UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO _______________________
COMMISSION FILE NUMBER: 1-5273-1
STERLING BANCORP
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-2565216
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION)
650 FIFTH AVENUE, NEW YORK, N.Y. 10019-6108
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
212-757-3300
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
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(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 JULY 31, 2003 THERE WERE 11,908,916 SHARES OF COMMON STOCK,
$1.00 PAR VALUE, OUTSTANDING.
STERLING BANCORP
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business 14
Results for Three Months 15
Results for Six Months 17
Balance Sheet Analysis 19
Capital 23
Average Balance Sheets 24
Rate/Volume Analysis 26
Regulatory Capital and Ratios 28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 29
Interest Rate Sensitivity 32
Item 4. Controls and Procedures 33
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
EXHIBIT INDEX 36
Exhibit 11 Statement re: Computation of Per Share Earnings 37
Exhibit 31 Certifications of the CEO and CFO pursuant to 38
Exchange Act Rule 13a-14(a) or Rule 15d-14(a)
Exhibit 32 Certifications of the CEO and CFO required by 40
Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of chapter 63 of title 18 of the U.S. Code
2
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2003 2002
---------------- ----------------
ASSETS
Cash and due from banks $ 58,168,239 $ 58,173,569
Interest-bearing deposits with other banks 2,287,689 2,872,710
Federal funds sold - 5,000,000
Securities available for sale 114,645,826 128,465,512
Securities available for sale - pledged 79,830,422 90,969,577
Securities held to maturity 152,621,335 147,109,430
Securities held to maturity - pledged 236,503,154 222,229,901
---------------- ----------------
Total investment securities 583,600,737 588,774,420
---------------- ----------------
Loans held for sale 69,811,132 54,684,987
---------------- ----------------
Loans held in portfolio, net of unearned discounts 800,978,701 791,315,047
Less allowance for loan losses 14,183,944 13,549,297
---------------- ----------------
Loans, net 786,794,757 777,765,750
---------------- ----------------
Customers' liability under acceptances 2,360,178 1,545,335
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 9,312,011 9,263,172
Other real estate 964,632 822,820
Accrued interest receivable 4,988,636 4,881,937
Bank owned life insurance 21,368,669 20,830,688
Other assets 19,075,094 15,347,734
---------------- ----------------
$ 1,579,890,214 $ 1,561,121,562
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 385,094,677 $ 401,553,363
Interest-bearing deposits 679,900,588 645,539,745
---------------- ----------------
Total deposits 1,064,995,265 1,047,093,108
Federal funds purchased and securities
sold under agreements to repurchase 118,722,437 100,925,635
Commercial paper 17,348,400 29,318,920
Other short-term borrowings 31,609,519 37,030,404
Acceptances outstanding 2,360,178 1,545,335
Accrued expenses and other liabilities 67,954,340 75,427,836
Long-term debt - FHLB 115,000,000 115,000,000
---------------- ----------------
Total liabilities 1,417,990,139 1,406,341,238
---------------- ----------------
Corporation Obligated Mandatorily Redeamable
Capital Securities of Subsidiary Trust 25,000,000 25,000,000
---------------- ----------------
Shareholders' equity
Preferred stock, $5 par value. Authorized
644,389 shares; Series D issued 228,389
and 232,206 shares, respectively 2,283,690 2,322,060
Common stock, $1 par value. Authorized
20,000,000 shares; issued 13,203,432 and 13,124,002
shares, respectively 13,203,432 13,124,002
Capital surplus 144,627,728 143,495,362
Retained earnings 10,952,765 3,783,539
Accumulated other comprehensive income, net of tax 812,784 1,330,239
---------------- ----------------
171,880,399 164,055,202
Less
Common shares in treasury at cost, 1,303,422
and 1,261,061 shares, respectively 33,477,738 32,400,952
Unearned compensation 1,502,586 1,873,926
---------------- ----------------
Total shareholders' equity 136,900,075 129,780,324
---------------- ----------------
$ 1,579,890,214 $ 1,561,121,562
================ ================
See Notes to Consolidated Financial Statements.
3
STERLING BANCORP SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
INTEREST INCOME
Loans $ 15,380,839 $ 14,245,642 $ 30,140,752 $ 28,412,016
Investment securities
Available for sale 2,394,809 4,413,069 4,906,586 8,589,319
Held to maturity 5,297,940 4,857,289 10,628,939 9,799,807
Federal funds sold 17,926 31,806 39,902 180,989
Deposits with other banks 3,941 10,925 12,494 19,606
------------ ------------ ------------ ------------
Total interest income 23,095,455 23,558,731 45,728,673 47,001,737
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 2,309,285 3,309,349 4,510,920 6,632,553
Federal funds purchased and
securities sold under agreements
to repurchase 408,199 356,939 718,616 803,589
Commercial paper 55,418 152,455 126,069 359,056
Other short-term borrowings 140,841 130,059 330,609 237,748
Long-term debt 1,081,377 1,125,607 2,162,257 2,185,582
------------ ------------ ------------ ------------
Total interest expense 3,995,120 5,074,409 7,848,471 10,218,528
------------ ------------ ------------ ------------
Net interest income 19,100,335 18,484,322 37,880,202 36,783,209
Provision for loan losses 2,172,500 4,600,000 3,963,800 6,279,300
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 16,927,835 13,884,322 33,916,402 30,503,909
------------ ------------ ------------ ------------
NONINTEREST INCOME
Factoring income 1,410,679 1,552,012 2,763,181 2,928,903
Mortgage banking income 3,690,889 2,682,715 6,933,537 5,213,054
Service charges on deposit accounts 1,269,782 1,239,696 2,501,780 2,387,931
Trade finance income 588,631 626,671 1,161,644 1,077,928
Trust fees 165,051 174,542 330,448 351,660
Other service charges and fees 531,504 611,895 966,714 1,042,937
Bank owned life insurance income 277,150 293,825 537,980 516,181
Securities gains 100,366 844,343 196,358 844,343
Other income 81,248 215,398 177,955 284,301
------------ ------------ ------------ ------------
Total noninterest income 8,115,300 8,241,097 15,569,597 14,647,238
------------ ------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 8,562,583 8,036,410 17,046,238 16,080,835
Occupancy expenses, net 1,234,531 1,322,235 2,530,252 2,498,584
Equipment expenses 719,575 793,707 1,366,089 1,361,696
Advertising and marketing 859,565 935,566 1,650,383 1,626,496
Professional fees 899,357 688,861 1,625,989 1,488,803
Data processing fees 260,022 370,731 525,054 727,915
Stationery and printing 236,797 329,143 445,115 542,313
Communications 405,989 387,949 848,679 792,676
Capital securities costs 536,449 512,447 1,071,566 733,665
Other expenses 1,829,280 1,858,641 3,350,439 3,615,144
------------ ------------ ------------ ------------
Total noninterest expenses 15,544,148 15,235,690 30,459,804 29,468,127
------------ ------------ ------------ ------------
Income before income taxes 9,498,987 6,889,729 19,026,195 15,683,020
Provision for income taxes 3,638,985 1,659,120 7,319,770 5,186,110
------------ ------------ ------------ ------------
Net income $ 5,860,002 $ 5,230,609 $ 11,706,425 $ 10,496,910
============ ============ ============ ============
Average number of common
shares outstanding
Basic 11,867,207 12,012,021 11,863,240 12,044,270
Diluted 12,579,840 12,813,243 12,564,370 12,826,687
Earnings per average common share
Basic $ 0.49 $ 0.44 $ 0.98 $ 0.87
Diluted 0.47 0.40 0.93 0.81
Dividends per common share 0.19 0.18 0.38 0.36
See Notes to Consolidated Financial Statements.
4
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Income $ 5,860,002 $ 5,230,609 $ 11,706,425 $ 10,496,910
Other comprehensive income,
net of tax:
Unrealized holding gains (losses)
arising during the period 108,583 2,596,974 (411,225) 1,670,919
Reclassification adjustment for
gains included in net income (54,298) (456,790) (106,230) (456,790)
------------ ------------ ------------ ------------
Comprehensive income $ 5,914,287 $ 7,370,793 $ 11,188,970 $ 11,711,039
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------- -------------
Preferred Stock
Balance at January 1 $ 2,322,060 $ 2,346,060
Conversions of Series D shares (38,370) (16,160)
------------- -------------
Balance at June 30 $ 2,283,690 $ 2,329,900
============= =============
Common Stock
Balance at January 1 $ 13,124,002 $ 10,834,853
Conversions of preferred shares into common shares 5,851 2,048
Option exercised 73,579 288,018
------------- -------------
Balance at June 30 $ 13,203,432 $ 11,124,919
============= =============
Capital Surplus
Balance at January 1 $ 143,495,362 $ 98,487,765
Conversions of preferred shares into common shares 32,519 14,112
Issuance of shares under incentive compensation plan - 386,400
Options exercised 1,099,847 3,504,240
------------- -------------
Balance at June 30 $ 144,627,728 $ 102,392,517
============= =============
Retained Earnings
Balance at January 1 $ 3,783,539 $ 32,419,767
Net Income 11,706,425 10,496,910
Cash dividends paid - common shares (4,474,055) (3,582,048)
- preferred shares (63,144) (56,554)
------------- -------------
Balance at January 30 $ 10,952,765 $ 39,278,075
============= =============
Accumulated Other Comprehensive Income
Balance at January 1 $ 1,330,239 $ 1,119,223
------------- -------------
Unrealized holding (losses) gains
arising during the period:
Before tax (760,122) 3,088,573
Tax effect 348,897 (1,417,654)
------------- -------------
Net of tax (411,225) 1,670,919
------------- -------------
Reclassification adjustment for gains
included in net income:
Before tax (196,358) (844,343)
Tax effect 90,128 387,553
------------- -------------
Net of tax (106,230) (456,790)
------------- -------------
Balance at June 30 $ 812,784 $ 2,333,352
============= =============
Treasury Stock
Balance at January 1 $ (32,400,952) $ (15,542,454)
Issuance of shares under incentive compensation plan - 1,267,200
Surrender of shares issued under incentive
compensation plan (820,779) (3,034,547)
Purchase of common shares (256,007) (11,955,295)
------------- -------------
Balance at June 30 $ (33,477,738) $ (29,265,096)
============= =============
Unearned Compensation
Balance at January 1 $ (1,873,926) $ (1,187,798)
Issuance of shares under incentive compensation plan - (1,653,600)
Amortization of unearned compensation 371,340 342,692
------------- -------------
Balance at June 30 $ (1,502,586) $ (2,498,706)
============= =============
Total Shareholders' Equity
Balance at January 1 $ 129,780,324 $ 128,477,416
Net changes during the period 7,119,751 (2,782,455)
------------- -------------
Balance at June 30 $ 136,900,075 $ 125,694,961
============= =============
See Notes to Consolidated Financial Statements.
6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------- -------------
Operating Activities $ 11,706,425 $ 10,496,910
Net Income
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 3,963,800 6,279,300
Depreciation and amortization of premises and equipment 834,745 795,195
Securities gains (196,358) (844,343)
Income from bank owned life insurance (537,980) (516,181)
Deferred income tax (benefit) provision (188,357) 592,505
Net change in loans held for sale (15,126,145) 21,266,385
Amortization of unearned compensation 371,340 342,692
Amortization of premiums on securities 1,075,929 703,567
Accretion of discounts on securities (715,271) (430,278)
(Increase) Decrease in accrued interest receivable (106,699) 52,619
Decrease in accrued expenses and
other liabilities (7,473,496) (5,589,998)
Increase in other assets (3,122,002) (21,050,245)
Issuance cost for preferred securities,
net of amortization - (924,479)
Other, net (798,756) (1,705,713)
------------- -------------
Net cash (used in) provided by operating activities (10,312,825) 9,467,936
------------- -------------
Investing Activities
Purchase of premises and equipment (883,584) (1,542,578)
Decrease (Increase) in interest-bearing deposits
with other banks 585,021 (384,021)
Decrease in Federal funds sold 5,000,000 10,000,000
Increase in other real estate (141,812) (357,890)
Net Increase in loans held in portfolio (12,992,807) (17,540,020)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 114,664,371 45,445, 487
Purchases of Securities - held to maturity (134,863,881) (58,930,888)
Purchases of Securities - available for sale (209,722,161) (153,152,564)
Proceeds from sales of securities - available for sale 5,846,762 39,568,514
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 228,127,812 95,103,154
------------- -------------
Net cash used in investing activities (4,380,279) (41,790,806)
------------- -------------
Financing Activities
Decrease in noninterest-bearing deposits (16,458,686) (22,431,332)
Increase in interest-bearing deposits 34,360,843 32,613,052
Net proceeds from issuance of Corporation Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trust - 24,062,500
Increase (Decrease) in Federal funds purchased
and securities sold under agreements to repurchase 17,796,802 (35,634,754)
(Decrease) Increase in commercial paper and
other short-term borrowings (17,391,405) 4,010,404
Purchase of treasury stock (256,007) (11,955,295)
Increase in other long-term debt - 29,650,000
Proceeds from exercise of stock options 1,173,426 3,792,258
Cash dividends paid on common and preferred stock (4,537,199) (3,638,602)
------------- -------------
Net cash provided by financing activities 14,687,774 20,468,231
------------- -------------
Net decrease in cash and due from banks (5,330) (11,854,639)
Cash and due from banks - beginning of period 58,173,569 50,362,016
------------- -------------
Cash and due from banks - end of period $ 58,168,239 $ 38,507,377
============= =============
Supplemental disclosures:
Interest paid $ 7,769,165 $ 10,330,893
Income taxes paid 7,405,194 8,655,303
See Notes to Consolidated Financial Statements.
7
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements include the accounts of Sterling
Bancorp ("the parent company") and its subsidiaries, principally
Sterling National Bank and its subsidiaries ("the bank"), after
elimination of material intercompany transactions. The term "the
Company" refers to Sterling Bancorp and its subsidiaries. The
consolidated financial statements as of and for the interim periods
ended June 30, 2003 and 2002 are unaudited; however, in the opinion of
management, all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of such periods have been made.
Certain reclassifications have been made to the 2002 consolidated
financial statements to conform to the current presentation. The
interim consolidated financial statements should be read in conjunction
with the Company's annual report on Form 10-K for the year ended
December 31, 2002. The Company paid stock dividends as follows: a 20%
stock dividend on December 9, 2002; a 10% stock dividend on December
10, 2001; a 10% stock dividend on December 11, 2000; and a 5% stock
dividend on December 14, 1999. Fractional shares were cashed-out and
payments were made to shareholders in lieu of fractional shares. The
basic and diluted average number of shares outstanding and earnings per
share information for all prior reporting periods have been restated to
reflect the effect of the stock dividends.
2. At June 30, 2003, the Company has a stock-based employee compensation
plan, which is described more fully in Note 15 of the Company's annual
report on Form 10-K for the year ended December 31, 2002. The Company
accounts for this plan under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying common
stock on the date of grant. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 148, the following table illustrates
the effect on net income and earnings per 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 June 30, 2003 2002
--------------------------- ------------ -------------
Net income available for
common shareholders $ 5,828,651 $ 5,202,431
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (297,668) (218,172)
------------ -------------
Pro forma, net income $ 5,530,983 $ 4,984,259
============ =============
Earnings per share:
Basic- as reported $ 0.49 $ 0.44
Basic- pro forma 0.47 0.42
Diluted- as reported 0.47 0.40
Diluted- pro forma 0.44 0.39
8
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Six Months Ended June 30, 2003 2002
------------------------- ------------ -------------
Net income available for
common shareholders $ 11,643,281 $ 10,440,356
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (586,655) (418,690)
------------ -------------
Pro forma, net income $ 11,056,626 $ 10,021,666
============ =============
Earnings per share:
Basic- as reported $ 0.98 $ 0.87
Basic- pro forma 0.93 0.83
Diluted- as reported 0.93 0.81
Diluted- pro forma 0.88 0.78
3. The major components of domestic loans held for sale and loans held in
portfolio are as follows:
June 30,
-------------------------------
2003 2002
------------- -------------
Loans held for sale
Real estate-mortgage $ 69,811,132 $ 27,336,456
============= =============
Loans held in portfolio
Commercial and industrial $ 490,035,642 $ 492,937,978
Lease financing 154,600,599 122,884,211
Real estate-mortgage 141,411,118 127,320,083
Real estate-construction 2,392,639 -
Installment 11,767,941 8,216,292
Loans to depository institutions 20,000,000 32,000,000
------------ -------------
Loans, gross 820,207,939 783,358,564
Less unearned discounts 19,229,238 13,821,581
------------- -------------
Loans, net of unearned discounts $ 800,978,701 $ 769,536,983
============= =============
4. The Company's outstanding Preferred Shares comprise 228,369 Series D
shares (of 300,000 Series D shares authorized). Each Series D share
(all of such shares are owned by the Company's Employee Stock Ownership
Trust) is entitled to dividends at the rate of $0.6125 per year, is
convertible into 1.5267 Common Shares, and is entitled to a liquidation
preference of $10 (together with accrued dividends). All preferred
shares are entitled to one vote per share (voting with the Common
Shares except as otherwise required by law).
9
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
5. The Financial Accounting Standards Board SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information, "established
standards for the way that public business enterprises report and
disclose selected information about operating segments in interim
financial statements issued to stockholders. The Company provides a
wide range of financial products and services, including commercial
loans, asset-based financing, accounts receivable management services,
trade financing, equipment leasing, corporate and consumer deposit
services, commercial and residential mortgage lending and brokerage,
trust and estate administration and investment management services. The
Company's primary source of earnings is net interest income, which
represents the difference between interest earned on interest-earning
assets and the interest incurred on interest-bearing liabilities. The
Company's 2003 year-to-date average interest-earning assets were 58.1%
loans (corporate lending was 72.1% and real estate lending was 25.2% of
total loans, respectively) and 41.9% investment securities and money
market investments. There are no industry concentrations exceeding 10%
of loans, gross, in the corporate loan portfolio. Approximately 72% of
loans are to borrowers located in the metropolitan New York area. In
order to comply with the Provisions of SFAS No. 131, the Company has
determined that it has three reportable operating segments: corporate
lending, real estate lending and company-wide treasury.
The following tables provide certain information regarding the
Company's operating segments for the three and six month periods ended
June 30, 2003 and 2002:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------- -------------- -------------- --------------
Three Months Ended June 30, 2003
--------------------------------
Net interest income $ 8,441,397 $ 4,175,562 $ 6,073,723 $ 18,690,682
Noninterest income 3,023,464 3,762,007 402,537 7,188,008
Depreciation and amortization 38,472 78,136 -- 116,608
Segment profit 4,911,158 3,995,067 6,413,440 15,319,665
Segment assets 641,338,480 217,811,425 692,351,954 1,551,501,859
Three Months Ended June 30, 2002
--------------------------------
Net interest income $ 7,242,502 $ 3,253,824 $ 7,607,181 $ 18,103,507
Noninterest income 3,172,763 2,656,382 1,159,659 6,988,804
Depreciation and amortization 48,147 47,103 -- 95,250
Segment profit 4,162,782 2,894,177 8,802,766 15,859,725
Segment assets 611,701,737 161,086,704 710,405,554 1,483,193,995
Six Months Ended June 30, 2003
------------------------------
Net interest income $ 16,764,934 $ 7,927,652 $ 12,367,554 $ 37,060,140
Noninterest income 6,028,036 7,067,164 779,670 13,874,870
Depreciation and amortization 88,637 154,392 -- 243,029
Segment profit 8,646,012 7,316,417 12,949,568 28,911,997
Segment assets 641,338,480 217,811,425 692,351,954 1,551,501,859
Six Months Ended June 30, 2002
------------------------------
Net interest income $ 14,274,480 $ 6,632,193 $ 15,106,381 $ 36,013,054
Noninterest income 6,009,261 5,174,390 1,400,211 12,583,862
Depreciation and amortization 93,499 94,143 -- 187,642
Segment profit 7,813,669 5,771,340 16,744,877 30,329,886
Segment assets 611,701,737 161,086,704 710,405,554 1,483,193,995
10
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table sets forth reconciliations of net interest income,
noninterest income, profits and assets of reportable operating segments to the
Company's consolidated totals:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net interest income:
Total for reportable operating segments $ 18,690,682 $ 18,103,507 $ 37,060,140 $ 36,013,054
Other [1] 409,653 380,815 820,062 770,155
--------------- --------------- --------------- ---------------
Consolidated net interest income $ 19,100,335 $ 18,484,322 $ 37,880,202 $ 36,783,209
=============== =============== =============== ===============
Noninterest income:
Total for reportable operating segments $ 7,188,008 $ 6,988,804 $ 13,874,870 $ 12,583,862
Other [1] 927,292 1,252,293 1,694,727 2,063,376
--------------- --------------- --------------- ---------------
Consolidated noninterest income $ 8,115,300 $ 8,241,097 $ 15,569,597 $ 14,647,238
=============== =============== =============== ===============
Profit:
Total for reportable operating segments $ 15,319,665 $ 15,859,725 $ 28,911,997 $ 30,329,886
Other [1] (5,820,678) (8,969,996) (9,885,802) (14,646,866)
--------------- --------------- --------------- ---------------
Consolidated income before income taxes $ 9,498,987 $ 6,889,729 $ 19,026,195 $ 15,683,020
=============== =============== =============== ===============
Assets:
Total for reportable operating segments $ 1,551,501,859 $ 1,483,193,995 $ 1,551,501,859 $ 1,483,193,995
Other [1] 28,388,355 26,306,282 28,388,355 26,306,282
--------------- --------------- --------------- ---------------
Consolidated assets $ 1,579,890,214 $ 1,509,500,277 $ 1,579,890,214 $ 1,509,500,277
=============== =============== =============== ===============
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
11
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
6 . In July 2001, the Financial Accounting Standards Board issued SFAS No.
142,"Goodwill and Other Intangible Assets." SFAS No. 142 changed the
Accounting for goodwill, including goodwill recorded in past business
combinations. The previous accounting principles governing goodwill
generated from a business combination ceased upon adoption of SFAS No.
142 on January 1, 2002. The adoption of SFAS No. 142 had no impact on
the Company's balance sheet or statement of income.
7. The following information is provided in connection with the sales of
available for sale securities:
Three Months Ended June 30, 2003 2002
---------------------------- ------------ -------------
Proceeds $ 3,281,747 $ 39,568,514
Gross Gains 100,366 844,343
Gross Losses -- --
Six Months Ended June 30, 2003 2002
------------------------- ------------ -------------
Proceeds $ 5,846,762 $ 39,568,514
Gross Gains 196,358 844,343
Gross Losses -- --
8. FASB Interpretation ("FIN") No. 46 "Consolidation of Variable Interest
Entities,an interpretation of ARB No. 51". FIN No.46 establishes
accounting guidance for consolidation of variable interest entities
("VIE") that function to support the activities of the primary
beneficiary. The primary beneficiary of the VIE entity is the entity
that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result
of ownership, controlling interest, contractual relationship or other
business relationships with a VIE. Prior to the implementation of FIN
No.46, VIE's were generally consolidated by an enterprise when the
enterprise had a controlling financial interest through ownership of a
majority of voting interest in the entity. The provisions of FIN No.46
were effective immediately for all arrangements entered into after
January 31, 2003, and are otherwise effective at the beginning of the
first interim period beginning after June 15, 2003.
The Company adopted FIN No.46 on July 1, 2003. In its
current form, FIN No.46 may require the Company to deconsolidate its
investment in Sterling Bancorp Trust I in future financial statements.
The potential de-consolidation of subsidiary trusts, like Sterling
Bancorp Trust I, which the Company formed in connection with the
issuance of Trust preferred securities, appears to be an unintended
consequence of FIN No. 46. It is currently unknown if, or when, the
Financial Accounting Standards Board will address this issue. In July
2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to
include the trust preferred securities in their Tier I capital for
regulatory capital purposes until notice is given to the contrary.
12
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Federal Reserve intends to review the regulatory implications of
any accounting treatment changes and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance that
the Federal Reserve will continue to allow institutions to include
trust preferred securities in Tier I capital for regulatory capital
purposes. As of June 30, 2003, assuming the Company was not allowed
to include the $25 million in trust preferred securities issued by
Sterling Bancorp Trust I in Tier I capital, the Company would still
exceed the regulatory required minimums for capital adequacy purposes
(See Regulatory Capital and Ratios on page 28). If the trust
preferred securities were no longer allowed to be included in Tier 1
capital, the Company would also be permitted to redeem the capital
securities, which bear interest at 8.375 percent, without penalty.
SFAS No.150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity". SFAS No.150
establishes standards for how an issuer clarifies, measures and
discloses in its financial statements certain financial instruments
with characteristics of both liabilities and equity. SFAS No.150
requires that an issuer classify financial instruments that are within
its scope as liabilities, in most circumstances. Such financial
instruments include:(i) financial instruments that are issued in the
form of shares that are mandatorily redeemable. The Company will
reflect its $25,000,000 of corporation obligated manditorily redeemable
capital securities in liabilities as of September 30, 2003. The
interest cost associated with these securities now must be reflected in
interest expense while previously this expense was included in
noninterest expense. Net income will not be affected by the above
changes. SFAS No.150 is effective for contracts entered into or
modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003.
Adoption of the SFAS No.150 on July 1, 2003 did not have a significant
impact on the Company's consolidated financial statements.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following commentary presents management's discussion and analysis of the
consolidated results of operations and financial condition of Sterling Bancorp
(the "parent company"), a financial holding company pursuant to an election made
under the Gramm-Leach-Bliley Act of 1999, and its wholly-owned subsidiaries
Sterling Banking Corporation, Sterling Financial Services Company, Inc.,
Sterling Bancorp Trust I, Sterling Real Estate Abstract Holding Company, Inc.,
and Sterling National Bank ("the bank"). The bank, which is the principal
subsidiary, owns all of the outstanding shares of Sterling Factors Corporation,
Sterling National Mortgage Company, Inc., Sterling National Servicing, Inc.,
Sterling Trade Services, Inc., and Sterling Holding Company of Virginia, Inc.
Sterling Real Estate Abstract Holding Company, Inc. owns 51% of the outstanding
common shares of SBC Abstract Company LLC. Sterling Trade Services, Inc. owns
all of the outstanding common shares of Sterling National Asia Limited, Hong
Kong. Sterling Holding Company of Virginia, Inc. owns all of the outstanding
common shares of Sterling Real Estate Holding Company, Inc. Throughout this
discussion and analysis, the term "the Company" refers to Sterling Bancorp and
its subsidiaries. This discussion and analysis should be read in conjunction
with the consolidated financial statements and supplemental data combined
elsewhere in this quarterly report as well as the Company's annual report on
Form 10-K for the year ended December 31, 2002.
Our Internet address is www.sterlingbancorp.com and the investor
relations section of our web site is located at www.sterlingbancorp.com/
ir/investor.cfm. We make available free of charge, on or through the investor
relations section of our web site, annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein, including but not limited to, statements
concerning future results of operations or financial position, borrowing
capacity and future liquidity, future investment results, future credit
exposure, future loan losses and plans and objectives for future operations, and
other statements contained herein regarding matters that are not historical
facts, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead are subject to numerous assumptions, risks and uncertainties,
and represent only our belief regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. Any forward-looking
statements we may make speak only as of the date on which such statements are
made. It is possible that our actual results and financial position may differ,
possibly materially, from the anticipated results and financial condition
indicated in or implied by these forward-looking statements.
Factors that could cause our actual results to differ, possibly
materially, from those in the forward-looking statements include, but are not
limited to, the following: inflation, interest rates, market and monetary
fluctuations; geopolitical developments including acts of war and terrorism and
their impact on economic conditions; the effects of, and changes in, trade,
monetary and fiscal policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve; changes, particularly declines, in
general
14
economic conditions and in the local economies in which the Company operates;
the financial condition of the Company's borrowers; competitive pressures on
loan and deposit pricing and demand; changes in technology and their impact on
the marketing of new products and services and the acceptance of these products
and services by new and existing customers; the willingness of customers to
substitute competitors' products and services for the Company's products and
services; the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance); changes in
accounting principles, policies and guidelines; the success of the Company at
managing the risks involved in the foregoing as well as other risks and
uncertainties detailed from time to time in press releases and other public
filings. The foregoing list of important factors is not exclusive, and we will
not update any forward-looking statement, whether written or oral, that may be
made from time to time.
BUSINESS
Sterling provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, factoring/accounts receivable management
services, trade financing, equipment leasing, deposit services, trust and estate
administration and investment management services. The Company has operations in
the metropolitan New York area, North Carolina and many mid-Atlantic states, and
conducts business throughout the United States.
There is intense competition in all areas in which the Company conducts
its business. The Company competes with banks and other financial institutions,
including savings and loan associations, savings banks, finance companies, and
credit unions. To a limited extent, the company also competes with other
providers of financial services, such as money market mutual funds, brokerage
firms, consumer finance companies and insurance companies. Competition is based
on a number of factors, including prices, interest rates, service, availability
of products, and geographic location. At June 30, 2003, the bank's year-to-date
average earning assets represented approximately 97% of the Company's
year-to-date average earning assets. Loans represented 57% and investment
securities represented 42% of the bank's year-to-date average earning assets at
June 30, 2003.
The Company regularly evaluates acquisition opportunities and conducts
due diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
Results for the Three Months Ended June 30, 2003 and 2002
---------------------------------------------------------
OVERVIEW
The Company reported net income for the three months ended June 30, 2003 of $5.9
million, representing $0.47 per share, calculated on a diluted basis, compared
to $5.2 million, or $0.40 per share, calculated on a diluted basis, for the like
period in 2002. This increase reflects higher net interest income and a lower
provision for loan losses, which more than offset lower noninterest income and
increases in noninterest expenses and the provision for income taxes.
Net interest income, on a tax equivalent basis, increased to $19.3
million for the second quarter of 2003 compared with $18.7 million for the same
period
15
in 2002, due to higher average earning assets outstanding coupled with lower
average cost of funding. The net interest margin, on a tax equivalent basis, was
5.46% for the second quarter of 2003 compared to 5.64% for the like 2002 period.
The net interest margin was impacted by a decrease of 60 basis points in the
average yield on earning assets partially offset by a decrease of 55 basis
points in the average yield on cost of funds.
The provision for loan losses was $2.2 million for the three months
ended June 30, 2003 compared with $4.6 million for the like 2002 period while
the provision for income taxes increased to $3.6 million in the 2003 quarter
from $1.7 million in the like 2002 period.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets and liabilities. The increases (decreases) in the components of interest
income and interest expense, expressed in terms of fluctuation in average volume
and rate are shown on page 26. Information as to the components of interest
income and interest expense and average rates is provided in the Average Balance
Sheets shown on page 24.
Net interest income, on a tax equivalent basis, for the three months
ended June 30, 2003 increased to $19,349,000 from $18,745,000 for the comparable
period in 2002.
Total interest income, on a tax equivalent basis, aggregated
$23,345,000 for the second quarter of 2003 down from $23,820,000 for the same
period of 2002. The tax equivalent yield on interest earning assets was 6.62%
for the three months ended June 30, 2003 compared with 7.22% for the comparable
period in 2002. The decrease in interest income was due to a decrease in income
earned on the securities portfolio partially offset by increased income on the
loan portfolio. The decrease in yield on earning assets was due to lower yields
on both the loan and securities portfolios.
Interest earned on the loan portfolio amounted to $15,381,000 which was
up $1,135,000 when compared to a year ago. Average loan balances amounted to
$834,160,000 which were up $103,994,000 from an average of $730,166,000 in the
prior year period. The increase in the average loans, the result of the
continued implementation of business plans to increase funds employed in this
asset category, was primarily in the real estate and the lease finance segments
of the Company's loan portfolio. The decrease in the yield on the domestic loan
portfolio to 7.64% for the three months ended June 30, 2003 from 8.14% for the
comparable 2002 period was primarily attributable to a lower rate environment on
average in the 2003 period.
Interest earned on the securities portfolio, on a tax equivalent basis,
decreased to $7,942,000 for the three months ended June 30, 2003 from $9,531,000
in the prior year period. Average outstandings decreased to $593,682,000 from
$606,178,000 in the prior year period. The yield on the securities portfolio
decreased to 5.35% for the three months ended June 30, 2003 from 6.29% for the
like 2002 period principally as the result of higher prepayments from
mortgage-backed securities and the reinvestment of a portion of those funds into
lower yielding securities at positive spreads over funding costs.
16
Interest expense on deposits decreased $1,000,000 for the three months
ended June 30, 2003 to $2,309,000 from $3,309,000 for the comparable 2002 period
principally due to lower rates paid. Average rate paid on interest-bearing
deposits was 1.37% which was 59 basis points lower than the prior year period.
The decrease in average cost of deposits reflects the lower interest rate
environment during the 2003 period.
Provision For Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below) and the growth in the loan portfolios, the
provision for loan losses for the second quarter of 2003 was $2,173,000. The
provision for the comparable prior year period was $4,600,000. During the prior
year quarter a $5.4 million loan to a corporate borrower which had become the
subject of an involuntary bankruptcy was charged-off.
Noninterest Income
Noninterest income decreased $126,000 for the second quarter of 2003 when
compared with the like 2002 period primarily as a result of decreased income
from factoring activities, from fees for various other services, from gains on
sales of available for sale securities, and from other income services partially
offset by increased income from mortgage banking activities.
Noninterest Expenses
Noninterest expenses increased $309,000 for the second quarter of 2003 when
compared with the like 2002 period primarily due to increased salary expenses,
pension costs and professional fees incurred to support growing levels of
business activity and continued investment in the business franchise. Partially
offsetting those higher costs were reductions achieved as the result of a cost
control program, in occupancy, equipment, advertising/marketing, data processing
and stationery and printing expenses.
Provision for Income Taxes
The provision for income taxes was $3,639,000 for the second quarter of 2003
compared with $1,659,000 for the like 2002 period reflecting the increase in
pretax income in the current year quarter. A further contributing factor to the
variance in the provision was that New York State completed an examination of
Sterling's tax returns through 1998 and issued a no change finding during the
second quarter of 2002. As a result, based on management's review of required
tax reserves with outside professionals, approximately $1.0 million in excess
reserves was adjusted through the provision in the 2002 quarter.
Results for the Six Months Ended June 30, 2003 and 2002
-------------------------------------------------------
OVERVIEW
The Company reported net income for the six months ended June 30, 2003 of $11.7
million, representing $0.93 per share, calculated on a diluted basis, compared
to $10.5 million, or $0.81 per share calculated on a diluted basis, for the like
period in 2002. This increase reflects continued growth in both net interest
income and noninterest income, which, together with a lower provision for loan
losses, more than offset increases in noninterest expenses and the provision for
income taxes.
Net interest income, on a tax equivalent basis, increased to $38.4
million for the first six months of 2003 compared with $37.3 million for the
same period in 2002, due to higher average earning assets outstanding coupled
with lower average cost of funding. The net interest margin, on a tax equivalent
basis, was 5.59% for the first six months of 2003 compared to 5.70% for the like
2002 period. The net interest margin benefitted from a decrease of 56 basis
points in the average costs of funds partially offset by a 54 basis point
decrease in the average yield on earning assets.
Noninterest income rose to $15.6 million for the six months ended June
30, 2003 compared to $14.6 million for the like 2002 period principally due to
continued growth in fees from mortgage banking, deposit services and trade
finance activities. Partially offsetting those increases were reductions in fees
for factoring activities and for various other services and in gains on sales of
available for sale securities.
17
The provision for loan losses was $4.0 million for the six months ended
June 30, 2003 compared with $6.3 million for the like 2002 period while the
provision for income taxes increased to $7.3 million in the 2003 six month
period from $5.2 Million in the like 2002 period.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets and liabilities. The increases (decreases) in the components of interest
income and interest expense, expressed in terms of fluctuation in average volume
and rate are shown on page 27. Information as to the components of interest
income and interest expense and average rates is provided in the Average Balance
Sheets shown on page 25.
Net interest income, on a tax equivalent basis, for the six months
ended June 30,2003 increased $1,070,000 to $38,378,000 from $37,308,000 for the
comparable period in 2002.
Total interest income, on a tax equivalent basis, aggregated
$46,227,000 down $1,300,000 for the first half of 2003 as compared to
$47,527,000 for the same period of 2002. The tax equivalent yield on
interest-earning assets was 6.76% for the first six months of 2003 compared with
7.30% for the comparable period in 2002. The decrease in interest income was due
to a decrease in income earned on the securities portfolio partially offset by
increased income on the loan portfolio. The decrease in yield on earning assets
was due to lower yields on both the loan and securities portfolios.
Interest earned on the loan portfolio amounted to $30,141,000 which was
up $1,729,000 when compared to a year ago. Average loan balances amounted to
$818,564,000 which were up $99,013,000 from an average of $719,551,000 in the
prior year period. The increase in the average loans, the result of the
continued implementation of business plans to increase funds employed in this
asset category, was primarily in the real estate and the lease finance segments
of the Company's loan portfolio. The decrease in the yield on the domestic loan
portfolio to 7.77% for the six months ended June 30, 2003 from 8.40% for the
comparable 2002 period was primarily attributable to a lower rate environment on
average in the 2002 period.
Interest earned on the securities portfolio, on a tax equivalent basis,
decreased to $16,034,000 for the six months ended June 30, 2003 from $18,914,000
in the prior year period. Average outstandings decreased to $580,916,000 from
$597,681,000 in the prior year period. The yield on the securities portfolio
decreased to 5.52% for the six months ended June 30, 2003 from 6.33% for the
like 2002 period principally as the result of higher prepayments from
mortgage-backed securities and the reinvestment of a portion of those funds into
lower yielding securities at positive spreads over funding costs.
Interest expense on deposits decreased $2,121,000 for the six months
ended June 30, 2003 to $4,511,000 from $6,632,000 for the comparable 2002 period
principally due to lower rates paid. Average rate paid on interest-bearing
deposits was 1.37% which was 64 basis points lower than the prior year period.
The decrease in average cost of deposits reflects the lower interest rate
environment during the 2002 period.
Provision For Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below) and growth in the loan portfolios, the provision
for loan losses for the first six months of 2003 was $3,964,000. The provision
for the comparable prior year period was $6,279,000. During the prior year
second quarter a $5.4 million loan to a corporate borrower which had become the
subject of an involuntary bankruptcy was charged-off.
18
Noninterest Income
Noninterest income increased $922,000 for the first six months of 2003 when
compared with the like 2002 period primarily as a result of increased income
from mortgage banking and trade finance activities and from fees for deposit
services. Partially offsetting those increases, were reductions in income from
factoring activities, from fees for various other services and from gains on
sales of available for sale securities.
Noninterest Expenses
Noninterest expenses increased $992,000 for the first six months of 2003 when
compared with the like 2002 period primarily due to increased salary expenses,
pension costs, occupancy expenses, professional fees, expenses related to the
trust preferred securities placement completed in February, 2002, and
communication expenses incurred to support growing levels of business activity
and continued investment in the business franchise. Partially offsetting those
increases, were reductions in costs for data processing, for stationery and
printing and for various other operating expenses.
Provision for Income Taxes
The provision for income taxes was $7,320,000 for the first six months of 2003
compared with $5,186,000 for the like 2002 period reflecting the increase in
pretax income in the current year period. A further contributing factor to the
variance in the provision was that New York State completed an examination of
Sterling's tax returns through 1998 and issued a no charge finding during the
second quarter of 2002. As a result, based on management's review of required
tax reserves with outside professionals, approximately $1.0 million in excess
reserves was adjusted through the provision in the 2002 quarter.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S. Government
corporation and agency guaranteed mortgage-backed securities and collateralized
mortgage obligations along with other debt and equity securities. At June 30,
2003, the Company's portfolio of securities totaled $583,601,000 of which U.S.
Government corporation and agency guaranteed mortgage-backed and collateralized
mortgage obligations securities having an average life of approximately 2.6
years amounted to $512,534,000.
Securities classified as "available for sale" may be sold in the
future, prior to maturity. These securities are carried at market value. Net
aggregate unrealized gains or losses on these securities are included in a
valuation allowance account and are shown net of taxes, as a component of
shareholders' equity. The following table presents information regarding
securities available for sale:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 2003 Cost Gains Losses Value
--------------------------- ------------ ------------ ------------ ------------
U.S. Treasury securities $ 2,498,962 $ 291 $ 35 $ 2,499,218
Obligations of U.S. govern-
ment corporations and
agencies--mortgage-backed
securities 93,832,117 2,736,250 6,349 96,562,018
Obligations of U.S. govern-
ment corporations and
agencies--collateralized
mortgage obligations 28,123,027 46,461 71,643 28,097,845
Obligations of state and
political institutions 32,414,835 2,487,949 _ 34,902,784
Trust preferred securities 3,221,917 489,636 _ 3,711,553
Other debt securities 20,000,000 _ _ 20,000,000
Federal Reserve Bank and
other equity securities 8,685,141 18,216 527 8,702,830
------------ ------------ ------------ ------------
Total $188,775,999 $ 5,778,803 $ 78,554 $194,476,248
============ ============ ============ ============
19
Given the generally high credit quality of the portfolio, management expects to
realize all of its investment upon the maturity of such instruments, and thus
believes that any market value impairment is temporary in nature.
The Company has the intent and ability to hold to maturity securities
classified as "held to maturity." These securities are carried at cost, adjusted
for amortization of premiums and accretion of discounts. The following table
presents information regarding securities held to maturity:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
June 30, 2003 Value Gains Losses Value
----------------------------- ------------ ------------ ------------ ------------
Obligations of U.S. govern-
ment corporations and
agencies -- mortgage-backed
securities $272,215,129 $ 9,883,037 $ 24,610 $282,073,556
Obligations of U.S. govern
ment corporations and
agencies -- collateralized
mortgage obligations 115,659,360 657,976 65,727 116,251,609
Debt securities issued by
Foreign governments 1,250,000 -- -- 1,250,000
------------ ------------ ------------ ------------
Total $389,124,489 $ 10,541,013 $ 90,337 $399,575,165
============ ============ ============ ============
Loan Portfolio
A key management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness and the
designation of lending limits for each borrower. The portfolio strategies seek
to avoid concentrations by industry or loan size in order to minimize credit
exposure and to originate loans in markets with which it is familiar.
The Company's commercial and industrial loan portfolio represents
approximately 56% of loans, net of unearned discounts. Loans in this category
are typically made to small and medium sized businesses and range between
$250,000 and $10 million. The primary source of repayment is from the borrower's
operating profits and cash flows. Based on underwriting standards, loans may be
secured in whole or in part by collateral such as accounts receivable,
inventory, marketable securities, other liquid collateral, equipment and/or
other assets. The Company's real estate loan portfolio, which represents
approximately 25% of loans, net of unearned discounts, is secured by mortgages
on real property located principally in the States of New York and Virginia. The
Company's leasing portfolio, which consists of finance leases for various types
of business equipment, represents approximately 16% of loans, net of unearned
discounts. The collateral securing any loan may vary in value based on market
conditions.
20
The following table sets forth the composition of the Company's loans
held for sale and loans held in portfolio:
June 30,
-----------------------------------------------------
2003 2002
--------------------- -----------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- ------ -------- -----
Domestic
Commercial and industrial $489,525 56.2% $492,276 61.8%
Equipment lease financing 135,903 15.6 109,771 13.8
Real estate 213,608 24.5 154,633 19.4
Installment - individuals 11,754 1.4 8,193 1.0
Loans to depository institutions 20,000 2.3 32,000 4.0
-------- ----- -------- -----
Loans, net of unearned discounts $870,790 100.0% $796,873 100.0%
======== ===== ======== =====
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Company's portfolio of loans may be
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
The allowance for loan losses is maintained through the provision for
loan losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for loan losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
evaluation of both loans presenting identified loss potential and of the risk
inherent in various components of the portfolio, including loans identified as
impaired as required by SFAS No. 114. Thus, an increase in the size of the
portfolio or in any of its components could necessitate an increase in the
allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance. At June 30, 2003, the ratio of the allowance to loans held in
portfolio, net of unearned discounts, was 1.77% and the allowance was
$14,184,000. At such date, the Company's non-accrual loans amounted to
$2,522,000; $906,000 of such loans were judged to be impaired within the scope
of SFAS No. 114 and required valuation allowances of $435,000. Based on the
foregoing, as well as management's judgment as to the current risks inherent in
the loan portfolio, the Company's allowance for loan losses was deemed adequate
to absorb all estimable losses on specifically known and other possible credit
risks associated with the portfolio as of June 30, 2003. Potential problem
loans, which are loans that are currently performing under present loan
repayment terms but where known information about possible credit problems of
borrowers cause management to have serious doubts as to the ability of the
borrowers to continue to comply with the present repayment terms, aggregated
$1,195,000 at June 30, 2003.
21
Deposits
A significant source of funds for the Company continues to be deposits,
consisting of demand (noninterest-bearing), NOW, savings, money market and time
deposits (principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
June 30,
----------------------------------------------------------
2003 2002
----------------------- -----------------------
($ in thousands)
% of % of
Balances Total Balances Total
---------- ----- -------- -----
Domestic
Demand $ 385,095 36.2% $333,872 33.6%
NOW 120,323 11.3 109,559 11.0
Savings 27,880 2.6 24,486 2.5
Money market 164,514 15.4 160,488 16.1
Time deposits 364,183 34.2 363,701 36.5
---------- ----- -------- -----
Total domestic deposits 1,061,995 99.7 992,106 99.7
Foreign
Time deposits 3,000 0.3 3,000 0.3
---------- ----- -------- -----
Total deposits $1,064,995 100.0% $995,106 100.0%
========== ===== ======== =====
Fluctuations of balances in total or among categories at any date may occur
based on the Company's mix of assets and liabilities as well as on customers'
balance sheet strategies. Historically, however, average balances for deposits
have been relatively stable. Information regarding these average balances is
presented on pages 24 and 25.
22
CAPITAL
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations is a leverage
requirement. This requirement establishes a minimum leverage ratio (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). Information regarding the Company's
and the bank's risk-based capital is presented on page 28. In addition, the
Company and the bank are subject to the Federal Deposit Insurance Corporation
Improvement Act of 1981 ("FDICIA") which imposes a number of mandatory
supervisory measures. Among other matters, FDICIA established five capital
categories ranging from "well capitalized" to "critically under capitalized."
Such classifications are used by regulatory agencies to determine a bank's
deposit insurance premium, approval of applications authorizing institutions to
increase their asset size or otherwise expand business activities or acquire
other institutions. Under FDICIA a "well capitalized" institution must maintain
minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and 10%,
respectively. At June 30, 2003, the Company and the bank exceeded the
requirements for "well capitalized" institutions. Under the Gramm-Leach-Bliley
Act of 1999, in order for the parent company to maintain its status as a
financial holding company, the bank must remain "well capitalized."
23
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended June 30,
(dollars in thousands)
2003 2002
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- ---------- ----------- ---------- ---------
ASSETS
Interest-bearing deposits
with other banks $ 3,087 $ 4 0.73% $ 3,650 $ 11 1.30%
Investment securities:
Available for sale 159,581 2,039 5.11 265,730 4,039 6.08
Held to maturity 401,479 5,298 5.28 306,127 4,857 6.35
Tax-exempt [2] 32,622 605 7.44 34,321 635 7.43
Federal funds sold 5,879 18 1.21 7,440 32 1.69
Loans, net of unearned discounts
Domestic [3] 834,160 15,381 7.64 730,166 14,246 8.14
---------- ---------- ----------- ----------
TOTAL INTEREST-EARNING ASSETS 1,436,808 23,345 6.62% 1,347,434 23,820 7.22%
---------- ========== ---------- =========
Cash and due from banks 57,931 47,542
Allowance for loan losses (14,481) (14,930)
Goodwill 21,158 21,158
Other assets 63,412 54,142
---------- -----------
TOTAL ASSETS $1,564,828 $ 1,455,346
========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 27,407 23 0.34% $ 26,525 41 0.63%
NOW 116,406 160 0.55 110,551 235 0.85
Money market 161,943 200 0.50 160,003 395 0.99
Time 367,452 1,916 2.09 378,106 2,625 2.78
Foreign
Time 3,000 10 1.29 3,000 13 1.81
---------- ---------- ----------- ----------
Total interest-bearing deposits 676,208 2,309 1.37 678,185 3,309 1.96
---------- ---------- ----------- ----------
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 128,009 409 1.28 71,359 357 2.01
Commercial paper 19,981 56 1.11 28,116 153 2.17
Other short-term debt 30,410 141 1.97 21,621 130 2.41
Long-term debt 115,000 1,081 3.76 121,593 1,126 3.70
---------- ---------- ----------- ----------
Total borrowings 293,400 1,687 2.31 242,689 1,766 2.91
---------- ---------- ----------- ----------
TOTAL INTEREST-BEARING LIABILITIES 969,608 3,996 1.66% 920,874 5,075 2.21%
---------- ==== ---------- =========
Noninterest-bearing deposits 358,902 309,088
Other liabilities 77,964 75,176
---------- -----------
Total liabilities 1,406,474 1,305,138
---------- -----------
Corporation Obligated Mandatorily
Redeemable Preferred Securities 25,000 25,000
---------- -----------
Shareholders' equity 133,354 125,208
---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,564,828 $ 1,455,346
========== ===========
Net interest income/spread 19,349 4.96% 18,745 5.01%
========== =========
Net yield on interest-earning
assets (margin) 5.46% 5.64%
========== =========
Less: Tax equivalent adjustment 249 261
---------- ----------
Net interest income $ 19,100 $ 18,484
========== ==========
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages. Average rates are presented on a
tax equivalent basis. Certain reclassifications have been made to 2002
amounts to conform to the current presentation.
[2] Interest on tax-exempt securities is presented on a tax equivalent basis.
[3] Includes loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent collected.
24
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Six Months Ended June 30,
(dollars in thousands)
2003 2002
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- ---------- ----------- ---------- ---------
ASSETS
Interest-bearing deposits
with other banks $ 3,391 $ 12 0.84% $ 3,575 $ 20 1.16%
Investment securities:
Available for sale 157,505 4,194 5.33 255,553 7,838 6.13
Held to maturity 390,773 10,629 5.44 307,666 9,800 6.37
Tax-exempt [2] 32,638 1,211 7.48 34,462 1,276 7.47
Federal funds sold 6,558 40 1.21 21,657 181 1.66
Loans, net of unearned discounts
Domestic [3] 818,564 30,141 7.77 719,551 28,412 8.40
---------- ---------- ----------- ----------
TOTAL INTEREST-EARNING ASSETS 1,409,429 46,227 6.76% 1,342,464 47,527 7.30%
---------- ========== ========== =========
Cash and due from banks 55,899 48,525
Allowance for loan losses (14,363) (14,707)
Goodwill 21,158 21,158
Other assets 63,075 50,911
---------- -----------
TOTAL ASSETS $1,535,198 $ 1,448,351
========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 26,812 49 0.37% $ 26,932 84 0.63%
NOW 115,571 297 0.52 105,505 464 0.89
Money market 156,573 375 0.48 164,986 791 0.97
Time 363,879 3,768 2.09 366,379 5,262 2.90
Foreign
Time 3,000 22 1.48 2,999 31 2.10
---------- ---------- ----------- ----------
Total interest-bearing deposits 665,835 4,511 1.37 666,801 6,632 2.01
---------- ---------- ----------- ----------
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 112,834 719 1.28 83,256 804 1.95
Commercial paper 21,982 126 1.16 33,346 359 2.17
Other short-term debt 30,881 331 2.21 20,310 238 2.36
Long-term debt 115,000 2,162 3.76 116,784 2,186 3.74
---------- ---------- ----------- ----------
Total borrowings 280,697 3,338 2.39 253,696 3,587 2.84
---------- ---------- ----------- ----------
TOTAL INTEREST-BEARING LIABILITIES 946,532 7,849 1.67% 920,497 10,219 2.23%
---------- ========== ---------- =========
Noninterest-bearing deposits 352,237 306,972
Other liabilities 79,522 77,096
---------- -----------
Total liabilities 1,378,291 1,304,565
---------- -----------
Corporation Obligated Mandatorily
Redeemable Preferred Securities 25,000 17,127
---------- -----------
Shareholders' equity 131,907 126,659
---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,535,198 $ 1,448,351
========== ===========
Net interest income/spread 38,378 5.09% 37,308 5.07%
========== =========
Net yield on interest-earning
assets (margin) 5.59% 5.70%
========== =========
Less: Tax equivalent adjustment 498 525
---------- ----------
Net interest income $ 37,880 $ 36,783
========== ==========
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages. Average rates are presented on a
tax equivalent basis. Certain reclassifications have been made to 2002
amounts to conform to the current presentation.
[2] Interest on tax-exempt securities is presented on a tax equivalent basis.
[3] Includes loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent collected.
25
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/ (Decrease)
Three Months Ended
June 30, 2003 to June 30, 2002
----------------------------------------
Volume Rate Net [2]
---------- ---------- ----------
INTEREST INCOME
Interest-bearing deposits with other banks $ (2) $ (5) $ (7)
---------- ---------- ----------
Investment securities
Available for sale (1,429) (571) (2,000)
Held to maturity 1,346 (905) 441
Tax-exempt (31) 1 (30)
---------- ---------- ----------
Total investment securities (114) (1,475) (1,589)
---------- ---------- ----------
Federal funds sold (6) (8) (14)
---------- ---------- ----------
Loans, net of unearned discounts
Domestic [3] 2,065 (930) 1,135
---------- ---------- ----------
Total loans, net of unearned discount 2,065 (930) 1,135
---------- ---------- ----------
TOTAL INTEREST INCOME $ 1,943 $ (2,418) $ (475)
========== ========== ==========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 1 $ (19) $ (18)
NOW 11 (86) (75)
Money market 5 (200) (195)
Time (72) (637) (709)
Foreign
Time - (3) (3)
---------- ---------- ----------
Total interest-bearing deposits (55) (945) (1,000)
---------- ---------- ----------
Borrowings
Federal funds purchased and securities sold
under agreements to repurchase 214 (162) 52
Commercial paper (36) (61) (97)
Other short-term debt 41 (30) 11
Long-term debt (63) 18 (45)
---------- ---------- ----------
Total borrowings 156 (235) (79)
---------- ---------- ----------
TOTAL INTEREST EXPENSE $ 101 $ (1,180) $ (1,079)
========== ========== ==========
NET INTEREST INCOME $ 1,842 $ (1,238) $ 604
========== ========== ==========
[1] The above table is presented on a tax equivalent basis.
[2] Changes in interest income and interest expense due to a combination of both
volume and rate have been allocated to the change due to volume and the
change due to rate in proportion to the relationship of the change due
solely to each.
[3] Included loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent collected.
26
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/ (Decrease)
Six Months Ended
June 30, 2003 to June 30, 2002
----------------------------------------
Volume Rate Net [2]
---------- ---------- ----------
INTEREST INCOME
Interest-bearing deposits with other banks $ (1) $ (7) $ (8)
---------- ---------- ----------
Investment securities
Available for sale (2,719) (925) (3,644)
Held to maturity 2,380 (1,551) 829
Tax-exempt (65) - (65)
---------- ---------- ----------
Total investment securities (404) (2,476) (2,880)
---------- ---------- ----------
Federal funds sold (102) (39) (141)
---------- ---------- ----------
Loans, net of unearned discounts
Domestic [3] 4,029 (2,300) 1,729
---------- ---------- ----------
Total loans, net of unearned discount 4,029 (2,300) 1,729
---------- ---------- ----------
TOTAL INTEREST INCOME $ 3,522 $ (4,822) $ (1,300)
========== ========== ==========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ - $ (35) $ (35)
NOW 41 (208) (167)
Money market (38) (378) (416)
Time (36) (1,458) (1,494)
Foreign
Time - (9) (9)
---------- ---------- ----------
Total interest-bearing deposits (33) (2,088) (2,121)
---------- ---------- ----------
Borrowings
Federal funds purchased and securities sold
under agreements to repurchase 238 (323) (85)
Commercial paper (98) (135) (233)
Other short-term debt 110 (17) 93
Long-term debt (35) 11 (24)
---------- ---------- ----------
Total borrowings 215 (464) (249)
---------- ---------- ----------
TOTAL INTEREST EXPENSE $ 182 $ (2,552) $ (2,370)
========== ========== ==========
NET INTEREST INCOME $ 3,340 $ (2,270) $ 1,070
========== ========== ==========
[1] The above table is presented on a tax equivalent basis.
[2] Changes in interest income and interest expense due to a combination of both
volume and rate have been allocated to the change due to volume and the
change due to rate in proportion to the relationship of the change due
solely to each.
[3] Includes loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent collected.
27
STERLING BANCORP AND SUBSIDIARIES
Regulatory Capital and Ratios
Ratios and Minimums
(dollars in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
----------------- ---------------- ----------------
As of June 30, 2003 Amount Ratio Amount Ratio Amount Ratio
------------------- -------- ----- ------- ----- ------- -----
Total Capital(To Risk Weighted Assets):
The Company $152,057 15.71% $77,455 8.00% $96,819 10.00%
The bank 118,151 12.75 74,159 8.00 92,699 10.00
Tier 1 Capital(to Risk Weighted Assets):
The Company 139,929 14.45 38,728 4.00 58,091 6.00
The bank 106,542 11.49 37,079 4.00 55,619 6.00
Tier 1 Leverage Capital(to Average Assets):
The Company 139,929 9.06 61,747 4.00 77,184 5.00
The bank 106,542 7.10 60,006 4.00 75,007 5.00
As of December 31, 2002
-----------------------
Total Capital(To Risk Weighted Assets):
The Company $144,054 15.34% $75,134 8.00% $93,917 10.00%
The bank 105,265 11.76 71,632 8.00 89,540 10.00
Tier 1 Capital(to Risk Weighted Assets):
The Company 132,292 14.09 37,567 4.00 56,350 6.00
The bank 94,059 10.50 35,816 4.00 53,724 6.00
Tier 1 Leverage Capital(to Average Assets):
The Company 132,292 8.95 59,153 4.00 73,942 5.00
The bank 94,059 6.55 57,437 4.00 71,796 5.00
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of market risk, liquidity risk, capital and asset quality. The
Company's net interest income is affected by changes in market interest rates
and by the level and composition of interest income is affected by changes in
market interest rates and by the level and composition of interest-earning
assets and interest-bearing liabilities. The Company's objectives in its
asset/liability management are to utilize its capital effectively, to provide
adequate liquidity and to enhance net interest income, without taking undue
risks or subjecting the Company unduly to interest rate fluctuations.
The Company takes a coordinated approach to the management of market
risk, liquidity and capital. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee("ALCO"). ALCO, which is comprised of
members of senior management and the Board, meets to review, among other things,
economic conditions, interest rates, yield curve, cash flow projections,
expected customer actions, liquidity levels, capital ratios and repricing
characteristics of assets, liabilities and off-balance sheet financial
instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. The Company monitors the interest rate sensitivity of its on- and
off-balance sheet positions by examining its near-term sensitivity and its
longer term gap position. In its management of interest rate risk, the Company
utilizes several tools including traditional gap analysis and income simulation
models.
A traditional gap analysis is prepared based on the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities for selected time bands. The mismatch between repricings or
maturities within a time band is commonly referred to as the "gap" for that
period. A positive gap (asset sensitive) where interest-rate sensitive assets
exceed interest-rate sensitive liabilities generally will result in an
institution's net interest margin increasing in a rising rate environment and
decreasing in a falling rate environment. A negative gap (liability sensitive)
will generally have the opposite result on an institution's net interest margin.
However, the traditional gap analysis does not assess the relative sensitivity
of assets and liabilities to changes in interest rates. The Company utilizes the
gap analysis to complement its income simulations modeling, primarily focusing
on the longer term structure of the balance sheet.
The Company's balance sheet structure is primarily short-term in nature
with a substantial portion of assets and liabilities repricing or maturing
within one year. The Company's gap analysis at June 30, 2003, is presented on
page 32. The results of both the income simulation analysis and the gap
analysis, reveal that net interest income would increase during periods of
rising interest rates and decrease during periods of falling interest rates.
29
As part of its interest rate risk strategy, the Company uses certain
financial instruments (derivatives) to hedge the interest rate sensitivity of
assets with the corresponding amortization reflected in the yield of the related
on-balance sheet assets being hedged. The Company has written policy guidelines,
which have been approved by the Board of Directors based on recommendations of
the ALCO, governing the use of off-balance sheet financial instruments,
including approved counterparties, risk limits and appropriate internal control
procedures. The credit risk of derivatives arises principally from the potential
for a counterparty to fail to meet its obligation to settle a contract on a
timely basis.
The Company purchased interest rate floor contracts to reduce the
impact of falling rates on its floating rate commercial loans. Interest rate
floor contracts require the counterparty to pay the Company at specified future
dates the amount, if any, by which the specified interest rate (3 month LIBOR)
falls below the fixed floor rates, applied to the notional amounts. The Company
utilizes these financial instruments to adjust its interest rate risk position
without exposing itself to principal risk and funding requirements.
At June 30, 2003, the Company's financial instruments consisted or two
interest rate floor contracts each having a notional amount of $25 million and a
final maturity of August 14, 2003. These financial instruments are being used as
part of the Company's interest rate risk management and not for trading
purposes. At June 30, 2003, all counterparties have investment grade credit
ratings from the major rating agencies. Each counterparty is specifically
approved for application credit exposure.
The interest rate floor contracts require the Company to pay a fee for
the right to receive a fixed interest payment. The Company paid up-front
premiums of $110,000 which are amortized monthly against interest income from
the designated assets. At June 30, 2003, the unamortized premiums on these
contracts totaled $7,000 and are included in other assets. At June 30, 2003,
there was a $136,000 receivable under these contracts.
The Company utilizes income simulation models to complement its
traditional gap analysis. While the ALCO routinely monitors simulated net
interest income sensitivity over a rolling two-year horizon, it also utilizes
additional tools to monitor potential longer-term interest rate risk. The income
simulation models measure the Company's net interest income sensitivity or
volatility to interest rate changes utilizing statistical techniques that allow
the company to consider various factors which impact net interest income. These
factors include actual maturities, estimated cash flows, repricing
characteristics, deposits growth/retention and, most importantly, the relative
sensitivity of the Company's assets and liabilities to changes in market
interest rates. This relative sensitivity is important to consider as the
Company's core deposit base is not subject to the same degree of interest rate
sensitivity as its assets. The core deposit costs are internally managed and
tend to exhibit less sensitivity to changes in interest rates than the Company's
adjustable rate assets whose yields are based on external indices and change in
concert with market interest rates.
The Company's interest rate sensitivity is determined by identifying
the probable impact of changes in market interest rates on the yields on the
Company's assets and the rates that would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
can project the impact of changes in interest rates on net interest margin. The
estimated effects of the Company's interest rate floors are included in the
results of the sensitivity analysis. The Company has established certain limits
for the potential volatility of its net interest margin assuming certain levels
of changes in market interest rates with the objective of maintaining a stable
net interest margin under various probable rate scenarios. Management generally
has maintained a risk position well within the policy limits.
30
As of June 30 2003, the model indicated the impact of a 200 basis point
parallel and pro rata rise in rates over twelve months would approximate a
4.53% ($3,193,000) increase in net interest income, while the impact of a 200
basis point decline in rates over the same period would approximate a 6.84%
($4,824,000) decline from an unchanged rate environment.
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions,
including the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cash flows, and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
"caps" or "floors" on adjustable rate assets, the potential effect of changing
debt service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
the Asset/Liability Committee might take in responding to or anticipating
changes in interest rates.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed throughout the Company. Liquid assets consist of cash and due from
banks, interest-bearing deposits in banks and Federal funds sold and securities
available for sale. Primary funding sources include core deposits, capital
markets funds and other money market sources. Core deposits include domestic
noninterest-bearing and interest-bearing retail deposits, which historically
have been relatively stable. The parent company and the bank have significant
unused borrowing capacity. Contingency plans exist and could be implemented on a
timely basis to minimize the impact of any dramatic change in market conditions.
The parent company generates income from its own operations. Its cash
requirements are supplemented from funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements.
The bank can supply funds to the parent company and its nonblank
subsidiaries subject to various legal restrictions. All national banks are
limited in the payment of dividends in any year without the approval of the
Comptroller of the Currency to an amount not to exceed the net profits as
defined, for that year to date combined with its retained net profits for the
preceding two calendar years.
At June 30, 2003, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $17,523,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$34,757,000 and back-up credit lines with banks of $24,000,000. Since 1979, the
parent company has had no need to use available back-up lines of credit.
While the Company's past performance is no guarantee of the future,
management believes that the Company's funding sources (including dividends from
its subsidiaries) and the bank's funding sources will be adequate to meet their
liquidity and capital requirements in the future.
31
STERLING BANCORP AND SUBSIDIARIES
Interest Rate Sensitivity
To mitigate the vulnerability of earnings to change 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 gape predominantly to repricing intervals of a year
or less so that adjustment can be made quickly. Assets and liabilities with
predetermined repricing dates are classified based on the earliest repricing
period. Amount 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 $ 2,288 $ - $ - $ - $ - $ 2,288
Investment securities 22,701 1,926 46,084 504,187 8,703 583,601
Loans, net of unearned
discounts
Commercial and industrial 478,477 4,696 6,835 27 (510) 489,525
Loans to depository
institutions 20,000 - - - - 20,000
Lease financing 887 8,023 139,809 5,882 (18,698) 135,903
Real estate 125,470 14,791 39,917 33,437 (7) 213,608
Installment 10,273 112 1,185 198 (14) 11,754
Noninterest-earning
assets and allowance
for loan losses - - - - 123,211 123,211
----------- ---------- --------- --------- --------- ----------
Total Assets 660,096 29,548 233,830 543,731 112,685 1,579,890
----------- ---------- --------- --------- --------- ----------
LIABILITIES AND
SHARESHOLDERS' EQUITY
Interest-bearing deposits
Saving [1] - - 27,880 - - 27,880
NOW [1] - - 120,323 - - 120,323
Money market [1] 133,804 30,710 - - 164,514
Time - domestic 192,590 85,611 85,866 116 - 364,183
- foreign 1,645 1,355 - - - 3,000
Federal funds purchased &
securities sold u/a/r 117,639 1,083 - - - 118,722
Commercial paper 17,348 - - - - 17,348
Other short-term borrowings 11,610 20,000 - - - 31,610
Long-term borrowings - FHLB - - 15,000 100,000 - 115,000
Noninterest-bearing liabilities
and shareholders' equity - - - - 617,310 617,310
----------- ---------- --------- --------- --------- ----------
Total Liabilities and
Shareholders' Equity 474,636 108,049 279,779 100,116 617,310 1,579,890
----------- ---------- --------- --------- --------- ----------
Net Interest Rate
Sensitivity Gap $ 185,460 $ (78,501) $ (45,949) $ 443,615 $(504,625) $ -
=========== ========== ========= ========= ========= ==========
Cumulative Gap
June 30, 2003 $ 185,460 $ 106,959 $ 61,010 $ 504,625 $ - $ -
=========== ========== ========= ========= ========= ==========
Cumulative Gap
June 30, 2002 $ 96,179 $ 70,928 $ (40,390) $ 463,156 $ - $ -
=========== ========== ========= ========= ========= ==========
Cumulative Gap
December 31, 2002 $ 260,814 $ 167,170 $ 98,271 $ 522,344 $ - $ -
=========== ========== ========= ========= ========= ==========
[1] Historically, balances in non-maturity deposit accounts have remained
relatively stable despite change in levels of interest rates. Balances are
shown in repricing periods based on management's historical repricing
practices and run-off experience.
32
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of the Company's Management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in rule 13a-15(e) or 15d-15(e)
under the Securities Exchange Act of 1934). As of the end of the period
covered by this report 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. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
33
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
(a) The Annual Meeting of Shareholders of the Company was held on
April 15, 2003
(b) The following matters were submitted to a vote of the
Shareholders of the Company:
(1) Election of Directors
Nominee Total Votes For Total Votes Withheld
------- -------------- --------------------
Robert Abrams 10,929,365 88,465
Joseph M. Adamko 10,750,535 267,295
Louis J. Cappelli 10,967,405 50,425
Walter Feldesman 9,443,498 1,574,332
Fernando Ferrer 10,962,483 55,347
Allan F. Hershfield 10,768,228 249,602
Henry J. Humphreys 10,464,024 553,806
John C. Millman 10,967,646 50,184
Eugene T. Rossides 10,744,671 273,159
There were no abstentions or broker nonvotes.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
11 Statement Re: Computation of Per Share Earnings
31 Certifications of the CEO and CFO pursuant to
Exchange Act Rule 13a-14(a) or Rule 15d-14(a)
32 Certifications of the CEO and CFO required by Rule
13a-14(b) or Rule 15d-14(b) and Section 1350 0f
chapter 63 of title 18 of the U.S. Code
(b) Reports on Form 8-K:
In a report on Form 8-K dated May 2, 2003 and filed on May 5,
2003, the Company reported, under Item 5. "Other Events" and
under Item 7. "Financial Statements, Pro Forma Financial
Information and Exhibits", the press release announcing a
presentation on May 7, 2003 by John C. Millman, President of
Sterling Bancorp, and by Michael Bizenov, President of
Sterling National Mortgage Company, Inc. as part of the Keefe,
Bruyette & Woods, Inc. New York Bank Field Trip and
Conference.
In a report on Form 8-K dated May 14, 2003 and filed on May
15, 2003, the company reported under Item 9. "Regulation FD
Disclosure", the filing by the Company's Chief Executive
Officer and Chief Financial Officer of Certifications required
to accompany the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003 required pursuant to section
906 of the Sarbanes-Oxley Act of 2002.
In a report on Form 8-K dated May 15, 2003 and filed on May
16, 2003, the company reported under Item 5. "Other Events"
and under Item 7. "Financial Statements Pro Forma Financial
Information and Exhibits" , the press release announcing the
declaration of a quarterly cash dividend of $0.19 payable June
30, 2003 to shareholders of record on June 15, 2003.
34
'
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING BANCORP
_____________________________
(Registrant)
Date 08/14/03 /s/ Louis J. Cappelli
----------- ------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 08/14/03 /s/ John W. Tietjen
----------- ------------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
35
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
------- ---------------------------------------------- ------------ -------- ----------
11 Statement re: Computation of X
Per Share Earnings
31 Certifications of the CEO and CFO pursuant to X
Exchange Act Rule 13a-14(a) or Rule 15d-14(a)
32 Certifications of the CEO and CFO required by X
Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of chapter 63 of title 18 of the U.S. Code
36