second quarter of 2004.
Total interest expense increased to $5.1 million for the third quarter of 2004,
from $4.3 million in the prior year period. The increase was primarily due to
higher average balances for interest-bearing deposits coupled with higher rates
paid for those balances.
15
Interest expense on deposits increased to $3.0 million for the third quarter of
2004 from $2.2 million for the 2003 period due to an increase in average balance
coupled with an increase in the cost of those funds. Average interest- bearing
deposit balances increased to $853.3 million for the third quarter of 2004 from
$681.6 million in the corresponding 2003 period primarily as a result of
branching initiatives and other business development activities. Average rate
paid on interest-bearing deposits was 1.41%, 15 basis points higher than the
prior year period. The increase in average cost of deposits reflects the higher
interest rate environment in 2004.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for loan losses for the third
quarter of 2004 was $2.3 million compared to $2.2 million for the prior year
period. Factors affecting the level of provision for loan losses included the
growth in the loan portfolios, changes in general economic conditions and the
amount of nonaccrural loans.
Noninterest Income
Noninterest income increased to $9.2 million for the third quarter of 2004 from
$8.7 million in the third quarter of 2003, primarily due to increased income
from factoring activities, from bank owned life insurance and from gains on
sales of available for sale securities. Partially offsetting these increases
were lower revenues from fees various other services.
Noninterest Expenses
Noninterest expenses increased $1.5 million for the third quarter of 2004 when
compared to the third quarter of 2003. The increase was primarily due to
investments in the Sterling franchise, including the new branches, with higher
expenses related to salaries and employee benefits, occupancy and professional
fees.
Provision for Income Taxes
The provision for income taxes was $3.5 million for the third quarter of 2004,
virtually unchanged from $3.7 million in the corresponding 2003 period.
Comparisons of the Nine Months Ended September 30, 2004 and 2003
The Company reported net income for the nine months ended September 30, 2004 of
$19.9 million, representing $1.25 per share, calculated on a diluted basis,
compared to $17.8 million, or $1.13 per share calculated on a diluted basis, for
the first nine months of 2003. This increase reflects continued growth in both
net interest income and noninterest income and a lower provision for income
taxes, which more than offset increases in the provision for loan losses and
noninterest expenses.
Net Interest Income
Net interest income on a tax-equivalent basis increased to $58.4 million for
the first nine months of 2004 from $55.6 million for the corresponding 2003
period, due to higher average earning assets outstanding coupled with lower
average cost of funding partially offset by a lower yield on earning assets and
higher average
16
interest-bearing deposit balances. The net interest margin, on a tax-equivalent
basis, was 4.92% for the first nine months of 2004 compared to 5.36% for 2003.
The decrease in the net interest margin was primarily the result of changes in
the mix of earning assets.
Total interest income, on a tax-equivalent basis, aggregated $72.5 million for
the first nine months of 2004, up from $68.8 million for the 2003 period. The
tax-equivalent yield on interest-earning assets was 6.13% for the first nine
months of 2004 compared to 6.64% for the corresponding 2003 period.
Interest earned on the loan portfolio amounted to $47.4 million for the first
nine months of 2004, up $1.4 million from a year ago. Average loan balances
amounted to $905.4 million, an increase of $61.1 million from an average of
$844.3 million in the prior year period. The increase in the average loans
(across virtually all segments of the Company's loan portfolio), primarily due
to the Company's business development activities and the ongoing consolidation
of banks in the Company's marketing area, accounted for the increase in interest
earned on loans. The decrease in the yield on the loan portfolio to 7.38% for
the first nine months of 2004 from 7.68% for the first nine months of 2003 was
primarily attributable to changes in the mix of outstanding balances on average
among the components of the loan portfolio.
Interest earned on the securities portfolio, on a tax-equivalent basis,
increased to $25.0 million for the first nine months of 2004 from $22.7 million
in the corresponding prior year period. Average outstandings increased to $698.3
million from $573.4 in the prior year period. The average life of the securities
portfolio was approximately 4.2 years at September 30, 2004 compared to 2.8
years at September 30, 2003, reflecting the impact of purchases made primarily
in the fourth quarter of 2003 and the first and second quarters of 2004. The
decrease in yields on the securities portfolio reflects the impact of purchases
made during the lower rate environment on average in the first and second
quarters of the 2004 period and of the principal prepayments primarily in the
fourth quarter of 2003 and the second quarter of 2004.
Total interest expense increased to $14.1 million for the first nine months of
2004 from $13.2 million for the corresponding 2003 period, primarily due to
higher average balances for interest-bearing deposits.
Interest expense on deposits increased to $7.9 million for the first nine months
of 2004 from $6.7 million for the 2003 period, primarily due to an increase in
average balances. Average interest-bearing deposit balances increased to $815.3
million for the first nine months of 2004 from $671.2 in the first nine months
of 2003 period, primarily as a result of branching initiatives and other
business development activities. Average rate paid on interest-bearing deposits
was 1.29%, which was 4 basis points lower than the prior year period.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for loan losses for the first nine
months of 2004 increased to $7.2 million from $6.1 million for the prior year
period. Factors 1 affecting the level of provision for loan losses included the
growth in the loan
17
portfolios, changes in general economic conditions and the amount of nonaccrural
loans.
Noninterest Income
Noninterest income increased to $26.1 million for the first nine months of 2004
from $24.3 million in the corresponding 2003 period, primarily due to increased
income from mortgage banking, principally the result of a change in the mix of
loans sold due to a broader array of loan products and an increased focus on
higher margin mortgage loans, and from factoring activities, from bank owned
life insurance and from gains on sales of available for sale securities.
Partially offsetting these increases were lower revenues from fees for deposit
and various other services.
Noninterest Expenses
Noninterest expenses increased $2.8 million for the first nine months of 2004
when compared to the corresponding 2003 period. The increase was primarily due
to investments in the Sterling franchise, including the new branches, with
higher expenses related to salaries and employee benefits, advertising and
marketing, and professional fees. These higher expenses were partially offset by
a $1.3 million reduction in employee benefit costs in the first quarter of 2004
as a result of an executive relinquishing his right to receive pension payments
in exchange for a life insurance policy.
Provision for Income Taxes
The provision for income taxes decreased to $9.7 million for the first nine
months of 2004 from $ 11.0 million in the first nine months of 2003. The lower
provision for taxes in the 2004 period was due to the resolution, during the
second quarter of 2004, of certain state tax issues for tax years 1999-2001.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S. government
and U.S. government corporation and agency guaranteed mortgage-backed securities
along with other debt and equity securities. At September 30, 2004, the
Company's portfolio of securities totaled $670.1 million, of which U.S.
government corporation and agency guaranteed mortgage-backed securities and
collateralized mortgage obligations having an average life of approximately 4.4
years amounted to $575.0 million. The Company has the intent and ability to hold
to maturity securities classified as "held to maturity." These securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts. The gross unrealized gains and losses on "held to maturity"
securities were $5.2 million and $2.4 million, respectively. Securities
classified as "available for sale" may be sold in the future, prior to maturity.
These securities are carried at market value. Net aggregate unrealized gains or
losses on these securities are included in a valuation allowance account and are
shown net of taxes, as a component of shareholders' equity. "Available for sale"
securities included gross unrealized gains of $3.3 million and gross unrealized
losses of $2.7 million. Given the generally high credit quality of the
portfolio, management expects to realize all of its investment upon the maturity
of such instruments and thus believes that any market value impairment is
temporary.
18
The following table presents information regarding securities available for
sale:
Gross Gross Gross
Amortized Unrealized Unrealized Market
September 30, 2004 Cost Gains Losses Value
------------------ ------------ ------------ ------------ ------------
U.S. Treasury securities $ 2,488,090 $ -- $ (1,059) $ 2,487,031
Obligations of U.S. govern-
ment corporations and
agencies--mortgage-backed
securities 149,099,649 1,499,379 (605,420) 149,993,608
Obligations of U.S. govern-
ment corporations and
agencies--collateralized
mortgage obligations 50,300,775 -- (1,906,729) 48,394,046
Obligations of state and
political institutions 29,074,083 1,331,349 -- 30,405,432
Trust preferred securities 3,220,732 442,315 -- 3,663,047
Other debt securities 39,994,461 -- (141,336) 39,853,125
Federal Reserve Bank and
other equity securities 7,623,241 17,831 -- 7,641,072
------------ ------------ ------------ ------------
Total $281,801,031 $ 3,290,874 $ (2,654,544) $282,437,361
============ ============ ============ ============
The following table presents information regarding securities held to maturity:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
September 30, 2004 Value Gains Losses Value
------------------ ------------ ------------ ------------ ------------
Obligations of U.S. govern-
ment corporations and
agencies -- mortgage-backed
securities $306,779,884 $ 5,066,482 $ (905,293) $310,941,073
Obligations of U.S. govern-
ment corporations and
agencies--collateralized
mortgage obligations 69,641,819 138,245 (1,507,360) 68,272,704
Debt securities issued by
Foreign governments 1,250,000 -- -- 1,250,000
Other debt securities 10,010,938 -- (12,500) 9,998,438
------------ ------------ ------------ ------------
Total $387,682,641 $ 5,204,727 $ (2,425,153) $390,462,215
============ ============ ============ ============
19
Loan Portfolio
A management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness of and the
designation of lending limits for each borrower. The portfolio strategies
include seeking industry and loan size diversification in order to minimize
credit exposure and the origination of loans in markets with which the Company
is familiar.
The Company's commercial and industrial loan portfolio represents approximately
58% of all loans. Loans in this category are typically made to small and
medium-sized businesses and range between $100,000 and $15 million. Sources of
repayment are from the borrower's operating profits, cash flows and liquidation
of pledged collateral. Based on underwriting standards, loans may be secured in
whole or in part by collateral such as liquid assets, accounts receivable,
equipment, inventory, and real property. The Company's real estate loan
portfolio, which represents approximately 24% of all loans, is secured by
mortgages on real property located principally in the states of New York, North
Carolina, Georgia and Virginia. The Company's leasing portfolio, which consists
of finance leases for various types of business equipment, represents
approximately 16% of all loans. The collateral securing any loan may vary in
value based on market conditions.
The following table sets forth the composition of the Company's loans held for
sale and loans held in portfolio:
September 30,
------------------------------------------------
2004 2003
-------------------- --------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- ----- -------- -----
Domestic
Commercial and industrial $ 584,754 58.1% $ 544,409 56.9%
Equipment lease financing 159,175 15.8 142,223 14.9
Real estate - mortgage 245,357 24.4 235,526 24.6
Real estate - construction 2,329 0.2 -- --
Installment - individuals 15,268 1.5 13,969 1.5
Loans to depository institutions -- -- 20,000 2.1
---------- ----- ---------- -----
Loans, net of unearned discounts $1,006,883 100.0% $ 956,127 100.0%
========== ===== ========== =====
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk of loss inherent in the Company's portfolio of loans
may 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 depend on current and expected economic conditions, the financial
condition of borrowers, the realization of collateral, and the credit management
process.
Management views the allowance for loan losses as a critical accounting policy
due to its subjectivity. The allowance for loan losses is maintained through the
provision for loan losses, which is a charge to operating earnings. The adequacy
20
of the provision and the resulting allowance for loan losses is determined by a
management evaluation process of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, an assessment of current and expected
economic conditions and changes in the size and character of the loan portfolio.
Other data utilized by management in determining the adequacy of the allowance
for loan losses includes, but is not limited to, the results of regulatory
reviews, the amount of, trend of and/or borrower characteristics on loans that
are identified as requiring special attention as part of the credit review
process, and peer group comparisons. The impact of this other data might result
in an allowance which will be greater than that indicated by the evaluation
process previously described. The allowance reflects management's evaluation
both of loans presenting identified loss potential and of the risk inherent in
various components of the loan 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, 2004,
the ratio of the allowance to loans held in portfolio, net of unearned
discounts, was 1.61% and the allowance was $15.6 million. At such date, the
Company's nonaccrual loans amounted to $3.0 million; $921 thousand of such loans
was judged to be impaired within the scope of SFAS No. 114. Based on the
foregoing, as well as management's judgment as to the current risks inherent in
loans held in portfolio, the Company's allowance for loan losses was deemed
adequate to absorb all reasonably anticipated losses on specifically known and
other possible credit risks associated with the portfolio as of September 30,
2004. Net losses within loans held in portfolio are not statistically
predictable and changes in conditions in the next twelve months could result in
future provisions for loan losses varying from the level taken in the first nine
months of 2004. Potential problem loans, which are loans that are currently
performing under present loan repayment terms but where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of the borrowers to continue to comply with the present
repayment terms, aggregated $0.6 million at September 30, 2004.
21
Deposits
A significant source of funds for the Company continues to be deposits,
consisting of demand (noninterest-bearing), NOW, savings, money market and time
deposits (principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
September 30,
----------------------------------------------------
2004 2003
-------------------- -----------------------
($ in thousands)
% of % of
Balances Total Balances Total
-------- ----- -------- -----
Domestic
Demand $ 424,534 32.6% $ 399,975 36.5%
NOW 111,868 8.6 116,601 10.6
Savings 29,488 2.3 27,264 2.5
Money market 226,655 17.4 175,345 16.0
Time deposits 503,824 38.8 373,121 34.1
---------- ----- ---------- -----
Total domestic deposits 1,296,369 99.7 1,092,306 99.7
Foreign
Time deposits 3,000 0.3 3,000 0.3
---------- ----- ---------- -----
Total deposits $1,299,369 100.0% $1,095,306 100.0%
========== ===== ========== =====
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.
The Company does not have any off-balance sheet arrangements that are reasonably
likely to have a material current or future effect on the Company's financial
condition, revenues, expenses, results of operations, liquidity or regulatory
capital.
CAPITAL
The Company and the bank are subject to risk-based capital regulations which
quantitatively measure capital against risk-weighted assets, including certain
off-balance sheet items. These regulations define the elements of the Tier 1 and
Tier 2 components of Total Capital and establish minimum ratios of 4% for Tier 1
capital and 8% for Total Capital for capital adequacy purposes. Supplementing
these regulations is a leverage requirement. This requirement establishes a
minimum leverage ratio (at least 3% 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 bank is subject to the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") which imposes a number
of mandatory supervisory measures. Among other matters, five capital categories,
ranging from "well capitalized" to "critically under capitalized", are used by
regulatory agencies
22
to determine a bank's deposit insurance premium, approval of applications
authorizing institutions to increase their asset size or otherwise expand
business activities or acquire other institutions. Under FDICIA, a "well
capitalized" bank must maintain minimum leverage, Tier 1 and Total Capital
ratios of 5%, 6% and 10%, respectively. The Federal Reserve Board applies
comparable tests for holding companies such as the Company. At September 30,
2004, the Company and the bank exceeded the requirements for "well capitalized"
institutions.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report, including but not limited
to, statements concerning future results of operations or financial position,
borrowing capacity and future liquidity, future investment results, future
credit exposure, future loan losses and plans and objectives for future
operations, and other statements contained herein regarding matters that are not
historical facts, are "forward-looking statements" as defined in the Securities
Exchange Act of 1934. These statements are not historical facts but instead are
subject to numerous assumptions, risks and uncertainties, and represent only our
belief regarding future events, many of which, by their nature, are inherently
uncertain and outside our control. Any forward-looking statements we may make
speak only as of the date on which such statements are made. Our actual results
and financial position may differ materially from the anticipated results and
financial condition indicated in or implied by these forward-looking statements.
Factors that could cause our actual results to differ materially from those in
the forward-looking statements include, but are not limited to, the following:
inflation, interest rates, market and monetary fluctuations; geopolitical
development 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 System; changes particularly declines, in general economic
conditions and in the local economies in which the Company operates; the
financial condition of the Company's borrowers; competitive pressures on loan
and deposit pricing and demand; changes in technology and their impact on the
marketing of new products and services and the acceptance of these products and
services by new and existing customers; the willingness of customers to
substitute competitors' products and services for the Company's products and
services; the impact of changes in the 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.
23
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended September 30,
(dollars in thousands)
2004 2003
---------------------------------- ---------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
Interest-bearing deposits
with other banks $ 3,799 $ 6 0.62% $ 4,244 $ 9 0.98%
Securities available for sale 266,551 2,886 4.33 171,712 1,917 4.58
Securities held to maturity 386,851 4,625 4.78 355,463 4,201 4.73
Securities tax-exempt [2] 29,267 528 7.18 31,404 583 7.37
Federal funds sold 19,620 73 1.45 2,065 5 1.00
Loans, net of unearned discounts [3] 951,941 16,898 7.31 895,036 15,877 7.18
----------- --------- ----------- ----------
TOTAL INTEREST-EARNING ASSETS 1,658,029 25,016 6.11% 1,459,924 22,592 6.22%
--------- ==== ---------- ====
Cash and due from banks 53,476 60,229
Allowance for loan losses (16,158) (15,004)
Goodwill 21,158 21,158
Other assets 70,050 63,256
----------- -----------
TOTAL ASSETS $ 1,786,555 $ 1,589,563
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 29,991 28 0.37% $ 27,561 24 0.34%
NOW 133,357 162 0.48 125,470 141 0.45
Money market 217,612 348 0.64 169,220 189 0.44
Time 469,319 2,469 2.09 356,358 1,803 2.01
Foreign
Time 3,000 8 1.10 3,000 11 1.30
----------- --------- ----------- ----------
Total interest-bearing deposits 853,279 3,015 1.41 681,609 2,168 1.26
----------- --------- ----------- ----------
Borrowings
Securities sold under agreements
to repurchase - customers 90,654 272 1.19 77,980 235 1.20
Securities sold under agreements
to repurchase - dealers 14,910 54 1.43 35,266 104 1.17
Federal funds purchased 2,500 9 1.44 7,228 21 1.14
Commercial paper 34,394 107 1.23 24,285 66 1.07
Other short-term debt 6,293 34 2.15 31,114 85 1.09
Long-term debt 135,774 1,559 4.59 140,774 1,605 4.56
----------- --------- ----------- ----------
Total borrowings 284,525 2,035 2.86 316,647 2,116 2.67
----------- --------- ----------- ----------
TOTAL INTEREST-BEARING LIABILITIES 1,137,804 5,050 1.77% 998,256 4,284 1.71%
--------- ==== ---------- ====
Noninterest-bearing deposits 424,974 377,624
Other liabilities 83,603 77,606
----------- -----------
Total liabilities 1,646,381 1,453,486
----------- -----------
Shareholders' equity 140,174 136,077
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,786,555 $ 1,589,563
=========== ===========
Net interest income/spread 19,966 4.34% 18,308 4.51%
==== ====
Net yield on interest-earning
assets (margin) 4.84% 5.02%
==== ====
Less: Tax equivalent adjustment 202 240
--------- ----------
Net interest income $ 19,764 $ 18,068
========= ==========
[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 amounts
for prior periods 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 earned.
24
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Nine Months Ended September 30,
(dollars in thousands)
2004 2003
------------------------------------- --------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
----------- --------- ------- ----------- --------- -------
Interest-bearing deposits
with other banks $ 3,151 $ 13 0.55% $ 3,679 $ 21 0.76%
Securities available for sale 282,504 9,364 4.37 162,294 6,110 5.02
Securities held to maturity 385,548 14,008 4.84 378,874 14,830 5.22
Securities tax-exempt [2] 30,217 1,619 7.16 32,222 1,794 7.44
Federal funds sold 14,361 129 1.18 5,044 45 1.18
Loans, net of unearned discounts [3] 905,402 47,392 7.38 844,335 46,018 7.68
----------- --------- ----------- ---------
TOTAL INTEREST-EARNING ASSETS 1,621,183 72,525 6.13% 1,426,448 68,818 6.64%
--------- ==== ----------- --------- ====
Cash and due from banks 59,477 57,391
Allowance for loan losses (15,694) (14,579)
Goodwill 21,158 21,158
Other assets 70,370 63,630
----------- -----------
TOTAL ASSETS $ 1,756,494 $ 1,554,048
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 31,851 93 0.39% $ 27,065 72 0.36%
NOW 134,237 463 0.46 118,907 438 0.49
Money market 210,257 909 0.58 160,835 565 0.47
Time 435,991 6,373 1.95 361,343 5,571 2.06
Foreign
Time 3,000 24 1.09 3,000 33 1.48
----------- --------- ----------- ---------
Total interest-bearing deposits 815,336 7,862 1.29 671,150 6,679 1.33
----------- --------- ----------- ---------
Borrowings
Securities sold under agreements
to repurchase - customers 81,625 702 1.15 69,057 639 1.24
Securities sold under agreements
to repurchase - dealers 34,018 305 1.20 40,198 384 1.28
Federal funds purchased 8,580 72 1.11 6,154 56 1.21
Commercial paper 28,733 248 1.15 22,758 192 1.13
Other short-term debt 16,603 240 1.93 30,959 416 1.80
Long-term debt 135,774 4,679 4.59 140,774 4,815 4.56
----------- --------- ----------- ---------
Total borrowings 305,333 6,246 2.73 309,900 6,502 2.80
----------- --------- ----------- ---------
TOTAL INTEREST-BEARING LIABILITIES 1,120,669 14,108 1.68% 981,050 13,181 1.80%
--------- ==== ----------- --------- ====
Noninterest-bearing deposits 411,916 360,793
Other liabilities 81,928 78,893
----------- -----------
Total liabilities 1,614,513 1,420,736
----------- -----------
Shareholders' equity 141,981 133,312
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,756,494 $ 1,554,048
=========== ===========
Net interest income/spread 58,417 4.45% 55,637 4.84%
==== ====
Net yield on interest-earning
assets (margin) 4.92% 5.36%
==== ====
Less: Tax equivalent adjustment 626 737
--------- ---------
Net interest income $ 57,791 $ 54,900
========= =========
[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 amounts
for prior periods 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 earned.
25
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/(Decrease)
Three Months Ended
September 30, 2004 to September 30, 2003
----------------------------------------
Volume Rate Net [2]
--------- --------- ---------
INTEREST INCOME
Interest-bearing deposits with other banks $ (1) $ (2) $ (3)
--------- --------- ---------
Securities available for sale 1,079 (110) 969
Securities held to maturity 378 46 424
Securities tax-exempt (40) (15) (55)
--------- --------- ---------
Total investment securities 1,417 (79) 1,338
--------- --------- ---------
Federal funds sold 65 3 68
Loans, net of unearned discounts [3] 795 226 1,021
--------- --------- ---------
TOTAL INTEREST INCOME $ 2,276 $ 148 $ 2,424
========= ========= =========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 2 $ 2 $ 4
NOW 10 11 21
Money market 62 97 159
Time 592 74 666
Foreign
Time -- (3) (3)
--------- --------- ---------
Total interest-bearing deposits 666 181 847
--------- --------- ---------
Borrowings
Securities sold under agreements
to repurchase - customers 39 (2) 37
Securities sold under agreements
to repurchase - dealers (69) 19 (50)
Federal funds purchased (16) 4 (12)
Commercial paper 30 11 41
Other short-term debt (98) 47 (51)
Long-term debt (57) 11 (46)
--------- --------- ---------
Total borrowings (171) 90 (81)
--------- --------- ---------
TOTAL INTEREST EXPENSE $ 495 $ 271 $ 766
========= ========= =========
NET INTEREST INCOME $ 1,781 $ (123) $ 1,658
========= ========= =========
[1] This 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 earned.
26
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/(Decrease)
Nine Months Ended
September 30, 2004 to September 30, 2003
----------------------------------------
Volume Rate Net [2]
--------- --------- ---------
INTEREST INCOME
Interest-bearing deposits with other banks $ (3) $ (5) $ (8)
--------- --------- ---------
Securities available for sale 4,121 (867) 3,254
Securities held to maturity 303 (1,125) (822)
Securities tax-exempt (111) (64) (175)
--------- --------- ---------
Total investment securities 4,313 (2,056) 2,257
--------- --------- ---------
Federal funds sold 84 -- 84
Loans, net of unearned discounts [3] 3,416 (2,042) 1,374
--------- --------- ---------
TOTAL INTEREST INCOME $ 7,810 $ (4,103) $ 3,707
========= ========= =========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 14 $ 7 $ 21
NOW 54 (29) 25
Money market 196 148 344
Time 1,115 (313) 802
Foreign
Time -- (9) (9)
--------- --------- ---------
Total interest-bearing deposits 1,379 (196) 1,183
--------- --------- ---------
Borrowings
Securities sold under agreements
to repurchase - customers 113 (50) 63
Securities sold under agreements
to repurchase - dealers (56) (23) (79)
Federal funds purchased 21 (5) 16
Commercial paper 53 3 56
Other short-term debt (204) 28 (176)
Long-term debt (166) 30 (136)
--------- --------- ---------
Total borrowings (239) (17) (256)
--------- --------- ---------
TOTAL INTEREST EXPENSE $ 1,140 $ (213) $ 927
========= ========= =========
NET INTEREST INCOME $ 6,670 $ (3,890) $ 2,780
========= ========= =========
[1] This 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. The effect of the extra day in 2004 has been included in
the change in volume.
[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 earned.
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, 2004 Amount Ratio Amount Ratio Amount Ratio
------------------------ -------- ----- -------- ---- -------- -----
Total Capital(to Risk Weighted Assets):
The Company $166,929 14.38% $ 92,839 8.00% $116,049 10.00%
The bank 135,324 12.32 87,879 8.00 109,849 10.00
Tier 1 Capital(to Risk Weighted Assets):
The Company 152,409 13.13 46,420 4.00 69,629 6.00
The bank 121,572 11.07 43,939 4.00 65,909 6.00
Tier 1 Leverage Capital(to Average Assets):
The Company 152,409 8.63 70,616 4.00 88,270 5.00
The bank 121,572 7.13 68,172 4.00 85,215 5.00
As of December 31, 2003
-----------------------
Total Capital(to Risk Weighted Assets):
The Company $161,593 14.88% $ 86,898 8.00% $108,623 10.00%
The bank 123,092 11.85 83,130 8.00 103,912 10.00
Tier 1 Capital(to Risk Weighted Assets):
The Company 148,004 13.63 43,449 4.00 65,174 6.00
The bank 110,086 10.59 41,565 4.00 62,347 6.00
Tier 1 Leverage Capital(to Average Assets):
The Company 148,004 8.87 66,741 4.00 83,426 5.00
The bank 110,086 6.76 65,112 4.00 81,390 5.00
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company to excessive
interest rate fluctuations.
The Company takes a coordinated approach to the management of its liquidity,
capital and interest rate risk. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee. This committee, which is comprised of
members of senior management, meets to review, among other things, economic
conditions, interest rates, yield curve, cash flow projections, expected
customer actions, liquidity levels, capital ratios and repricing characteristics
of assets, liabilities and financial instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates. Interest
rate sensitivity is the relationship between market interest rates and net
interest income due to the repricing characteristics of assets and liabilities.
The Company monitors the interest rate sensitivity of its balance sheet
positions by examining its near-term sensitivity and its longer-term gap
position. In its management of interest rate risk, the Company utilizes several
financial and statistical tools, including traditional gap analysis and
sophisticated income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time periods. The mismatch between repricings or maturities within a
time period is commonly referred to as the "gap" for that period. A positive gap
(asset sensitive) where interest rate sensitive assets exceed interest rate
sensitive liabilities generally will result in the net interest margin
increasing in a rising rate environment and decreasing in a falling rate
environment. A negative gap (liability sensitive) will generally have the
opposite result on the net interest margin. However, the traditional gap
analysis does not assess the relative sensitivity of assets and liabilities to
changes in interest rates and other factors that could have an impact on
interest rate sensitivity or net interest income. The Company utilizes the gap
analysis to complement its income simulations modeling, primarily focusing on
the longer-term structure of the balance sheet.
29
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, 2004, presented on page 33,
indicates that net interest income would increase during periods of rising
interest rates and decrease during periods of falling interest rates, but, as
mentioned above, gap analysis may not be an accurate predictor of net interest
income.
As part of its interest rate risk strategy, the Company may use financial
instrument derivatives to hedge the interest rate sensitivity of assets with the
corresponding amortization reflected in the yield of the related balance sheet
assets being hedged. The Company has written policy guidelines, approved by the
Board of Directors, governing the use of financial instruments, including
approved counterparties, risk limits and appropriate internal control
procedures. The credit risk of derivatives arises principally from the potential
for a counterparty to fail to meet its obligation to settle a contract on a
timely basis.
The Company utilizes income simulation models to complement its traditional gap
analysis. While the Asset/Liability Committee routinely monitors simulated net
interest income sensitivity over a rolling two-year horizon, it also utilizes
additional tools to monitor potential longer-term interest rate risk.
The income simulation models measure the Company's net interest income
volatility or sensitivity to interest rate changes utilizing statistical
techniques that allow the Company to consider various factors which impact net
interest income. These factors include actual maturities, estimated cash flows,
repricing characteristics, deposits growth/retention and, most importantly, the
relative sensitivity of the Company's assets and liabilities to changes in
market interest rates. This relative sensitivity is important to consider as the
Company's core deposit base has not been subject to the same degree of interest
rate sensitivity as its assets. The core deposit costs are internally managed
and tend to exhibit less sensitivity to changes in interest rates than the
Company's adjustable rate assets whose yields are based on external indices and
generally change in concert with market interest rates.
The Company's interest rate sensitivity is determined by identifying the
probable impact of changes in market interest rates on the yields on the
Company's assets and the rates that would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
projects the impact of changes in interest rates on net interest margin. The
Company has established certain policy limits for the potential volatility of
its net interest margin assuming certain levels of changes in market interest
rates with the objective of maintaining a stable net interest margin under
various probable rate scenarios. Management generally has maintained a risk
position well within the policy limits. As of September 30, 2004, the model
indicated the impact of a 200 basis point parallel and pro rata rise in rates
over 12 months would approximate a 3.0% ($2.4 million) increase in net interest
income, while the impact of a 200 basis point decline in rates over the same
period would approximate a 5.2% ($4.2 million) decline from an unchanged rate
environment.
30
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,
pre-payments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot provide any assurances as to the
predictive nature of these assumptions, including how customers 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: pre-payment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals and
product preference changes, and other variables. Furthermore, the sensitivity
analysis does not reflect actions that the Asset/Liability Committee might take
in responding to or anticipating changes in interest rates.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the bank levels. Liquid Assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital market funds and other money market sources. Core deposits
included domestic noninterest-bearing and interest-bearing retail deposits,
which historically have been relatively stable. The parent company and the bank
believe that they have significant unused borrowing capacity. Contingency plans
exist which we believe could be implemented on a timely basis to mitigate the
impact of any dramatic change in market conditions.
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements throughout its history.
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for the year
to date combined with its retained net profits for the preceding two calendar
years.
At September 30, 2004, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $35.0 million. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating $34.8
million. The parent company also has back-up credit lines with banks of $24.0
million. Since 1979, the parent company has had no need to use the available
back-up lines of credit.
31
The following table sets forth information regarding the Company's obligations
and commitments to make future payments under contract as of September 30, 2004:
Payments Due by Period
--------------------------------------------------------------------------
Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
------------------------------------------------------------------------------------------------------------------
(in thousands)
Long-Term Debt $ 110,000 $ -- $ -- $ 10,000 $ 100,000
Operating Leases 30,242 3,522 6,670 6,515 13,535
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $ 140,242 $ 3,522 $ 6,670 $ 16,515 $ 113,535
========== ========== ========== ========== ==========
The following table sets forth information regarding the Company's obligations
under other commercial commitments as of September 30, 2004:
Amount of Commitment Expiration Per Period Other
Other --------------------------------------------------------------------------
Commercial Total Amount Less than 1-3 4-5 After 5
Commitments Committed 1 Year Years Years Years
------------------------------------------------------------------------------------------------------------------
(in thousands)
Residential loans $ 69,175 $ 69,175 $ -- $ -- $ --
Standby Letters of Credit 31,483 29,520 1,963 -- --
Other Commercial Commitments 46,610 32,325 11,484 2,725 76
---------- ---------- ---------- ---------- ----------
Total Commercial Commitments $ 147,268 $ 131,020 $ 13,447 $ 2,725 $ 76
========== ========== ========== ========== ==========
INFORMATION AVAILABLE ON OUR WEB SITE
Our Internet address is www.sterlingbancorp.com and the investor relations
section of our web site is located at www.sterlingbancorp.com/ir/investor.cfm.
We make available free of charge, on or through the investor relations section
of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission.
Also posted on our web site, and available in print upon request of any
shareholder to our Investor Relations Department, are the charters for our Board
of Directors' Audit Committee, Compensation Committee and Corporate Governance
and Nominating Committee, our Corporate Governance Guidelines, our Method for
Interested Persons to Communicate with Non-Management Directors and a Code of
Business Conduct and Ethics governing our directors, officers and employees.
Within the time period required by the Securities and Exchange Commission and
the New York Stock Exchange, we will post on our web site any amendment to the
Code of Business Conduct and Ethics and any waiver applicable to our senior
financial officers, as defined in the Code, or our executive officers or
directors. In addition, information concerning purchases and sales of our equity
securities by our executive officers and directors is posted on our web site.
32
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 $ 2,670 $ -- $ -- $ -- $ -- $ 2,670
Investment securities 16,500 7,582 82,098 556,299 7,641 670,120
Loans, net of unearned
discounts
Commercial and industrial 577,019 1,088 7,173 8 (535) 584,753
Loans to depository
institutions -- -- -- -- -- --
Lease financing 1,212 16,289 154,045 10,126 (22,496) 159,176
Real estate 98,694 9,966 105,857 33,170 (1) 247,686
Installment 13,108 82 2,052 28 (2) 15,268
Noninterest-earning
assets and allowance
for loan losses -- -- -- -- 130,206 130,206
---------- ---------- ---------- ---------- ---------- ----------
Total Assets 709,203 35,007 351,225 599,631 114,813 1,809,879
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings [1] -- -- 29,488 -- -- 29,488
NOW [1] -- -- 111,868 -- -- 111,868
Money market [1] 185,045 -- 41,610 -- -- 226,655
Time - domestic 194,096 170,298 139,320 110 -- 503,824
- foreign 1,355 1,645 -- -- -- 3,000
Securities sold u/a/r - cust 98,483 5,113 -- -- -- 103,596
Securities sold u/a/r - deal -- -- -- -- -- --
Federal funds purchased -- -- -- -- -- --
Commercial paper 34,954 -- -- -- -- 34,954
Other short-term borrowings 1,108 -- -- -- -- 1,108
Long-term borrowings - FHLB -- -- 10,000 100,000 25,774 135,774
Noninterest-bearing liabilities
and shareholders' equity -- -- -- -- 659,612 659,612
---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity 515,041 177,056 332,286 100,110 685,386 1,809,879
---------- ---------- ---------- ---------- ---------- ----------
Net Interest Rate
Sensitivity Gap $ 194,162 $ (142,049) $ 18,939 $ 499,521 $ (570,573) $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap
September 30, 2004 $ 194,162 $ 52,113 $ 71,052 $ 570,573 $ -- $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap
September 30, 2003 $ 259,449 $ 129,985 $ 107,689 $ 543,384 $ -- $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap
December 31, 2003 $ 230,662 $ 77,756 $ 46,397 $ 595,450 $ -- $ --
========== ========== ========== ========== ========== ==========
[1] Historically, balances in non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical repricing
practices and run-off experience.
33
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) or 15d-15(e)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer and 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 have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
34
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
3.(i) Restated Certificate of Incorporation filed with
the State of New York Department of State, October
28, 2004
3.(ii) The By-Laws as in effect on August 5, 2004 (Filed
as Exhibit 3(ii)(A) to the Registrant's Form 10-Q
for the quarter ended June 30, 2004 and
incorporated herein by reference)
10. Sterling Bancorp Stock Incentive Plan (Amended and
Restated as of May 20, 2004.)
Form of Award Letter for Non-Employee Directors
Form of Award Letter for Officers
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 16,2004 and filed on July
19, 2004, the Company reported under Items 9 and 12 "Results
of Operations and Financial Condition and Regulation FD
Disclosure", the press release announcing a conference call on
July 20, 2004 to discuss the results of operations for the
second quarter ended June 30, 2004.
In a report on Form 8-K dated July 20, 2004 and filed on July
21, 2004, the Company reported, under Items 9 and 12 "Results
of Operations and Financial Condition and Regulation FD
Disclosure", the press release announcing the results of
operations for the quarter and six months ended June
30,2004.
In a report on Form 8-K dated July 21, 2004 and filed on July
22, 2004, the Company reported, under Item 7 "Financial
Statements, Pro Forma Information and Exhibits" and under Item
9 "Regulation FD Disclosure", the press release announcing a
presentation on July 27, 2004 by John C. Millman, President of
Sterling Bancorp, as part of the Keefe, Bruyette & Woods, Inc.
Fifth Annual Investor Conference.
35
In a report on Form 8-K dated August 19, 2004 and filed on
August 20, 2004, 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 quarterly cash dividend of
$0.19 payable September 30, 2004 to shareholders of record on
September 15, 2004.
In a report on Form 8-K dated September 20, 2004 and filed on
September 21, 2004, the Company reported, under Item 7
"Financial Statements, Pro Forma Information and Exhibits" and
under Item 9 "Regulation FD Disclosure", the press release
announcing a presentation on September 23, 2004 by John C.
Millman, President of Sterling Bancorp and Michael Bizenov,
President of Sterling National Mortgage Company Inc., as part
of the LI Invest First Annual Investor Conference.
In a report on Form 8-K/A dated September 20, 2004 and filed
on September 21, 2004, the Company reported, under Item 7.01
"Regulation FD Disclosure" and Item 9.01 "Financial
Statements, Pro Forma Information and Exhibits", the press
release announcing a presentation on September 23, 2004 by
John C. Millman, President of Sterling Bancorp and Michael
Bizenov, President of Sterling National Mortgage Company Inc.,
as part of the LI Invest First Annual Investor Conference.
36
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 11/9/04 /s/ Louis J. Cappelli
------------ -----------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 11/9/04 /s/ John W. Tietjen
------------ -----------------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
37
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
------ ----------- ------------ -------- ---
3(i) Restated Certificate of Incorporation filed with the State
of New York Department of State, October 28, 2004 X 39
3(ii) The By-Laws as in effect on August 5, 2004 (Filed as Exhibit
3(ii)(A) to the Registrant's Form 10-Q for the quarter ended
June 30, 2004 and incorporated herein by reference)
10 Sterling Bancorp Stock Incentive Plan (Amended And
Restated as of May 20, 2004). X 49
Form of Award Letter for Non-Employee Directors 68
Form of Award Letter for Officers 69
11 Statement re: Computation of Per Share Earnings X 71
31 Certifications of the CEO and CFO pursuant to Exchange Act
Rule 13a-14(a) X 72
32 Certifications of the CEO and CFO required by Section 1350
of Chapter 63 of Title 18 of the U.S. Code X 74
38