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 March 31, 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 April 30, 2004 there were 15,341,208 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 12
Income Statement Analysis 13
Balance Sheet Analysis 15
Capital 19
Cautionary Statement Regarding Forward-Looking Statements 20
Average Balance Sheets 21
Rate/Volume Analysis 22
Regulatory Capital and Ratios 23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 24
Interest Rate Sensitivity 28
Item 4. Controls and Procedures 29
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 32
EXHIBIT INDEX
Exhibit 11 Statement Re: Computation of Per Share Earnings 34
Exhibit 31 Certifications of the CEO and CFO pursuant to 35
Exchange Act Rule 13a-14(a)
Exhibit 32 Certifications of the CEO and CFO required by 37
Section 1350 of Chapter 63 of Title 18 of the
U.S. Code
2
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
ASSETS 2004 2003
--------------- ---------------
Cash and due from banks $ 45,756,741 $ 63,947,722
Interest-bearing deposits with other banks 2,475,551 1,656,338
Securities available for sale 198,355,342 195,477,473
Securities available for sale - pledged 130,493,321 117,250,082
Securities held to maturity 223,257,474 203,480,172
Securities held to maturity - pledged 160,737,934 166,910,347
--------------- ---------------
Total investment securities 712,844,071 683,118,074
--------------- ---------------
Loans held for sale 48,426,817 40,556,380
--------------- ---------------
Loans held in portfolio, net of unearned discounts 853,007,704 900,556,215
Less allowance for loan losses 14,762,771 14,458,951
--------------- ---------------
Loans, net 838,244,933 886,097,264
--------------- ---------------
Customers' liability under acceptances 1,413,995 953,571
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 9,704,799 9,226,183
Other real estate 1,292,078 829,856
Accrued interest receivable 5,419,115 5,069,423
Bank owned life insurance 22,105,961 21,872,266
Other assets 26,523,285 24,260,063
--------------- ---------------
$ 1,735,365,786 $ 1,758,745,580
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 429,296,562 $ 474,091,890
Interest-bearing deposits 794,000,826 737,648,930
--------------- ---------------
Total deposits 1,223,297,388 1,211,740,820
Securities sold under agreements to repurchase - customers 77,795,349 42,490,862
Securities sold under agreements to repurchase - dealers 35,392,079 51,327,944
Federal funds purchased -- 10,000,000
Commercial paper 24,401,800 28,799,055
Other short-term borrowings 15,416,233 56,871,359
Acceptances outstanding 1,413,995 953,571
Accrued expenses and other liabilities 73,501,227 77,602,887
Long-term debt 135,774,000 135,774,000
--------------- ---------------
Total liabilities 1,586,992,071 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
20,000,000 shares; issued 16,756,554
and 16,244,549 shares, respectively 16,756,554 16,244,549
Capital surplus 145,065,971 142,393,959
Retained earnings 21,293,568 17,751,859
Accumulated other comprehensive loss, net of tax (203,741) (976,782)
--------------- ---------------
182,912,352 177,657,905
Less
Common shares in treasury at cost, 1,314,895
and 1,306,587 shares, respectively 33,829,331 33,577,847
Unearned compensation 709,306 894,976
--------------- ---------------
Total shareholders' equity 148,373,715 143,185,082
--------------- ---------------
$ 1,735,365,786 $ 1,758,745,580
=============== ===============
See Notes to Consolidated Financial Statements.
3
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2004 2003
------------- -------------
INTEREST INCOME
Loans $ 15,081,995 $ 14,759,913
Investment securities
Available for sale 3,691,820 2,511,777
Held to maturity 4,706,408 5,330,999
Federal funds sold 50,342 21,976
Deposits with other banks 58,563 8,553
------------- -------------
Total interest income 23,589,128 22,633,218
------------- -------------
INTEREST EXPENSE
Deposits 2,473,145 2,201,635
Securities sold under agreements
to repurchase 315,632 298,945
Federal funds purchased 15,890 11,472
Commercial paper 62,762 70,651
Other short-term borrowings 112,194 189,768
Long-term debt 1,559,692 1,615,997
------------- -------------
Total interest expense 4,539,315 4,388,468
------------- -------------
Net interest income 19,049,813 18,244,750
Provision for loan losses 2,426,500 1,791,300
------------- -------------
Net interest income after provision
for loan losses 16,623,313 16,453,450
------------- -------------
NONINTEREST INCOME
Factoring income 1,426,869 1,352,502
Mortgage banking income 3,631,391 3,242,648
Service charges on deposit accounts 1,063,343 1,231,998
Trade finance income 492,807 573,013
Trust fees 181,697 165,397
Other service charges and fees 474,404 435,210
Bank owned life insurance income 233,695 260,830
Securities gains 536,304 95,992
Other income 129,145 96,707
------------- -------------
Total noninterest income 8,169,655 7,454,297
------------- -------------
NONINTEREST EXPENSES
Salaries and employee benefits 8,351,775 8,483,655
Occupancy expenses, net 1,225,730 1,295,721
Equipment expenses 756,154 646,514
Advertising and marketing 1,093,460 790,818
Professional fees 913,671 726,632
Data processing fees 287,460 265,032
Stationery and printing 266,571 208,318
Communications 406,727 442,690
Mortgage tax expense 161,696 177,667
Other expenses 1,230,606 1,343,492
------------- -------------
Total noninterest expenses 14,693,850 14,380,539
------------- -------------
Income before income taxes 10,099,118 9,527,208
Provision for income taxes 3,638,609 3,680,785
------------- -------------
Net income $ 6,460,509 $ 5,846,423
============= =============
Average number of common
shares outstanding
Basic 15,188,650 14,839,328
Diluted 16,051,105 15,641,746
Earnings per average common share
Basic $ 0.43 $ 0.39
Diluted 0.40 0.37
Dividends per common share 0.19 0.15
See Notes to Consolidated Financial Statements.
4
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
2004 2003
----------- -----------
Net Income $ 6,460,509 $ 5,846,423
Other comprehensive income,
net of tax:
Unrealized holding gains (losses)
arising during the period 1,427,580 (519,808)
Reclassification adjustment for
gains included in net income (290,141) (51,932)
Minimum pension liability adjustment (364,398) --
----------- -----------
Comprehensive income $ 7,233,550 $ 5,274,683
=========== ===========
See Notes to Consolidated Financial Statements.
5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Three Months Ended
March 31,
2004 2003
------------- -------------
Preferred Stock
Balance at January 1 $ 2,244,320 $ 2,322,060
Conversions of Series D shares (2,244,320) (9,510)
------------- -------------
Balance at March 31 $ -- $ 2,312,550
============= =============
Common Stock
Balance at January 1 $ 16,244,549 $ 13,124,002
Conversions of preferred shares into common shares 428,304 1,450
Options exercised 83,701 11,207
------------- -------------
Balance at March 31 $ 16,756,554 $ 13,136,659
============= =============
Capital Surplus
Balance at January 1 $ 142,393,959 $ 143,495,362
Conversions of preferred shares into common shares 1,816,016 8,060
Options exercised 855,996 172,303
------------- -------------
Balance at March 31 $ 145,065,971 $ 143,675,725
============= =============
Retained Earnings
Balance at January 1 $ 17,751,859 $ 3,783,539
Net Income 6,460,509 5,846,423
Cash dividends paid - common shares (2,918,800) (2,231,362)
- preferred shares -- (31,793)
------------- -------------
Balance at March 31 $ 21,293,568 $ 7,366,807
============= =============
Accumulated Other Comprehensive Income
Balance at January 1 $ (976,782) $ 1,330,239
------------- -------------
Unrealized holding gains (losses) arising during the period:
Before tax 2,638,779 (960,829)
Tax effect (1,211,199) 441,021
------------- -------------
Net of tax 1,427,580 (519,808)
------------- -------------
Reclassification adjustment for gains:
included in net income:
Before tax (536,304) (95,992)
Tax effect 246,163 44,060
------------- -------------
Net of tax (290,141) (51,932)
------------- -------------
Minimum pension liability adjustment:
Before tax (673,563) --
Tax effect 309,165 --
------------- -------------
Net of tax (364,398) --
------------- -------------
Balance at March 31 $ (203,741) $ 758,499
============= =============
Treasury Stock
Balance at January 1 $ (33,577,847) $ (32,400,952)
Purchase of common shares -- (117,798)
Issuance of shares under incentive compensation plan -- (493,654)
Surrender of shares issued under
incentive compensation plan (251,484) --
------------- -------------
Balance at March 31 $ (33,829,331) $ (33,012,404)
============= =============
Unearned Compensation
Balance at January 1 $ (894,976) $ (1,873,926)
Amortization of unearned compensation 185,670 185,670
------------- -------------
Balance at March 31 $ (709,306) $ (1,688,256)
============= =============
Total Shareholders' Equity
Balance at January 1 $ 143,185,082 $ 129,780,324
Net changes during the period 5,188,633 2,769,256
------------- -------------
Balance at March 31 $ 148,373,715 $ 132,549,580
============= =============
See Notes to Consolidated Financial Statements.
6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2004 2003
------------- -------------
Operating Activities
Net Income $ 6,460,509 $ 5,846,423
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 2,426,500 1,791,300
Depreciation and amortization of premises and equipment 419,137 420,313
Securities gains (536,304) (95,992)
Income from bank owned life insurance (233,695) (260,830)
Deferred income tax benefit (398,534) (77,608)
Net change in loans held for sale (7,870,437) (2,206,850)
Amortization of unearned compensation 185,670 185,670
Amortization of premiums on securities 333,904 487,138
Accretion of discounts on securities (97,977) (393,779)
Increase in accrued interest receivable (349,692) (413,416)
Increase in accrued expenses and
other liabilities (4,101,660) 1,374,017
Increase in other assets (2,829,723) (2,455,581)
Other, net (615,882) (482,643)
------------- -------------
Net cash (used in) provided by operating activities (7,208,184) 3,718,162
------------- -------------
Investing Activities
Purchase of premises and equipment (897,753) (671,798)
(Increase) Decrease in interest-bearing deposits
with other banks (819,213) 735,761
Decrease in Federal funds sold -- 5,000,000
Net decrease in loans held in portfolio 45,425,831 10,041,658
Increase in other real estate (462,222) (123,346)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 29,621,561 46,132,302
Purchases of securities - held to maturity (43,387,576) (85,864,790)
Proceeds from sales of securities - available for sale 37,031,642 3,707,515
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 12,592,171 117,120,717
Purchases of securities - available for sale (63,180,944) (94,236,576)
------------- -------------
Net cash provided by investing activities 15,923,497 1,841,443
------------- -------------
Financing Activities
Decrease in noninterest-bearing deposits (44,795,328) (47,394,401)
Increase in interest-bearing deposits 56,351,896 41,276,312
Net proceeds from issuance of Corporation Obligated
Decrease in Federal funds purchased (10,000,000) --
Net increase in securities sold under agreements
to repurchase 19,368,622 18,596,874
Decrease in commercial paper and
other short-term borrowings (45,852,381) (17,738,302)
Purchase of treasury stock -- (117,798)
Proceeds from exercise of stock options 939,697 183,510
Cash dividends paid on common and preferred stock (2,918,800) (2,263,155)
------------- -------------
Net cash used in financing activities (26,906,294) (7,456,960)
------------- -------------
Net decrease in cash and due from banks (18,190,981) (1,897,355)
Cash and due from banks - beginning of period 63,947,722 58,173,569
------------- -------------
Cash and due from banks - end of period $ 45,756,741 $ 56,276,214
============= =============
Supplemental disclosures:
Interest paid $ 4,479,390 $ 3,846,231
Income taxes paid 5,942,600 2,346,594
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 March 31, 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 the 2003 consolidated financial statements to conform to the current
presentation. The interim consolidated financial statements should be read
in conjunction with the Company's annual report on Form 10-K for the year
ended December 31, 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 March 31, 2004, the Company has a stock-based employee compensation
plan, which is described more fully in Note 15 of the Company's annual
report on Form 10-K for the year ended December 31, 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 March 31, 2004 2003
---------------------------- ------------- -------------
Net income available for
common shareholders $ 6,460,509 $ 5,814,630
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (125,600) (288,988)
------------- -------------
Pro forma, net income $ 6,334,909 $ 5,525,642
============= =============
Earnings per average common share:
Basic- as reported $ 0.43 $ 0.39
Basic- pro forma 0.42 0.37
Diluted- as reported 0.40 0.37
Diluted- pro forma 0.39 0.35
8
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
3. The major components of domestic loans held for sale and loans held in
portfolio are as follows:
March 31,
------------------------------
2004 2003
------------ ------------
Loans held for sale
Real estate-mortgage $ 48,426,817 $ 56,891,837
============ ============
Loans held in portfolio
Commercial and industrial $509,376,472 $481,855,068
Lease financing 173,423,983 150,516,210
Real estate-mortgage 163,288,645 133,891,771
Real estate-construction 2,354,375 2,400,000
Installment 16,012,469 9,582,449
Loans to depository institutions 10,000,000 20,000,000
------------ ------------
Loans, gross 874,455,944 798,245,498
Less unearned discounts 21,448,240 18,493,727
------------ ------------
Loans, net of unearned discounts $853,007,704 $779,751,771
============ ============
4. The Financial Accounting Standards Board SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," established standards
for the way that public business enterprises report and disclose selected
information about operating segments in interim financial statements
provided to stockholders.
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 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 54.5% loans (corporate lending was 73.0% and
real estate lending was 24.0% of total loans, respectively) and 43.9%
investment securities and money market investments. There are no industry
concentrations exceeding 10% of loans, gross, in the corporate loan
portfolio. Approximately 67% of loans are to borrowers located in the
metropolitan New York area. In order to comply with the provisions of SFAS
No. 131, the Company has determined that it has three reportable operating
segments: corporate lending, real estate lending and company-wide
treasury.
9
The following tables provide certain information regarding the Company's
operating segments for the three-month periods ended March 31, 2004 and 2003:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------- -------------- -------------- --------------
Three Months Ended March 31, 2004
Net interest income $ 8,343,016 $ 3,806,233 $ 6,454,685 $ 18,603,934
Noninterest income 2,925,051 3,703,428 794,919 7,423,398
Depreciation and amortization 60,781 99,771 -- 160,552
Segment income before taxes 2,627,153 4,068,608 7,906,229 14,601,990
Segment assets 677,522,971 221,637,058 802,047,198 1,701,207,227
Three Months Ended March 31, 2003
Net interest income $ 8,323,536 $ 3,752,090 $ 5,770,393 $ 17,846,019
Noninterest income 3,004,572 3,305,157 377,133 6,686,862
Depreciation and amortization 50,165 76,256 -- 126,421
Segment income before taxes 3,734,854 3,321,350 6,536,128 13,592,332
Segment assets 631,517,965 196,423,973 708,292,761 1,536,234,699
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 March 31,
-------------------------------------
2004 2003
--------------- ---------------
Net interest income:
Total for reportable operating segments $ 18,603,934 $ 17,846,019
Other [1] 445,879 410,410
--------------- ---------------
Consolidated net interest income $ 19,049,813 $ 18,256,429
=============== ===============
Noninterest income:
Total for reportable operating segments $ 7,423,398 $ 6,686,862
Other [1] 746,257 767,435
--------------- ---------------
Consolidated noninterest income $ 8,169,655 $ 7,454,297
=============== ===============
Income before taxes:
Total for reportable operating segments $ 14,601,990 $ 13,592,332
Other [1] (4,502,872) (4,065,124)
--------------- ---------------
Consolidated income before income taxes $ 10,099,118 $ 9,527,208
=============== ===============
Assets:
Total for reportable operating segments $ 1,701,207,227 $ 1,536,234,699
Other [1] 34,158,559 26,783,075
--------------- ---------------
Consolidated assets $ 1,735,365,786 $ 1,563,017,774
=============== ===============
[1] Represents operations not considered to be a reportable segment
and/or general operating expenses of the Company.
10
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
5. The following information is provided in connection with the sales of
available for sale securities:
Three Months Ended March 31, 2004 2003
---------------------------- ----------- -----------
Proceeds $37,031,642 $ 3,707,515
Gross Gains 536,304 95,992
Gross Losses -- --
6. 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.
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:
Quarters Ended March 31, 2004 2003
------------------------ ----------- -----------
COMPONENTS OF NET PERIODIC COST
Service Cost $ 410,546 $ 271,815
Interest Cost 516,744 414,305
Expected return on plan assets (452,029) (342,613)
Amortization of prior service cost 19,331 19,331
Recognized actuarial loss 209,121 175,058
----------- -----------
Net periodic benefit cost 703,713 537,896
Settlement gain (1,331,190) --
----------- -----------
Net benefit cost $ (627,477) $ 537,896
=========== ===========
The Company previously disclosed in its financial statements for the year
ended December 31,2003, that it expected to contribute approximately
$2,000,000 to the defined benefit pension plan in 2004. As of March 31,
2004, the expected contribution has decreased to $1,000,000. No
contribution has been made as of March 31, 2004.
11
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 as well as to reflect the effect of
the five-for-four stock split effected on September 10, 2003.
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, New Jersey, 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 March 31, 2004, the bank's average earning assets
represented approximately 97.5% of the Company's average earning assets. Loans
represented 53.4% and investment securities represented 45.1% of the bank's
average earning assets for the first quarter 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
judgements about the collectibility of the loan portfolio based on its
experience and evaluation of economic conditions. If such assumptions or
judgements 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.
12
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 Page
22. Information as to the components of interest income and interest expense and
average rates is provided in the Average Balance Sheets shown on page 21.
Comparisons of the Three Months Ended March 31, 2004 and 2003
The Company reported net income for the three months ended March 31, 2004 of
$6.5 million, representing $0.40 per share, calculated on a diluted basis,
compared to $5.8 million, or $0.37 per share calculated on a diluted basis, for
the first quarter of 2003. This increase reflects continued growth in both net
interest income and noninterest income which more than offset increases in the
provision for loan losses and noninterest expenses.
13
Net Interest Income
Net interest income on a tax equivalent basis, increased to $19.3 million for
the first quarter of 2004 from $18.5 million for the 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 4.90% for the first three months of 2004 compared to 5.47% for 2003.
The decrease in the net interest margin was primarily the result of the impact
of the lower interest rate environment in 2004, partially offset by the impact
of an increase in average investment securities and loan outstandings.
Total interest income, on a tax-equivalent basis, aggregated $23.8 million for
the first three months of 2004, up from $22.9 million for the 2003 period. The
tax-equivalent yield on interest-earning assets was 6.09% for the first quarter
of 2004 compared to 6.80% for the 2003 period.
Interest earned on the loan portfolio amounted to $15.1 million for the first
three months of 2004, up $0.3 million from a year ago. Average loan balances
amounted to $862.6 million an increase of $59.8 million from an average of
$802.8 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 domestic loan portfolio to
7.22% for the first quarter of 2004 from 7.73% for 2003 was primarily
attributable to the mix of outstanding balances on average among the components
of the loan portfolio and lower interest rate environment in 2004.
Interest earned on the securities portfolio, on a tax-equivalent basis,
increased to $8.6 million for the first three months of 2004 from $8.1 million
in the prior year period. Average outstandings increased to $695.1 million from
$568.0 in the prior year period. The average life of the securities portfolio
was approximately 3.4 years at March 31, 2004 compared to 2.7 years at March 31,
2003, reflecting the impact of purchases made in the second, third and fourth
quarters of 2003 and the first quarter of 2004. The decrease in yields on most
of the securities portfolio reflects the impact of purchases made during the
lower rate environment on average in the 2004 period and of the principal
prepayments primarily in the second, third and fourth quarters of 2003.
Total interest expense increased to $4.5 million for the first three months of
2004 from $4.4 million for the 2003 period, primarily due to higher average
balances for interest-bearing deposits partially offset by lower rates paid for
those balances and for borrowed funds.
Interest expense on deposits increased to $2.5 million for the first quarter of
2004 from $2.2 million for the 2003 period due to an increase in average balance
partially offset by a decrease in the cost of those funds. Average interest-
bearing deposit balances increased to $793.7 million for the first
quarter of 2004 from $655.3 in the 2003 period primarily the result of the
Company's branching initiatives and other business development activities.
Average rate paid on interest-bearing deposits was 1.25% which was 11 basis
points lower than
14
the prior year period. The decrease in average cost of deposits reflects the
lower interest rate environment during the 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 first three
months of 2004 increased to $2.4 million from $1.8 million for the prior year
period. Factors affecting the level of provision included the growth in the loan
portfolios, changes in general economic conditions and the amount of nonaccrural
loans.
Noninterest Income
Noninterest income increased to $8.2 million for the first quarter of 2004 from
$7.5 million in the 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 loans,
and gains on sales of available for sale securities. Partially offsetting these
increases were lower revenues from fees for deposit and various other services
and from bank-owned life insurance program.
Noninterest Expenses
Noninterest expenses increased $0.3 million for the first quarter of 2004 when
compared to 2003 period. The increase was primarily due to investments in the
Sterling franchise, including the new branches, with higher expenses related to
salaries, advertising, professional fees and equipment. These higher expenses
were partially offset by a $1.3 million reduction in employee benefit costs as a
result of an executive relinquishing his right to receive pension payments in
exchange for a life insurance policy.
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 March 31, 2004, the Company's
portfolio of securities totaled $712.8 million, of which U.S. government
corporation and agency guaranteed mortgage-backed securities and collateralized
mortgage obligations having an average life of approximately 3.4 years amounted
to $630.1 million. The Company has the intent and ability to hold to maturity
securities classified as "held to maturity." These securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts. The
gross unrealized gains and losses on "held to maturity" securities were $7.8
million and $1.4 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 $6.8 million and gross unrealized losses of $0.9
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.
15
The following table presents information regarding securities available for
sale:
Gross Gross Gross
Amortized Unrealized Unrealized Market
March 31, 2004 Cost Gains Losses Value
-------------- ------------ ------------ ------------ ------------
U.S. Treasury securities $ 2,497,497 $ 3 $ -- $ 2,497,500
Obligations of U.S. govern-
ment corporations and
agencies--mortgage-backed
securities 183,670,329 4,302,020 79,276 187,893,073
Obligations of U.S. govern-
ment corporations and
agencies--collateralized
mortgage obligations 60,240,209 56,029 821,600 59,474,638
Obligations of state and
political institutions 30,599,793 1,801,578 -- 32,401,371
Trust preferred securities 3,221,206 557,526 -- 3,778,732
Other debt securities 34,994,283 103,592 -- 35,097,875
Federal Reserve Bank and
other equity securities 7,685,142 20,531 199 7,705,474
------------ ------------ ------------ ------------
Total $322,908,459 $ 6,841,279 $ 901,075 $328,848,663
============ ============ ============ ============
The following table presents information regarding securities held to maturity:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
March 31, 2004 Value Gains Losses Value
-------------- ------------ ------------ ------------ ------------
Obligations of U.S. govern-
ment corporations and
agencies-- mortgage-backed
securities $300,156,326 $ 7,739,964 $ 86,796 $307,809,494
Obligations of U.S. govern-
ment corporations and
agencies--collateralized
mortgage obligations 82,589,082 105,273 1,349,894 81,344,461
Debt securities issued by
Foreign governments 1,250,000 -- -- 1,250,000
------------ ------------ ------------ ------------
Total $383,995,408 $ 7,845,237 $ 1,436,690 $390,403,955
============ ============ ============ ============
16
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
57% of all loans. Loans in this category are typically made to small and
medium-sized businesses and range between $25,000 and $10 million. Sources of
repayment are from the borrower's operating profits, cash flows and liquidation
of pledged collateral. Based on underwriting standards, loans may be secured in
whole or in part by collateral such as liquid assets, accounts receivable,
equipment, inventory, and real property. The Company's real estate loan
portfolio, which represents approximately 24% of all loans, is secured by
mortgages on real property located principally in the states of New York and
Virginia. The Company's leasing portfolio, which consists of finance leases for
various types of business equipment, represents approximately 17% of all loans.
The collateral securing any loan may vary in value based on market conditions.
The following table sets forth the composition of the Company's loans held for
sale and loans held in portfolio:
March 31,
---------------------------------------------
2004 2003
------------------- -------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- ----- -------- -----
Domestic
Commercial and industrial $508,879 56.4% $481,183 57.5%
Equipment lease financing 152,483 16.9 132,720 15.9
Real estate - mortgage 211,712 23.5 190,774 22.8
Real estate - construction 2,354 0.3 2,400 0.3
Installment - individuals 16,007 1.8 9,567 1.1
Loans to depository institutions 10,000 1.1 20,000 2.4
-------- ----- -------- -----
Loans, net of unearned discounts $901,435 100.0% $836,644 100.0%
======== ===== ======== =====
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
17
provision for loan losses, which is a charge to operating earnings. The adequacy
of the provision and the resulting allowance for loan losses is determined by a
management evaluation process of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, an assessment of current and expected
economic conditions and changes in the size and character of the loan portfolio.
Other data utilized by management in determining the adequacy of the allowance
for loan losses includes, but is not limited to, the results of regulatory
reviews, the amount of, trend of and/or borrower characteristics on loans that
are identified as requiring special attention as part of the credit review
process, and peer group comparisons. The impact of this other data might result
in an allowance which will be greater than that indicated by the evaluation
process previously described. The allowance reflects management's evaluation
both of loans presenting identified loss potential and of the risk inherent in
various components of the 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 March 31, 2004, the
ratio of the allowance to loans held in portfolio, net of unearned discounts,
was 1.73% and the allowance was $14.8 million. At such date, the Company's
nonaccrual loans amounted to $2.7 million; $1.4 million of such loans was judged
to be impaired within the scope of SFAS No. 114. Nonaccrual and impaired loans
at March 31, 2004 include one commercial loan in the amount of $0.6 million.
Based on the foregoing, as well as management's judgement 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 March 31, 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 quarter 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 $1.0 million at March 31, 2004.
18
Deposits
A significant source of funds for the Company continues to be deposits,
consisting of demand (noninterest-bearing), NOW, savings, money market and time
deposits (principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
March 31,
----------------------------------------------------------
2004 2003
------------------------ ------------------------
($ in thousands)
% of % of
Balances Total Balances Total
-------- ----- -------- -----
Domestic
Demand $ 429,297 35.1% $ 354,159 34.0%
NOW 133,189 10.9 114,971 11.0
Savings 34,216 2.8 26,959 2.6
Money market 199,206 16.3 173,851 16.7
Time deposits 424,389 34.7 368,035 35.4
---------- ----- ---------- -----
Total domestic deposits 1,220,297 99.8 1,037,975 99.7
Foreign
Time deposits 3,000 0.2 3,000 0.3
---------- ----- ---------- -----
Total deposits $1,223,297 100.0% $1,040,975 100.0%
========== ===== ========== =====
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 page 21.
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 23. In addition, the bank is subject to the Federal Deposit
Insurance Corporation Improvement Act of 1981 ("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 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 March 31, 2004,
the Company and the bank exceeded the requirements for "well capitalized"
institutions.
19
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 product 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.
20
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended March 31,
(dollars in thousands)
2004 2003
----------------------------------- -------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
---------- ---------- ------- ---------- ---------- -------
Interest-bearing deposits
with other banks $ 3,429 $ 59 0.94% $ 3,700 $ 8 0.94%
Securities available for sale 290,099 3,353 4.55 155,407 2,155 5.55
Securities held to maturity 374,141 4,706 5.09 379,948 5,331 5.61
Securities tax-exempt [2] 30,901 575 7.48 32,655 606 7.52
Federal funds sold 20,989 50 0.95 7,244 22 1.21
Loans, net of unearned discounts [3] 862,599 15,082 7.22 802,795 14,760 7.73
---------- ---------- ---------- ----------
TOTAL INTEREST-EARNING ASSETS 1,582,158 23,825 6.09% 1,381,749 22,882 6.80%
---------- ===== ---------- =====
Cash and due from banks 66,657 53,842
Allowance for loan losses (15,322) (14,244)
Goodwill 21,158 21,158
Other assets 67,859 63,527
---------- ----------
TOTAL ASSETS $1,722,510 $1,506,032
========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 32,947 32 0.39% $ 26,211 26 0.40%
NOW 134,021 154 0.46 114,727 137 0.48
Money market 209,946 370 0.71 151,143 175 0.47
Time 413,758 1,909 1.86 360,263 1,852 2.08
Foreign
Time 3,000 8 1.07 3,000 12 1.66
---------- ---------- ---------- ----------
Total interest-bearing deposits 793,672 2,473 1.25 655,344 2,202 1.36
---------- ---------- ---------- ----------
Borrowings
Securities sold under agreements
to repurchase - customers 75,369 211 1.13 57,517 180 1.27
Securities sold under agreements
to repurchase - dealers 36,550 105 1.15 36,307 119 1.34
Federal funds purchased 5,906 16 1.08 3,667 11 1.27
Commercial paper 23,419 63 1.08 24,005 70 1.19
Other short-term debt 24,746 112 1.82 31,357 190 2.45
Long-term debt 135,774 1,559 4.59 140,774 1,604 4.56
---------- ---------- ---------- ----------
Total borrowings 301,764 2,066 2.74 293,627 2,174 2.97
---------- ---------- ---------- ----------
TOTAL INTEREST-BEARING LIABILITIES 1,095,436 4,539 1.67% 948,971 4,376 1.87%
========== ===== ========== =====
Noninterest-bearing deposits 402,110 345,519
Other liabilities 81,137 81,098
---------- ----------
Total liabilities 1,578,683 1,375,588
---------- ----------
Shareholders' equity 143,827 130,444
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,722,510 $1,506,032
========== ==========
Net interest income/spread 19,286 4.42% 18,506 4.93%
===== =====
Net yield on interest-earning
assets (margin) 4.90% 5.47%
===== =====
Less: Tax equivalent adjustment 236 249
---------- ----------
Net interest income $ 19,050 $ 18,257
========== ==========
[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 2003
amounts to conform to the current presentation.
[2] Interest on tax-exempt securities is presented on a tax-equivalent basis.
[3] Includes loans held for sale and loans held in portfolio; all loans are
domestic. Nonaccrual loans are included in amounts outstanding and income
has been included to the extent collected.
21
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/(Decrease)
Three Months Ended
March 31, 2004 to March 31, 2003
-----------------------------------------
Volume Rate Net [2]
--------- --------- ---------
INTEREST INCOME
Interest-bearing deposits with other banks $ 51 $ -- $ 51
--------- --------- ---------
Securities available for sale 1,637 (439) 1,198
Securities held to maturity (46) (579) (625)
Securities tax-exempt (28) (3) (31)
--------- --------- ---------
Total investment securities 1,563 (1,021) 542
--------- --------- ---------
Federal funds sold 34 (6) 28
Loans, net of unearned discounts [3] 1,332 (1,010) 322
--------- --------- ---------
TOTAL INTEREST INCOME $ 2,980 $ (2,037) $ 943
========= ========= =========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 7 $ (1) $ 6
NOW 23 (6) 17
Money market 86 109 195
Time 272 (215) 57
Foreign
Time -- (4) (4)
--------- --------- ---------
Total interest-bearing deposits 388 (117) 271
--------- --------- ---------
Borrowings
Securities sold under agreements
to repurchase - customers 53 (22) 31
Securities sold under agreements
to repurchase - dealers 2 (16) (14)
Federal funds purchased 7 (2) 5
Commercial paper (1) (6) (7)
Other short-term debt (34) (44) (78)
Long-term debt (54) 9 (45)
--------- --------- ---------
Total borrowings (27) (81) (108)
--------- --------- ---------
TOTAL INTEREST EXPENSE $ 361 $ (198) $ 163
========= ========= =========
NET INTEREST INCOME $ 2,619 $ (1,839) $ 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 collected.
22
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 March 31, 2004 Amount Ratio Amount Ratio Amount Ratio
-------------------- -------- ----- -------- ----- -------- -----
Total Capital(to Risk Weighted Assets):
The Company $165,534 15.80% $ 83,804 8.00% $104,755 10.00%
The bank 128,618 12.85 80,091 8.00 100,114 10.00
Tier 1 Capital(to Risk Weighted Assets):
The Company 152,419 14.55 41,902 4.00 62,853 6.00
The bank 116,078 11.59 40,045 4.00 60,068 6.00
Tier 1 Leverage Capital(to Average Assets):
The Company 152,419 8.96 68,054 4.00 85,068 5.00
The bank 116,078 6.97 66,607 4.00 83,258 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
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company unduly to interest
rate fluctuations.
The Company takes a coordinated approach to the management of its liquidity,
capital and interest rate risk. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee. This committee, which is comprised of
members of senior management, meets to review, among other things, economic
conditions, interest rates, yield curve, cash flow projections, expected
customer actions, liquidity levels, capital ratios and repricing characteristics
of assets, liabilities and financial instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates. Interest
rate sensitivity is the relationship between market interest rates. Interest
rate sensitivity is the relationship between market interest rates and net
interest income due to the repricing characteristics of assets and liabilities.
The Company monitors the interest rate sensitivity of its balance sheet
positions by examining its near-term sensitivity and its longer-term gap
position. In its management of interest rate risk, the Company utilizes several
financial and statistical tools including traditional gap analysis and
sophisticated income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest rate sensitive assets exceed interest rate sensitive
liabilities generally will result in the net interest margin increasing in a
rising rate environment and decreasing in a falling rate environment. A negative
gap (liability sensitive) will generally have the opposite result on the net
interest margin. However, the traditional gap analysis does not assess
the relative sensitivity of assets and liabilities to changes in interest rates
and other factors that could have an impact on interest rate sensitivity or net
interest income. The Company utilizes the gap analysis to complement its income
simulations modeling, primarily focusing on the longer-term structure of the
balance sheet.
24
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 March 31, 2004, presented on page 28,
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 March 31, 2004, the model
indicated the impact of a 200 basis point parallel and pro rata rise in rates
over 12 months would approximate a 3.50% ($2.5 million) increase in net interest
income, while the impact of a 200 basis point decline in rates over the same
period would approximate a 6.80% ($4.9 million) decline from an unchanged rate
environment.
25
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 March 31, 2004, the parent company's short-term debt, consisting principally
of commercial paper used to finance ongoing current business activities, was
approximately $24.4 million. The parent company had cash, interest-bearing
deposits with banks and other current assets aggregating $43.8 million. The
parent company also has back-up credit lines with banks of $19.0 million. Since
1979, the parent company has had no need to use the available back-up lines of
credit.
26
The following table sets forth information regarding the Company's obligations
and commitments to make future payments under contract as of March 31, 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 $135,774 $ -- $ 25,774 $ 10,000 $100,000
Operating Leases 27,876 3,319 6,166 6,192 12,199
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $163,650 $ 3,319 $ 31,940 $ 16,192 $112,199
======== ======== ======== ======== ========
The following table sets forth information regarding the Company's obligations
under other commercial commitments as of March 31, 2004:
Amount of Commitment Expiration Per Period
------------------------------------------------------------------
Other Commercial Total Amount Less than 1-3 4-5 After 5
Commitments Committed 1 Year Years Years Years
----------------------------------------------------------------------------------------------------------
(in thousands)
Residential loans $ 56,513 $ 56,513 $ -- $ -- $ --
Standby Letters of Credit 31,647 30,711 936 -- --
Other Commercial Commitments 29,722 20,942 6,444 2,336 --
-------- -------- -------- -------- --------
Total Commercial Commitments $117,882 $108,166 $ 7,380 $ 2,336 $ --
======== ======== ======== ======== ========
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.
27
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 $ 2,476 $ -- $ -- $ -- $ -- $ 2,476
Investment securities 1,500 2,872 81,979 618,787 7,706 712,844
Loans, net of unearned
discounts
Commercial and industrial 501,359 1,501 6,510 8 (498) 508,880
Loans to depository
institutions 10,000 -- -- -- -- 10,000
Lease financing 1,405 13,931 149,814 8,274 (20,942) 152,482
Real estate 119,661 8,425 68,427 17,556 (3) 214,066
Installment 14,784 45 1,119 64 (5) 16,007
Noninterest-earning
assets and allowance
for loan losses -- -- -- -- 118,611 118,611
---------- ---------- ---------- ---------- ---------- ----------
Total Assets 651,185 26,774 307,849 644,689 104,869 1,735,366
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings [1] -- -- 34,217 -- -- 34,217
NOW [1] -- -- 133,189 -- -- 133,189
Money market [1] 161,190 -- 38,016 -- -- 199,206
Time - domestic 189,253 155,097 79,889 150 -- 424,389
- foreign 1,355 1,645 -- -- -- 3,000
Securities sold u/a/r - cust 35,392 -- -- -- -- 35,392
Securities sold u/a/r - deal 77,795 -- -- -- -- 77,795
Federal funds purchased -- -- -- -- -- --
Commercial paper 24,402 -- -- -- -- 24,402
Other short-term borrowings 10,416 5,000 -- -- -- 15,416
Long-term borrowings - FHLB -- -- 10,000 100,000 25,774 135,774
Noninterest-bearing liabilities
and shareholders' equity -- -- -- -- 652,586 652,586
---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity 499,803 161,742 295,311 100,150 678,360 1,735,366
---------- ---------- ---------- ---------- ---------- ----------
Net Interest Rate
Sensitivity Gap $ 151,382 $ (134,968) $ 12,538 $ 544,539 $ (573,491) $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap
March 31, 2004 $ 151,382 $ 16,414 $ 28,952 $ 573,491 $ -- $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap
March 31, 2003 $ 129,736 $ 35,084 $ 24,421 $ 478,106 $ -- $ --
========== ========== ========== ========== ========== ==========
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.
28
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.
29
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)(A) Amended and Restated Certificate of Incorporation
filed with the State of New York Department of
State, August 14, 1986 (Filed as Exhibit 3.3 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1986 and incorporated by reference
herein).
(i)(B) Certificate of Amendment of the Certificate of
Incorporation filed with the State of New York
Department of State, June 13, 1988 (Filed as Exhibit
3.5 to Registrant's Form 10-K for the fiscal year
ended December 31, 1988 and incorporated by
reference herein).
(i)(C) Certificate of Amendment of the Certificate of
Incorporation filed with the State of New York
Department of State, March 3, 1989 (Filed as Exhibit
A to the Registrant's Form 8-A dated March 6,1989
and incorporated by reference herein).
(i)(D) Certificate of Amendment of the Certificate of
Incorporation filed with the State of New York
Department of State, March 5, 1993 (Filed as Exhibit
4.1 to Registrant's Form 8-K dated March 5, 1993 and
incorporated by reference herein).
(i)(E) Certificate of Amendment of the Certificate of
Incorporation filed with the State of New York
Department of State, February 26, 2004 (Filed as
Exhibit 3(i)(E) to Registrant's Form 10-K for the
fiscal year ended December 31, 2003 and incorporated
by reference herein.
(ii)(A) By-Laws as in effect on March 15, 1993 (Filed as
Exhibit 3.3 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1992 and incorporated
by reference herein).
(ii)(B) Amendments to By-Laws adopted May 21, 1998 (Filed as
Exhibit 3 to the Registrant's Form 10-Q for the
quarter ended June 30, 1998 and incorporated by
reference herein).
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
30
(b) Reports on Form 8-K:
In a report on Form 8-K dated January 21, 2004 and filed on January
22, 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 a conference call on
January 22, 2004 to discuss the results of operations for the
quarter and fiscal year ended December 31, 2003.
In a report on Form 8-K dated January 22, 2004 and filed on January
23, 2004, the Company reported, under Item 7. "Financial Statements,
Pro Forma Financial Information and Exhibits", and under Item 12.
"Results of Operations and Financial Condition", the press release
announcing the results of operations for the quarter and year ended
December 31, 2003.
In a report on Form 8-K dated February 10, 2004 and filed on
February 11, 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 grand
opening of its Regional Banking Center in Long Island City, Queens.
In a report on Form 8-K dated February 19, 2004 and filed on
February 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 March 31,
2004 to shareholders of record on March 15, 2004.
In a report on Form 8-K dated March 1, 2004 and filed on March 2,
2004 the Company reported under Item 7. "Financial Statements, Pro
Forma Financial Information and Exhibits" and under Item 9.
"Regulation FD Disclosure", the press release announcing a
presentation on March 3, 2004 by John C. Millman, President of
Sterling Bancorp, as part of the Keefe, Bruyette & Woods, Inc.
Eastern Regional Bank Symposium.
31
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 5/10/04 /s/ Louis J. Cappelli
------------- -----------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 5/10/04 /s/ John W. Tietjen
------------- -----------------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
32
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
------ ----------- ------------ -------- ----------
11 Statement re: Computation X
of Per Share Earnings
31.1 Certifications of the CEO pursuant to X
Exchange Act Rule 13a-14(a)
31.2 Certifications of the CFO pursuant to X
Exchange Act Rule 13a-14(a)
32 Certifications of the CEO and CFO required by X
Section 1350 of Chapter 63 of Title 18 of the
U.S. Code
33