1
Sterling Bancorp
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
- ------------ -------------- --------------
ASSETS
Cash and due from banks $50,212,689 $31,655,213
Interest-bearing deposits with other banks 2,656,678 4,365,129
Securities available for sale 62,060,656 96,321,415
Securities available for sale--pledged 90,138,534 66,142,300
Securities held to maturity 104,585,942 154,969,607
Securities held to maturity--pledged 177,011,726 139,969,110
-------------- --------------
Total investment securities 433,796,858 457,402,432
-------------- --------------
Loans, net of unearned discounts 750,887,822 689,096,080
Less allowance for possible loan losses 12,675,052 11,116,848
-------------- --------------
Loans, net 738,212,770 677,979,232
-------------- --------------
Customers' liability under acceptances 987,048 3,888,140
Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 5,469,462 5,847,842
Other real estate 647,994 358,175
Accrued interest receivable 5,195,956 4,541,954
Other assets 12,410,719 11,690,695
-------------- --------------
$1,270,748,614 $1,218,887,252
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $341,039,328 $291,807,803
Interest-bearing deposits 525,242,856 570,712,149
-------------- --------------
Total deposits 866,282,184 862,519,952
Federal funds purchased and securities sold under agreements to repurchase 162,763,009 118,238,418
Commercial paper 25,655,020 40,319,200
Other short-term borrowings 17,733,482 10,993,363
Acceptances outstanding 987,048 3,888,140
Other liabilities and accrued expenses 69,611,777 56,638,052
Long-term borrowings--FHLB 10,700,000 21,050,000
-------------- --------------
Total liabilities 1,153,732,520 1,113,647,125
-------------- --------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, $5 par value 2,402,760 2,443,430
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 9,563,329 and 8,723,051 shares, respectively 9,563,329 8,723,051
Capital surplus 67,450,110 51,911,883
Retained earnings 47,466,602 52,360,024
Accumulated other comprehensive income:
Net unrealized depreciation on securities available for sale, net of tax (22,652) (2,634,509)
-------------- --------------
126,860,149 112,803,879
Less
Common stock in treasury at cost, 473,125 and 357,993 shares, respectively 7,986,763 6,515,522
Unearned compensation 1,857,292 1,048,230
-------------- --------------
Total shareholders' equity 117,016,094 105,240,127
-------------- --------------
$1,270,748,614 $1,218,887,252
============== ==============
See Notes to Consolidated Financial Statements.
14
2
Sterling Bancorp
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000 1999 1998
- ------------------------ ----------- ----------- -----
INTEREST INCOME
Loans $66,623,639 $55,012,164 $52,033,931
Deposits with other banks 104,828 227,940 132,352
Investment securities
Available for sale 9,740,695 8,375,949 7,562,173
Held to maturity 20,441,076 15,073,036 13,485,747
Federal funds sold 214,959 555,774 564,622
----------- ----------- -----------
Total interest income 97,125,197 79,244,863 73,778,825
----------- ----------- -----------
INTEREST EXPENSE
Deposits 22,696,661 16,705,744 16,106,218
Federal funds purchased and securities
sold under agreements to repurchase 8,789,015 5,021,305 4,002,161
Commercial paper 1,490,402 1,780,107 1,719,857
Other short-term borrowings 749,247 224,090 738,445
Long-term borrowings--FHLB 517,082 2,051,600 1,774,228
----------- ----------- -----------
Total interest expense 34,242,407 25,782,846 24,340,909
----------- ----------- -----------
Net interest income 62,882,790 53,462,017 49,437,916
Provision for loan losses 6,563,000 5,583,800 5,389,000
----------- ----------- -----------
Net interest income after provision for loan losses 56,319,790 47,878,217 44,048,916
----------- ----------- -----------
NONINTEREST INCOME
Factoring income 5,396,750 4,921,641 4,584,004
Mortgage banking income 5,737,456 5,382,766 4,650,353
Service charges on deposit accounts 5,030,622 3,100,990 3,194,510
Trade finance income 2,762,431 2,137,217 1,874,464
Trust fees 864,058 890,493 858,934
Other service charges and fees 2,417,442 1,387,348 939,636
Net securities gains -- -- 86,291
Other income 164,429 123,945 260,149
----------- ----------- -----------
Total noninterest income 22,373,188 17,944,400 16,448,341
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries 22,889,419 20,120,568 18,114,084
Employee benefits 4,908,620 3,950,572 3,671,487
----------- ----------- -----------
Total personnel expense 27,798,039 24,071,140 21,785,571
Occupancy expense, net 4,123,012 3,459,987 3,321,081
Equipment expense 2,464,174 2,622,960 2,455,347
Other expenses 15,894,606 11,428,560 10,735,564
----------- ----------- -----------
Total noninterest expense 50,279,831 41,582,647 38,297,563
----------- ----------- -----------
Income before income taxes 28,413,147 24,239,970 22,199,694
Provision for income taxes 11,854,490 9,676,018 9,403,151
----------- ----------- -----------
Net income $16,558,657 $14,563,952 $12,796,543
----------- ----------- -----------
Average number of common shares outstanding
Basic 9,122,973 9,309,489 9,469,207
Diluted 9,452,442 9,685,772 9,978,425
Earnings per average common share
Basic $ 1.81 $ 1.56 $ 1.35
Diluted 1.74 1.50 1.28
Dividends per common share .58 .50 .43
See Notes to Consolidated Financial Statements.
15
3
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Years Ended December 31, 2000 1999 1998
- ------------------------ ----------- ----------- -----------
Net income $16,558,657 $14,563,952 $12,796,543
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising during the year 2,611,857 (3,173,349) 388,150
Less: reclassification adjustment for
losses included in net income -- -- (46,684)
----------- ----------- -----------
Comprehensive income $19,170,514 $11,390,603 $13,138,009
=========== =========== ===========
See Notes to Consolidated Financial Statements.
16
4
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2000 1999 1998
- ------------------------ ------------ ------------ ------------
PREFERRED STOCK
Balance at beginning of year $ 2,443,430 $ 2,463,890 $ 2,486,730
Conversions of Series B and Series D shares (40,670) (20,460) (22,840)
------------ ------------ ------------
Balance at end of year 2,402,760 2,443,430 2,463,890
============ ============ ============
COMMON STOCK
Balance at beginning of year $ 8,723,051 $ 8,310,284 $ 8,262,500
Conversions of preferred shares into common shares 4,067 2,046 2,284
Options exercised 10,760 12,500 45,500
Common shares issued in connection with stock dividend 825,451 398,221 --
------------ ------------ ------------
Balance at end of year $ 9,563,329 $ 8,723,051 $ 8,310,284
============ ============ ============
CAPITAL SURPLUS
Balance at beginning of year $ 51,911,883 $ 45,287,315 $ 44,775,759
Conversions of preferred shares into common shares 36,603 18,414 20,556
Options exercised 84,015 135,063 491,000
Common shares issued in connection with stock dividend 15,631,978 6,471,091 --
Issuance of shares under incentive compensation plan (214,369) -- --
------------ ------------ ------------
Balance at end of year $ 67,450,110 $ 51,911,883 $ 45,287,315
------------ ------------ ------------
RETAINED EARNINGS
Balance at beginning of year $ 52,360,024 $ 48,817,648 $ 39,590,806
Net income 16,558,657 14,563,952 12,796,543
Cash dividends paid --common shares (4,897,121) (4,074,846) (3,515,636)
--preferred shares (82,563) (65,711) (54,065)
Stock dividend paid --common shares (16,457,429) (6,869,312) --
--cash in lieu (14,966) (11,707) --
------------ ------------ ------------
Balance at end of year $ 47,466,602 $ 52,360,024 $ 48,817,648
============ ============ ============
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year $ (2,634,509) $ 538,840 $ 197,374
------------ ------------ ------------
Unrealized holding gains/(losses) arising during the period:
Before tax 4,827,835 (5,865,712) 717,461
Tax effect (2,215,978) 2,692,363 (329,311)
------------ ------------ ------------
Net of tax 2,611,857 (3,173,349) 388,150
------------ ------------ ------------
Reclassification adjustment for gains included in net income:
Before tax -- -- (86,291)
Tax effect -- -- 39,607
------------ ------------ ------------
Net of tax -- -- (46,684)
------------ ------------ ------------
Balance at end of year $ (22,652) $ (2,634,509) $ 538,840
============ ============ ============
TREASURY STOCK
Balance at beginning of year $ (6,515,522) $ (1,592,690) $ (441,257)
Purchase of common shares (3,008,420) (4,922,832) (1,151,433)
Issuance of shares under incentive compensation plan 1,677,025 -- --
Surrender of shares issued under incentive compensation plan (139,846) -- --
------------ ------------ ------------
Balance at end of year $ (7,986,763) $ (6,515,522) $ (1,592,690)
============ ============ ============
UNEARNED COMPENSATION
Balance at beginning of year $ (1,048,230) $ (1,673,963) $ (2,249,346)
Issuance of shares under incentive compensation plan (1,462,656) -- --
Amortization of unearned compensation 653,594 625,733 575,383
------------ ------------ ------------
Balance at end of year $ (1,857,292) $ (1,048,230) $ (1,673,963)
============ ============ ============
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of year $105,240,127 $102,151,324 $ 92,622,566
Net changes during the year 11,775,967 3,088,803 9,528,758
------------ ------------ ------------
Balance at end of year $117,016,094 $105,240,127 $102,151,324
============ ============ ============
See Notes to Consolidated Financial Statements.
17
5
Sterling Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 1999 1998
- ------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES
Net income $16,558,657 $14,563,952 $12,796,543
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 6,563,000 5,583,800 5,389,000
Depreciation and amortization of premises and equipment 1,746,645 1,890,313 1,686,199
Deferred income tax (benefit) provision (756,817) 15,080 (454,107)
Net change in loans held for sale 715,006 9,123,907 (12,714,005)
Net securities gains -- -- (86,291)
Amortization of unearned compensation 653,594 625,733 575,383
Amortization of premiums on investment securities 854,215 1,840,417 2,107,863
Accretion of discounts on investment securities (969,566) (892,117) (637,104)
(Increase) Decrease in accrued interest receivable (654,002) (550,040) 155,094
Increase in other liabilities and accrued expenses 12,973,725 12,885,712 1,393,280
Increase in other assets (720,024) (4,027,154) (21,591)
Other, net (1,599,007) 2,677,284 164,399
----------- ---------- ----------
Net cash provided by operating activities 35,365,426 43,736,887 10,354,661
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of premises and equipment (1,368,265) (1,443,501) (650,791)
Net decrease in interest-bearing deposits with other banks 1,708,451 443,693 90,072
Net increase in loans (67,511,544) (62,636,708) (72,920,991)
(Increase) Decrease in other real estate (289,819) 686,334 (299,073)
Proceeds from prepayments, redemptions or maturities of
securities--held to maturity 38,062,361 60,065,989 69,459,395
Purchases of securities--held to maturity (25,217,337) (171,671,423) (19,853,914)
Proceeds from sale of securities--available for sale -- -- 14,965,434
Proceeds from prepayments, redemptions or maturities--available
for sale 96,520,193 153,664,553 340,067,757
Purchases of securities--available for sale (80,816,457) (176,469,337) (350,247,181)
------------ ------------- ------------
-------------
Net cash used in investing activities (38,912,417) (197,360,400) (19,389,292)
------------ ------------- ------------
FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 49,231,525 (37,212,484) 16,558,798
Net (decrease) increase in interest-bearing deposits (45,469,293) 196,929,968 (45,164,310)
Net increase (decrease) in securities sold under agreements
to repurchase 39,524,591 47,809,391 (16,323,519)
Net (decrease) increase in commercial paper and other
short-term borrowings (7,924,061) (2,988,062) 10,338,773
(Decrease) Increase in other long-term borrowings--FHLB (10,350,000) (20,350,000) 39,650,000
Increase (Decrease) in Federal funds purchased 5,000,000 (29,000,000) 9,000,000
Purchase of treasury shares (3,008,420) (4,922,832) (1,151,433)
Proceeds from exercise of stock options 94,775 147,563 536,500
Cash dividends paid on preferred and common shares (4,979,684) (4,140,557) (3,569,701)
Cash paid in lieu of fractional shares in connection with stock dividend (14,966) (11,707) --
---------- ------------ -----------
Net cash provided by financing activities 22,104,467 146,261,280 9,875,108
---------- ------------ -----------
Net increase (decrease) in cash and due from banks 18,557,476 (7,362,233) 840,477
Cash and due from banks--beginning of year 31,655,213 39,017,446 38,176,969
----------- ----------- -----------
Cash and due from banks--end of year $50,212,689 $31,655,213 $39,017,446
=========== =========== ===========
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $40,670 $20,460 $22,840
Issuance of treasury shares under incentive compensation plan 1,677,025 -- --
Surrender of treasury shares issued under incentive compensation plan 139,846 -- --
Issuance of common stock 16,457,429 6,869,312 --
Supplemental disclosure of cash flow information:
Interest paid 35,281,653 25,298,166 25,256,440
Income taxes paid 11,097,414 8,573,024 7,487,552
See Notes to Consolidated Financial Statements.
18
6
Sterling National Bank
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 2000 1999
- ------------ -------------- --------------
ASSETS
Cash and due from banks $50,045,143 $31,494,441
Interest-bearing deposits with other banks 2,656,678 4,365,129
Securities available for sale 62,003,618 96,267,101
Securities available for sale--pledged 90,138,534 66,142,300
Securities held to maturity 104,585,942 154,969,607
Securities held to maturity--pledged 177,011,726 139,969,110
-------------- --------------
Total investment securities 433,739,820 457,348,118
-------------- --------------
Loans, net of unearned discounts 719,443,019 649,554,159
Less allowance for loan losses 10,946,856 8,944,702
-------------- --------------
Loans, net 708,496,163 640,609,457
-------------- --------------
Receivables from affiliates 686,661 660,570
Customers' liability under acceptances 987,048 3,888,140
Premises and equipment, net 5,366,763 5,762,846
Other real estate 647,994 358,175
Accrued interest receivable 5,195,956 4,564,403
Other assets 11,283,433 10,470,419
-------------- --------------
$1,219,105,659 $1,159,521,698
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $345,825,990 $299,716,917
Interest-bearing deposits 542,184,778 589,699,315
-------------- --------------
Total deposits 888,010,768 889,416,232
Federal funds purchased and securities sold under agreements to repurchase 162,763,009 118,238,418
Other short-term borrowings 17,733,482 10,993,363
Due to affiliates 1,126,173 1,029,467
Acceptances outstanding 987,048 3,888,140
Other liabilities and accrued expenses 60,447,982 51,511,650
Long-term borrowings--FHLB 10,700,000 21,050,000
-------------- --------------
Total liabilities 1,141,768,462 1,096,127,270
-------------- --------------
Commitments and contingent liabilities
Shareholders' Equity
Common stock, $50 par value
Authorized and issued, 358,526 shares 17,926,300 17,926,300
Surplus 19,762,560 19,762,560
Undivided profits 39,677,803 28,345,418
Accumulated other comprehensive income:
Net unrealized appreciation on securities
Available for sale, net of tax (29,466) (2,639,850)
Total shareholders' equity 77,337,197 63,394,428
-------------- --------------
$1,219,105,659 $1,159,521,698
============== ==============
See Notes to Consolidated Financial Statements.
19
7
Sterling Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sterling Bancorp ("the parent company") is a financial holding company, pursuant
to an election made under the Gramm-Leach-Bliley Act of 1999. Throughout the
notes, the term "the Company" refers to Sterling Bancorp and its subsidiaries.
The Sterling companies provide a full range of products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, accounts receivable management, trade
financing, leasing, trust and estate administration and investment management
services. Sterling has operations in New York and Virginia and conducts business
throughout the United States.
The following summarizes the significant accounting policies of Sterling Bancorp
and its subsidiaries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the parent company
and its subsidiaries, principally Sterling National Bank ("the bank"), after
elimination of material intercompany transactions.
GENERAL ACCOUNTING POLICIES
The Company follows accounting principles generally accepted in the United
States of America and prevailing practices within the banking industry. Any
preparation of financial statements requires management to make assumptions and
estimates that impact the amounts reported in those statements and are, by their
nature, subject to change in the future as additional information becomes
available or as circumstances vary. Certain reclassifications have been made to
the prior years' consolidated financial statements to conform to the current
presentation.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective January
1, 2001 for the Company, and requires the recognition of all derivatives as
either assets or liabilities measured at fair value. The accounting for
derivative instruments depends on the intended use of the derivative and its
classification as a fair value hedge, cash flow hedge, or a hedge of a foreign
currency exposure. The Company has the opportunity to reclassify securities from
the held to maturity category to the available for sale or trading categories
upon adoption of the standard on January 1, 2001.
Special hedge accounting treatment is permitted only if specific criteria are
met. One requirement is that the hedging relationship be highly effective both
at inception and on an ongoing basis. Accounting for hedge is determined based
on the type of hedge--fair value, cash flow or foreign currency hedge of a net
investment in a foreign operation. Effective hedge results are recognized in
current earnings for fair value hedges, in other comprehensive income for cash
flow hedges and as part of the cumulative transaction adjustments in other
comprehensive income for foreign currency net investment hedges. Ineffective
portions of hedges are recognized immediately in current earnings.
The Company adopted the provisions of SFAS No. 133 effective January 1, 2001. At
adoption, the Company recorded an insignificant loss and believes that SFAS No.
133 will not have a material impact on the Company's 2001 financial statements.
INVESTMENT SECURITIES
Securities are designated as available for sale or held to maturity at the time
of acquisition. Securities which the Company will hold for indefinite periods of
time and which might be sold in the future as part of efforts to manage interest
rate risk or in response to changes in interest rates, changes in prepayment
risk, changes in market conditions or changes in economic factors, are
classified as available for sale and carried at estimated market values. Net
aggregate unrealized gains or losses are included in a valuation allowance
account and are reported, net of taxes, as a component of shareholders' equity.
Securities which the Company has the positive intent and ability to hold to
maturity are designated as held to maturity and are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity. Interest and dividends on securities are reported in interest
income. Gains and losses realized on sales of securities are determined on the
specific identification method and are reported in noninterest income as net
securities gains.
In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," securities pledged as
collateral are reported separately in the consolidated balance sheets if the
secured party has the right by contract or custom to sell or repledge the
collateral. Securities are pledged by the Company to secure trust and public
deposits, securities sold under agreements to repurchase, advances from the
Federal Home Loan Bank of New York and for other purposes required or permitted
by law.
LOANS
Loans, other than those held for sale, are reported at their principal amount
outstanding, net of unearned discounts and unamortized nonrefundable fees and
direct costs associated with their origination or acquisition. Interest earned
on loans without discounts is credited to income based on loan principal amounts
outstanding at appropriate interest rates. Material origination fees net of
direct costs and discounts on loans are credited to income over the terms of the
loans using a method which results in an approximate level rate of return.
20
8
Mortgage loans held for sale, including deferred fees and costs, are reported at
the lower of cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
loan basis. Gains or losses resulting from sales of mortgage loans, net of
unamortized deferred fees and costs, are recognized when the proceeds are
received from investors and are included under the caption "Mortgage banking
income."
Nonaccrual loans are those on which the accrual of interest has ceased. Loans,
including loans that are individually identified as being impaired under SFAS
No. 114, are generally placed on nonaccrual status immediately if, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more and collateral, if any, is insufficient to cover
principal and interest. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income. Interest income
is recognized on nonaccrual loans only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses, which is available for losses incurred in the
loan portfolio, is increased by a provision charged to expense and decreased by
charge-offs, net of recoveries.
SFAS No. 114 and No. 118 address the accounting for impairment of certain loans
when it is probable that all amounts due pursuant to the contractual terms of
the loan will not be collected. Under the provisions of these standards,
individually identified impaired loans are measured based on the present value
of payments expected to be received, using the historical effective loan rate as
the discount rate. Alternatively, measurement may also be based on observable
market prices; or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the collateral. Loans
that are to be foreclosed are measured based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds fair value,
a valuation allowance is required as a component of the allowance for loan
losses. Changes to the valuation allowance are recorded as a component of the
provision for loan losses.
The adequacy of the allowance for loan losses is reviewed regularly by
management. Additions to the allowance for loan losses are made by a provision
charged to the expense. On a quarterly basis, a comprehensive review of the
adequacy of the allowance for loan losses is performed. This assessment is made
in the context of historical losses and other factors, including changes in the
composition and volume of the loan portfolio, current economic conditions and
the relationship of the allowance to the loan portfolio.
EXCESS COST OVER EQUITY IN NET ASSETS OF THE BANKING SUBSIDIARY
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes accounting standards for determining and measuring
the impairment of certain assets, including excess cost over equity in net
assets. Since the bank was acquired by the parent company prior to October 31,
1970 and the excess cost over equity in net assets has a continuing value, this
excess is not being amortized.
PREMISES AND EQUIPMENT
Premises and equipment, excluding land, are stated at cost less accumulated
depreciation and amortization. Land is reported at cost. Depreciation is
computed on a straight-line basis and is charged to noninterest expense over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is charged to noninterest expense over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Maintenance, repairs and minor improvements are charged to noninterest expenses
as incurred.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Deferred income tax expense (benefit) is determined by recognizing
deferred tax assets and liabilities for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The realization of
deferred tax assets is assessed and a valuation allowance provided for that
portion of the assets for which it is more likely than not that it will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates and will be adjusted for the effects of future changes in tax laws or
rates, if any.
For income tax purposes, the Company files: a consolidated Federal income tax
return; combined New York City and New York State income tax returns; and
separate state income tax returns for its out-of-state subsidiaries. The parent
company, under tax sharing agreements, either pays or collects on account of
current income taxes to or from its subsidiaries.
21
9
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
STOCK INCENTIVE PLANS
The Company recognizes as expense over the vesting period, the fair value of all
stock-based awards on the date of grant. The Company also provides pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair value-based method noted
above had been applied.
EARNINGS PER AVERAGE COMMON SHARE
Basic earnings per share are computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
The Board announced stock dividends as follows: on November 16, 2000, the
declaration of a 10% stock dividend payable on December 11, 2000 to shareholders
of record on December 1, 2000; and 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 dividends.
OFF-BALANCE SHEET INSTRUMENTS
The Company enters into interest rate floor contracts primarily to manage
interest rate exposure. These instruments are entered into as hedges against
interest rate risk associated with certain identified assets. The premiums paid
for these instruments are amortized to interest income over the term of the
related asset. Amounts receivable are accounted for on an accrual basis and are
recognized as adjustments to the interest income of the related assets.
NOTE 2.
CASH AND DUE FROM BANKS
The bank is required to maintain average reserves, net of vault cash, on deposit
with the Federal Reserve Bank of New York against outstanding domestic deposits
and certain other liabilities. The required reserves, which are reported in cash
and due from banks, were $5,814,000 and $5,816,000 at December 31, 2000 and
1999, respectively. Average required reserves during 2000 and 1999 were
$6,034,000 and $4,912,000, respectively.
NOTE 3.
MONEY MARKET INVESTMENTS
The Company's money market investments include interest-bearing deposits with
other banks and Federal funds sold. The following table presents information
regarding money market investments.
Years Ended December 31, 2000 1999 1998
- ------------------------ ----------- ----------- -----------
Interest-bearing deposits with other banks
At December 31--Balance $2,656,678 $4,365,129 $4,808,822
Average interest rate 4.24% 4.23% 3.77%
Average original maturity 48 DAYS 104 Days 156 Days
During the year--Maximum month-end balance 2,950,097 11,857,000 6,536,000
Daily average balance 2,160,000 7,180,000 4,017,000
Average interest rate earned 4.72% 4.38% 4.65%
Range of interest rates earned 2.00-6.00% 2.00-5.50% 1.00-5.30%
========== =========== ==========
Federal funds sold
At December 31 Balance $-- $-- $--
Average interest rate -- -- --
Average original maturity -- -- --
During the year Maximum month-end balance 20,000,000 15,000,000 31,000,000
Daily average balance 3,735,000 11,049,000 10,356,000
Average interest rate earned 5.76% 4.96% 5.45%
Range of interest rates earned 5.25-6.81% 3.50-5.75% 4.25-5.85%
========== ========== ==========
22
10
NOTE 4.
INVESTMENT SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
DECEMBER 31, 2000 Cost Gains Losses Value
- ----------------- ------------ ------------ ------------ ------------
U.S. Treasury securities $ 2,891,595 $ -- $ 2,689 $ 2,888,906
Obligations of U.S. government corporations and
agencies--mortgage-backed securities 106,461,147 520,776 934,470 106,047,453
Obligations of state and political institutions 32,820,767 428,935 94,109 33,155,593
Other debt securities 2,995,408 27,092 -- 3,022,500
Federal Reserve Bank and other equity securities 7,072,141 13,195 598 7,084,738
------------ --------- ----------- ------------
Total $152,241,058 $ 989,998 $ 1,031,866 $152,199,190
============ ========= =========== ============
December 31, 1999
- -----------------
U.S. Treasury securities $ 24,854,055 $ -- $ 7,180 $ 24,846,875
Obligations of U.S. government corporations and
agencies--mortgage-backed securities 102,458,468 23,637 4,080,894 98,401,211
Obligations of state and political institutions 28,048,753 10,660 825,798 27,233,615
Other debt securities 5,000,000 -- -- 5,000,000
Federal Reserve Bank and other equity securities 6,972,142 10,651 779 6,982,014
------------ --------- ---------- ------------
Total $167,333,418 $ 44,948 $ 4,914,651 $162,463,715
============ ========= =========== ============
The carrying value and estimated market value of securities held to maturity are
as follows:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
DECEMBER 31, 2000 Value Gains Losses Value
- ----------------- ------------ -------------- ------------ -------------
Obligations of U.S. government corporations and
agencies--mortgage-backed securities $279,347,668 $2,573,134 $1,785,000 $280,135,802
Debt securities issued by foreign governments 2,250,000 -- -- 2,250,000
------------ ---------- ---------- ------------
Total $281,597,668 $2,573,134 $1,785,000 $282,385,802
============ ========== ========== ============
December 31, 1999
- -----------------
Obligations of U.S. government corporations and
agencies--mortgage-backed securities $292,938,717 $111,210 $8,829,678 $284,220,249
Debt securities issued by foreign governments 2,000,000 -- -- 2,000,000
------------ -------- ---------- ------------
Total $294,938,717 $111,210 $8,829,678 $286,220,249
============ ======== ========== ============
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The following tables present information regarding securities available for sale
and securities held to maturity at December 31, 2000, based on contractual
maturity. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. The average yield is based on the ratio of actual income
divided by the average outstanding balances during the year. The average yield
on obligations of state and political subdivisions and Federal Reserve Bank
securities is stated on a tax-equivalent basis.
Estimated
Amortized Market Average
SECURITIES AVAILABLE FOR SALE Cost Value Yield
- ----------------------------- ------------- ------------ -------
U.S. Treasury securities
Due within 1 year $ 2,891,595 $ 2,888,906 5.74%
------------ ------------
Obligations of U.S. government corporations and agencies-
mortgage-backed securities 106,461,147 106,047,453 6.81
------------ ------------
Obligations of state and political subdivisions
Due after 1 year but within 5 years 9,076,266 9,187,810 7.63
Due after 5 years 23,744,501 23,967,783 7.24
------------ ------------
Total 32,820,767 33,155,593 7.34
------------ ------------
Other debt securities
Due after 5 years 2,995,408 3,022,500 7.93
------------ ------------
Federal Reserve Bank and other securities 7,072,141 7,084,738 9.96
------------ ------------
Total $152,241,058 $152,199,190 6.87
============ ============
Estimated
Carrying Market Average
SECURITIES HELD TO MATURITY Value Value Yield
- --------------------------- ------------ ------------- ----------
Obligations of U.S. government corporations and agencies-
mortgage-backed securities $279,347,668 $280,135,802 6.86%
------------ ------------
Debt securities issued by foreign governments
Due after 1 year but within 5 years 1,500,000 1,500,000
Due after 5 years 750,000 750,000
------------ ------------
Total 2,250,000 2,250,000 7.84
------------ ------------
Total $281,597,668 $282,385,802 6.87
============ ============
There were no securities sales during the years ended December 31, 2000 and
1999. During the year ended December 31, 1998, the proceeds from securities
sales were $14,965,434 and the gross gains were $86,291; there were no gross
losses.
Investment securities are pledged to secure trust and public deposits,
securities sold under agreements to repurchase, advances from the Federal Home
Loan Bank of New York and for other purposes required or permitted by law.
24
12
NOTE 5.
LOANS
December 31, 2000 1999
- ------------ ------------ -------------
Domestic
Commercial and industrial $ 500,381,623 $ 462,845,464
Lease financing 114,804,282 91,845,424
Real estate--mortgage 122,344,017 96,509,540
Real estate--construction -- 4,958,005
Installment 9,572,526 13,321,386
Loans to depository institutions 20,000,000 30,000,000
Foreign
Government and official institutions 777,000 783,359
------------ -------------
Loans, gross 767,879,448 700,263,178
Less unearned discounts 16,991,626 11,167,098
------------- -------------
Loans, net of unearned discounts $ 750,887,822 $ 689,096,080
------------- -------------
The Company originates certain residential mortgage loans with the intention of
reselling those loans, including the servicing rights, without recourse.
Residential mortgage loans held for sale, included in "Real estate-mortgage,"
are $12,516,000 and $13,231,000 at December 31, 2000 and 1999, respectively.
There are no industry concentrations (exceeding 10% of loans, gross) in the
commercial and industrial loan portfolio. Approximately 74% of the bank's loans
are to borrowers located in the metropolitan New York area.
Nonaccrual loans at December 31, 2000 and 1999 totaled $1,995,000 and $1,417,000
respectively. There were no reduced rate loans at December 31, 2000 or 1999. The
interest income that would have been earned on nonaccrual loans outstanding at
December 31, 2000, 1999 and 1998 in accordance with their original terms is
estimated to be $58,000, $39,000 and $88,000, respectively, for the years then
ended. No interest income was actually realized for aforementioned years and
there were no commitments to lend additional funds on nonaccrual loans.
Loans are made at normal lending limits and credit terms to officers or
directors (including their immediate families) of the Company or for the benefit
of corporations in which they have a beneficial interest. There were no
outstanding balances on such loans in excess of $60,000 to any individual or
entity at December 31, 2000 or 1999.
NOTE 6.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, 2000 1999 1998
- ------------------------ ----------- ----------- -----------
Balance at beginning of year $11,116,848 $10,156,077 $ 8,677,610
Provision for loan losses 6,563,000 5,583,800 5,389,000
----------- ----------- -----------
17,679,848 15,739,877 14,066,610
----------- ----------- -----------
Less charge-offs, net of recoveries:
Charge-offs 5,490,253 5,021,581 4,350,944
Recoveries (485,457) (398,552) (440,411)
----------- ----------- ----------
Net charge-offs 5,004,796 4,623,029 3,910,533
----------- ----------- -----------
Balance at end of year $12,675,052 $11,116,848 $10,156,077
=========== =========== ===========
The Company follows SFAS No. 114 which establishes rules for calculating certain
components of the allowance for loan losses. As of December 31, 2000, 1999 and
1998, $470,000, $315,000 and $286,000, respectively, of loans were judged to be
impaired within the scope of SFAS No. 114 and carried on a cash-basis. The
average recorded investment in impaired loans during the years ended December
31, 2000, 1999 and 1998, was approximately $513,000, $435,000 and $589,000,
respectively. The
25
13
application of SFAS No. 114 indicated that these loans required valuation
allowances, totaling $200,000, $150,000 and $100,000 at December 31, 2000, 1999
and 1998, respectively, which are included within the overall allowance for loan
losses.
NOTE 7.
INTEREST-BEARING DEPOSITS
The following table presents certain information for interest expense on
deposits:
Years Ended December 31, 2000 1999 1998
- ------------------------ ----------- ----------- ------------
Interest expense
Interest-bearing deposits in domestic offices savings $ 577,467 $ 572,358 $ 537,798
NOW 1,786,567 1,684,477 1,808,972
Money Market 4,982,894 4,486,117 4,221,286
Time
Three months or less 8,883,017 4,949,566 5,282,470
More than three months through twelve months 4,735,798 3,931,787 3,156,896
More than twelve months through sixty months 1,599,345 958,559 953,362
----------- ----------- -----------
22,565,088 16,582,864 15,960,784
Interest-bearing deposits in foreign offices time
Three months or less 59,111 52,600 73,105
More than three months through twelve months 72,462 70,280 72,329
----------- ----------- -----------
Total $22,696,661 $16,705,744 $16,106,218
=========== =========== ===========
Foreign deposits totaled $2,975,000 and $2,830,000 at December 31, 2000 and
1999, respectively.
The aggregate of time certificates of deposit and other time deposits in
denominations of $100,000 or more by remaining maturity range and related
interest expense is presented below:
December 31, 2000 1999 1998
- ------------ ----------- ----------- -----------
Domestic
Three months or less $133,592,022 $ 83,352,007 $ 78,557,787
More than three months through six months 25,559,595 40,840,515 6,538,501
More than six months through twelve months 23,663,118 29,671,064 15,044,812
More than twelve months through twenty-four months 7,190,734 370,000 246,453
More than twenty-four months through thirty-six months -- 233,908 --
------------ ----------- -----------
190,005,469 154,467,494 100,387,553
------------ ----------- -----------
Foreign
Three months or less 2,975,000 1,730,000 1,730,000
More than three months through six months -- 1,100,000 1,000,000
------------ ------------ ------------
2,975,000 2,830,000 2,730,000
------------ ------------ ------------
Total $192,980,469 $157,297,494 $103,117,553
Years Ended December 31, 2000 1999 1998
- ------------------------ ------------ ---------- ----------
Interest expense
Domestic $ 10,322,879 $5,165,518 $5,310,269
Foreign 131,573 122,880 145,434
------------ ---------- ----------
Total $ 10,454,452 $5,288,398 $5,455,703
============ ========== ==========
26
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NOTE 8.
SHORT-TERM BORROWINGS
The following table presents information regarding Federal funds purchased,
securities sold under agreements to repurchase, and commercial paper:
Years Ended December 31, 2000 1999 1998
- ------------------------ ------------ ----------- -------------
Federal funds purchased
At December 31--Balance $ 10,000,000 $5,000,000 $ 34,000,000
-Average interest rate 5.88% 4.75% 5.69%
-Average original maturity 1 DAY 1 Day 1 Day
During the year--Maximum month-end balance 24,000,000 24,000,000 34,000,000
-Daily average balance 5,664,000 5,529,000 1,630,000
-Average interest rate paid 6.50% 5.38% 5.34%
-Range of interest rates paid 5.625-7.375% 4.00-6.25% 4.50-7.00%
============ ============ =============
Securities sold under agreements to repurchase
At December 31--Balance $152,763,009 $113,238,418 $ 65,429,027
-Average interest rate 5.57% 5.18% 4.69%
-Average original maturity 33 DAYS 80 Days 66 Days
During the year--Maximum month-end balance 183,782,831 128,169,089 102,286,658
-Daily average balance 143,764,000 96,262,000 75,737,000
-Average interest rate paid 5.86% 4.91% 5.15%
-Range of interest rates paid 3.65-6.65% 3.65-5.96% 4.25-5.85%
============ ============ =============
Commercial paper
At December 31--Balance $ 25,655,020 $ 40,319,200 $ 41,529,300
-Average interest rate 5.27% 4.80% 4.72%
-Average original maturity 64 DAYS 74 Days 51 Days
During the year--Maximum month-end balance 36,679,000 43,295,900 43,617,400
-Daily average balance 28,496,000 37,466,000 33,843,000
-Average interest rate paid 5.23% 4.75% 5.08%
-Range of interest rates paid 3.90-6.10% 3.50-5.20% 2.50-5.30%
============ ============ =============
The parent company has agreements with its line banks for back-up lines of
credit for which it pays a fee at the annual rate of 1/4 of 1% times the line of
credit extended. At December 31, 2000, these back-up bank lines of credit
totaled $29,000,000; no lines were used at any time during 2000 and 1999.
Other short-term borrowings include collateralized advances from the Federal
Home Loan Bank of New York due within one year and treasury tax and loan funds.
At December 31, 2000, Federal Home Loan Bank borrowings included an advance of
$14,000,000 repayable January 2, 2001 at a rate of 6.60%, and an advance of
$350,000 repayable March 5, 2001 at a rate of 6.07%.
At December 31, 1999, Federal Home Loan Bank borrowings included an advance of
$350,000 payable March 5, 2000 at a rate of 5.92%.
At December 31, 1998, Federal Home Loan Bank borrowings included an advance of
$10,000,000 payable January 4, 1999 at a rate of 5.125%, and an advance of
$350,000 repayable in March, 1999 at a rate of 5.68%.
27
15
NOTE 9.
OTHER LONG-TERM BORROWINGS
These borrowings represent advances from the Federal Home Loan Bank of New York
("FHLB"), as follows:
December 31,
Advance Interest Maturity Initial -----------------------------
Type Rate Date Call Date 2000 1999
- ------ -------- -------- --------- ----------- -----------
Term 6.07% 3/5/01 -- $ -- $ 350,000
Term 6.22 3/5/02 -- 350,000 350,000
Term 6.37 3/5/03 -- 350,000 350,000
Callable 5.06 2/17/08 2/17/00 -- 10,000,000
Callable 5.13 2/20/08 2/20/01 10,000,000 10,000,000
----------- -----------
Total $10,700,000 $21,050,000
=========== ===========
Weighted-average interest rate 5.21% 5.15%
Under the terms of a collateral agreement with the FHLB, advances are secured by
stock in the FHLB and by certain qualifying assets (primarily mortgage-backed
securities) having market values at least equal to 110% of the advances
outstanding. After the initial call date, each callable advance is callable by
the FHLB quarterly from the initial call date.
NOTE 10.
PREFERRED STOCK
The parent company is authorized to issue up to 644,389 shares of convertible
preferred stock, $5 par value, in one or more series. At December 31, 1999 and
1998 two series of preferred stock had been issued--Series B and Series D.
The following table presents information regarding the parent company's
preferred stock:
December 31, 2000 1999
---------- ----------
Series B shares. Authorized 4,389 shares; issued and outstanding--
1,199 and 1,230 shares, respectively, at liquidation value $ 23,980 $ 24,600
Series D shares. Authorized 300,000 shares; issued and outstanding--
237,878 and 241,883 shares, respectively, at liquidation value 2,378,780 2,418,830
---------- ----------
Total $2,402,760 $2,443,430
========== ==========
SERIES B
Series B shares may be redeemed, in whole or in part, at the election of the
parent company at a price of $28 per share, plus accrued and unpaid dividends to
the date of redemption. In the event of involuntary liquidation of the parent
company, the holders of these shares are entitled to receive, before any
distribution to the holders of common shares, $20 per share ("liquidation
value"). At the option of holders of these shares, such shares are convertible
into common shares of the parent company at a conversion rate of two common
shares for each Series B share surrendered. Dividends on the Series B shares are
paid at the rate of $.10 per annum, payable semi-annually and are cumulative.
Holders of these shares are entitled to one vote for each share held and vote
together as one class with the holders of the common shares. During 2000 and
1999, 31 shares and -0- shares, respectively, were converted into common shares.
SERIES D
Series D shares may only be issued to the trustee acting on behalf of an
Employee Stock Ownership Plan ("ESOP") or other employee benefit plan of the
Company. Each Series D share is convertible into 1.1561 common shares of the
parent company. During 1993, the parent company issued 250,000 shares to the
trustee of the Company's ESOP. These shares are entitled to receive cash
dividends in the amount of $.6125 per annum (subject to adjustment), payable
quarterly. Participants in the Company's ESOP are entitled to vote in accordance
with the terms of the ESOP and vote together as one class with the holders of
the common shares. The holders of these shares are entitled to receive $10 per
share and certain other preferences on liquidation, dissolution or winding up.
During 2000 and 1999, 4,005 shares and 2,046 shares, respectively, were
converted into common shares. See Footnote 14 for a discussion of the Company's
ESOP.
28
16
NOTE 11.
COMMON STOCK
Number of shares reserved for issuance:
December 31, 2000 1999
--------- ---------
Conversion of Series B preferred shares 2,398 2,460
Conversion of Series D preferred shares 287,878 291,883
--------- ---------
290,276 294,343
========= =========
Number of shares outstanding at December 31, 9,090,204 8,365,058
========= =========
Number of shareholders at December 31, 1,913 1,966
========= =========
NOTE 12.
RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends 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. In addition, from time to time dividends are paid
to the parent company by the finance subsidiaries from their retained earnings
without regulatory restrictions.
NOTE 13.
STOCK INCENTIVE PLAN
In April 1992, shareholders approved a Stock Incentive Plan ("the plan")
covering up to 100,000 common shares of the parent company. Under the plan, key
employees of the parent company and its subsidiaries could be granted awards in
the form of incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights ("SARs"), restricted stock or a combination
of these. The plan is administered by committees of the Board of Directors. In
April 1995, shareholders approved amendments to the plan which increased the
number of shares covered under the plan by 300,000 and which provided for the
annual automatic grant of NQSOs to each director who is not an employee or
officer ("outside director") of the Company. Under this provision annual NQSO
awards covering 2,000 common shares of the parent company are granted to each
outside director beginning April 1995 and continuing through April 1999. In
April 1998, 1999 and 2000 shareholders approved amendments to the plan which
increased the number of shares covered under the plan by 400,000, 400,000 and
- -0-, respectively. After giving effect to stock option and restricted stock
awards granted and the effect of the 10% stock dividend paid in December, 2000
and 5% stock dividend paid in December, 1999, shares available for grant were
106,130, 668,250 and 595,250 at December 31, 2000, 1999 and 1998, respectively.
STOCK OPTIONS
The following tables present information on the qualified and non-qualified
stock options outstanding (after the effect of the 10% stock dividend paid in
December, 2000 and the 5% stock dividend paid in December, 1999) as of December
31, 2000, 1999 and 1998 and changes during the years then ended:
2000 1999 1998
------------------------------ ---------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Qualified Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------- -------- ---------------- -------- ---------------- --------- ----------------
Outstanding at beginning of year 675,742 $ 14.71 522,127 $ 13.61 440,122 $ 11.10
Granted 167,176 14.38 166,320 18.03 142,065 21.44
Exercised -- -- (9,240) 10.83 (42,735) 10.62
Forfeit (3,300) 14.38 (3,465) 18.03 (17,325) 21.44
-------- -------- --------
Outstanding at end of year 839,618 14.65 675,742 14.71 522,127 13.61
======== ========== ======== ========== ======== ==========
Options exercisable at end of year 403,414 301,111 240,308
======== ======== ========
Weighted-average fair value of
options granted during the year $ 3.13 $ 4.13 $ 4.29
========= ======== ========
29
17
2000 1999 1998
----------------------------- ---------------------------- --------------------------
Weighted-Average Weighted-Average Weighted-Average
Non-Qualified Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ---------------- -------- ---------------- -------- ----------------
Outstanding at beginning of year 480,412 $ 18.88 270,779 $ 19.50 70,387 $ 11.14
Granted 193,953 14.36 214,830 17.87 210,210 21.76
Exercised (11,660) 8.13 (5,197) 9.15 (9,818) 8.46
--------- --------- -------- --------- -------- ---------
Outstanding at end of year 662,705 17.75 480,412 18.88 270,779 19.50
========= ========= ======== ========= ======== =========
Options exercisable at end of year 402,446 208,786 15,459
========= ======== ========
Weighted-average fair value of
options granted during the year $ 3.78 $ 5.13 $ 5.86
========= ======== ========
The following table presents information regarding qualified and non-qualified
stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/00 Contractual Life Price 12/31/00 Price
----------- ------------ ---------------- ---------------- ----------- ----------------
Qualified $6.28-21.44 839,318 6.7 years $ 14.65 403,414 $ 12.50
Non-Qualified 6.28-24.25 662,705 4.2 years 17.75 402,446 19.34
Other than director NQSOs which expire five years from the date of grant and
become exercisable in four annual installments, starting one year from the date
of grant, or upon the death or disability of the grantee, stock options
generally expire ten years from the date of grant or, to the extent appropriate
to qualify to the maximum extent possible as ISOs vest in installments, subject
to earlier exercisability upon the death or disability of the grantee or other
specified events. Amounts received upon exercise of options are recorded as
common stock and capital surplus.
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement encourages, but does not require companies to use a
fair value-based method of accounting for stock-based employee compensation
plans, including stock options and stock appreciation rights. Under this method,
compensation expense is measured as of the date the awards are granted based on
the estimated fair value of the awards, and the expense is generally recognized
over the vesting period. If a company elects to continue using the intrinsic
value-based method under APB Opinion No. 25, pro forma disclosures of net income
and net income per share are required as if the fair value-based method had been
applied. Under the intrinsic method, compensation expense is the excess, if any,
of the market price of the stock as of the grant date over the amount employees
must pay to acquire the stock or over the price established for determining
appreciation. Under the Company's current compensation policies, there is no
such excess on the date of grant and therefore, no compensation expense is
recorded.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes option-pricing model with the following assumptions:
2000 1999 1998
---- ---- ----
Dividend yield 3.11% 3.25% 2.0%
Volatility 25% 25% 20%
Expected term
Qualified 4 YEARS 4 years 4 years
Non-Qualified (Directors) 4 YEARS 4 years 4 years
Non-Qualified (Officers) 8 YEARS 8 years 8 years
Risk-free interest rate 6.14% 7.12% 5.32%
30
18
The Company has elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock incentive plan. Accordingly, no
compensation expense has been recognized in the consolidated statements of
income related to the plan. Had compensation expense been determined based on
the estimated fair value of the awards at the grant dates, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated in the table that follows:
Years Ended December 31, 2000 1999 1998
- ------------------------ -------------- -------------- --------------
Net income
As reported $ 16,559,000 $ 14,564,000 $ 12,797,000
Pro forma 15,368,000 13,628,000 12,381,000
Basic earnings per share
As reported 1.81 1.56 1.35
Pro forma 1.68 1.46 1.30
Diluted earnings per share
As reported 1.74 1.50 1.28
Pro forma 1.63 1.40 1.23
Pro forma net income reflects only options granted in 2000, 1999 and 1998.
Additionally, the full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net income above,
since such expense is apportioned over the vesting period of those options which
are expected to vest. Compensation expense for options granted prior to 1996 is
also not considered.
RESTRICTED STOCK
On January 3, 1996, 110,500 shares of restricted stock were awarded from
Treasury shares. The fair value was $12.50 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year.
On February 11, 2000, 92,500 shares of restricted stock were awarded from
Treasury shares. The fair value was $15.8125 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year; the initial
awards vested on February 11, 2000.
The plan calls for the forfeiture of non-vested shares which are restored to the
Treasury and become available for future awards. During 2000, 1999 and 1998,
there were no shares forfeited. Unearned compensation resulting from these
awards is amortized as a charge to noninterest expense over a four-year period;
such charges were $365,664, $320,833, and $320,833 in 2000, 1999 and 1998,
respectively. The balance of unearned compensation is shown as a reduction of
shareholders' equity. For income tax purposes, the Company is entitled to a
deduction in an amount equal to the average market value of the shares on
vesting date and dividends paid on shares for which restrictions have not
lapsed.
NOTE 14.
EMPLOYEE STOCK OWNERSHIP PLAN
On March 5, 1993, the Company established an Employee Stock Ownership Plan
("ESOP"). This plan covers substantially all employees with one or more years of
service of at least 1,000 hours who are at least 21 years of age. During 1993,
the parent company issued 250,000 shares of Series D preferred stock at a price
of $10.00 per share to the Company's ESOP trust. The trust borrowed $2,500,000
from the bank, to pay for the shares. The ESOP loan is at a fixed interest rate
for a term of ten years with quarterly payments of interest. Quarterly principal
payments at an annual rate of $250,000 and $350,000 commenced on March 31, 1996
and March 31, 1999, respectively. The bank match-funded the ESOP loan with
collateralized advances from the Federal Home Loan Bank of New York. The ESOP
shares, pledged as collateral for the ESOP loan, are held in a suspense account
and released for allocation among the participants as principal and interest on
the ESOP loan is repaid. Under the terms of the ESOP, participants may vote both
allocated and unallocated shares.
The Company makes quarterly contributions to the ESOP equal to the debt service
on the ESOP loan less dividends paid on the ESOP shares. All dividends paid are
used for debt service. ESOP shares released from the suspense account are
allocated among the participants on the basis of salary in the year of
allocation. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
Accordingly, the Company initially recorded a deduction from shareholders'
equity equal to the purchase price of the shares reflecting such amount as
unearned compensation.
31
19
The consolidated balance sheets report as unearned compensation the remaining
shares pledged as collateral. The unearned compensation is reduced as payments
are made on the loan and, as shares are released from the suspense account, the
Company recognizes compensation expense equal to the current market price of the
common shares into which the preferred shares are convertible, and the shares
become outstanding for earnings per share computations. Dividends on unallocated
ESOP shares are recorded as a reduction of accrued interest payable; dividends
on allocated ESOP shares are recorded as a reduction of retained earnings.
Compensation expense was $287,930, $304,900 and $254,550 for 2000, 1999 and
1998, respectively, with a corresponding reduction in unearned compensation. As
of December 31, 2000, 145,177 shares had been allocated and 28,793 shares had
been released for allocation; 76,030 shares were not released ("unallocated").
There were no contributions made by the Company during the years ended December
31, 2000, 1999 or 1998. The following table presents interest paid on the ESOP
loan and dividends paid on the Series D preferred shares:
Years Ended December 31, 2000 1999 1998
---- ---- ----
Interest paid $ 96,651 $122,862 $144,844
Dividends paid 146,645 148,467 149,839
NOTE 15.
EMPLOYEE BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan that covers the
majority of employees with one or more years of service of at least 1,000 hours
who are at least 21 years of age. The quarterly payments to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act of 1974 funding standards.
The following tables set forth the disclosures required for pension benefits:
Pension Benefits 2000 1999
------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 13,936,151 $ 14,122,359
Service cost 769,161 862,903
Interest cost 1,071,411 955,902
Actuarial loss/(gain) 375,611 (1,375,995)
Benefits paid (483,347) (629,018)
------------ ------------
Benefit obligation at end of year $ 15,668,987 $ 13,936,151
============ ============
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year $ 16,873,357 $ 17,441,784
Actual return on plan assets 1,116,157 60,591
Benefits paid (483,347) (629,018)
------------ ------------
Fair value of assets at end of year $ 17,506,167 $ 16,873,357
============ ============
FUNDED STATUS
Funded status $ 1,837,180 $ 2,937,206
Unrecognized prior service cost 7,774 5,154
Unrecognized net actuarial gain (117,472) (999,846)
------------ ------------
Prepaid benefits cost $ 1,727,482 $ 1,942,514
============ ============
32
20
December 31, 2000 1999 1998
- ---------------------------- ---------- ------------ ------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.50% 8.00% 6.75%
Expected rate of return on plan assets 9.75 9.25 9.25
Rate of compensation increase 4.50 5.00 4.00
Years Ended December 31, 2000 1999 1998
- ----------------------------- ----------- ----------- -----------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 769,161 $ 862,903 $ 698,446
Interest cost 1,071,411 955,902 872,194
Expected return on plan assets (1,622,920) (1,589,376) (1,356,833)
Amortization of prior service cost (2,620) (2,620) (2,620)
----------- ----------- -----------
Net periodic benefits cost $ 215,032 $ 226,809 $ 211,187
=========== =========== ===========
NOTE 16.
INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
Years Ended December 31, 2000 1999 1998
------------ ------------ ------------
FEDERAL
Current $ 10,089,339 $ 8,257,539 $ 7,579,074
Deferred (630,913) 15,080 (454,165)
------------ ------------ ------------
Total $ 9,458,426 $ 8,272,619 $ 7,124,909
============ ============ ============
STATE AND LOCAL
Current $ 2,521,968 $ 1,403,399 $ 2,278,184
Deferred (125,904) -- 58
------------ ------------ ------------
Total $ 2,396,064 $ 1,403,399 $ 2,278,242
============ ============ ============
TOTAL
Current $ 12,611,307 $ 9,660,938 $ 9,857,258
Deferred (756,817) 15,080 (454,107)
------------ ------------ ------------
Total $ 11,854,490 $ 9,676,018 $ 9,403,151
============ ============ ============
Reconciliations of income tax provisions with taxes or tax benefits computed at
Federal statutory rates are as follows:
Years Ended December 31, 2000 1999 1998
----------- ----------- -----------
Federal statutory rate 35% 35% 35%
----------- ----------- -----------
Computed tax $ 9,944,601 $ 8,483,990 $ 7,769,893
Increase in tax resulting from:
Principally state and local taxes, net of Federal income tax benefit 1,909,889 1,192,028 1,633,258
----------- ----------- -----------
Total $11,854,490 $ 9,676,018 $ 9,403,151
=========== =========== ===========
33
21
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31, 2000 1999
---------- ----------
Deferred tax assets
Difference between financial statement provision for loan losses and tax bad debt deduction $4,436,268 $3,908,257
Nonaccrual and other interest 1,894,719 1,867,836
Deferred compensation 1,352,954 1,039,060
Other 188,238 229,552
---------- ----------
Total deferred tax assets 7,872,179 7,044,705
---------- ----------
Deferred tax liabilities
Pension and benefit plans 470,507 824,664
Other 1,027,424 602,610
---------- ----------
Total deferred tax liabilities 1,497,931 1,427,274
---------- ----------
Net deferred tax asset 6,374,248 5,617,431
SFAS No. 115 deferred tax liability 16,800 2,232,778
---------- ----------
Total net deferred tax asset $6,357,448 $7,850,209
========== ==========
Management believes, based upon current facts, that more likely than not there
will be sufficient taxable income in future years to realize the deferred tax
assets. However, there can be no assurance about the level of future earnings.
NOTE 17.
EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share," simplified the standards for computing
earnings per share ("EPS") previously found in APB Opinion No. 15 and replaced
the presentation of primary and fully diluted EPS with the presentation of basic
and diluted EPS.
Basic EPS is computed by dividing net income less preferred dividends on Series
B shares and allocated Series D shares, held on behalf of the Employee Stock
Ownership Plan, ("basic net income") by the weighted-average common shares
outstanding during the year.
Diluted EPS is computed by dividing basic net income by the weighted-average
common shares and common equivalent shares outstanding during the year. The
common equivalent shares outstanding include the weighted-average number of
Series B and Series D (held on behalf of the Employee Stock Ownership Plan)
preferred shares and the dilutive effect of unexercised stock options using the
treasury stock method. When applying the treasury stock method, the average
price of the Company's common stock is utilized.
34
22
The following table provides a reconciliation of basic and diluted EPS as
required by SFAS No. 128:
For The Year Ended 12/31/00 For the Year Ended 12/31/99 For the Year Ended 12/31/98
------------------------------- --------------------------------- ---------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Net income $16,558,657 $14,563,952 $12,796,543
Less preferred dividends 82,441 65,587 51,053
----------- ----------- -----------
Net income available for
common shareholders 16,476,216 9,122,973 $1.81 14,498,365 9,309,489 $1.56 12,745,490 9,469,207 $1.35
===== ===== =====
DILUTED EPS
Options[1] 89,502 133,613 264,630
Convertible preferred stock 239,967 242,670 244,588
----------- --------- ----------- --------- ----------- ---------
Net income available for
common shareholders plus
assumed conversions $16,476,216 9,452,442 $1.74 $14,498,365 9,685,772 $1.50 $12,745,490 9,978,425 $1.28
=========== ========= ===== =========== ========= ===== =========== ========= =====
[1] Options issued with exercise prices greater than the average market price
of the common shares for each of the years ended December 31, 2000, 1999
and 1998 have not been included in computation of diluted EPS for those
respective years. As of December 31, 2000, 334,950 options to purchase
shares at prices between $21.44 and $24.25 were not included; as of
December 31, 1999, 691,845 options to purchase shares at prices between
$17.98 and $24.25 were not included; as of December 31, 1998, options to
purchase 18,480 shares at a price of $24.25 were not included.
NOTE 18.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No.107 "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose the "fair value" of certain financial instruments for
which it is practical to estimate "fair value."
Much of the information used to arrive at "fair value" is highly subjective and
judgmental in nature and therefore the results may not be precise. The
subjective factors include, among other things, estimated cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. With the exception of investment securities and long-term debt, the
Company's financial instruments are not readily marketable and market prices do
not exist. Since negotiated prices for the instruments which are not readily
marketable depend greatly on the motivation of the buyer and seller, the amounts
which will actually be realized or paid per settlement or maturity of these
instruments could be significantly different.
The following disclosures represent the Company's best estimate of the "fair
value" of both on- and off-balance sheet financial instruments.
FINANCIAL INSTRUMENTS WITH CARRYING AMOUNT EQUAL TO FAIR VALUE
The carrying amount of cash and due from banks, interest-bearing deposits with
other banks, Federal funds sold, customers' liabilities under acceptances,
accrued interest receivable, Federal funds purchased and securities sold under
agreements to repurchase, commercial paper, other short-term borrowings,
acceptances outstanding, due to factoring clients, and accrued interest payable,
as a result of their short-term nature, is considered to be equal to fair value.
INVESTMENT SECURITIES
For investment securities, fair value has been based upon current market
quotations, where available. If quoted market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
LOANS
The fair value of loans which reprice within 90 days reflecting changes in the
base rate is equal to their carrying amount. For other loans, the estimated fair
value is calculated based on discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality and for similar maturities. These calculations have been adjusted
for credit risk based on the Company's historical credit loss experience.
35
23
The estimated fair value for secured nonaccrual loans is the value of the
underlying collateral which is sufficient to repay each loan. For other
nonaccrual loans, the estimated fair value represents book value less a credit
risk adjustment based on the Company's historical credit loss experience.
DEPOSITS
SFAS No. 107 requires that the fair value of demand, savings, NOW and certain
money market deposits be equal to their carrying amount. The Company believes
that the fair value of these deposits is clearly greater than that prescribed by
SFAS No. 107.
For other types of deposits with fixed maturities, fair value has been estimated
based upon interest rates currently being offered on deposits with similar
characteristics and maturities.
LONG-TERM DEBT
For other long-term borrowings, the estimated fair value is calculated based on
discounted cash flow analyses, using interest rates currently being quoted for
similar characteristics and maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
The notional amount of off-balance sheet commitments to extend credit, standby
letters of credit, and financial guarantees, is considered equal to fair value.
Due to the uncertainty involved in attempting to assess the likelihood and
timing of a commitment being drawn upon, coupled with lack of an established
market and the wide diversity of fee structures, the Company does not believe it
is meaningful to provide an estimate of fair value that differs from the
notional value of the commitment.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company enters into interest rate floor contracts to manage interest rate
exposure. These instruments are entered into as hedges against interest rate
risk associated with certain identified assets. At December 31, 2000 the
notional amount of these instruments was $125,000,000. The Company paid up front
premiums of $476,000 which are amortized over the term of the related assets. At
December 31, 2000 the unamortized premiums on these contracts totaled $157,000
and there were no amounts receivable. The estimated fair value of these
contracts generally reflects the amount the Company would receive to terminate
the contracts, thereby taking into account the current unrealized gain on these
contracts. Dealer quotes are available on all of these contracts. At December
31, 2000 the estimated fair value of these contracts was $128,000. Under SFAS
No. 133, the transition amount involved with these instruments as of January 1,
2001 will not be significant.
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
December 31, 2000 1999
- ------------ ---------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
FINANCIAL ASSETS
Cash and due from banks $ 50,212,689 $ 50,212,689 $ 31,655,213 $ 31,655,213
Interest-bearing deposits with other banks 2,656,678 2,656,678 4,365,129 4,365,129
Investment securities 433,796,858 434,584,992 457,402,432 448,683,964
Loans, net 738,212,770 761,454,000 677,979,232 699,606,770
Customers' liability under acceptances 987,048 987,048 3,888,140 3,888,140
Accrued interest receivable 5,195,956 5,195,956 4,541,954 4,541,954
FINANCIAL LIABILITIES
Demand, NOW, savings and money market deposits 602,454,332 602,454,332 539,482,134 539,482,134
Time deposits 263,827,852 264,501,000 323,037,818 321,907,186
Federal funds purchased and securities sold
under agreements to repurchase 162,763,009 162,763,009 118,238,418 118,238,418
Commercial paper 25,655,020 25,655,020 40,319,200 40,319,200
Other short-term borrowings 17,733,482 17,733,482 10,993,363 10,993,363
Acceptances outstanding 987,048 987,048 3,888,140 3,888,140
Due to factoring clients 46,927,397 46,927,397 37,933,948 37,933,948
Accrued interest payable 2,794,420 2,794,420 3,833,666 3,833,666
Other long-term borrowings--FHLB 10,700,000 10,742,000 21,050,000 20,842,164
36
24
NOTE 19.
CAPITAL MATTERS
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 certain 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). In addition, the bank is
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 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" bank
must maintain minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and
10%, respectively. The Federal Reserve Board applies comparable tests for
holding companies such as the Company. At December 31, 2000, the Company and the
bank exceeded the requirements for "well capitalized" institutions.
The following tables present information regarding the Company's and the bank's
regulatory capital ratios:
RATIOS AND MINIMUMS
(dollars in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
--------------------- -------------------- ---------------------
AS OF DECEMBER 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- ------ ----- ------ ----- ------ -----
Total Capital (to Risk-Weighted Assets):
The Company $105,503 13.35% $ 63,205 8.00% $ 79,006 10.00%
The bank 86,877 11.44 60,746 8.00 75,933 10.00
Tier 1 Capital (to Risk-Weighted Assets):
The Company 95,593 12.10 31,602 4.00 47,404 6.00
The bank 77,367 10.19 30,373 4.00 45,560 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 95,593 8.11 47,141 4.00 58,926 5.00
The bank 77,367 6.73 46,015 4.00 57,519 5.00
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- ------ ----- ------ ----- ------ -----
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
NOTE 20.
SEGMENT REPORTING
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.
37
25
The Company provides a full range of financial products and services, including
commercial loans, commercial and residential mortgage lending and brokerage,
asset-based financing, factoring/accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposit services, 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 58.0% loans (corporate lending was 78.5% and real
estate lending was 18.0% of total loans, respectively) and 42.0% investment
securities and money market investments. There are no industry concentrations
(exceeding 10% of loans, gross, in the corporate loan portfolio). Approximately
74% 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. There are no significant differences between
the accounting policies used for these operating segments and those described in
Footnote 1.
The following table provides certain information regarding the Company's
operating segments:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
--------- ----------- ------------ ------
YEAR ENDED DECEMBER 31, 2000
Net interest income $ 30,565,459 $ 11,477,053 $ 18,138,222 $ 60,180,734
Noninterest income 12,524,032 6,020,064 133,530 18,677,626
Depreciation and amortization 192,241 207,098 683 400,022
Segment profit 18,627,739 9,156,966 22,564,754 50,349,459
Segments assets 593,231,247 122,788,721 512,167,906 1,228,187,874
Year Ended December 31, 1999
Net interest income 26,423,903 8,998,476 14,670,691 50,093,070
Noninterest income 8,765,876 5,400,138 133,866 14,299,880
Depreciation and amortization 168,823 199,044 683 368,550
Segment profit 13,068,157 8,189,400 20,621,800 41,879,357
Segments assets 546,629,572 101,898,728 530,682,020 1,179,210,320
Year Ended December 31, 1998
Net interest income 24,241,672 8,415,676 13,379,959 46,037,307
Noninterest income 8,583,240 4,395,814 182,135 13,161,189
Depreciation and amortization 100,588 176,751 342 277,681
Segment profit 10,025,072 7,860,500 18,664,500 36,550,072
Segments assets 522,141,693 106,189,496 377,622,851 1,005,954,040
38
26
The following table sets forth reconciliations of net interest income,
noninterest income, profits and assets for reportable operating segments to the
Company's consolidated totals:
Years Ended December 31, 2000 1999 1998
- ------------------------ --------------- --------------- ---------------
Net interest income:
Total for reportable operating segments $ 60,180,734 $ 50,093,070 $ 46,037,307
Other[1] 2,702,056 3,368,947 3,400,609
--------------- --------------- ---------------
Consolidated net interest income $ 62,882,790 $ 53,462,017 $ 49,437,916
=============== =============== ===============
Noninterest income:
Total for reportable operating segments $ 18,677,626 $ 14,299,880 $ 13,161,189
Other[1] 3,695,562 3,644,520 3,287,152
--------------- --------------- ---------------
Consolidated noninterest income $ 22,373,188 $ 17,944,400 $ 16,448,341
=============== =============== ===============
Profit:
Total for reportable operating segments $ 50,349,459 $ 41,879,357 $ 36,550,072
Other[1] (21,936,312) (17,639,387) (14,350,378)
--------------- --------------- ---------------
Consolidated income before income taxes $ 28,413,147 $ 24,239,970 $ 22,199,694
=============== =============== ===============
Assets:
Total for reportable operating segments $ 1,228,187,874 $ 1,179,210,320 $ 1,005,954,040
Other[1] 42,560,740 39,676,932 38,491,175
--------------- --------------- ---------------
Consolidated assets $ 1,270,748,614 $ 1,218,887,252 $ 1,044,445,215
=============== =============== ===============
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
NOTE 21.
PARENT COMPANY
CONDENSED BALANCE SHEETS
December 31, 2000 1999
- ------------ ------------ ------------
ASSETS
Cash and due from banks $ 4,994,086 $ 8,104,664
Interest-bearing deposits--banking subsidiary 16,715,284 18,836,902
Loans, net of unearned discounts 32,494,803 40,941,921
Less allowance for loan losses 1,728,196 2,172,146
------------ ------------
Loans, net 30,766,607 38,769,775
------------ ------------
Investment in subsidiaries
Banking subsidiary 98,495,637 84,552,869
Other subsidiaries 1,130,782 1,105,104
Due from subsidiaries
Banking subsidiary 1,126,173 1,029,468
Other assets 1,309,245 1,359,247
------------ ------------
$154,537,814 $153,758,029
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper $ 25,655,020 $ 40,319,200
Other short-term borrowings 350,000 350,000
Due to subsidiaries
Banking subsidiary 686,661 660,570
Other subsidiaries 996,295 995,444
Accrued expenses and other liabilities 9,133,744 5,142,688
Other long-term debt 700,000 1,050,000
Shareholders' equity 117,016,094 105,240,127
------------ ------------
$154,537,814 $153,758,029
============ ============
39
27
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2000 1999 1998
- ------------------------ ------------ ------------ ------------
INCOME
Dividends and interest from
Banking subsidiary $ 5,498,626 $ 11,533,371 $ 2,440,305
Other subsidiaries -- 127,500 --
Management and service fees from
Banking subsidiary 2,089,156 1,159,063 564,605
Other subsidiaries -- -- --
Interest and fees on loans 5,774,546 8,238,703 7,524,416
Other income 510,386 97,495 72,339
------------ ------------ ------------
Total income 13,872,714 21,156,132 10,601,665
------------ ------------ ------------
EXPENSE
Interest expense 1,585,662 2,404,708 1,986,694
Provision for loan losses 300,000 -- 110,000
Salaries and employee benefits 3,907,682 2,783,410 2,136,747
Other expenses 2,678,261 1,810,452 1,172,072
------------ ------------ ------------
Total expense 8,471,605 6,998,570 5,405,513
------------ ------------ ------------
Income before income taxes and equity in undistributed
net income of subsidiaries 5,401,109 14,157,562 5,196,152
Provision for income taxes 225,516 1,425,533 1,534,046
------------ ------------ ------------
5,175,593 12,732,029 3,662,106
Equity in undistributed net income of subsidiaries 11,383,064 1,831,923 9,134,437
------------ ------------ ------------
Net income 16,558,657 14,563,952 12,796,543
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) arising during the year 1,473 (3,383) 1,180
------------ ------------ ------------
Comprehensive income $ 16,560,130 $ 14,560,569 $ 12,797,723
============ ============ ============
40
28
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 1999 1998
- ------------------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 16,558,657 $ 14,563,952 $ 12,796,543
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 300,000 -- 110,000
Amortization of unearned compensation 653,594 625,733 575,383
Increase (Decrease) in accrued expenses and other liabilities 3,991,056 4,513,002 (532,551)
Increase (Decrease) in due to subsidiaries, net 26,942 (8,187) (10,753)
(Increase) Decrease in due from subsidiaries, net (96,705) (123,029) 18,984
Equity in undistributed net income of subsidiaries (11,383,064) (5,417,183) (9,134,437)
Other, net (807,319) 3,469,951 (391,992)
------------ ------------ ------------
Net cash provided by operating activities 9,243,161 17,624,239 3,431,177
------------ ------------ ------------
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits--banking subsidiary 2,121,618 (10,461,902) (2,525,000)
Net decrease (increase) in loans 8,447,118 9,937,992 (12,730,497)
------------ ------------ ------------
Net cash provided by (used in) investing activities 10,568,736 (523,910) (15,255,497)
------------ ------------ ------------
FINANCING ACTIVITIES
Net (decrease) increase in commercial paper (14,664,180) (1,210,100) 17,458,700
Net (decrease) increase in other short-term borrowings -- -- (490,000)
Cash dividends paid on preferred and common shares (4,994,650) (4,152,264) (3,569,701)
Proceeds from exercise of stock options 94,775 147,563 536,500
Purchase of treasury shares (3,008,420) (4,922,832) (1,151,433)
Decrease in other long-term borrowings (350,000) (350,000) (350,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities (22,922,475) (10,487,633) 12,434,066
------------ ------------ ------------
Net (decrease) increase in cash and due from banks (3,110,578) 6,612,696 609,746
Cash and due from banks--beginning of year 8,104,664 1,491,968 882,222
------------ ------------ ------------
Cash and due from banks--end of year $ 4,994,086 $ 8,104,664 $ 1,491,968
============ ============ ============
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $ 40,670 $ 29,460 $ 22,840
Issuance of treasury shares under incentive compensation plan 1,677,025 -- --
Surrender of treasury shares issued under incentive compensation plan 139,846 -- --
Issuance of common shares 16,457,429 6,869,312 --
Supplemental disclosure of cash flow information:
Interest paid 1,741,517 2,438,723 1,976,730
Income taxes paid 10,875,871 8,433,725 7,487,552
The parent company is required to maintain a deposit with the bank in an amount
equal to the unpaid principal balance on the bank's loan to the trustee of the
Employee Stock Ownership Plan. The required deposit which is reported in
interest-bearing deposits on the parent company's condensed balance sheet was
$1,050,000 at December 31, 2000.
41
29
NOTE 22.
COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $3,015,784, $2,647,009 and $2,398,083, respectively, for the
years ended December 31, 2000, 1999 and 1998, respectively.
The future minimum rental commitments as of December 31, 2000 under
noncancelable leases follow:
Rental
Year(s) Commitments
- ------ -----------
2001 $ 2,142,288
2002 2,017,611
2003 2,067,420
2004 2,022,146
2005 1,778,392
2006 and thereafter 9,331,070
-----------
Total $19,358,927
===========
Certain leases included above have escalation clauses and/or provide that the
Company pay maintenance, electric, taxes and other operating expenses applicable
to the leased property.
In the normal course of business, there are various commitments and contingent
liabilities outstanding which are properly not recorded on the balance sheet.
Management does not anticipate that losses, if any, as a result of these
transactions would materially affect the financial position of the Company.
Loan commitments, substantially all of which have an original maturity of one
year or less, were approximately $52,654,000 as of December 31, 2000. These
commitments are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements because
some of the commitments are expected to expire without being drawn upon. The
bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, by the bank upon extension
of credit is based on management's credit evaluation of the borrower. Collateral
held varies but may include cash, U.S. Treasury and other marketable securities,
accounts receivable, inventory and property, plant and equipment.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the bank to guarantee the performance of a customer to a
third party. At December 31, 2000, these commitments totaled $38,415,000 of
which $27,843,000 expired within one year, $10,499,000 within two years and
$73,000 within three years. Approximately 52% of the commitments were
automatically renewable for a period of one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The bank holds cash or cash equivalents and
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 2000 ranged from 0% to 100%; the average amount
collateralized is approximately 37%.
The Company uses interest rate floor contracts to manage fluctuating interest
rates. In exchange for the payment of a premium, an interest rate floor gives
the Company the right to receive at specified future dates the amount, if any,
by which the market interest rate specified in the floor falls below the fixed
floor rate, multiplied by the notional amount of the floor. The credit exposure
on a floor is limited to this interest-derived amount. Potential credit losses
are minimized through careful evaluation of counterparty credit standing. The
floors currently held by the Company have an average remaining term of
approximately 1 1/4 years and total notional amount of $125 million.
In the normal course of business there are various legal proceedings pending
against the Company. Management, after consulting with counsel, is of the
opinion that there should be no material liability with respect to such
proceedings, and accordingly no provision has been made in the accompanying
consolidated financial statements.
42
30
NOTE 23.
QUARTERLY DATA (UNAUDITED)
2000 QUARTER MAR 31 JUN 30 SEPT 30 DEC 31
- ------------ ----------- ----------- ----------- -----------
Total interest income $22,799,945 $24,145,797 $24,932,416 $25,247,039
Total interest expense 7,935,640 8,437,974 8,905,991 8,962,802
Net interest income 14,864,305 15,707,823 16,026,425 16,284,237
Provision for loan losses 1,412,800 1,626,800 1,478,600 2,044,800
Noninterest income 4,575,186 5,539,398 5,628,819 6,629,785
Noninterest expenses 11,608,617 12,705,660 12,646,396 13,319,158
Income before income taxes 6,418,074 6,914,761 7,530,248 7,550,064
Net income 3,878,559 3,998,658 4,186,095 4,495,345
Earnings per average common share:
Basic .42 .44 .46 .49
Diluted .41 .42 .45 .46
Common stock closing price:
High 16.363 14.942 18.362 21.875
Low 13.012 12.953 13.637 16.817
Quarter--end 13.637 14.316 17.727 21.875
1999 Quarter Mar 31 Jun 30 Sept 30 Dec 31
- ------------ ----------- ----------- ----------- -----------
Total interest income $17,881,775 $18,771,252 $20,348,876 $22,242,960
Total interest expense 5,341,995 5,737,705 6,728,438 7,974,708
Net interest income 12,539,780 13,033,547 13,620,438 14,268,252
Provision for loan losses 1,383,000 1,370,000 1,365,000 1,465,800
Noninterest income 4,227,888 4,595,995 4,658,262 4,462,255
Noninterest expenses 9,642,282 10,458,412 10,681,781 10,800,172
Income before income taxes 5,742,386 5,801,130 6,231,919 6,464,535
Net income 3,464,622 3,551,431 3,684,808 3,863,091
Earnings per average common share:
Basic .37 .37 .40 .42
Diluted .35 .36 .39 .40
Common stock closing price:
High 19.695 18.344 17.750 16.992
Low 16.395 15.258 14.285 14.125
Quarter--end 16.938 16.449 14.934 14.547
43
31
INDEPENDENT AUDITORS' REPORT
[Logo KPMG]
The Shareholders and Board of Directors Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling Bancorp
as of December 31, 2000 and 1999, and the related consolidated statements of
income, comprehensive income, changes in shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2000 and the
consolidated statements of condition of Sterling National Bank as of December
31, 2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling Bancorp as
of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2000 and the financial position of Sterling National Bank as of December 31,
2000 and 1999 in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
New York, New York January 22, 2001
44
32
Sterling Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
financial condition and results of operations of Sterling Bancorp ("the parent
company"), a financial holding company pursuant to an election made under the
Gramm-Leach-Bliley Act of 1999, and its wholly-owned subsidiaries Sterling
Banking Corporation, Sterling Industrial Loan Association, 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. and Sterling Holding Company of
Virginia, Inc. Sterling Holding Company of Virginia, Inc. owns all of the
outstanding common shares of Sterling Real Estate Holding Company Inc.
Throughout this discussion and analysis, the term "the Company" refers to
Sterling Bancorp and its subsidiaries. This discussion and analysis should be
read in conjunction with the consolidated financial statements and supplemental
data contained elsewhere in the report. Certain reclassifications have been made
to prior years' financial data to conform to current financial statement
presentations as well as to reflect the effect of the 10% stock dividend paid in
December 2000. In this discussion, information presented in the "Comparison of
Years Ended December 31, 1999 and December 31, 1998" section has been modified
to reflect current presentation and to reflect the effect of the 10% stock
dividend paid in December 2000.
SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Total interest income $ 97,125 $ 79,245 $ 73,779 $ 67,596 $ 60,694 $ 53,484
Total interest expense 34,242 26,783 24,341 22,024 21,031 19,319
Net interest income 62,883 53,462 49,438 45,572 39,663 34,165
Provision for loan losses 6,563 5,584 5,389 3,075 2,047 1,866
Net securities gains/(losses) -- -- 86 -- (71) 5
Noninterest income 22,373 17,944 16,362 12,972 9,979 5,973
Noninterest expenses 50,280 41,582 38,297 35,707 31,697 26,660
Income before taxes 28,413 24,240 22,200 19,762 15,827 11,617
Provision for income taxes 11,854 9,676 9,403 8,874 7,575 5,979
Net income 16,559 14,564 12,797 10,888 8,252 5,638
Per common share--basic 1.81 1.56 1.35 1.19 1.00 0.74
--diluted 1.74 1.50 1.28 1.12 0.89 0.69
Dividends per common share 0.58 0.50 0.43 0.37 0.31 0.25
YEAR END BALANCE SHEETS
Investment securities 433,797 457,402 329,806 384,951 304,331 299,238
Loans, net of unearned discounts 750,888 689,096 640,206 558,482 465,517 397,229
Total assets 1,270,749 1,218,887 1,044,445 1,019,980 861,605 775,608
Noninterest-bearing deposits 341,039 291,808 329,020 312,462 229,977 224,081
Interest-bearing deposits 525,243 570,712 373,782 418,946 344,446 326,947
Long-term convertible subordinated debentures -- -- -- -- 6,389 21,346
Shareholders' equity 117,016 105,240 102,151 92,623 77,177 59,657
AVERAGE BALANCE SHEETS
Investment securities 453,237 379,872 336,690 304,753 321,957 304,741
Loans, net of unearned discounts 634,980 556,630 512,711 446,268 376,879 311,119
Total assets 1,165,707 1,022,698 935,964 838,354 777,695 695,522
Noninterest-bearing deposits 258,347 237,324 224,780 199,431 175,232 153,244
Interest-bearing deposits 536,523 452,734 409,027 377,301 330,520 327,102
Long-term convertible subordinated debentures -- -- -- 4,618 16,779 23,975
Shareholders' equity 107,584 102,361 96,644 82,515 65,768 56,401
RATIOS
Return on average total assets 1.42% 1.42% 1.37% 1.30% 1.06% 0.81%
Return on average tangible shareholders' equity 19.16 17.94 16.95 17.75 18.50 16.00
Return on average shareholders' equity 15.39 14.23 13.24 13.20 12.55 10.00
Dividend payout ratio 29.57 27.98 27.47 26.64 26.95 28.14
Average shareholders' equity to average total assets 9.23 10.01 10.33 9.84 8.46 8.11
Net interest margin (Tax-equivalent basis) 6.13 5.97 6.12 6.37 5.93 5.52
Loans/assets, period end 59.09 56.53 61.30 54.75 54.03 51.22
Net charge-offs/loans, period end 0.67 0.67 0.61 0.43 0.00 0.20
Nonperforming loans/loans, period end 0.27 0.21 0.19 0.25 0.09 0.09
Allowance/loans, period end 1.69 1.61 1.59 1.55 1.72 1.31
45
33
COMPANY 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 deposit services, trust and
estate administration, and investment management services. The Company has
operations in the metropolitan New York area, 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 December 31,
2000, the bank's year-to-date average earning assets (of which loans were 57%
and investment securities were 42%) 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.
OVERVIEW
The Company reported net income for 2000 of $16.6 million, representing $1.74
per share, calculated on a diluted basis, compared to $14.6 million, or $1.50
per share, calculated on a diluted basis, for 1999. This increase reflects
continued growth in both net interest income and noninterest income.
Net interest income, on a tax-equivalent basis, increased to $63.8 million for
2000, up from $54.2 million in 1999, principally due to higher average earning
asset outstandings. The net interest margin, on a tax-equivalent basis, was
6.13% for 2000 compared to 5.97% for 1999. This increase was principally due to
a 62 basis point increase in average yield on earning assets partially offset by
a 59 basis point decrease in average cost of funds.
Noninterest income rose to $22.4 million for 2000 compared to $17.9 million for
1999, principally due to continued growth in fees from factoring, mortgage
banking, deposit services, trade finance, and various other services.
Noninterest expenses totaled $50.3 million for 2000 compared to $41.6 million in
1999. The increased expenses were incurred to support growing levels of business
activity and continued investments in the business franchise.
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) for the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate are shown on page 58. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 57.
Net interest income, on a tax-equivalent basis, for 2000 increased $9,696,000
from 1999 to $63,846,000.
Total interest income aggregated $98,088,000, up $18,155,000 for 2000 when
compared to 1999. The tax-equivalent yield on interest-earning assets was 9.42%
for 2000 compared with 8.80% for 1999. The increase in interest income was
principally due to an increase in the loan and investment securities portfolios
as a result of management's strategy of increasing outstandings for those asset
categories. The other contributing factor was higher yields on loans and
investment securities.
Interest earned on the loan portfolio amounted to $66,623,000, up $11,611,000
when compared to a year ago. Average loan balances amounted to $634,980,000, up
$78,350,000 from the average of the prior year period. The increase in the
average loans (across virtually all 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 11.45% for
2000 from 10.77% for 1999 was primarily attributable to the higher rate
environment in the 2000 period.
Tax-equivalent interest earned on investment securities increased $7,008,000 to
$31,145,000 in 2000, due to higher average outstandings and higher yields.
Average investment securities outstandings increased to $453,237,000 from
$379,872,000 in the prior year period. The increase in average balances was
primarily U.S. Government and U.S. Government corporation and agency guaranteed
mortgage-backed securities. The tax-equivalent yield on investment securities
increased to 6.87% from 6.35% for the prior year period, reflecting the purchase
of securities in a rising rate environment in the current year period.
Total interest expense increased $8,459,000 from 1999 to $34,242,000 for 2000.
The increase in interest expense was due to higher funds employed coupled with
higher rates paid for interest-bearing liabilities.
46
34
Interest expense on deposits increased to $22,697,000 for 2000 due to higher
average outstandings and the cost of funds. Average balances increased to
$536,523,000 in 2000 from $452,734,000 in 1999, primarily due to higher money
market and time deposits. The average rate paid on interest-bearing deposits
increased to 4.23% in 2000 compared to 3.69% in the comparable year ago period.
Interest expense associated with borrowed funds increased to $11,545,000 for
2000 from $9,077,000 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 $47,637,000 to $149,428,000 for 2000 and
the average rates paid rose to 5.88% from 4.93% 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 portfolio, the provision for credit losses increased to $6,563,000, up
$979,000 when compared to the same period last year.
NONINTEREST INCOME
Noninterest income increased $4,429,000 for 2000 when compared with 1999,
primarily as a result of increased fees from factoring, mortgage banking,
deposit services, trade finance, and various other services.
NONINTEREST EXPENSES
Noninterest expenses increased $8,697,000 for 2000 when compared with 1999,
primarily due to increased personnel 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 December 31, 2000, the Company's
portfolio of securities totaled $433,797,000 of which U.S. Government and U.S.
Government corporation and agency guaranteed mortgage-backed securities having
an average life of approximately 6.7 years amounted to $385,395,000. 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 $2,573,000 and $1,785,000, 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
$990,000 and gross unrealized losses of $1,032,000. 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.
Information regarding book values and range of maturities by type of security
and weighted average yields for totals of each category is presented in Footnote
4 beginning on page 23.
The following table sets forth the composition of the Company's investment
securities by type, with related carrying values at the end of the most recent
three fiscal years:
December 31, 2000 1999 1998
- ------------ -------- -------- --------
(in thousands)
U.S. Treasury securities $ 2,889 $ 24,847 $ 19,731
Obligations of U.S. government
corporations and agencies--
mortgage-backed securities 385,395 391,339 268,067
Obligations of states and
political subdivisions 33,156 27,234 19,217
Debt securities issued by
foreign governments 2,250 2,000 2,000
Other debt securities 3,022 5,000 13,993
Federal Reserve Bank and
other equity securities 7,085 6,982 6,798
-------- -------- --------
Total $433,797 $457,402 $329,806
======== ======== ========
LOAN PORTFOLIO
A management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness of and the
designation of lending limits for each borrower. The portfolio strategies
include seeking industry and loan size diversification in order to minimize
credit exposure and the origination of loans in markets with which the Company
is familiar.
The Company's commercial and industrial loan portfolio represents approximately
67% of gross loans. Loans in this category are typically made to small and
medium-sized businesses and range between $250,000 and $10 million, and are
often collateralized by accounts receivable, inventory and marketable
47
35
securities and other liquid collateral. Sources of repayment are from the
borrower's operating profits, cash flows and liquidation of pledged collateral.
Based on underwriting standards, loans may be secured in whole or in part by
collateral such as liquid assets, accounts receivable, equipment, inventory, and
real property. The Company's real estate loan portfolio, which represents
approximately 16% of gross loans, is secured by mortgages on real property
located principally in the State of New York and in the State of Virginia. The
collateral securing any loan may vary in value based on market conditions.
The following table sets forth the composition of the Company's loan portfolio,
net of unearned discounts, at the end of each of the most recent five fiscal
years:
December 31, 2000 1999 1998 1997 1996
- ------------ ----------------- ----------------- ----------------- ----------------- ----------------
% of % of % of % of % of
Balances Total Balances Total Balances Total Balances Total Balances Total
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(dollars in thousands)
Domestic
Commercial and
industrial $499,984 66.59% $462,400 67.10% $465,048 72.64% $413,887 74.11% $350,641 75.32%
Lease financing 98,349 13.10 81,398 11.81 56,146 8.77 43,705 7.82 34,750 7.46
Real estate--
mortgage 122,272 16.28 96,376 13.99 104,621 16.34 73,878 13.23 63,633 13.67
Real estate--
construction -- -- 4,958 0.72 -- -- 8,352 1.50 1,136 0.25
Installment--
individuals 9,506 1.27 13,181 1.91 13,604 2.13 17,871 3.20 14,568 3.13
Loans to depository
institutions 20,000 2.66 30,000 4.35 -- -- -- -- -- --
Foreign government and
official institutions 777 0.10 783 0.12 787 0.12 789 0.14 789 0.17
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, net of
unearned discounts $750,888 100.00% $689,096 100.00% $640,206 100.00% $558,482 100.00% $465,517 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
The following table sets forth the maturities and sensitivity to changes in
interest rates of the Company's commercial and industrial and foreign loans, as
of December 31, 2000:
Due One Due One Due After Total
Year to Five Five Gross
or Less Years Years Loans
-------- -------- -------- --------
(in thousands)
Commercial and industrial $497,957 $ 2,289 $ 136 $500,382
Foreign 777 -- -- 777
-------- -------- -------- --------
$498,734 $ 2,289 $ 136 $501,159
======== ======== ======== ========
All loans due after one year have predetermined interest rates.
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, the realization of collateral, and the credit management process.
48
36
The following table sets forth the aggregate amount of domestic nonaccrual and
past due loans of the Company at the end of each of the most recent five fiscal
years; there were no foreign loans accounted for on a nonaccrual basis and there
were no troubled debt restructurings for any types of loans. Loans contractually
past due 90 days or more as to principal or interest and still accruing are
loans which are both well-secured or guaranteed by financially responsible third
parties and are in the process of collection.
December 31, 2000 1999 1998 1997 1996
- ------------ ------ ------ ------ ------ ------
(dollars in thousands)
Nonaccrual basis loans* $1,995 $1,417 $1,214 $1,388 $ 442
Past due 90 days or more
(other than the above) 162 59 675 245 390
------ ------ ------ ------ ------
Total $2,157 $1,476 $1,889 $1,633 $ 832
====== ====== ====== ====== ======
*Interest income that would have been
earned on nonaccrual and reduced
rate loans outstanding $ 58 $ 39 $ 88 $ 55 $ 13
====== ====== ====== ====== ======
Applicable interest income actually realized $ -- $ -- $ -- $ -- $--
====== ====== ====== ====== ======
Nonaccrual and past due loans as a
percentage of total gross loans .28% .21% .29% .29% .18%
====== ====== ====== ====== ======
The allowance for possible 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 possible 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 non-performing 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 December 31, 2000, the ratio of the allowance to
loans, net of unearned discounts, was 1.7% and the allowance was $12,675,000. At
such date, the Company's nonaccrual loans amounted to $1,995,000; $470,000 of
such loans were judged to be impaired within the scope of SFAS No. 114 and
required valuation allowances of $200,000. 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 possible loan losses was deemed adequate to absorb
all reasonably anticipated losses on specifically known and other possible
credit risks associated with the portfolio as of December 31, 2000. Net losses
within the loan portfolio are not statistically predictable and changes in
conditions in the next twelve months could result in future provisions for loan
losses varying from the level taken in 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
to have serious doubts as to the ability of the borrowers to continue to comply
with the present repayment terms, aggregated $966,000 and $1,005,000 at December
31, 2000 and 1999, respectively.
49
37
The following table sets forth certain information with respect to the Company's
loan loss experience for each of the most recent five fiscal years:
December 31, 2000 1999 1998 1997 1996
- ------------ --------- --------- --------- --------- ---------
(dollars in thousands)
Average loans outstanding, net of
unearned discounts, during year $ 634,980 $ 556,630 $ 512,711 $ 446,268 $ 376,879
========= ========= ========= ========= =========
Allowance for loan losses:
Balance at beginning of year $ 11,117 $ 10,156 $ 8,678 $ 8,003 $ 5,192
--------- --------- --------- --------- ---------
Charge-offs:
Commercial and industrial 4,010 4,149 3,328 2,064 561
Lease financing 1,075 612 616 228 49
Real estate 313 177 146 239 71
Installment 92 84 261 193 57
--------- --------- --------- --------- ---------
Total charge-offs 5,490 5,022 4,351 2,724 738
--------- --------- --------- --------- ---------
Recoveries:
Commercial and industrial 220 169 232 240 1,456
Lease financing 228 178 142 56 37
Real estate -- 1 2 2 --
Installment 37 51 64 26 9
--------- --------- --------- --------- ---------
Total recoveries 485 399 440 324 1,502
--------- --------- --------- --------- ---------
Subtract/(Add):
Net charge-offs/(recoveries) 5,005 4,623 3,911 2,400 (764)
--------- --------- --------- --------- ---------
Provision for loan losses 6,563 5,584 5,389 3,075 2,047
--------- --------- --------- --------- ---------
Balance at end of year $ 12,675 $ 11,117 $ 10,156 $ 8,678 $ 8,003
========= ========= ========= ========= =========
Ratio of net charge-offs to average
loans outstanding, net of
unearned discounts during year .79% .83% .76% .54% 0%
========= ========= ========= ========= =========
50
38
To comply with a regulatory requirement to provide an allocation of the
allowance for possible loan losses, the following table presents the Company's
allocation of the allowance. This allocation is based on estimates by management
and may vary from year to year based on management's evaluation of the risk
characteristics of the loan portfolio. The amount allocated to a particular loan
category may not necessarily be indicative of actual future charge-offs in a
loan category.
December 31, 2000 1999 1998 1997 1996
- ------------ ---------------- --------------- --------------- ---------------- ----------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(dollars in thousands)
Domestic
Commercial and industrial $ 8,968 1.79% $ 8,262 1.79% $ 7,429 1.60% $ 6,013 1.45% $ 5,588 1.59%
Loans to depository institutions 160 0.80 240 0.80 -- -- -- -- -- --
Lease financing 1,637 1.66 1,036 1.27 837 1.49 648 1.48 508 1.46
Real estate--mortgage 1,578 1.28 1,223 1.27 1,583 1.51 1,059 1.43 820 1.29
Real estate--construction -- -- 30 0.61 -- -- 70 0.84 8 0.70
Installment--individuals 10 0.11 75 0.56 25 0.18 35 0.20 25 0.17
Unallocated 322 -- 251 -- 282 -- 853 -- 1,054 --
------- ------- ------- ------- -------
Total $12,675 1.69% $11,117 1.61% $10,156 1.59% $ 8,678 1.55% $ 8,003 1.72%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
DEPOSITS
A significant source of funds 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 for each of the most recent three fiscal years:
December 31, 2000 1999 1998
- ------------ -------- -------- --------
(in thousands)
Domestic
Demand $341,039 $291,808 $329,020
NOW 68,319 70,205 54,980
Savings 24,836 23,625 25,254
Money Market 168,260 153,845 127,470
Time deposits by remaining maturity
Within 3 months 146,734 177,964 110,079
After 3 months but within 1 year 89,388 119,613 42,012
After 1 year but within 5 years 24,731 22,630 11,257
-------- -------- --------
Total domestic deposits 863,307 859,690 700,072
-------- -------- --------
Foreign
Time deposits by remaining maturity
Within 3 months 150 1,730 1,730
After 3 months but within 1 year 2,825 1,100 1,000
-------- -------- --------
Total foreign deposits 2,975 2,830 2,730
-------- -------- --------
Total deposits $866,282 $862,520 $702,802
======== ======== ========
Fluctuations of balances in total or among categories at any date can 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 for
the most recent three fiscal years is presented on page 57.
51
39
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company unduly to interest
rate fluctuations.
The Company takes a coordinated approach to the management of its liquidity,
capital and interest rate risk. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee ("ALCO"). ALCO, which is comprised of
members of senior management, meets to review among other things, economic
conditions, interest rates, yield curve, cash flow projections, expected
customer actions, liquidity levels, capital ratios and repricing characteristics
of assets, liabilities and 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
financial and statistical tools including traditional gap analysis and
sophisticated income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest rate sensitive assets exceed interest rate sensitive
liabilities generally will result in the net interest margin increasing in a
rising rate environment and decreasing in a falling rate environment. A negative
gap (liability sensitive) will generally have the opposite result on the net
interest margin. However, the traditional gap analysis does not assess the
relative sensitivity of assets and liabilities to changes in interest rates and
other factors that could have an impact on interest rate sensitivity or net
interest income. The Company utilizes the gap analysis to complement its income
simulations modeling, primarily focusing on the longer-term structure of the
balance sheet.
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 December 31, 2000, presented on page 59,
indicates that net interest income would increase during periods of rising
interest rates and decrease during periods of falling interest rates, but, as
mentioned above, gap analysis may not be an accurate predictor of net interest
income.
As part of its interest rate risk strategy, the Company 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,
approved by the Board of Directors, 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.
52
40
At December 31, 2000, the Company's off-balance sheet financial instruments
consisted of five 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
1, 2001 and two contracts with a notional amount of $25 million each and a final
maturity of November 11, 2002. These financial instruments are being used as
part of the Company's interest rate risk management and not for trading
purposes. At December 31, 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 December 31, 2000, the unamortized premiums on these contracts
totaled $157,000 and are included in other assets. At December 31, 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 volatility or sensitivity to
interest rate changes utilizing statistical techniques that allow the Company to
consider various factors which impact net interest income. These factors include
actual maturities, estimated cash flows, repricing characteristics, deposits
growth/retention and, most importantly, the relative sensitivity of the
Company's assets and liabilities to changes in market interest rates. This
relative sensitivity is important to consider as the Company's core deposit base
has not been subject to the same degree of interest rate sensitivity as its
assets. The core deposit costs are internally managed and tend to exhibit less
sensitivity to changes in interest rates than the Company's adjustable rate
assets whose yields are based on external indices and 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 policy
limits for the potential volatility of its net interest margin assuming certain
levels of changes in market interest rates with the objective of maintaining a
stable net interest margin under various probable rate scenarios. Management
generally has maintained a risk position well within the policy limits. As of
December 31, 2000, the model indicated the impact of a 200 basis point parallel
and pro rata rise in rates over 12 months would approximate a 2.15% ($1,399,000)
increase in net interest income, while the impact of a 200 basis point decline
in rates over the same period would approximate a 2.44% ($1,592,000) 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 provide 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 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.
53
41
LIQUIDITY RISK
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the bank levels. Liquid assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital 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
believe that they 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.
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements throughout its history.
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for the year
to date combined with its retained net profits for the preceding two calendar
years.
At December 31, 2000, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $26,005,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$54,261,000 and back-up credit lines with banks of $29,000,000. 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 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 requirements in the future.
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 certain 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 at December 31, 2000 and December
31, 1999, is presented in Footnote 19 beginning on page 37. In addition, the
bank is 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 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" bank
must maintain minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and
10%, respectively. The Federal Reserve Board applies comparable tests for
holding companies such as the Company. At December 31, 2000, the Company and the
bank exceeded the requirements for "well capitalized" institutions.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The parent company's common stock is traded on The New York Stock Exchange under
the symbol STL. Information regarding the quarterly prices of the common stock
is presented in Footnote 23 on page 43. Information regarding the average common
shares outstanding and dividends per common share is presented in the
Consolidated Statements of Income on page 15. Information regarding legal
restrictions on the ability of the bank to pay dividends is presented in
Footnote 12 on page 29. There are no such restrictions on the ability of the
parent company to pay dividends to its shareholders. Information related to the
parent company's preferred stock is presented in Footnote 10 on page 28.
54
42
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 performance and conditions
and assumptions relating thereto.
The Company may include forward-looking statements in its filings with the
Securities and Exchange Commission, including this annual report, 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.
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 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 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.
55
43
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
OVERVIEW
The Company reported net income for 1999 of $14.6 million, representing $1.50
per share, calculated on a diluted basis, compared to $12.8 million, or $1.28
per share, calculated on a diluted basis, in 1998. This increase reflects higher
net interest income and continued growth in noninterest income.
Net interest income was $53.5 million for 1999, up from $49.4 million in 1998,
principally due to higher average earning asset outstandings. The net interest
margin, on a tax-equivalent basis, was 5.97% for 1999 compared to 6.12% for
1998. This decrease was principally due to a 30 basis point decrease in average
yield on earning assets partially offset by a 22 basis point decrease in the
average cost of funds.
Noninterest income rose to $17.9 million for 1999, compared to $16.4 million for
1998 principally due to continued growth in fees from mortgage banking,
factoring, trade finance and various other services.
Noninterest expenses totaled $41.6 million for 1999 compared to $38.3 million in
1998. The increases in personnel expenses were incurred to support growing
levels of business activity.
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 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) for the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate, are shown on page 58. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 57.
Net interest income for 1999 increased $4,024,000 from 1998 to $53,462,000.
Total interest income aggregated $79,245,000 up $5,466,000 for 1999 when
compared to 1998. The tax-equivalent yield on interest-earning assets was 8.80%
for 1999 compared with 9.10% for 1998. The increase in interest income was
principally due to an increase in income earned on the loan and investment
securities portfolios as a result of management's strategy of increasing
outstandings for those asset categories. The decrease in yield on earning assets
was due to lower yields on loans and investment securities.
Interest earned on the loan portfolio amounted to $55,012,000 up $2,978,000 when
compared to a year ago. Average loan balances amounted to $556,630,000 up
$43,919,000 from the average of the prior year period. The increase in average
loans accounted for the increase in interest earned on loans. The decrease in
the yield on the domestic loan portfolio to 10.77% for 1999 from 11.22% for 1998
was primarily attributable to a lower prime rate in the 1999 period.
Tax-equivalent interest earned on investment securities increased $2,721,000 to
$24,137,000 in 1999 due to higher average outstandings partially offset by lower
yields.
Total interest expense increased $1,442,000 from 1998 to $25,783,000 for 1999.
The increase in interest expense was due to higher deposit balances and amounts
of borrowed funds partially offset by lower average rates paid for
interest-bearing deposits and borrowed funds.
Interest expense on deposits increased to $16,706,000 for 1999 from $16,106,000
for 1998 primarily due to higher average balances partially offset by decreases
in rates paid on deposits. Average balances increased to $452,734,000 in 1999
from $409,027,000 in 1998 primarily due to higher money market and time
deposits. The average rate paid on interest-bearing deposits decreased to 3.69%
in 1999 compared to 3.94% for the comparable year ago period.
Interest expense on borrowed funds increased $843,000 from 1998 to $9,077,000
primarily due to increases in average out-standings. Average borrowed funds
amounted to $180,805,000, up $20,772,000 from the prior year period. This
increase in borrowings reflects the implementation of plans designed to support
asset growth.
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 portfolio, the provision for credit losses increased to $5,584,000, up
$195,000 when compared to the same period last year.
NONINTEREST INCOME
Noninterest income increased $1,496,000 for 1999 when compared with 1998
primarily as a result of increased fees from mortgage banking, factoring, trade
finance and various other services.
NONINTEREST EXPENSES
Noninterest expenses increased $3,285,000 for 1999 when compared with 1998
primarily due to increased personnel expenses incurred to support growing levels
of business activity and continuing investments in the business franchise.
56
44
Sterling Bancorp
CONSOLIDATED AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST EARNINGS [1]
Years Ended December 31, 2000 1999 1998
- ------------------------ -------------------------------- -------------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------- -------- ------- ----------- -------- ------- --------- -------- -------
(dollars in thousands)
ASSETS
Interest-bearing deposits with
other banks $ 2,160 $ 105 4.72% $ 7,180 $ 228 4.38% $ 4,017 $ 132 4.65%
Investment securities
Available for sale 123,854 8,363 6.75 118,549 7,387 6.22 111,562 7,063 6.33
Held to maturity 297,515 20,441 6.87 237,696 15,073 6.34 213,532 13,486 6.32
Tax-exempt[2] 31,868 2,341 7.35 23,627 1,677 7.10 11,596 867 7.55
Federal funds sold 3,735 215 5.76 11,049 556 4.96 10,356 565 5.45
Loans, net of unearned discounts
Domestic[3] 634,200 66,565 11.45 555,844 54,963 10.77 511,923 51,982 11.22
Foreign 780 58 7.46 786 49 6.21 788 52 6.65
----------- -------- ----------- -------- --------- --------
TOTAL INTEREST-EARNING ASSETS 1,094,112 98,088 9.42% 954,731 79,933 8.80% 863,774 74,147 9.10%
-------- ===== -------- ===== ======= =====
Cash and due from banks 39,350 37,857 38,966
Allowance for loan losses (12,106) (10,549) (9,270)
Excess cost over equity in net
assets of the bank 21,158 21,158 21,158
Other 23,193 19,501 21,336
----------- ----------- ---------
TOTAL ASSETS $ 1,165,707 $ 1,022,698 $ 935,964
=========== =========== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $ 24,298 577 2.38% $ 24,405 572 2.35% $ 23,619 538 2.28%
NOW 70,704 1,787 2.53 68,326 1,685 2.47 62,265 1,809 2.91
Money market 157,791 4,983 3.16 150,094 4,486 2.99 136,577 4,222 3.09
Time 280,871 15,218 5.42 207,142 9,840 4.75 183,837 9,393 5.11
Foreign
Time 2,859 132 4.60 2,767 123 4.44 2,729 145 5.33
Borrowings
Federal funds purchased and
securities sold under agreements
to repurchase 149,428 8,789 5.88 101,791 5,021 4.93 77,367 4,002 5.15
Commercial paper 28,496 1,490 5.23 37,466 1,780 4.75 33,843 1,720 5.08
Other short-term debt 10,708 749 5.76 4,273 224 5.19 13,583 738 5.15
Long-term debt 12,046 517 5.35 37,275 2,052 5.16 35,240 1,774 5.03
----------- -------- ----------- -------- --------- --------
Total Interest-Bearing
Liabilities 737,201 34,242 4.64% 633,539 25,783 4.05% 569,060 24,341 4.27%
===== ===== =====
Noninterest-bearing
demand deposits 258,347 -- 237,324 -- 224,780 --
----------- -------- ----------- -------- --------- --------
Total including
noninterest-bearing
demand deposits 995,548 34,242 3.44% 870,863 25,783 2.95% 793,840 24,341 3.06%
-------- ===== -------- ===== -------- =====
Other liabilities 62,575 49,474 45,480
----------- ----------- ---------
Total Liabilities 1,058,123 920,337 839,320
Shareholders' equity 107,584 102,361 96,644
----------- ----------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,165,707 $ 1,022,698 $ 935,964
=========== =========== =========
Net interest income/spread 63,846 4.78% 54,150 4.75% 49,806 4.83%
===== ===== =====
Net yield on interest-earning
assets 6.13% 5.97% 6.12%
===== ===== =====
Less: Tax-equivalent adjustment 963 688 368
-------- -------- --------
Net interest income $ 62,883 $ 53,462 $ 49,438
======== ======== ========
[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 prior
period amounts to conform to current presentation.
[2] Interest on tax-exempt securities included herein is presented on a
tax-equivalent basis.
[3] Nonaccrual loans are included in amounts outstanding and income has been
included to the extent earned.
57
45
Sterling Bancorp
CONSOLIDATED RATE/VOLUME ANALYSIS [1]
December 31, 1999 TO December 31, 1998 to
Increase (Decrease) from Years Ended, December 31, 2000 December 31, 1999
- ------------------------------------- ------------------------------------- --------------------------------------
Volume Rate Total[2] Volume Rate Total[2]
-------- -------- -------- -------- -------- --------
(in thousands)
INTEREST INCOME
Interest-bearing deposits with other banks $ (143) $ 20 $ (123) $ 110 $ (14) $ 96
-------- -------- -------- -------- -------- --------
Investment securities
Available for sale 400 576 976 446 (122) 324
Held to maturity 4,085 1,283 5,368 1,544 43 1,587
Tax-exempt 603 61 664 791 19 810
-------- -------- -------- -------- -------- --------
Total 5,088 1,920 7,008 2,781 (60) 2,721
-------- -------- -------- -------- -------- --------
Federal funds sold (380) 39 (341) 40 (49) (9)
-------- -------- -------- -------- -------- --------
Loans, net of unearned discounts[3]
Domestic 8,233 3,369 11,602 5,171 (2,190) 2,981
Foreign 1 8 9 -- (3) (3)
-------- -------- -------- -------- -------- --------
Total 8,234 3,377 11,611 5,171 (2,193) 2,978
-------- -------- -------- -------- -------- --------
TOTAL INTEREST INCOME $ 12,799 $ 5,356 $ 18,155 $ 8,102 $ (2,316) $ 5,786
======== ======== ======== ======== ======== ========
INTEREST EXPENSE
Savings and time deposits
Domestic
Savings $ 2 $ 3 $ 5 $ 17 $ 17 $ 34
NOW 68 34 102 166 (290) (124)
Money market 267 230 497 405 (141) 264
Time 3,895 1,483 5,378 1,138 (691) 447
Foreign
Time 5 4 9 2 (24) (22)
-------- -------- -------- -------- -------- --------
Total 4,237 1,754 5,991 1,728 (1,129) 599
-------- -------- -------- -------- -------- --------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase 2,693 1,075 3,768 1,197 (178) 1,019
Commercial paper (390) 100 (290) 177 (117) 60
Other short-term debt 490 35 525 (519) 5 (514)
Long-term debt (1,556) 21 (1,535) 192 86 278
-------- -------- -------- -------- -------- --------
Total 1,237 1,231 2,468 1,047 (204) 843
-------- -------- -------- -------- -------- --------
TOTAL INTEREST EXPENSE $ 5,474 $ 2,985 $ 8,459 $ 2,775 $ (1,333) $ 1,442
======== ======== ======== ======== ======== ========
NET INTEREST INCOME $ 7,325 $ 2,371 $ 9,696 $ 5,327 $ (983) $ 4,344
======== ======== ======== ======== ======== ========
[1] Amounts are 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 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 earned.
58
46
Sterling Bancorp
CONSOLIDATED INTEREST RATE SENSITIVITY
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less, so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are classified based on the earliest repricing
period. Based on the interest rate sensitivity analysis shown below, the
Company's net interest income would decrease during periods of rising interest
rates and increase during periods of falling interest rates. Amounts are
presented in thousands.
Repricing Date
----------------------------------------------------------------------------------
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 $ 2,657 $ -- $ -- $ -- $ -- $ 2,657
Investment securities 2,040 2,889 22,327 399,455 7,086 433,797
Loans, net of unearned discounts
Commercial and industrial 492,573 5,384 2,289 136 (398) 499,984
Loans to depository institutions 20,000 -- -- -- -- 20,000
Lease financing 28,181 3,373 64,750 18,501 (16,456) 98,349
Real estate 50,514 1,858 26,319 43,652 (71) 122,272
Installment 2,874 1,448 2,595 2,656 (67) 9,506
Foreign government and
official institutions -- 777 -- -- -- 777
Noninterest-earning assets and
allowance or loan losses -- -- -- -- 83,407 83,407
---------- ---------- ---------- ---------- ---------- ----------
Total Assets 598,839 15,729 118,280 464,400 73,501 1,270,749
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings[1] -- -- 24,836 -- -- 24,836
NOW[1] -- -- 68,319 -- -- 68,319
Money market[1] 135,121 -- 33,139 -- -- 168,260
Time--domestic 146,734 89,388 24,716 15 -- 260,853
- --foreign 150 2,825 -- -- -- 2,975
Securities sold under agreements
to repurchase 162,763 -- -- -- -- 162,763
Commercial paper 25,655 -- -- -- -- 25,655
Other short-term borrowings 17,383 350 -- -- -- 17,733
Other long-term borrowings--FHLB 10,000 -- 700 -- -- 10,700
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 528,655 528,655
---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity 497,806 92,563 151,710 15 528,655 1,270,749
---------- ---------- ---------- ---------- ---------- ----------
Net Interest Rate Sensitivity Gap $ 101,033 $ (76,834) $ (33,430) $ 464,385 $ (455,154) $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap at December 31, 2000 $ 101,033 $ 24,199 $ (9,231) $ 455,154 $ -- $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap at December 31, 1999 $ 32,513 $ (82,261) $ (65,726) $ 389,893 $ -- $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap at December 31, 1998 $ 149,850 $ 113,187 $ 65,435 $ 404,572 $ -- $ --
========== ========== ========== ========== ========== ==========
[1] Historically, balances on 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.
59