1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 1-5273-1
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Sterling Bancorp
- --------------------------------------------------------------------------------
(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)
430 Park Avenue, New York, N.Y. 10022-3505
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(Address of principal executive offices) (Zip Code)
212-826-8000
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(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of September 30, 2000 there were 8,261,848 shares of common stock,
$1.00 par value, outstanding.
2
STERLING BANCORP
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business 13
Results for Three Months 13
Results for Nine Months 15
Balance Sheet Analysis 17
Capital 19
Average Balance Sheets 20
Rate/Volume Analysis 22
Regulatory Capital and Ratios 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 25
Interest Rate Sensitivity 28
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 29
EXHIBIT INDEX 30
Exhibit 11 Computation of Per Share Earnings 31
Exhibit 27 Financial Data Schedule 32
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3
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
ASSETS 2000 1999
------------------------- ----------------------
Cash and due from banks $ 36,444,673 $ 35,505,342
Interest-bearing deposits with other banks 1,062,463 515,000
Investment securities
Available for sale (at estimated market value) 147,703,657 162,463,715
Held to Maturity (estimated market value
$287,246,493 and $286,220,249, respectively) 291,594,018 294,938,717
------------------------- ----------------------
Total investment securities 439,297,675 457,402,432
------------------------- ----------------------
Loans, net of unearned discounts 718,651,621 689,096,080
Less allowance for credit losses 12,249,069 11,116,848
------------------------- ----------------------
Loans, net 706,402,552 677,979,232
------------------------- ----------------------
Customers' liability under acceptances 958,386 3,888,140
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 5,316,827 5,847,842
Other real estate 865,209 358,175
Accrued interest receivable 5,068,265 4,541,954
Other assets 17,672,636 11,690,695
------------------------- ----------------------
$ 1,234,247,126 $ 1,218,887,252
========================= ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 296,696,204 $ 291,807,803
Interest-bearing deposits 512,769,355 570,712,149
------------------------- ----------------------
Total deposits 809,465,559 862,519,952
Federal funds purchased and securities
sold under agreements to repurchase 188,782,831 118,238,418
Commercial paper 27,002,100 40,319,200
Other short-term borrowings 19,865,673 10,993,363
Acceptances outstanding 958,386 3,888,140
Due to factoring clients 40,918,449 37,933,948
Accrued expenses and other liabilities 24,367,479 18,704,104
------------------------- ----------------------
1,111,360,477 1,092,597,125
Long-term debt - FHLB 10,700,000 21,050,000
------------------------- ----------------------
Total liabilities 1,122,060,477 1,113,647,125
------------------------- ----------------------
Commitments and contingent liabilities
Shareholders' equity
Preferred stock, $5 par value. Authorized 644,389 shares
Series B, issued 1,230 shares 24,600 24,600
Series D, issued 238,961 and
241,883 shares, respectively 2,389,610 2,418,830
------------------------- ----------------------
2,414,210 2,443,430
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 8,734,973 and 8,723,051 shares, respectively 8,734,973 8,723,051
Capital surplus 51,792,233 51,911,883
Retained earnings 60,906,372 52,360,024
Accumulated other comprehensive loss, net of tax (1,429,428) (2,634,509)
------------------------- ----------------------
122,418,360 112,803,879
Less
Common shares in treasury at cost, 473,125 and
357,993 shares, respectively 7,986,763 6,515,522
Unearned compensation 2,244,948 1,048,230
------------------------- ----------------------
Total shareholders' equity 112,186,649 105,240,127
------------------------- ----------------------
$ 1,234,247,126 $ 1,218,887,252
========================= ======================
See Notes to Consolidated Financial Statements.
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4
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
INTEREST INCOME
Loans $ 17,500,648 $ 14,140,542 $ 49,301,744 $ 40,715,827
Investment securities
Available for sale 2,409,409 2,077,844 7,246,480 6,040,834
Held to maturity 5,124,572 4,182,405 15,487,800 10,208,168
Federal funds sold 10,283 23,158 189,311 295,787
Deposits with other banks 25,966 75,707 84,829 150,015
------------------ ------------------ ------------------ ------------------
Total interest income 25,070,878 20,499,656 72,310,164 57,410,631
------------------ ------------------ ------------------ ------------------
INTEREST EXPENSE
Deposits 5,668,635 4,322,777 17,116,264 11,300,950
Federal funds purchased and
securities sold under agreements
to repurchase 2,588,850 1,432,218 6,206,974 3,460,176
Commercial paper 371,943 422,781 1,108,575 1,356,253
Other short-term borrowings 307,801 219,768 870,140 572,687
Long-term debt 107,224 481,674 409,658 1,526,800
------------------ ------------------ ------------------ ------------------
Total interest expense 9,044,453 6,879,218 25,711,611 18,216,866
------------------ ------------------ ------------------ ------------------
Net interest income 16,026,425 13,620,438 46,598,553 39,193,765
Provision for credit losses 1,478,600 1,365,000 4,518,200 4,118,000
------------------ ------------------ ------------------ ------------------
Net interest income after provision
for credit losses 14,547,825 12,255,438 42,080,353 35,075,765
------------------ ------------------ ------------------ ------------------
NONINTEREST INCOME
Factoring income 1,391,732 1,269,084 3,782,349 3,736,987
Mortgage banking income 1,529,230 1,557,141 4,419,367 4,238,156
Service charges on deposit accounts 1,407,675 769,303 3,403,894 2,309,648
Trade finance income 631,627 548,427 2,083,158 1,547,930
Trust fees 171,282 181,150 523,140 582,466
Other service charges and fees 423,500 309,479 1,388,773 991,647
Other income 73,773 23,678 142,722 75,311
------------------ ------------------ ------------------ ------------------
Total noninterest income 5,628,819 4,658,262 15,743,403 13,482,145
------------------ ------------------ ------------------ ------------------
NONINTEREST EXPENSES
Salaries 5,836,273 5,151,303 17,088,670 14,805,623
Employee benefits 1,250,407 951,990 3,709,112 3,108,191
------------------ ------------------ ------------------ ------------------
Total personnel expenses 7,086,680 6,103,293 20,797,782 17,913,814
Occupancy expenses, net 1,197,744 969,856 3,146,422 2,532,660
Equipment expenses 604,153 627,552 1,780,225 2,027,450
Other expenses 3,757,819 2,981,080 11,236,244 8,308,551
------------------ ------------------ ------------------ ------------------
Total noninterest expenses 12,646,396 10,681,781 36,960,673 30,782,475
------------------ ------------------ ------------------ ------------------
Income before income taxes 7,530,248 6,231,919 20,863,083 17,775,435
Provision for income taxes 3,344,153 2,547,111 8,799,771 7,074,574
------------------ ------------------ ------------------ ------------------
Net income $ 4,186,095 $ 3,684,808 $ 12,063,312 $ 10,700,861
================== ================== ================== ==================
Average number of common
shares outstanding
Basic 8,265,373 8,439,008 8,307,064 8,514,735
Diluted 8,569,729 8,792,279 8,547,588 8,887,344
Per average common share
Basic $0.50 $0.43 $1.44 $1.25
Diluted 0.49 0.42 1.40 1.20
Dividends per common share 0.14 0.12 0.42 0.36
See Notes to Consolidated Financial Statements.
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5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------ ------------------ ------------------ -----------------
Net Income $ 4,186,095 $ 3,684,808 $ 12,063,312 $ 10,700,861
Other comprehensive income,
net of tax:
Unrealized holding gains(losses)
arising during the period 915,857 (345,451) 1,205,081 (2,187,475)
------------------ ------------------ ------------------ -----------------
Comprehensive income $ 5,101,952 $ 3,339,357 $ 13,268,393 $ 8,513,386
================== ================== ================== =================
See Notes to Consolidated Financial Statements.
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6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended
September 30,
2000 1999
------------------- -------------------
Preferred Stock
Balance at January 1 $ 2,443,430 $ 2,463,890
Conversions of Series D shares (29,220) (20,460)
------------------- -------------------
Balance at September 30 $ 2,414,210 $ 2,443,430
=================== ===================
Common Stock
Balance at January 1 $ 8,723,051 $ 8,310,284
Conversions of preferred shares into common shares 2,922 2,046
Options exercised 9,000 12,500
------------------- -------------------
Balance at September 30 $ 8,734,973 $ 8,324,830
=================== ===================
Capital Surplus
Balance at January 1 $ 51,911,883 $ 45,287,315
Conversions of preferred shares into common shares 26,298 18,414
Issuance of shares under incentive compensation plan (214,369) -
Options exercised 68,421 135,063
------------------- -------------------
Balance at September 30 $ 51,792,233 $ 45,440,792
=================== ===================
Retained Earnings
Balance at January 1 $ 52,360,024 $ 48,817,648
Net Income 12,063,312 10,700,861
Cash dividends paid - common shares (3,454,897) (2,906,230)
- preferred shares (62,067) (49,332)
------------------- -------------------
Balance at September 30 $ 60,906,372 $ 56,562,947
=================== ===================
Accumulated Other Comprehensive (Loss)Income, Net of Tax
Balance at January 1 $ (2,634,509) $ 538,840
------------------- -------------------
Unrealized holding gains(losses)
arising during the period
Before tax 2,227,509 (4,043,394)
Tax (expense)benefit (1,022,428) 1,855,919
------------------- -------------------
Net of tax 1,205,081 (2,187,475)
------------------- -------------------
Balance at September 30 $ (1,429,428) $ (1,648,635)
=================== ===================
Treasury Stock
Balance at January 1 $ (6,515,522) $ (1,592,690)
Issuance of shares under incentive compensation plan 1,537,179 -
Purchase of common shares (3,008,420) (4,324,640)
------------------- -------------------
Balance at September 30 $ (7,986,763) $ (5,917,330)
=================== ===================
Unearned Compensation
Balance at January 1 $ (1,048,230) $ (1,673,963)
Issuance of shares under incentive compensation plan (1,462,656) -
Amortization of unearned compensation 265,938 240,625
------------------- -------------------
Balance at September 30 $ (2,244,948) $ (1,433,338)
=================== ===================
Total Shareholders' Equity
Balance at January 1 $ 105,240,127 $ 102,151,324
Amortization of unearned compensation 6,946,522 1,621,372
------------------- -------------------
Balance at September 30 $ 112,186,649 $ 103,772,696
=================== ===================
See Notes to Consolidated Financial Statements.
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7
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Nine Months Ended
September 30,
2000 1999
------------------- ---------------------
Operating Activities
Net Income $ 12,063,312 $ 10,700,861
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 4,518,200 4,118,000
Depreciation and amortization of premises and equipment 1,243,106 1,420,816
Deferred income tax benefit (350,698) (140,054)
Net change in loans held for sale (1,642,130) 9,307,975
Amortization of unearned compensation 265,938 240,625
Amortization of premiums of securities 648,463 1,561,063
Accretion of discounts on securities (820,972) (634,843)
Increase in accrued interest receivable (526,311) (770,735)
Increase in due to factored clients 2,984,501 10,502,574
Increase in other liabilities 5,663,375 5,340,364
Increase in other assets (5,981,941) (3,139,899)
Other, net (4,197,554) (1,848,460)
------------------- ---------------------
Net cash provided by operating activities 13,867,289 36,658,287
------------------- ---------------------
Investing Activities
Purchase of premises and equipment (712,091) (1,370,593)
Net increase in interest-bearing deposits (547,463) -
(Increase)Decrease in other real estate (507,034) 550,513
Net increase in loans (27,913,411) (16,417,115)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 28,172,875 49,954,562
Purchases of securities - held to maturity (25,217,335) (146,943,929)
Purchases of securities - available for sale (61,354,495) (117,486,978)
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 78,903,729 119,615,688
------------------- ---------------------
Net cash used in investing activities (9,175,225) (112,097,852)
------------------- ---------------------
Financing Activities
Net increase(decrease) in noninterest-bearing deposits 4,888,401 (52,856,890)
Net (decrease)increase in interest-bearing deposits (57,942,794) 128,693,921
Net increase in Federal funds purchased
and securities sold under agreements to repurchase 70,544,413 33,077,444
Net decrease in commercial paper and
other short-term borrowings (4,444,790) (13,678,481)
Purchase of treasury stock (3,008,420) (4,324,640)
Decrease in other long-term debt (10,350,000) (10,350,000)
Proceeds from exercise of stock options 77,421 147,563
Cash dividends paid on common and preferred stock (3,516,964) (2,955,562)
------------------- ---------------------
Net cash (used in) provided by financing activities (3,752,733) 77,753,355
------------------- ---------------------
Net increase in cash and due from banks 939,331 2,313,790
Cash and due from banks - beginning of period 35,505,342 43,311,268
------------------- ---------------------
Cash and due from banks - end of period $ 36,444,673 $ 45,625,058
=================== =====================
Supplemental schedule of non-cash financing activities:
Issuance of treasury stock $ 1,537,179 $ -
Preferred stock conversions 29,220 20,460
Supplemental disclosure of cash flow information:
Interest paid 26,737,461 18,420,455
Income taxes paid 8,103,063 6,251,902
See Notes to Consolidated Financial Statements.
7
8
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The consolidated financial statements include the accounts of Sterling
Bancorp ("the parent company") and its subsidiaries, principally Sterling
National Bank and its subsidiaries ("the bank"), after elimination of
material intercompany transactions. The term "the Company" refers to
Sterling Bancorp and its subsidiaries. The consolidated financial
statements as of and for the interim periods ended September 30, 2000 and
1999 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 1999 financial statements to
conform to the current presentation. The interim financial statements
should be read in conjunction with the Company's annual report on Form
10-K for the year ended December 31, 1999. The Board announced on
November 18, 1999, the declaration of a 5% stock dividend payable on
December 14, 1999 to shareholders of record on that date. 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 dividend.
2. For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks.
3. The Company's outstanding Preferred Shares comprise 1,230 Series B shares
(of 4,389 Series B shares authorized) and 238,961 Series D shares (of
300,000 Series D shares authorized). Each Series B share is entitled to
cumulative dividends at the rate of $0.10 per year, to one vote per share
and upon liquidation or redemption to an amount equal to accrued and
unpaid dividends to the date of redemption or liquidation plus an amount
which is $20 in the case of involuntary liquidation and $28 otherwise;
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 one Common Share, 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).
4. In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements, requires that selected information about
operating segments be reported in interim financial statements issued to
stockholders and establishes standards for related disclosures about an
enterprise's products and services, geographic areas, and major
customers.
8
9
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company provides a full range of financial products and services,
including business and consumer 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 2000
year-to-date average interest-earning assets were 57.2% loans (corporate lending
was 80.4% and real estate lending was 17.8% of total loans, respectively) and
42.8% investment securities and money market investments. There are no industry
concentrations exceeding 10% of loans, gross, in the corporate loan portfolio.
Approximately 76% of loans are to borrowers located in the metropolitan New York
area. In order to comply with the provisions of SFAS No. 131, the Company has
determined that it has three reportable operating segments: corporate lending,
real estate lending and company-wide treasury.
The following tables provide certain information regarding the Company's
operating segments for the three and nine month periods ended September 30, 2000
and 1999:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------- -------------- -------------- ---------------
Three Months Ended September 30, 2000
- -------------------------------------
Net interest income $ 8,086,055 $ 3,097,145 $ 4,273,097 $ 15,456,297
Noninterest income 3,339,648 1,609,839 27,106 4,976,593
Depreciation and amortization 51,177 58,753 171 110,101
Segment profit 5,221,904 2,389,240 5,571,695 13,182,839
Segment assets 568,058,326 118,370,413 503,468,683 1,189,897,422
Three Months Ended September 30, 1999
- -------------------------------------
Net interest income $ 6,756,367 $ 2,254,289 $ 3,814,475 $ 12,825,131
Noninterest income 2,296,193 1,513,506 30,074 3,839,773
Depreciation and amortization 45,235 54,121 175 99,531
Segment profit 3,527,646 2,197,500 5,425,200 11,150,346
Segment assets 537,173,996 98,944,050 472,263,765 1,108,381,811
Nine Months Ended September 30, 2000
- ------------------------------------
Net interest income $ 22,962,417 $ 8,021,052 $ 13,464,205 $ 44,447,674
Noninterest income 8,965,153 4,712,202 103,931 13,781,286
Depreciation and amortization 140,585 156,572 511 297,668
Segment profit 13,403,039 6,705,486 17,231,994 37,340,519
Segment assets 568,058,326 118,370,413 503,468,683 1,189,897,422
Nine Months Ended September 30, 1999
- ------------------------------------
Net interest income $ 20,201,830 $ 6,640,171 $ 9,814,585 $ 36,656,586
Noninterest income 6,347,478 4,176,853 108,152 10,632,483
Depreciation and amortization 122,659 149,818 518 272,995
Segment profit 10,494,908 6,341,200 15,153,900 31,990,008
Segment assets 537,173,996 98,944,050 472,263,765 1,108,381,811
9
10
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth reconciliations of net interest income,
noninterest income, profits and assets of reportable operating segments to the
Company's consolidated totals:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Net interest income:
Total for reportable operating segments $ 15,456,297 $ 12,825,131 $ 44,447,674 $ 36,656,586
Other [1] 570,128 795,307 2,150,879 2,537,179
--------------- --------------- --------------- ---------------
Consolidated net interest income $ 16,026,425 $ 13,620,438 $ 46,598,553 $ 39,193,765
=============== =============== =============== ===============
Noninterest income:
Total for reportable operating segments $ 4,976,593 $ 3,839,773 $ 13,781,286 $ 10,632,483
Other [1] 652,226 818,489 1,962,117 2,849,662
--------------- --------------- --------------- ---------------
Consolidated noninterest income $ 5,628,819 $ 4,658,262 $ 15,743,403 $ 13,482,145
=============== =============== =============== ===============
Profit:
Total for reportable operating segments $ 13,182,839 $ 11,150,346 $ 37,340,519 $ 31,990,008
Other [1] (5,652,591) (4,918,427) (16,477,436) (14,214,573)
--------------- --------------- --------------- ---------------
Consolidated income before income taxes $ 7,530,248 $ 6,231,919 $ 20,863,083 $ 17,775,435
=============== =============== =============== ===============
Assets:
Total for reportable operating segments $ 1,189,897,422 $ 1,108,381,811 $ 1,189,897,422 $ 1,108,381,811
Other [1] 44,349,704 38,658,430 44,349,704 38,658,430
--------------- --------------- --------------- ---------------
Consolidated assets $ 1,234,247,126 $ 1,147,040,241 $ 1,234,247,126 $ 1,147,040,241
=============== =============== =============== ===============
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
5. In June 1998, the Financial Accounting Standard Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statements of financial condition and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative (that
is, unrealized gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133," and SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities - An
Amendment to FASB Statement 133," is effective for fiscal quarters of
fiscal years beginning after September 15, 2000 and does not require
restatement of prior periods. Management of the Company believes the
implementation of SFAS No. 133 will not have a material impact on the
Company's financial condition or results of operations.
10
11
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. On September 29, 2000, the Financial Accounting Standards Board issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." SFAS No. 140 replaces SFAS No. 125
and addresses implementation issues that were identified in applying SFAS
No. 125. SFAS No. 140 is effective for transfers of financial assets
(including securitizations) occurring after March 31, 2001. However, the
provisions of SFAS No. 140 related to the recognition and
reclassification of collateral in financial statements and disclosures
related to securitization transactions and collateral are effective for
fiscal years ending after December 15, 2000. The Company does not expect
the adoption of SFAS No. 140 to have a material effect upon its financial
statements.
11
12
STERLING BANCORP AND SUBSIDIARIES
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 bank holding company as defined by the Bank Holding
Company Act of 1956, as amended, and its wholly-owned subsidiaries Sterling
Banking Corporation, Sterling Industrial Loan Association, and Sterling National
Bank. Sterling National Bank, which is the principal subsidiary, owns all of the
outstanding shares of Sterling Factors Corporation ("Factors"), Sterling
National Mortgage Company, Inc. ("SNMC-New York"), Sterling National Mortgage
Corp. ("SNMC-Virginia") and Sterling Holding Company of Virginia, Inc. Sterling
Holding Company of Virginia, Inc. owns all of the outstanding shares of Sterling
Real Estate Holding Company, Inc. ("SREHC"). Throughout this discussion and
analysis, the term "the Company" refers to Sterling Bancorp and its subsidiaries
and the term "the bank" refers to Sterling National Bank and its subsidiaries.
This discussion and analysis should be read in conjunction with the Company's
annual report on Form 10-K for the year ended December 31, 1999.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may
include, but are not limited to, financial projections, statements of plans and
objectives for future operations, estimates of future economic performance and
assumptions relating thereto.
The Company may include forward-looking statements in its filings with
the Securities and Exchange Commission, including this 10-Q, in reports to
stockholders, in other written materials, and in statements made by officers and
representatives of the Company to analysts, rating agencies, institutional
investors, representatives of the media and others.
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 of 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.
Important 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; 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; a decline in general economic conditions and the strength
of the local economies in which we operate; competitive pressures on loan and
deposit pricing and demand; changes in technology and their impact on the
marketing of products and services; the timely development and effective
marketing of competitive 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 our products and
services; the impact of changes in financial services' laws and regulations
(including laws
12
13
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 forwarding-looking statement, whether written or oral, that may be
made from time to time.
BUSINESS
The Company provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposits services, trust
and estate administration, and investment management services. The Company has
operations in metropolitan New York and Washington, DC areas, as well as
Virginia and other mid-Atlantic states and conducts business throughout the
United States.
There is intense competition in all areas in which the Company conducts
its business. In addition to competing with other banks, the Company competes in
certain areas of its business with other financial institutions. At September
30, 2000, the bank's year-to-date average earning assets (of which loans were
56% and investment securities were 43%) represented approximately 97% of the
Company's year-to-date average earning assets.
The Company regularly evaluates acquisition opportunities and conducts
due diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
Results for the Three Months Ended September 30, 2000 and 1999
--------------------------------------------------------------
OVERVIEW
The Company reported net income for the three months ended September 30, 2000 of
$4.2 million, representing $0.49 per share, calculated on a diluted basis,
compared to $3.7 million, or $0.42 per share, calculated on a diluted basis, for
the like period in 1999. This increase reflects higher net interest income and
continued growth in noninterest income.
Net interest income, on a tax equivalent basis, increased to $16.3
million for the third quarter of 2000 compared with $13.8 million for the same
period in 1999, principally due to higher average earning assets outstanding.
The net interest margin, on a tax equivalent basis, was 6.05% for the third
quarter of 2000 compared to 5.84% for the like 1999 period. This increase was
principally due to an increase of 69 basis points in the average yield on
earning assets partially offset by an increase in average cost of funds of 68
basis points.
Noninterest income rose to $5.6 million for the three months ended
September 30, 2000 compared to $4.7 million for the like 1999 period principally
due to continued growth in fees from deposit servicing, factoring, trade finance
and leasing activities.
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
13
14
assets, liabilities and shareholders' equity. The increases (decreases) in the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate are shown on page 22. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 20.
Net interest income, on a tax equivalent basis, for the three months
ended September 30, 2000 increased to $16,278,000 from $13,798,000 for the
comparable period in 1999.
Total interest income, on a tax equivalent basis, aggregated $25,322,000
which was up $4,645,000 for the third quarter of 2000 when compared to
$20,677,000 for the same period of 1999. The tax equivalent yield on interest
earning assets was 9.44% for the three months ended September 30, 2000 compared
with 8.75% for the comparable period in 1999. The increase in interest income
was due to an increase in income earned on the Company's loan portfolio and on
the investment securities portfolio as a result of higher average outstandings
and higher yields. Loan balances increased as the result of the implementation
of business plans, including the purchase of portfolios, designed to increase
funds employed in this asset category. The increase in investment securities
balances reflects the implementation of asset/liability management strategies.
The increase in yield on earning assets was due to higher yields on loans and
investment securities.
Interest earned on the loan portfolio amounted to $17,501,000 which was
up $3,360,000 when compared to a year ago. Average loan balances amounted to
$640,221,000 which were up $73,806,000 from an average of $566,415,000 in the
prior year period. The increase in the average loans (primarily in the leasing,
real estate and commercial and industrial loan segments of the Company's loan
portfolio), coupled with higher yields, accounted for the increase in interest
earned on loans. The increase in the yield on the domestic loan portfolio to
11.47% for the three months ended September 30, 2000 from 10.53% for the
comparable 1999 period was primarily attributable to a higher rate environment.
Tax equivalent interest earned on investment securities increased
$1,348,000 to $7,785,000 in 2000 due to higher average outstandings and higher
yields. Average investment securities outstandings increased to $453,043,000
from $400,967,000 in the prior year period. The increase in average balances was
primarily in U.S. Government and U.S. Government corporation and agency
guaranteed mortgage-backed securities. The increase in yield on investment
securities to 6.84% for the third quarter of 2000 from 6.41% in the prior year
period reflects the purchase of these securities in a rising rate environment in
the current year period.
Interest expense increased $2,165,000 to $9,044,000 for the third quarter
of 2000 from $6,879,000 for the comparable period in 1999. The increase in
interest expense was due to higher average funds employed coupled with higher
average rates paid for those funds.
Interest expense on deposits increased $1,346,000 for the three months
ended September 30, 2000 to $5,668,000 from $4,322,000 for the comparable 1999
period due to increases in average outstandings and higher rates paid on
deposits. Average interest-bearing deposit balances amounted to $525,893,000
which were up $63,663,000 from an average of $462,230,000 in the prior year
period. The increase in average balances was principally in certificates of
deposit which are included in time deposits. The average rate paid on
interest-bearing deposits increased to 4.29% for the third quarter of 2000
compared to 3.71% for the comparable year-ago period.
Interest expense associated with borrowed funds increased to $3,376,000
for the third quarter of 2000 from $2,557,000 in the comparable 1999 period as
the result of higher average outstandings and rates paid principally for Federal
funds purchased and securities sold under agreements to repurchase. Average
amounts outstanding for this category of borrowing increased $53,374,000 to
$169,175,000 for the three months ended September 30, 2000 and the average rates
paid rose to 6.09% from 4.91% in the prior year period.
14
15
Provision for Credit Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), and principally as the result of the growth in the
loan portfolios, the provision for credit losses increased to $1,478,000 up
$113,000 when compared to the same period last year.
Noninterest Income
Noninterest income increased $971,000 for the third quarter of 2000 when
compared with the like 1999 period primarily as a result of increased fees from
factoring, leasing, trade finance and deposit services.
Noninterest Expenses
Noninterest expenses increased $1,965,000 for the third quarter of 2000 when
compared with the like 1999 period primarily due to increased personnel,
occupancy and various other expenses incurred to support growing levels of
business activity and continued investment in the business franchise.
Results for the Nine Months Ended September 30, 2000 and 1999
-------------------------------------------------------------
OVERVIEW
The Company reported net income for the nine months ended September 30,2000 of
$12.1 million, representing $1.40 per share, calculated on a diluted basis,
compared to $10.7 million, or $1.20 per share calculated on a diluted basis, for
the like period in 1999. This increase reflects continued growth in both net
interest income and noninterest income as explained below.
Net interest income, on a tax equivalent basis, increased to $47.3
million for the first nine months of 2000 compared with $39.7 million for the
same period in 1999, principally due to higher average earning assets
outstanding. The net interest margin, on a tax equivalent basis, was 6.02% for
the first nine months of 2000 compared to 6.06% for the like 1999 period. This
decrease was due to a 65 basis point increase in the average cost of funds
partially offset by a 48 basis point increase in average yield on earning
assets.
Noninterest income rose to $15.7 million for the nine months ended
September 30,2000 compared to $13.5 million for the like 1999 period principally
due to continued growth in fees from mortgage banking, factoring, leasing, trade
finance and deposit services.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) in the
components of interest income and interest expense for the first nine months,
expressed in terms of fluctuation in average volume and rate are shown on page
23. Information as to the components of interest income and interest expense and
average rates for the first nine months is provided in the Average Balance
Sheets shown on page 21.
Net interest income, on a tax equivalent basis, for the nine months ended
September 30,2000 increased $7,624,000 to $47,312,000 from $39,688,000 for the
comparable period in 1999.
Total interest income, on a tax equivalent basis, aggregated $73,024,000
up $15,119,000 for the first nine months of 2000 as compared to $57,905,000 for
the same period of 1999. The tax equivalent yield on interest-earning assets was
15
16
9.29% for the first nine months of 2000 compared with 8.81% for the comparable
period in 1999. The increase in interest income was due to increases in income
earned on the Company's loan and investment securities portfolios as a result of
management's strategy to increase funds employed in these asset categories. The
increase in yield on earning assets was due to higher yields on loans and
investment securities.
Interest earned on the loan portfolio amounted to $49,302,000 up
$8,586,000 when compared to a year ago. Average loan balances amounted to
$620,439,000 up $77,609,000 from an average of $542,830,000 in the prior year
period. The increase in the average loans (primarily in the leasing and
commercial and industrial segments of the Company's loan portfolio), coupled
with higher yields, accounted for the increase in interest earned on loans. The
increase in the yield on the domestic loan portfolio to 11.32% for the nine
months ended September 30,2000 from 10.73% for the comparable 1999 period was
primarily attributable to the higher rate environment in the 2000 period.
Tax equivalent interest earned on investment securities increased
$6,705,000 to $23,448,000 in 2000 due to higher average outstandings and higher
yields. Average investment securities outstandings increased to $457,702,000
from $358,734,000 in the prior year period. The increase in average balances was
primarily in U.S. Government and U.S. Government corporation and agency
guaranteed mortgage-backed securities. The yield on investment securities
increased to 6.83% for the nine months ended September 30, 2000 from 6.23% for
the prior year period reflecting the purchase of these securities in a rising
rate environment in the current year period.
Total interest expense increased $7,495,000 to $25,712,000 for the first
nine months of 2000 from $18,217,000 for the comparable period in 1999. The
increase in interest expense was due to higher funds employed coupled with
higher average rates paid for interest-bearing liabilities.
Interest expense on deposits increased $5,815,000 for the nine months
ended September 30,2000 to $17,116,000 from $11,301,000 for the comparable 1999
period due to increases in average outstandings and the cost of funds. Average
outstandings increased $117,711,000 to $542,277,000 in 2000 from $424,566,000 in
1999. The average rate paid on interest-bearing deposits increased to 4.22% in
2000 compared to 3.56% in the comparable year ago period.
Interest expense associated with borrowed funds increased to $8,596,000
for the first nine months of 2000 from $6,916,000 in the comparable 1999 period
as the result of higher average outstandings and rates paid principally for
Federal funds purchased and securities sold under agreements to repurchase.
Average amounts outstanding for this category of borrowing increased $47,064,000
to $142,888,000 for the nine months ended September 30, 2000 and the average
rates paid rose to 5.80% from 4.83% in the prior year period.
Provision for Credit Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), and principally as the result of the growth in the
loan portfolios, the provision for credit losses increased to $4,518,000 up
$400,000 when compared to the same period last year.
Noninterest Income
Noninterest income increased $2,261,000 for the first nine months of 2000 when
compared with the like 1999 period primarily as a result of increased fees from
mortgage banking, leasing, factoring, trade finance and deposit services.
16
17
Noninterest Expense
Noninterest expenses increased $6,178,000 for the first nine months of 2000 when
compared with the like 1999 period primarily due to increased personnel and
occupancy expenses incurred to support growing levels of business activity and
continued investments in the business franchise.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S. Government
and U.S. Government corporation and agency guaranteed mortgage-backed
securities along with other debt and equity securities. At September 30, 2000,
the Company's portfolio of securities totalled $439,298,000 of which U.S.
Government and U.S. Government corporation and agency guaranteed mortgage-backed
securities having an average life of approximately 6.9 years amounted to
$397,491,000. The Company has the intent and ability to hold to maturity
securities classified as "held to maturity." These securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts. The
gross unrealized gains and losses on "held to maturity" securities were $686,000
and $5,034,000, respectively. Securities classified as "available for sale" may
be sold in the future, prior to maturity. These securities are carried at market
value. Net aggregate unrealized gains or losses on these securities are included
in a valuation allowance account and are shown net of taxes, as a component of
shareholders' equity. "Available for sale" securities included gross unrealized
gains of $262,000 and gross unrealized losses of $2,916,000. Given the generally
high credit quality of the portfolio, management currently 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 and will not ultimately
be realized.
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 of 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 66% of gross loans. Loans in this category are typically made to
small and medium sized businesses and range between $500,000 and $10 million.
The primary source of repayment is from the borrower's operating profits and
cash flows. Based on underwriting standards, loans may be secured in whole or in
part by collateral such as liquid assets, accounts receivable, equipment,
inventory or real property. The Company's real estate loan portfolio, which
represents approximately 17% of gross loans, is secured by mortgages on real
property located principally in the State of New York and the Commonwealth of
Virginia. The Company's leasing portfolio, which consists of finance leases for
various types of business equipment, represents approximately 14% of gross
loans. The collateral securing any loan may vary in value based on market
conditions.
17
18
The following table sets forth the composition of the Company's loan
portfolio.
September 30,
-------------------------------------------------------------
2000 1999
----------------------- -------------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- ----- -------- -----
Domestic
Commercial and industrial $482,297 65.9% $461,674 70.1%
Equipment lease financing 99,463 13.6 80,925 12.3
Real estate 120,353 16.5 100,782 15.3
Installment - individuals 8,665 1.2 14,317 2.2
Loan to depository institutions 20,000 2.7 -- --
Foreign
Government and official institutions 777 0.1 784 0.1
-------- ----- -------- -----
Gross loan 731,555 100.0% 658,482 100.0%
===== =====
Unearned discounts 12,903 11,167
-------- --------
Loans, net of unearned discounts $718,652 $647,315
======== ========
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 credit losses is maintained through the provision for
credit losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for credit losses is determined by
management's continuing review of the loan portfolio (including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral), review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
evaluation of both loans presenting identified loss potential and of the risk
inherent in various components of the portfolio, including loans identified as
impaired as required by SFAS No. 114. Thus, an increase in the size of the
portfolio or in any of its components could necessitate an increase in the
allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance. At September 30, 2000, the ratio of the allowance to loans, net of
unearned discounts, was 1.70% and the allowance was $12,249,000. At such date,
the Company's non-accrual loans amounted to $1,962,000; $890,000 of such loans
were judged to be impaired within the scope of SFAS No. 114 and required
valuation allowances of $400,000. 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 credit losses was deemed adequate to absorb all
estimable losses on specifically known and other possible credit risks
associated with the portfolio as of September 30, 2000. 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
18
19
to have serious doubts as to the ability of the borrowers to continue to comply
with the present repayment terms, aggregated $291,000 at September 30, 2000 and
$1,458,000 at September 30, 1999.
Deposits
A significant source of funds for the Company continues to be deposits,
consisting of demand (noninterest-bearing), NOW, savings, money market and time
deposits (principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
September 30,
-----------------------------------------------------------------
2000 1999
------------------------ --------------------------
($ in thousands)
% of % of
Balances Total Balances Total
-------- ----- -------- -----
Domestic
Demand $296,696 36.6% $276,163 35.5%
NOW 69,587 8.6 77,793 10.0
Savings 23,151 2.9 25 834 3.3
Money Market 146,284 18.1 167,593 21.4
Time deposits 270,852 33.4 228,476 29.4
-------- ----- -------- -----
Total domestic deposits 806,570 99.6 775,859 99.6
Foreign
Time deposits 2,895 0.4 2,780 0.4
-------- ----- -------- -----
Total deposits $809,465 100.0% $778,639 100.0%
======== ===== ======== =====
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 customer's
balance sheet strategies. Historically, however, average balances for deposits
have been relatively stable. Information regarding these average balances is
presented on pages 20 and 21.
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 24. In addition, the
Company and the bank are subject to the provisions of 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, among other
things, to determine a bank's deposit insurance premium, approval of
applications authorizing institutions to increase their asset size or otherwise
expand business activities or acquire other institutions. Under the provisions
of FDICIA a "well capitalized" institution must maintain minimum leverage, Tier
1 and Total Capital ratios of 5%, 6% and 10%, respectively. At September 30,
2000, the Company and the bank exceeded the requirements for "well capitalized"
institutions.
19
20
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended September 30,
(dollars in thousands)
2000 1999
---------------------------------------- ------------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------------- ------------- ---------- ------------- -------------- ----------
Interest-bearing deposits
with other banks $ 1,623 $ 26 5.54 % $ 6,674 $ 76 6.57 %
Investment securities:
Available for sale 121,864 2,052 6.60 118,135 1,823 6.12
Held to maturity 298,217 5,125 6.87 258,472 4,182 6.47
Tax-exempt [2] 32,962 608 7.34 24,360 432 7.04
Federal funds sold 620 10 6.49 1,707 23 5.31
Loans, net of unearned discounts
Domestic [3] 639,444 17,486 11.47 565,630 14,129 10.53
Foreign 777 15 7.70 785 12 5.96
------------- ------------- ------------- --------------
TOTAL INTEREST-EARNING ASSETS 1,095,507 25,322 9.44 % 975,763 20,677 8.75 %
------------- ========== -------------- ==========
Cash and due from banks 38,755 31,705
Allowance for credit losses (12,310) (10,312)
Goodwill 21,158 21,158
Other assets 23,319 19,033
------------- -------------
TOTAL ASSETS $ 1,166,429 $ 1,037,347
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 24,466 147 2.39 % $ 24,772 147 2.35 %
NOW 69,143 460 2.65 71,892 443 2.45
Money market 151,735 1,195 3.13 163,016 1,315 3.20
Time 277,705 3,833 5.49 199,770 2,387 4.74
Foreign
Time 2,844 33 4.67 2,780 30 4.25
------------- ------------- ------------- --------------
Total interest-bearing deposits 525,893 5,668 4.29 462,230 4,322 3.71
------------- ------------- ------------- --------------
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 169,175 2,589 6.09 115,801 1,432 4.91
Commercial paper 27,823 372 5.32 35,440 423 4.73
Other short-term debt 11,803 308 5.34 5,388 220 5.08
Long-term debt 10,700 107 5.19 36,376 482 5.30
------------- ------------- ------------- --------------
Total borrowings 219,501 3,376 5.91 193,005 2,557 4.95
------------- ------------- ------------- --------------
TOTAL INTEREST-BEARING LIABILITIES 745,394 9,044 4.76 % 655,235 6,879 4.08 %
------------- ========== -------------- ==========
Noninterest-bearing deposits 253,331 227,460
Other liabilities 59,217 53,087
------------- -------------
Total liabilities 1,057,942 935,782
Shareholders' equity 108,487 101,565
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,166,429 $ 1,037,347
============= =============
Net interest income/spread 16,278 4.68 % 13,798 4.67 %
========== ==========
Net yield on interest-earning
assets (margin) 6.05 % 5.84 %
========== ==========
Less: Tax equivalent adjustment 252 177
------------- --------------
Net interest income $ 16,026 $ 13,621
============= ==============
[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 1999
amounts to conform to current presentation.
[2] Interest on tax-exempt securities is presented on a tax equivalent basis.
[3] Nonaccrual loans are included in amounts outstanding and income has been
included to the extent earned.
20
21
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Nine Months Ended September 30,
(dollars in thousands)
2000 1999
---------------------------------------- ------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------------- ------------ ------------ ------------- ---------- --------
Interest-bearing deposits
with other banks $ 2,191 $ 85 4.97 % $ 7,536 $ 150 4.91 %
Investment securities:
Available for sale 125,247 6,227 6.59 116,055 5,331 6.14
Held to maturity 300,951 15,488 6.86 219,993 10,208 6.19
Tax-exempt [2] 31,504 1,733 7.35 22,686 1,204 7.10
Federal funds sold 4,471 189 5.56 8,330 296 4.68
Loans, net of unearned discounts
Domestic [3] 619,658 49,259 11.32 542,044 40,680 10.73
Foreign 781 43 7.38 786 36 6.07
------------- ------------ ------------- ----------
TOTAL INTEREST-EARNING ASSETS 1,084,803 73,024 9.29 % 917,430 57,905 8.81 %
------------ ============ ---------- ========
Cash and due from banks 37,713 36,018
Allowance for credit losses (11,972) (10,479)
Goodwill 21,158 21,158
Other assets 22,646 19,373
------------- -------------
TOTAL ASSETS $ 1,154,348 $ 983,500
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 24,317 432 2.37 % $ 24,544 431 2.35 %
NOW 70,245 1,335 2.54 68,039 1,252 2.46
Money market 157,899 3,732 3.16 144,581 3,142 2.91
Time 286,981 11,521 5.36 184,647 6,383 4.62
Foreign
Time 2,835 96 4.51 2,755 93 4.50
------------- ------------ ------------- ----------
Total interest-bearing deposits 542,277 17,116 4.22 424,566 11,301 3.56
------------- ------------ ------------- ----------
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 142,888 6,207 5.80 95,824 3,460 4.83
Commercial paper 28,769 1,109 5.15 38,395 1,356 4.72
Other short-term debt 10,450 870 5.38 4,264 573 5.07
Long-term debt 12,498 410 5.39 39,556 1,527 5.15
------------- ------------ ------------- ----------
Total borrowings 194,605 8,596 5.66 178,039 6,916 4.88
------------- ------------ ------------- ----------
TOTAL INTEREST-BEARING LIABILITIES 736,882 25,712 4.60 % 602,605 18,217 3.95 %
------------ ============ ---------- ========
Noninterest-bearing deposits 252,500 233,153
Other liabilities 59,085 45,746
------------- -------------
Total liabilities 1,048,467 881,504
Shareholders' equity 105,881 101,996
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,154,348 $ 983,500
============= =============
Net interest income/spread 47,312 4.69 % 39,688 4.86 %
============ ========
Net yield on interest-earning
assets (margin) 6.02 % 6.06 %
============ ========
Less: Tax equivalent adjustment 713 494
------------ ----------
Net interest income $ 46,599 $ 39,194
============ ==========
[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 1999
amounts to conform to current presentation.
[2] Interest on tax-exempt securities is presented on a tax equivalent basis.
[3] Nonaccrual loans are included in amounts outstanding and income has been
included to the extent earned.
21
22
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/(Decrease)
From Three Months Ended
September 30, 2000 to September 30, 1999
-------------------------------------------------
Volume Rate Net [2]
-------------- -------------- ---------------
INTEREST INCOME
Interest-bearing deposits with other banks $ (42) $ (8) $ (50)
-------------- -------------- ---------------
Investment securities
Available for sale 66 163 229
Held to maturity 672 271 943
Tax-exempt 157 19 176
-------------- -------------- ---------------
Total investment securities 895 453 1,348
-------------- -------------- ---------------
Federal funds sold (17) 4 (13)
-------------- -------------- ---------------
Loans, net of unearned discounts
Domestic [3] 1,993 1,364 3,357
Foreign - 3 3
-------------- -------------- ---------------
Total loans, net of unearned discount 1,993 1,367 3,360
-------------- -------------- ---------------
TOTAL INTEREST INCOME $ 2,829 $ 1,816 $ 4,645
============== ============== ===============
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ (2) $ 2 $ -
NOW (18) 35 17
Money market (91) (29) (120)
Time 1,028 418 1,446
Foreign
Time 1 2 3
-------------- -------------- ---------------
Total interest-bearing deposits 918 428 1,346
-------------- -------------- ---------------
Borrowings
Federal funds purchased and securities sold
under agreements to repurchase 761 396 1,157
Commercial paper (99) 48 (51)
Other short-term debt 84 4 88
Long-term debt (364) (11) (375)
-------------- -------------- ---------------
Total borrowings 382 437 819
-------------- -------------- ---------------
TOTAL INTEREST EXPENSE $ 1,300 $ 865 $ 2,165
============== ============== ===============
NET INTEREST INCOME $ 1,529 $ 951 $ 2,480
============== ============== ===============
[1] The above table is presented on a tax equivalent basis.
[2] The change in interest income and interest expense due to both rate and
volume has been allocated to the change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts
of the changes in each. The effect of the extra day in 2000 has been
included in the change in volume.
[3] Nonaccrual loans have been included in the amounts outstanding and income
has been included to the extent accrued.
22
23
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/(Decrease)
From Nine Months Ended
September 30, 2000 to September 30, 1999
-------------------------------------------------
Volume Rate Net [2]
-------------- -------------- ---------------
INTEREST INCOME
Interest-bearing deposits with other banks $ (70) $ 5 $ (65)
-------------- -------------- ---------------
Investment securities
Available for sale 494 402 896
Held to maturity 4,107 1,173 5,280
Tax-exempt 486 43 529
-------------- -------------- ---------------
Total investment securities 5,087 1,618 6,705
-------------- -------------- ---------------
Federal funds sold (154) 47 (107)
-------------- -------------- ---------------
Loans, net of unearned discounts
Domestic [3] 6,314 2,265 8,579
Foreign - 7 7
-------------- -------------- ---------------
Total loans, net of unearned discount 6,314 2,272 8,586
-------------- -------------- ---------------
TOTAL INTEREST INCOME $ 11,177 $ 3,942 $ 15,119
============== ============== ===============
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ (2) $ 3 $ 1
NOW 48 35 83
Money market 322 268 590
Time 4,003 1,135 5,138
Foreign
Time 3 - 3
-------------- -------------- ---------------
Total interest-bearing deposits 4,374 1,441 5,815
-------------- -------------- ---------------
Borrowings
Federal funds purchased and securities sold
under agreements to repurchase 1,962 785 2,747
Commercial paper (359) 112 (247)
Other short-term debt 285 12 297
Long-term debt (1,178) 61 (1,117)
-------------- -------------- ---------------
Total borrowings 710 970 1,680
-------------- -------------- ---------------
TOTAL INTEREST EXPENSE $ 5,084 $ 2,411 $ 7,495
============== ============== ===============
NET INTEREST INCOME $ 6,093 $ 1,531 $ 7,624
============== ============== ===============
[1] The above table is presented on a tax equivalent basis.
[2] The change in interest income and interest expense due to both rate and
volume has been allocated to the change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts
of the changes in each. The effect of the extra day in 2000 has been
included in the change in volume.
[3] Nonaccrual loans have been included in the amounts outstanding and income
has been included to the extent accrued.
23
24
STERLING BANCORP AND SUBSIDIARIES
Regulatory Capital and Ratios
Ratios and Minimums
(dollars in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
----------------------- ------------------- --------------------
As of September 30, 2000 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------ ------------ ---------- ---------- ------- ---------- ---------
Total Capital(to Risk Weighted Assets):
The Company $102,048 13.35 % $61,166 8.00 % $76,457 10.00 %
The bank 87,050 11.84 58,808 8.00 73,510 10.00
Tier 1 Capital(to Risk Weighted Assets):
The Company 92,458 12.09 30,583 4.00 45,874 6.00
The bank 77,844 10.59 29,404 4.00 44,106 6.00
Tier 1 Leverage Capital(to Average Assets):
The Company 92,458 8.07 45,811 4.00 57,264 5.00
The bank 77,844 6.97 44,651 4.00 55,814 5.00
As of December 31, 1999
- ------------------------------------------------
Total Capital(to Risk Weighted Assets):
The Company $95,880 13.11 % $58,488 8.00 % $73,109 10.00 %
The bank 74,694 10.79 55,402 8.00 69,252 10.00
Tier 1 Capital(to Risk Weighted Assets):
The Company 86,717 11.86 29,244 4.00 43,868 6.00
The bank 66,034 9.54 27,701 4.00 41,551 6.00
Tier 1 Leverage Capital(to Average Assets):
The Company 86,717 7.75 44,729 4.00 55,911 5.00
The bank 66,034 6.13 43,102 4.00 53,877 5.00
24
25
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of market risk, liquidity risk, capital and asset quality. The
Company's net interest income is affected by changes in market interest rates
and by the level and composition of interest-earning assets and interest-bearing
liabilities. The Company's objectives in its asset/liability management are to
utilize its capital effectively, to provide adequate liquidity and to enhance
net interest income, without taking undue risks or subjecting the Company unduly
to interest rate fluctuations.
The Company takes a coordinated approach to the management of market
risk, liquidity and capital. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee ("ALCO"). ALCO, which is comprised of
members of senior management and the Board, meets to review among other things,
economic conditions, interest rates, yield curve, cash flow projections,
expected customer actions, liquidity levels, capital ratios and repricing
characteristics of assets, liabilities and off-balance sheet financial
instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. The Company monitors the interest rate sensitivity of its on- and
off-balance sheet positions by examining its near-term sensitivity and its
longer term gap position. In its management of interest rate risk, the Company
utilizes several tools including traditional gap analysis and sophisticated
income simulation models.
A traditional gap analysis is prepared based on the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities for selected time bands. The mismatch between repricings or
maturities within a time band is commonly referred to as the "gap" for that
period. A positive gap (asset sensitive) where interest-rate sensitive assets
exceed interest-rate sensitive liabilities generally will result in 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.
The Company's gap analysis at September 30, 2000, is presented on page 28.
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. However, since 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 simulation modeling,
primarily focusing on the longer term structure of the balance sheet. The
results of the income simulation analysis reveal that net interest income would
increase during periods of rising interest rates and decrease during periods of
falling interest rates.
As part of its interest rate risk strategy, the Company uses off-balance
sheet 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
25
26
recommendations of the Asset/Liability Committee, 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 September 30, 2000, the Company's off-balance sheet financial
instruments consisted of four interest rate floor contracts having a notional
amount totaling $125 million consisting of a contract with a notional amount of
$25 million and a final maturity of February 9, 2001, another contract with a
notional amount of $25 million and a final maturity of May 1, 2001, another
contract with a notional amount of $25 million and a final maturity of November
15, 2001 and two contracts with a notional amount of $25 million each and a
final maturity of November 15, 2002. These financial instruments are being used
as part of the Company's interest rate risk management and not for trading
purposes. At September 30, 2000, all counterparties have investment grade credit
ratings from the major rating agencies. Each counterparty is specifically
approved for applicable 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 $476,000 which are amortized monthly against interest income from
the designated assets. At September 30, 2000, the unamortized premiums on these
contracts totaled $196,000 and are included in other assets. At September 30,
2000, there were no amounts receivable under these contracts.
The Company utilizes income simulation models to complement its
traditional gap analysis. While 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, deposit
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 which 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. As of September
30, 2000, the model indicated the impact of a 200 basis point parallel and pro
rata rise in rates over twelve months would approximate a 1.36% ($901,000)
increase in net interest income from an unchanged rate environment, while the
impact of a 200 basis point decline in rates over the same period would
approximate a 1.88% ($1,242,000) decline from an unchanged rate environment.
26
27
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
market funds and other money market sources. Core deposits include domestic
noninterest-bearing and interest-bearing retail deposits, which historically
have been relatively stable. The parent company and the bank have significant
unused borrowing capacity. Contingency plans exist and could be implemented on a
timely basis to minimize the impact of any dramatic change in market conditions.
The parent company generates income from its own operations. Its cash
requirements are supplemented from funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements.
The bank can supply funds to the parent company and its nonbank
subsidiaries subject to various legal restrictions. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits, as defined, for the
current year to date combined with its retained net profits for the preceding
two calendar years.
At September 30, 2000, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $27,002,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$51,462,000 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 past performance is no guarantee of the future, management
currently believes that the Company's funding sources (including dividends from
all its subsidiaries) and the bank's funding sources will be adequate to meet
their liquidity and capital requirements in the future.
27
28
STERLING BANCORP AND SUBSIDIARIES
Interest Rate Sensitivity
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to
confine significant rate sensitivity gaps predominantly to repricing intervals
of a year or less so that adjustments can be made quickly. Assets and
liabilities with predetermined repricing dates are placed in a time of the
earliest repricing period. Amounts are presented in thousands.
Repricing Date
-----------------------------------------------------------------------------
More than More than Non
3 months 3 months 1 Year to Over Rate
or less to 1 Year 5 years 5 years Sensitive Total
---------- ---------- ---------- ---------- ---------- ------------
ASSETS
Interest-bearing deposits
with other banks $ 1,062 $ - $ - $ - $ - $ 1,062
Investment securities 13,055 1,253 18,368 399,537 7,085 439,298
Federal funds sold - - - - - -
Loans, net of unearned
discounts -
Commercial and industrial 477,014 3,116 2,029 138 (540) 481,757
Lease financing 29,638 3,373 64,750 1,702 (12,192) 87,271
Real estate 38,852 3,056 29,622 48,823 (83) 120,270
Installment 2,886 1,848 2,824 1,107 (88) 8,577
Loans to depository -
institutions 20,000 - - - - 20,000
Foreign government and
official institutions 777 - - - - 777
Noninterest-earning
assets and allowance
for credit losses - - - - 75,235 75,235
---------- ---------- ---------- ---------- ---------- ------------
Total Assets 583,284 12,646 117,593 451,307 69,417 1,234,247
---------- ---------- ---------- ---------- ---------- ------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings [1] - - 23,151 - - 23,151
NOW [1] - - 69,587 - - 69,587
Money market [1] 117,395 - 28,889 - - 146,284
Time - domestic 159,795 84,736 26,317 4 - 270,852
- foreign 1,100 1,795 - - - 2,895
Federal funds purchased &
securities sold u/a/r 171,825 16,958 - - - 188,783
Commercial paper 27,002 - - - - 27,002
Other short-term borrowings 19,516 350 - - - 19,866
Long-term borrowings - FHLB 10,000 - 700 - - 10,700
Noninterest-bearing liabilities
and shareholders' equity - - - - 475,127 475,127
---------- ---------- ---------- ---------- ---------- ------------
Total Liabilities and
Shareholders' Equity 506,633 103,839 148,644 4 475,127 1,234,247
---------- ---------- ---------- ---------- ---------- ------------
Net Interest Rate
Sensitivity Gap $ 76,651 $ (91,193) $ (31,051) $ 451,303 $(405,710) $ -
========== ========== ========== ========== ========== ============
Cumulative Gap
September 30, 2000 $ 76,651 $ (14,542) $ (45,593) $ 405,710 $ - $ -
========== ========== ========== ========== ========== ============
Cumulative Gap
September 30, 1999 $ 92,523 $ (31,205) $ (67,939) $ 365,170 $ - $ -
========== ========== ========== ========== ========== ============
Cumulative Gap
December 31, 1999 $ 32,513 $ (82,261) $ (65,726) $ 389,893 $ - $ -
========== ========== ========== ========== ========== ============
[1] Historically, balances in non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical repricing
practices and runoff experience.
28
29
STERLING BANCORP AND SUBSIDIARIES
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
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
STERLING BANCORP
.............................
(Registrant)
Date 11/13/00 /s/ Louis J. Cappelli
-------------------------- ---------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 11/13/00 /s/ John W. Tietjen
-------------------------- ---------------------------
John W. Tietjen
Executive Vice President,
Treasurer and Chief
Financial Officer
29
30
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
------- ----------- ------------ -------- ---
11 Computation of X
Per Share Earnings
27 Financial Data X
Schedule
30