FINANCIAL INFORMATION
Consolidated Financial Statements 16
Consolidated Statements of Condition 21
Notes to Consolidated Financial Statements 22
Independent Auditors' Report 46
Management's Discussion and Analysis of
Financial Condition and Results of Operations 47
Sterling Bancorp
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000
--------------- ---------------
ASSETS
Cash and due from banks $ 50,362,016 $ 49,707,941
Interest-bearing deposits with other banks 2,487,178 3,161,426
Federal fund sold 10,000,000 --
Securities available for sale 177,810,042 62,060,656
Securities available for sale -- pledged 91,752,370 90,138,534
Securities held to maturity 101,077,406 104,585,942
Securities held to maturity -- pledged 205,387,986 177,011,726
--------------- ---------------
Total investment securities 576,027,804 433,796,858
--------------- ---------------
Loans, net of unearned discounts 808,686,874 750,887,822
Less allowance for loan losses 14,038,322 12,675,052
--------------- ---------------
Loans, net 794,648,552 738,212,770
--------------- ---------------
Customers' liability under acceptances 608,660 987,048
Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 7,852,362 5,469,462
Other real estate 809,184 647,994
Accrued interest receivable 5,867,121 5,195,956
Other assets 13,049,654 12,410,719
--------------- ---------------
$ 1,482,870,971 $ 1,270,748,614
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 356,303,308 $ 341,039,328
Interest-bearing deposits 628,620,646 525,242,856
--------------- ---------------
Total deposits 984,923,954 866,282,184
Federal funds purchased and securities sold under agreements to repurchase 147,095,635 162,763,009
Commercial paper 42,103,200 25,655,020
Other short-term borrowings 8,687,671 17,733,482
Acceptances outstanding 608,660 987,048
Other liabilities and accrued expenses 75,624,435 69,611,777
Long-term borrowings -- FHLB 95,350,000 10,700,000
--------------- ---------------
Total liabilities 1,354,393,555 1,153,732,520
--------------- ---------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, $5 par value 2,346,060 2,402,760
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 10,834,853 and 9,563,329 shares, respectively 10,834,853 9,563,329
Capital surplus 98,487,765 67,450,110
Retained earnings 32,419,767 47,466,602
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation) on securities
available for sale, net of tax 1,119,223 (22,652)
--------------- ---------------
145,207,668 126,860,149
Less
Common stock in treasury at cost, 745,023 and 473,125 shares, respectively 15,542,454 7,986,763
Unearned compensation 1,187,798 1,857,292
--------------- ---------------
Total shareholders' equity 128,477,416 117,016,094
--------------- ---------------
$ 1,482,870,971 $ 1,270,748,614
=============== ===============
See Notes to Consolidated Financial Statements.
16
Sterling Bancorp
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001 2000 1999
----------- ----------- -----------
INTEREST INCOME
Loans $65,282,135 $66,623,639 $55,012,164
Deposits with other banks 96,842 104,828 227,940
Investment securities
Available for sale 12,715,635 9,740,695 8,375,949
Held to maturity 17,554,909 20,441,076 15,073,036
Federal funds sold 215,973 214,959 555,774
----------- ----------- -----------
Total interest income 95,865,494 97,125,197 79,244,863
----------- ----------- -----------
INTEREST EXPENSE
Deposits 19,029,850 22,696,661 16,705,744
Federal funds purchased and securities
sold under agreements to repurchase 4,089,480 8,789,015 5,021,305
Commercial paper 1,489,137 1,490,402 1,780,107
Other short-term borrowings 151,368 749,247 224,090
Long-term borrowings -- FHLB 2,056,103 517,082 2,051,600
----------- ----------- -----------
Total interest expense 26,815,938 34,242,407 25,782,846
----------- ----------- -----------
Net interest income 69,049,556 62,882,790 53,462,017
Provision for loan losses 7,400,864 6,563,000 5,583,800
----------- ----------- -----------
Net interest income after provision for loan losses 61,648,692 56,319,790 47,878,217
----------- ----------- -----------
NONINTEREST INCOME
Factoring income 5,571,178 5,396,750 4,921,641
Mortgage banking income 7,545,079 5,737,456 5,382,766
Service charges on deposit accounts 5,608,733 5,030,622 3,100,990
Trade finance income 2,478,258 2,762,431 2,137,217
Trust fees 878,106 864,058 890,493
Other service charges and fees 1,666,285 2,417,442 1,387,348
Other income 375,822 164,429 123,945
----------- ----------- -----------
Total noninterest income 24,123,461 22,373,188 17,944,400
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries 24,255,002 22,889,419 20,120,568
Employee benefits 3,976,926 4,908,620 3,950,572
----------- ----------- -----------
Total personnel expense 28,231,928 27,798,039 24,071,140
Occupancy expense, net 4,711,216 4,123,012 3,459,987
Equipment expense 2,547,288 2,464,174 2,622,960
Advertising and marketing 2,971,206 2,607,137 1,735,828
Professional fees 5,127,067 4,758,483 2,122,473
Data processing fees 1,258,975 1,251,326 1,121,714
Other expenses 8,848,005 7,277,660 6,448,545
----------- ----------- -----------
Total noninterest expense 53,695,685 50,279,831 41,582,647
----------- ----------- -----------
Income before income taxes 32,076,468 28,413,147 24,239,970
Provision for income taxes 12,688,920 11,854,490 9,676,018
----------- ----------- -----------
Net income $19,387,548 $16,558,657 $14,563,952
=========== =========== ===========
Average number of common shares outstanding
Basic 10,133,378 10,058,294 10,244,417
Diluted 10,724,514 10,394,770 10,632,288
Earnings per average common share
Basic $ 1.90 $ 1.64 $ 1.42
Diluted 1.80 1.59 1.36
Dividends per common share .66 .58 .50
See Notes to Consolidated Financial Statements.
17
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Years Ended December 31, 2001 2000 1999
------------ ------------ ------------
Net income $ 19,387,548 $ 16,558,657 $ 14,563,952
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising during the year 1,141,875 2,611,857 (3,173,349)
------------ ------------ ------------
Comprehensive income $ 20,529,423 $ 19,170,514 $ 11,390,603
============ ============ ============
See Notes to Consolidated Financial Statements.
18
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2001 2000 1999
------------- ------------- -------------
PREFERRED STOCK
Balance at beginning of year $ 2,402,760 $ 2,443,430 $ 2,463,890
Conversions of Series B and Series D shares (35,180) (40,670) (20,460)
Redemption of Series B shares (21,520) -- --
------------- ------------- -------------
Balance at end of year $ 2,346,060 $ 2,402,760 $ 2,443,430
============= ============= =============
COMMON STOCK
Balance at beginning of year $ 9,563,329 $ 8,723,051 $ 8,310,284
Conversions of preferred shares into common shares 4,047 4,067 2,046
Options exercised 331,643 10,760 12,500
Common shares issued in connection with stock dividend 935,834 825,451 398,221
------------- ------------- -------------
Balance at end of year $ 10,834,853 $ 9,563,329 $ 8,723,051
============= ============= =============
CAPITAL SURPLUS
Balance at beginning of year $ 67,450,110 $ 51,911,883 $ 45,287,315
Conversions of preferred shares into common shares 31,137 36,603 18,414
Options exercised 3,847,869 84,015 135,063
Common shares issued in connection with stock dividend 27,167,261 15,631,978 6,471,091
Issuance of shares under incentive compensation plan -- (214,369) --
Redemption of Series B shares (8,612) -- --
------------- ------------- -------------
Balance at end of year $ 98,487,765 $ 67,450,110 $ 51,911,883
============= ============= =============
RETAINED EARNINGS
Balance at beginning of year $ 47,466,602 $ 52,360,024 $ 48,817,648
Net income 19,387,548 16,558,657 14,563,952
Cash dividends paid -- common shares (6,209,939) (4,897,121) (4,074,846)
-- preferred shares (98,014) (82,563) (65,711)
Stock dividend paid -- common shares (28,103,095) (16,457,429) (6,869,312)
-- cash in lieu (23,335) (14,966) (11,707)
------------- ------------- -------------
Balance at end of year $ 32,419,767 $ 47,466,602 $ 52,360,024
============= ============= =============
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year $ (22,652) $ (2,634,509) $ 538,840
Unrealized holding gains/(losses) arising during the period: ------------- ------------- -------------
Before tax 2,110,676 4,827,835 (5,865,712)
Tax effect (968,801) (2,215,978) 2,692,363
------------- ------------- -------------
Net of tax 1,141,875 2,611,857 (3,173,349)
------------- ------------- -------------
Balance at end of year $ 1,119,223 $ (22,652) $ (2,634,509)
============= ============= =============
TREASURY STOCK
Balance at beginning of year $ (7,986,763) $ (6,515,522) $ (1,592,690)
Purchase of common shares (6,063,976) (3,008,420) (4,922,832)
Issuance of shares under incentive compensation plan -- 1,677,025 --
Surrender of shares issued under incentive compensation plan (1,491,715) (139,846) --
------------- ------------- -------------
Balance at end of year $ (15,542,454) $ (7,986,763) $ (6,515,522)
============= ============= =============
UNEARNED COMPENSATION
Balance at beginning of year $ (1,857,292) $ (1,048,230) $ (1,673,963)
Issuance of shares under incentive compensation plan -- (1,462,656) --
Amortization of unearned compensation 669,494 653,594 625,733
------------- ------------- -------------
Balance at end of year $ (1,187,798) $ (1,857,292) $ (1,048,230)
============= ============= =============
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of year $ 117,016,094 $ 105,240,127 $ 102,151,324
Net changes during the year 11,461,322 11,775,967 3,088,803
------------- ------------- -------------
Balance at end of year $ 128,477,416 $ 117,016,094 $ 105,240,127
============= ============= =============
See Notes to Consolidated Financial Statements.
19
Sterling Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 2000 1999
------------- ------------- -------------
OPERATING ACTIVITIES
Net income $ 19,387,548 $ 16,558,657 $ 14,563,952
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 7,400,864 6,563,000 5,583,800
Depreciation and amortization of premises and equipment 1,758,622 1,746,645 1,890,313
Deferred income tax provision (benefit) 1,973,791 (756,817) 15,080
Net change in loans held for sale (36,086,841) 715,006 9,123,907
Amortization of unearned compensation 669,494 653,594 625,733
Amortization of premiums on investment securities 1,312,890 854,215 1,840,417
Accretion of discounts on investment securities (783,332) (969,566) (892,117)
Increase in accrued interest receivable (671,165) (654,002) (550,040)
Increase in other liabilities and accrued expenses 6,012,658 12,973,725 12,885,712
Increase in other assets (638,935) (720,024) (4,027,154)
Other, net (4,434,301) (1,599,007) 2,677,284
------------- ------------- -------------
Net cash (used in) provided by operating activities (4,098,707) 35,365,426 43,736,887
------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of premises and equipment (4,141,522) (1,368,265) (1,443,501)
Net decrease in interest-bearing deposits with other banks 674,248 1,203,703 443,693
Net increase in loans (27,749,805) (67,511,544) (62,636,708)
(Increase) Decrease in other real estate (161,190) (289,819) 686,334
Proceeds from prepayments, redemptions or
maturities of securities -- held to maturity 81,874,168 38,062,361 60,065,989
Purchases of securities -- held to maturity (107,147,984) (25,217,337) (171,671,423)
Increase in Federal funds sold (10,000,000) -- --
Proceeds from prepayments, redemptions or
maturities -- available for sale 184,137,834 96,520,193 153,664,553
Purchases of securities -- available for sale (299,513,848) (80,816,457) (176,469,337)
------------- ------------- -------------
Net cash used in investing activities (182,028,099) (39,417,165) (197,360,400)
------------- ------------- -------------
FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 15,263,980 49,231,525 (37,212,484)
Net increase (decrease) in interest-bearing deposits 103,377,790 (45,469,293) 196,929,968
Net (decrease) increase in securities sold under
agreements to repurchase (5,667,374) 39,524,591 47,809,391
Net increase (decrease) in commercial paper
and other short-term borrowings 7,402,369 (7,924,061) (2,988,062)
Increase (Decrease) in other long-term borrowings -- FHLB 84,650,000 (10,350,000) (20,350,000)
(Decrease) Increase in Federal funds purchased (10,000,000) 5,000,000 (29,000,000)
Purchase of treasury shares (6,063,976) (3,008,420) (4,922,832)
Redemption of preferred stock (30,132) -- --
Proceeds from exercise of stock options 4,179,512 94,775 147,563
Cash dividends paid on preferred and common shares (6,307,953) (4,979,684) (4,140,557)
Cash paid in lieu of fractional shares in connection with stock dividend (23,335) (14,966) (11,707)
------------- ------------- -------------
Net cash provided by financing activities 186,780,881 22,104,467 146,261,280
------------- ------------- -------------
Net increase (decrease) in cash and due from banks 654,075 18,052,728 (7,362,233)
Cash and due from banks -- beginning of year 49,707,941 31,655,213 39,017,446
------------- ------------- -------------
Cash and due from banks -- end of year $ 50,362,016 $ 49,707,941 $ 31,655,213
============= ============= =============
Supplemental disclosure of non-cash financing activities:
Preferred stock conversions $ 35,180 $ 40,670 $ 20,460
Issuance of treasury shares under incentive compensation plan -- 1,677,025 --
Surrender of treasury shares issued under incentive compensation plan 1,491,715 139,846 --
Issuance of common stock 28,103,095 16,457,429 6,869,312
Supplemental disclosure of cash flow information:
Interest paid 27,220,986 35,281,653 25,298,166
Income taxes paid 12,212,440 11,097,414 8,573,024
See Notes to Consolidated Financial Statements.
20
Sterling National Bank
CONSOLIDATED STATEMENTS OF CONDITION
Years Ended December 31, 2001 2000
--------------- ---------------
ASSETS
Cash and due from banks $ 50,097,111 $ 49,540,395
Interest-bearing deposits with other banks 2,487,178 3,161,426
Federal funds sold 10,000,000 --
Securities available for sale 177,748,847 62,003,618
Securities available for sale -- pledged 91,752,370 90,138,534
Securities held to maturity 101,077,406 104,585,942
Securities held to maturity -- pledged 205,387,986 177,011,726
--------------- ---------------
Total investment securities 575,966,609 433,739,820
--------------- ---------------
Loans, net of unearned discounts 757,680,553 719,443,019
Less allowance for loan losses 12,271,899 10,946,856
--------------- ---------------
Loans, net 745,408,654 708,496,163
--------------- ---------------
Receivables from affiliates 686,883 686,661
Customers' liability under acceptances 608,660 987,048
Premises and equipment, net 7,767,469 5,366,763
Other real estate 809,184 647,994
Accrued interest receivable 5,867,121 5,195,956
Other assets 11,804,849 11,283,433
--------------- ---------------
$ 1,411,503,718 $ 1,219,105,659
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 374,999,623 $ 345,825,990
Interest-bearing deposits 630,126,853 542,184,778
--------------- ---------------
Total deposits 1,005,126,476 888,010,768
Federal funds purchased and securities sold under agreements to repurchase 147,095,635 162,763,009
Other short-term borrowings 8,687,671 17,733,482
Due to affiliates 1,195,973 1,126,173
Acceptances outstanding 608,660 987,048
Other liabilities and accrued expenses 66,236,084 60,447,982
Long-term borrowings -- FHLB 95,350,000 10,700,000
--------------- ---------------
Total liabilities 1,324,300,499 1,141,768,462
--------------- ---------------
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 48,404,199 39,677,803
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation) on securities
available for sale, net of tax 1,110,160 (29,466)
--------------- ---------------
Total shareholders' equity 87,203,219 77,337,197
--------------- ---------------
$ 1,411,503,718 $ 1,219,105,659
=============== ===============
See Notes to Consolidated Financial Statements.
21
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, was effective
January 1, 2001 for the Company, and required the recognition of all derivatives
as either assets or liabilities measured at fair value. At adoption, the Company
recorded an insignificant loss; the provisions of SFAS No. 133 did not have a
material impact on the Company's 2001 financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." These Statements will change the accounting for business combinations
and goodwill in two ways. First, SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. Second, SFAS No. 142 changes the accounting for goodwill, including
goodwill recorded in past business combinations. The previous accounting
principles governing goodwill generated from a business combination will cease
upon adoption of SFAS No. 142. Under SFAS No. 142, goodwill will not be
amortized but rather will be tested at least annually for impairment. The
Company anticipates that the adoption of SFAS No. 142 is not expected to affect
the Company's statements of financial condition and results of operations. SFAS
No. 142 will become effective on January 1, 2002 for the Company.
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.
22
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. The allowance for loan losses is maintained through the provision
for loan losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for loan losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
evaluation of both loans presenting identified loss potential and of the risk
inherent in various components of the portfolio, including loans identified as
impaired as required by SFAS No. 114. Thus, an increase in the size of the
portfolio or in any of its components could necessitate an increase in the
allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance.
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. Effective January 1, 2002, the Company must follow the provisions of
SFAS No. 142 (see "New Accounting Standards" discussion on page 22) with respect
to the excess of cost over equity in net assets of the banking subsidiary.
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
23
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.
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 reflect 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 Company paid stock dividends as follows: a 10% stock dividend on December
10, 2001; a 10% stock dividend on December 11, 2000; and a 5% stock dividend on
December 14, 1999. Fractional shares were cashed-out and payments were made to
shareholders in lieu of fractional shares. The basic and diluted average number
of shares outstanding and earnings per share information for all prior reporting
periods have been restated to reflect the effect of the stock dividends.
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 $13,754,000 and $5,814,000 at December 31, 2001 and
2000, respectively. Average required reserves during 2001 and 2000 were
$9,182,000 and $6,034,000, 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, 2001 2000 1999
----------- ----------- ------------
Interest-bearing deposits with other banks
At December 31 -- Balance $ 2,487,178 $ 3,161,426 $ 4,365,129
-- Average interest rate 1.31% 4.24% 4.23%
-- Average original maturity 107 Days 48 Days 104 Days
During the year -- Maximum month-end balance 4,748,678 2,950,097 11,857,000
-- Daily average balance 3,216,000 2,215,000 7,180,000
-- Average interest rate earned 3.01% 4.72% 4.38%
-- Range of interest rates earned 0.50-6.00% 2.00-6.00% 2.00-5.50%
=========== =========== ===========
Federal funds sold
At December 31 -- Balance $10,000,000 $ -- $ --
-- Average interest rate 1.56% -- --
-- Average original maturity 1 Day -- --
During the year -- Maximum month-end balance 30,000,000 20,000,000 15,000,000
-- Daily average balance 8,638,000 3,735,000 11,049,000
-- Average interest rate earned 2.50% 5.76% 4.96%
-- Range of interest rates earned 1.25-5.875% 5.25-6.81% 3.50-5.75%
=========== =========== ===========
24
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, 2001 COST GAINS LOSSES VALUE
- ----------------- ------------ ------------ ------------ ------------
U.S. Treasury securities $ 2,490,551 $ 2,574 $ -- $ 2,493,125
Obligations of U.S. government corporations and
agencies -- mortgage-backed securities 134,317,852 1,313,824 461,812 135,169,864
Obligations of U.S. government corporations and
agencies -- collateralized mortgage obligations 72,449,363 530,199 273,851 72,705,711
Obligations of state and political institutions 34,518,464 980,223 22,111 35,476,576
Other debt securities 17,497,236 -- 16,995 17,480,241
Federal Reserve Bank and other equity securities 6,220,142 17,240 487 6,236,895
------------ ------------ ------------ ------------
Total $267,493,608 $ 2,844,060 $ 775,256 $269,562,412
============ ============ ============ ============
December 31, 2000
- -----------------
U.S. Treasury securities $ 2,891,595 $ -- $ 2,689 $ 2,888,906
Obligations of U.S. government corporations and
agencies -- mortgage-backed securities 74,302,173 274,045 630,567 73,945,651
Obligations of U.S. government corporations and
agencies -- collateralized mortgage obligations 32,158,974 246,731 303,903 32,101,802
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
============ ============ ============ ============
The carrying value and estimated market value of securities held to maturity are
as follows:
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
DECEMBER 31, 2001 VALUE GAINS LOSSES VALUE
- ----------------- ------------ ------------ ------------ ------------
Obligations of U.S. government corporations and
agencies -- mortgage-backed securities $304,965,392 $ 5,055,188 $ 2,024,440 $307,996,140
Debt securities issued by foreign governments 1,500,000 -- -- 1,500,000
------------ ------------ ------------ ------------
Total $306,465,392 $ 5,055,188 $ 2,024,440 $309,496,140
============ ============ ============ ============
December 31, 2000
- -----------------
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
============ ============ ============ ============
25
The following tables present information regarding securities available for
sale and securities held to maturity at December 31, 2001, 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 $ 2,490,551 $ 2,493,125 4.73%
------------ ------------
Obligations of U.S. government corporations and agencies --
mortgage-backed securities 134,317,852 135,169,864 6.50
------------ ------------
Obligations of U.S. government corporations and agencies --
collateralized mortgage obligations 72,449,363 72,705,711 6.72
------------ ------------
Obligations of state and political subdivisions
Due within 1 year 350,560 354,625 8.71
Due after 1 year but within 5 years 22,515,163 23,254,250 7.33
Due after 5 years 11,652,741 11,867,701 7.37
------------ ------------
Total 34,518,464 35,476,576 7.39
------------ ------------
Other debt securities
Due within 1 year 17,497,236 17,480,241 2.58
------------ ------------
Federal Reserve Bank and other securities 6,220,142 6,236,895 6.46
------------ ------------
Total $267,493,608 $269,562,412 6.69
============ ============
ESTIMATED
CARRYING MARKET AVERAGE
SECURITIES HELD TO MATURITY VALUE VALUE YIELD
- --------------------------- ------------ ------------ ------------
Obligations of U.S. government corporations and agencies --
mortgage-backed securities $304,965,392 $307,996,140 6.74%
------------ ------------
Debt securities issued by foreign governments
Due after 1 year but within 5 years 1,250,000 1,250,000 7.52
Due after 5 years 250,000 250,000 7.52
------------ ------------
Total 1,500,000 1,500,000 7.52
------------ ------------
Total $306,465,392 $309,496,140 6.75
============ ============
There were no securities sales during the years ended December 31, 2001, 2000
and 1999.
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.
26
NOTE 5.
LOANS
December 31, 2001 2000
- ------------ ------------ ------------
Domestic
Commercial and industrial $520,240,448 $500,381,623
Lease financing 103,942,668 114,804,282
Real estate -- mortgage 161,046,326 122,344,017
Installment 8,539,199 9,572,526
Loans to depository institutions 29,000,000 20,000,000
Foreign
Government and official institutions -- 777,000
------------ ------------
Loans, gross 822,768,641 767,879,448
Less unearned discounts 14,081,767 16,991,626
------------ ------------
Loans, net of unearned discounts $808,686,874 $750,887,822
============ ============
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 $48,603,000 and $12,516,000 at December 31, 2001 and 2000, respectively.
There are no industry concentrations (exceeding 10% of loans, gross) in the
commercial and industrial loan portfolio. Approximately 72% of loans are to
borrowers located in the metropolitan New York area.
Nonaccrual loans at December 31, 2001 and 2000 totaled $1,748,000 and
$1,995,000, respectively. There were no reduced rate loans at December 31, 2001
or 2000. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 2001, 2000 and 1999 in accordance with their
original terms is estimated to be $61,000, $58,000 and $39,000, respectively,
for the years then ended. No interest income was actually realized for the
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, 2001 or 2000.
NOTE 6.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, 2001 2000 1999
- ------------------------ ------------ ------------ ------------
Balance at beginning of year $ 12,675,052 $ 11,116,848 $ 10,156,077
Provision for loan losses 7,400,864 6,563,000 5,583,800
------------ ------------ ------------
20,075,916 17,679,848 15,739,877
------------ ------------ ------------
Less charge-offs, net of recoveries:
Charge-offs 6,798,616 5,490,253 5,021,581
Recoveries (761,022) (485,457) (398,552)
------------ ------------ ------------
Net charge-offs 6,037,594 5,004,796 4,623,029
------------ ------------ ------------
Balance at end of year $ 14,038,322 $ 12,675,052 $ 11,116,848
============ ============ ============
The Company follows SFAS No. 114 which establishes rules for calculating certain
components of the allowance for loan losses. As of December 31, 2001, 2000 and
1999, $-0-, $470,000 and $315,000, 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, 2001, 2000 and 1999, was approximately $282,000, $513,000 and $435,000,
respectively. The application of SFAS No. 114 indicated that these loans
required valuation allowances, totaling $-0-, $200,000 and $150,000 at December
31, 2001, 2000 and 1999, respectively, which are included within the overall
allowance for loan losses.
27
NOTE 7.
INTEREST-BEARING DEPOSITS
The following table presents certain information for interest expense on
deposits:
Years Ended December 31, 2001 2000 1999
- ------------------------ ----------- ----------- -----------
Interest expense
Interest-bearing deposits in domestic offices
Savings $ 557,282 $ 577,467 $ 572,358
NOW 1,549,957 1,786,567 1,684,477
Money Market 4,222,446 4,982,894 4,486,117
Time
Three months or less 7,448,523 8,883,017 4,949,566
More than three months through twelve months 3,239,586 4,735,798 3,931,787
More than twelve months through sixty months 1,883,253 1,599,345 958,559
----------- ----------- -----------
18,901,047 22,565,088 16,582,864
Interest-bearing deposits in foreign offices
Time
Three months or less 64,402 59,111 52,600
More than three months through twelve months 64,401 72,462 70,280
----------- ----------- -----------
Total $19,029,850 $22,696,661 $16,705,744
=========== =========== ===========
Foreign deposits totaled $2,975,000 at December 31, 2001 and 2000.
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, 2001 2000 1999
- ------------ ----------- ----------- -----------
Domestic
Three months or less $157,412,385 $133,592,022 $ 83,352,007
More than three months through six months 12,707,593 25,559,595 40,840,515
More than six months through twelve months 23,943,301 23,663,118 29,671,064
More than twelve months through twenty-four months 13,760,613 7,190,734 370,000
More than twenty-four months through thirty-six months 2,295,180 -- 233,908
----------- ----------- -----------
210,119,072 190,005,469 154,467,494
----------- ----------- -----------
Foreign
Three months or less 1,795,000 2,975,000 1,730,000
More than three months through six months 1,180,000 -- 1,100,000
----------- ----------- -----------
2,975,000 2,975,000 2,830,000
----------- ----------- -----------
Total $213,094,072 $192,980,469 $157,297,494
============ ============ ============
Years Ended December 31, 2001 2000 1999
- ------------------------ ----------- ----------- -----------
Interest expense
Domestic $ 8,985,923 $10,322,879 $ 5,165,518
Foreign 128,803 131,573 122,880
----------- ----------- -----------
Total $ 9,114,726 $10,454,452 $ 5,288,398
=========== =========== ===========
28
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, 2001 2000 1999
- ------------------------ ------------ ------------ ------------
Federal funds purchased
At December 31 -- Balance $ -- $ 10,000,000 $ 5,000,000
-- Average interest rate -- 5.88% 4.75%
-- Average original maturity -- 1 Day 1 Day
During the year -- Maximum month-end balance 28,000,000 24,000,000 24,000,000
-- Daily average balance 3,935,000 5,664,000 5,529,000
-- Average interest rate paid 4.73% 6.50% 5.38%
-- Range of interest rates paid 1.00-6.375% 5.625-7.375% 4.00-6.25%
============ ============ ============
Securities sold under agreements to repurchase
At December 31 -- Balance $147,095,635 $152,763,009 $113,238,418
-- Average interest rate 2.47% 5.57% 5.18%
-- Average original maturity 4 DAYS 33 Days 80 Days
During the year -- Maximum month-end balance 147,095,635 183,782,831 128,169,089
-- Daily average balance 89,077,000 143,764,000 96,262,000
-- Average interest rate paid 4.38% 5.86% 4.91%
-- Range of interest rates paid 1.25-6.55% 3.65-6.65% 3.65-5.96%
============ ============ ============
Commercial paper
At December 31 -- Balance $ 42,103,200 $ 25,655,020 $ 40,319,200
-- Average interest rate 2.25% 5.27% 4.80%
-- Average original maturity 59 DAYS 64 Days 74 Days
During the year -- Maximum month-end balance 42,103,200 36,679,000 43,295,900
-- Daily average balance 36,498,000 28,496,000 37,466,000
-- Average interest rate paid 4.08% 5.23% 4.75%
-- Range of interest rates paid 1.75-5.85% 3.90-6.10% 3.50-5.20%
============ ============ ============
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, 2001, these back-up bank lines of credit
totaled $24,000,000; no lines were used at any time during 2001, 2000 or 1999.
Other short-term borrowings include advances from the Federal Home Loan Bank of
New York due within one year and treasury tax and loan funds. At December 31,
2001, Federal Home Loan Bank borrowings included an advance of $350,000 payable
on March 5, 2002 at a rate of 6.22%.
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%.
29
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 2001 2000
---- ---- ---- --------- ---- ----
Term 6.22% 3/5/02 -- $ -- $ 350,000
Term 6.37 3/5/03 -- 350,000 350,000
Term 3.62 10/26/04 -- 5,000,000 --
Callable 5.13 2/20/08 2/20/01 10,000,000 10,000,000
Callable 4.26 2/13/11 8/13/01 10,000,000 --
Callable 4.36 2/13/11 2/13/02 10,000,000 --
Callable 4.70 2/20/11 2/20/03 10,000,000 --
Callable 3.17 10/22/11 10/22/03 10,000,000 --
Callable 2.52 11/14/11 11/14/03 10,000,000 --
Callable 3.66 10/22/11 10/22/04 10,000,000 --
Callable 3.62 10/15/11 10/15/04 10,000,000 --
Callable 4.28 10/15/11 10/15/06 10,000,000 --
---------- ----------
Total $95,350,000 $10,700,000
========== ==========
Weighted-average interest rate 3.97% 5.21%
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. The following table
presents information regarding the parent company's preferred stock:
December 31, 2001 2000
--------- ---------
Series B shares. Authorized 4,389 shares; issued and outstanding --
-0- and 1,199 shares, respectively, at liquidation value $ -- $ 23,980
Series D shares. Authorized 300,000 shares; issued and outstanding --
234,606 and 237,878 shares, respectively, at liquidation value 2,346,060 2,378,780
--------- ---------
Total $2,346,060 $2,402,760
========== ==========
SERIES B
On June 29, 2001, all of the outstanding Series B shares were redeemed by the
parent company at $28.05 which included $.05 for accrued and unpaid dividends.
Prior to June 29, 2001, Series B shares could have been 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 were
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 were 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 were entitled to one
vote for each share held and vote together as one class with the holders of the
common shares. During 2001 and 2000, 123 shares and 31 shares, respectively,
were converted into common shares.
30
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 1.2723 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 2001 and 2000, 3,272 shares and 4,005 shares, respectively, were
converted into common shares. See Note 14 for a discussion of the Company's
ESOP.
NOTE 11.
COMMON STOCK
Number of shares reserved for issuance:
December 31, 2001 2000
- ------------ ---------- ----------
Conversion of Series B preferred shares -- 2,398
Conversion of Series D preferred shares 284,606 287,878
---------- ----------
284,606 290,276
========== ==========
Number of shares outstanding at December 31, 10,089,830 9,090,204
========== ==========
Number of shareholders at December 31, 1,842 1,913
========== ==========
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 the provisions of the plan,
annual NQSOs were granted to each outside director as follows: in April 1995,
annual awards covering 2,000 common shares beginning April 1995 and continuing
through April 1999; in June 1998, annual awards covering 2,000 common shares in
June 1998 and June 1999 and covering 4,000 common shares beginning June 2000 and
continuing through June 2002; and in June 2000, annual awards covering 2,000
common shares in June 2000 and beginning July 2001 and continuing through July
2004. In April 1999, 2000 and 2001, shareholders approved amendments to the plan
which increased the number of shares covered under the plan by 400,000, -0- and
400,000, respectively. After giving effect to stock option and restricted stock
awards granted and the effect of the 10% stock dividend paid in December 2001,
the 10% stock dividend paid in December 2000 and the 5% stock dividend paid in
December 1999, shares available for grant were 506,974, 106,130 and 668,250 at
December 31, 2001, 2000 and 1999, respectively.
31
STOCK OPTIONS
The following tables present information on the qualified and non-qualified
stock options outstanding (after the effect of the 10% stock dividends paid in
December 2001 and December 2000 and the 5% stock dividend paid in December 1999)
as of December 31, 2001, 2000 and 1999 and changes during the years then ended:
2001 2000 1999
---- ---- ----
WEIGHTED-AVERAGE Weighted-Average Weighted-Average
Qualified Stock Options SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ----------------------- ------- ----------- ------- -------------- ---------- ---------------
Outstanding at beginning of year 911,493 $ 13.31 743,316 $ 13.37 574,340 $ 12.37
Granted 29,600 20.01 171,807 13.07 182,952 16.39
Exercised (298,161) 11.06 -- -- (10,164) 9.85
Forfeited (14,242) 17.90 (3,630) 13.07 (3,812) 16.39
-------- ---------- ---------
Outstanding at end of year 628,690 14.59 911,493 13.31 743,316 13.37
======== ========== ========== =========== ========= ===========
Options exercisable at end of year 311,943 443,755 331,222
======== ========== ========
Weighted-average fair value of
options granted during the year $ 4.52 $ 2.85 $ 3.75
========= ========== ========
2001 2000 1999
---- ---- ----
WEIGHTED-AVERAGE Weighted-Average Weighted-Average
Non-Qualified Stock Options SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ---------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of year 741,062 $ 16.09 528,453 $ 17.17 297,857 $ 17.73
Granted 52,514 27.19 225,435 13.06 236,313 16.25
Exercised (66,415) 13.25 (12,826) 7.39 (5,717) 8.32
Forfeited (5,082) 21.26 -- -- -- --
----------- ----------- -----------
Outstanding at end of year 722,079 17.12 741,062 16.09 528,453 17.17
=========== =========== =========== =========== =========== ===========
Options exercisable at end of year 593,732 442,691 229,664
=========== =========== ===========
Weighted-average fair value of
options granted during the year $ 5.79 $ 3.44 $ 4.66
=========== =========== ===========
The following table presents information regarding qualified and
non-qualified stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/01 Contractual Life Price 12/31/01 Price
-------- ----------- --------- -------- ----------- --------
Qualified $6.30-20.01 628,690 6.46 years $ 14.59 311,943 $ 13.97
Non-Qualified 9.85-27.82 722,079 5.91 years 17.12 593,732 16.62
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.
32
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:
2001 2000 1999
---- ---- ----
Dividend yield 2.56% 3.11% 3.25%
Volatility 25% 25% 25%
Expected term
Qualified 4 YEARS 4 years 4 years
Non-Qualified (Directors) 4 YEARS 4 years 4 years
Non-Qualified (Officers) N/A 8 years 8 years
Risk-free interest rate 5.15% 6.14% 7.12%
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, 2001 2000 1999
- ------------------------ ---- ---- ----
Net income
As reported $ 19,388,000 $ 16,559,000 $ 14,564,000
Pro forma 17,462,000 15,368,000 13,628,000
Basic earnings per share
As reported 1.90 1.64 1.42
Pro forma 1.72 1.53 1.33
Diluted earnings per share
As reported 1.80 1.59 1.36
Pro forma 1.63 1.48 1.28
Pro forma net income reflects only options granted in 2001, 2000 and 1999.
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 vested 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.
33
The plan calls for the forfeiture of non-vested shares which are restored to
the Treasury and become available for future awards. During 2001, 2000 and 1999,
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 $398,904, $365,664 and $320,833 in 2001, 2000 and 1999,
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. 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 $270,590, $287,930 and $304,900 for 2001, 2000 and
1999, respectively, with a corresponding reduction in unearned compensation. As
of December 31, 2001, 173,970 shares had been allocated and 27,059 shares had
been released for allocation; 48,971 shares were not released ("unallocated").
There were no contributions made by the Company during the years ended December
31, 2001, 2000 or 1999. The following table presents interest paid on the ESOP
loan and dividends paid on the Series D preferred shares:
Years Ended December 31, 2001 2000 1999
- ------------------------ ---- ---- ----
Interest paid $ 69,672 $ 96,651 $122,862
Dividends paid 144,464 146,645 148,467
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.
34
The following tables set forth the disclosures required for pension benefits:
Pension Benefits 2001 2000
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 15,668,987 $ 13,936,151
Service cost 870,019 769,161
Interest cost 1,128,313 1,071,411
Amendments 18,368 --
Actuarial loss/(gain) 85,682 375,611
Benefits paid (741,318) (483,347)
------------ ------------
Benefit obligation at end of year $ 17,030,051 $ 15,668,987
============ ============
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year $ 17,506,167 $ 16,873,357
Actual return on plan assets 1,075,696 1,116,157
Benefits paid (741,318) (483,347)
------------ ------------
Fair value of assets at end of year $ 17,840,545 $ 17,506,167
============ ============
FUNDED STATUS
Funded status $ 810,494 $ 1,837,180
Unrecognized prior service cost 27,231 7,774
Unrecognized net actuarial loss/(gain) 567,999 (117,472)
------------ ------------
Prepaid benefits cost $ 1,405,724 $ 1,727,482
============ ============
December 31, 2001 2000 1999
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.25% 7.50% 8.00%
Expected rate of return on plan assets 9.75 9.75 9.25
Rate of compensation increase 4.00 4.50 5.00
Years Ended December 31, 2001 2000 1999
---- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 870,019 $ 769,161 $ 862,903
Interest cost 1,128,313 1,071,411 955,902
Expected return on plan assets (1,675,485) (1,622,920) (1,589,376)
Amortization of prior service cost (1,089) (2,620) (2,620)
------------- ------------- -------------
Net periodic benefits cost $ 321,758 $ 215,032 $ 226,809
============= ============= =============
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, 2001 2000 1999
-------------- -------------- --------------
FEDERAL
Current $ 8,962,569 $ 10,972,028 $ 8,257,539
Deferred 1,011,960 (630,913) 15,080
-------------- -------------- --------------
Total $ 9,974,529 $ 10,341,115 $ 8,272,619
============== ============== ==============
STATE AND LOCAL
Current $ 1,752,560 $ 1,639,279 $ 1,403,399
Deferred 961,831 (125,904) --
-------------- -------------- --------------
Total $ 2,714,391 $ 1,513,375 $ 1,403,399
============== ============== ==============
TOTAL
Current $ 10,715,129 $ 12,611,307 $ 9,660,938
Deferred 1,973,791 (756,817) 15,080
-------------- -------------- --------------
Total $ 12,688,920 $ 11,854,490 $ 9,676,018
============== ============== ==============
35
Reconciliations of income tax provisions with taxes or tax benefits computed at
Federal statutory rates are as follows:
Years Ended December 31, 2001 2000 1999
---- ---- ----
Federal statutory rate 35% 35% 35%
----------- ----------- -----------
Computed tax $11,226,764 $ 9,944,601 $ 8,483,990
Increase in tax resulting from:
Principally state and local taxes, net of Federal income tax benefit 1,462,156 1,909,889 1,192,028
----------- ----------- -----------
Total $12,688,920 $11,854,490 $ 9,676,018
=========== =========== ===========
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31, 2001 2000
---- ----
Deferred tax assets
Difference between financial statement provision for loan losses
and tax bad debt deduction $ 4,913,413 $ 4,436,268
Nonaccrual and other interest -- 1,894,719
Deferred compensation 1,248,684 1,352,954
Other 184,827 188,238
------------ ------------
Total deferred tax assets 6,346,924 7,872,179
------------ ------------
Deferred tax liabilities
Pension and benefit plans 729,039 470,507
Other 1,217,428 1,027,424
------------ ------------
Total deferred tax liabilities 1,946,467 1,497,931
------------ ------------
Net deferred tax asset 4,400,457 6,374,248
SFAS No. 115 deferred tax liability 949,583 16,800
------------ ------------
Total net deferred tax asset $ 3,450,874 $ 6,357,448
============ ============
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
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.
36
The following table provides a reconciliation of basic and diluted EPS as
required by SFAS No. 128:
For The Year Ended 12/31/01 For the Year Ended 12/31/00 For the Year Ended 12/31/99
------------------------------- --------------------------------- ---------------------------------
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 $19,387,548 $16,558,657 $14,563,952
Less preferred dividends 97,896 82,441 65,587
----------- ----------- -----------
Net income available for
common shareholders 19,289,652 10,133,378 $1.90 16,476,216 10,058,294 $1.64 14,498,365 10,244,417 $1.42
===== ===== =====
DILUTED EPS
Options[1] 354,938 96,509 145,201
Convertible preferred stock 236,198 239,967 242,670
----------- --------- ----------- --------- ----------- ---------
Net income available for
common shareholders plus
assumed conversions $19,289,652 10,724,514 $1.80 $16,476,216 10,394,770 $1.59 $14,498,365 10,632,288 $1.36
=========== ========== ===== =========== ========== ===== =========== ========== =====
[1] Options issued with exercise prices greater than the average market
price of the common shares for each of the years ended December 31,
2001, 2000 and 1999 have not been included in computation of diluted
EPS for those respective years. As of December 31, 2001, 49,742 options
to purchase shares at prices between $25.88 and $27.82 were not
included; as of December 31, 2000, 783,885 options to purchase shares
at prices between $14.97 and $20.48 were not included; and as of
December 31, 1999, 761,016 options to purchase shares at prices between
$16.35 and $22.05 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 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, and other liabilities and accrued expenses, 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.
37
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 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.
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, 2001, the
notional amount of these instruments was $100,000,000. The Company paid up front
premiums of $305,000 which are amortized over the term of the related assets. At
December 31, 2001, the unamortized premiums on these contracts totaled $144,000
and there was $299,000 receivable under these contracts. 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, 2001, the estimated fair value of these contracts was
$2,297,000. Under SFAS No. 133, the transition amount involved with these
instruments as of January 1, 2001 was not significant.
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
December 31, 2001 2000
---- ----
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
------ ---------- ------ ----------
FINANCIAL ASSETS
Cash and due from banks $ 50,362,016 $ 50,362,016 $ 49,707,941 $ 49,707,941
Interest-bearing deposits with other banks 2,487,178 2,487,178 3,161,426 3,161,426
Investment securities 576,027,804 579,058,552 433,796,858 434,584,992
Loans, net 794,648,552 806,283,191 738,212,770 761,454,000
Customers' liability under acceptances 608,660 608,660 987,048 987,048
Accrued interest receivable 5,867,121 5,867,121 5,195,956 5,195,956
FINANCIAL LIABILITIES
Demand, NOW, savings and money market deposits 665,402,593 665,402,593 602,454,332 602,454,332
Time deposits 319,521,361 321,870,779 263,827,852 264,501,000
Federal funds purchased and securities sold
under agreements to repurchase 147,095,635 147,095,635 162,763,009 162,763,009
Commercial paper 42,103,200 42,103,200 25,655,020 25,655,020
Other short-term borrowings 8,687,671 8,687,671 17,733,482 17,733,482
Acceptances outstanding 608,660 608,660 987,048 987,048
Other liabilities and accrued expenses 53,587,917 53,587,917 49,721,817 49,721,817
Other long-term borrowings -- FHLB 95,350,000 94,676,561 10,700,000 10,742,000
38
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, 2001, 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, 2001 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Total Capital (to Risk-Weighted Assets):
The Company $116,912 13.70% $68,290 8.00% $85,362 10.00%
The bank 96,158 11.97 64,240 8.00 80,300 10.00
Tier 1 Capital (to Risk-Weighted Assets):
The Company 106,200 12.44 34,145 4.00 51,217 6.00
The bank 86,093 10.72 32,120 4.00 48,180 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 106,200 7.79 54,553 4.00 68,191 5.00
The bank 86,093 6.54 52,681 4.00 65,852 5.00
As of December 31, 2000
Total Capital (to Risk-Weighted Assets):
The Company $105,791 13.39% $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 95,881 12.14 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 95,881 8.14 47,141 4.00 58,926 5.00
The bank 77,367 6.73 46,015 4.00 57,519 5.00
NOTE 20.
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way information about operating
segments is reported in annual financial statements and establishes standards
for related disclosures about an enterprise's products and services, geographic
areas, and major customers.
39
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 2001 year-to-date average
interest-earning assets were 59.5% loans (corporate lending was 76.6% and real
estate lending was 20.4% of total loans, respectively) and 40.5% investment
securities and money market investments. There are no industry concentrations
(exceeding 10% of loans, gross, in the corporate loan portfolio). Approximately
72% of loans are to borrowers located in the metropolitan New York area. In
order to comply with the provisions of SFAS No. 131, the Company has determined
that it has three reportable operating segments: corporate lending, real estate
lending and company-wide treasury.
The following table provides certain information regarding the Company's
operating segments:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
------- ------- -------- ------
YEAR ENDED DECEMBER 31, 2001
Net interest income $ 30,221,675 $ 13,951,769 $ 22,957,894 $ 67,131,338
Noninterest income 12,895,216 7,738,035 111,864 20,745,115
Depreciation and amortization 194,534 214,834 342 409,710
Segment profit 18,090,982 11,211,097 25,918,865 55,220,944
Segments assets 599,746,055 164,138,675 673,851,376 1,437,736,106
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
40
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, 2001 2000 1999
---- ---- ----
Net interest income:
Total for reportable operating segments $ 67,131,338 $ 60,180,734 $ 50,093,070
Other[1] 1,918,218 2,702,056 3,368,947
-------------- -------------- --------------
Consolidated net interest income $ 69,049,556 $ 62,882,790 $ 53,462,017
============== ============== ==============
Noninterest income:
Total for reportable operating segments $ 20,745,115 $ 18,677,626 $ 14,299,880
Other[1] 3,378,346 3,695,562 3,644,520
-------------- -------------- --------------
Consolidated noninterest income $ 24,123,461 $ 22,373,188 $ 17,944,400
============== ============== ==============
Profit:
Total for reportable operating segments $ 55,220,944 $ 50,349,459 $ 41,879,357
Other[1] (23,144,476) (21,936,312) (17,639,387)
-------------- -------------- --------------
Consolidated income before income taxes $ 32,076,468 $ 28,413,147 $ 24,239,970
============== ============== ==============
Assets:
Total for reportable operating segments $1,437,736,106 $1,228,187,874 $1,179,210,320
Other[1] 45,134,865 42,560,740 39,676,932
-------------- -------------- --------------
Consolidated assets $1,482,870,971 $1,270,748,614 $1,218,887,252
============== ============== ==============
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
NOTE 21.
PARENT COMPANY
As of January 1, 2001, Sterling Financial Services Company, Inc. became a
subsidiary of the parent company. Prior to that date, Sterling Financial
Services was a division of the parent company. The prior period statements have
been restated to conform to the current presentation.
CONDENSED BALANCE SHEETS
December 31, 2001 2000
---- ----
ASSETS
Cash and due from banks
Banking subsidiary $ 15,939,231 $ 2,171,721
Other banks 25,000 25,000
Interest-bearing deposits -- banking subsidiary 1,435,838 16,715,284
Investment in subsidiaries
Banking subsidiary 108,361,659 98,495,638
Other subsidiaries 4,086,818 1,130,782
Due from subsidiaries
Banking subsidiary 1,195,973 1,126,173
Other subsidiaries 48,853,991 32,425,045
Other assets 652,875 619,153
-------------- ---------------
$ 180,551,385 $ 152,708,796
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper $ 42,103,200 $ 25,655,020
Other short-term borrowings 350,000 350,000
Due to subsidiaries
Banking subsidiary 660,570 660,570
Other subsidiaries 992,467 996,295
Accrued expenses and other liabilities 7,617,732 7,330,817
Other long-term debt 350,000 700,000
Shareholders' equity 128,477,416 117,016,094
-------------- ---------------
$ 180,551,385 $ 152,708,796
============== ===============
41
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2001 2000 1999
---- ---- ----
INCOME
Dividends and interest from
Banking subsidiary $10,326,789 $ 5,495,523 $11,530,194
Other subsidiaries 1,951,446 1,752,663 2,475,029
Other income 10,888 18,099 14,010
----------- ----------- -----------
Total income 12,289,123 7,266,285 14,019,233
=========== =========== ===========
EXPENSE
Interest expense 1,563,539 1,585,662 1,862,660
Salaries and employee benefits 1,216,690 2,482,941 1,597,555
Other expenses 2,032,783 1,775,238 909,763
----------- ----------- -----------
Total expense 4,813,012 5,843,841 4,369,978
----------- ----------- -----------
Income before income taxes and equity in undistributed
net income of subsidiaries 7,476,111 1,422,444 9,649,255
Benefit for income taxes (1,229,005) (1,648,925) (707,552)
----------- ----------- -----------
8,705,116 3,071,369 10,356,807
Equity in undistributed net income of
Banking subsidiary 8,726,396 11,332,385 1,917,273
Other subsidiaries 1,956,036 2,154,903 2,289,872
----------- ----------- -----------
Net income 19,387,548 16,558,657 14,563,952
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) arising during the year 2,248 1,473 (3,383)
----------- ----------- -----------
Comprehensive income $19,389,796 $16,560,130 $14,560,569
=========== =========== ===========
42
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 19,387,548 $ 16,558,657 $ 14,563,952
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of unearned compensation 669,494 653,594 625,733
Increase in accrued expenses and other liabilities 286,915 4,712,755 4,048,009
(Decrease) Increase in due to subsidiaries, net (3,828) 851 638
(Increase) Decrease in due from subsidiaries, net (16,498,746) 8,340,631 9,579,442
Equity in undistributed net income of subsidiaries (10,682,432) (13,487,288) (4,207,147)
Other, net (1,523,183) (158,032) (86,601)
------------ ------------ ------------
Net cash (used in) provided by operating activities (8,364,232) 16,621,168 24,524,026
------------ ------------ ------------
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits --
banking subsidiary 15,279,446 2,121,618 (10,461,902)
Capital contributed to subsidiaries (1,000,000) -- --
Net decrease in loans -- -- 2,500,000
------------ ------------ ------------
Net cash provided by (used in) investing activities 14,279,446 2,121,618 (7,961,902)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in commercial paper 16,448,180 (14,664,180) (1,210,100)
Cash dividends paid on preferred and common shares (6,307,953) (4,979,684) (4,140,557)
Proceeds from exercise of stock options 4,179,512 94,775 147,563
Purchase of treasury shares (6,063,976) (3,008,420) (4,922,832)
Decrease in other long-term borrowings (350,000) (350,000) (350,000)
Redemption of preferred stock (30,132) -- --
Cash paid in lieu of fractional shares in connection with
stock dividend (23,335) (14,966) (11,707)
------------ ------------ ------------
Net cash provided by (used in) financing activities 7,852,296 (22,922,475) (10,487,633)
------------ ------------ ------------
Net increase (decrease) in cash and due from banks 13,767,510 (4,179,689) 6,074,491
Cash and due from banks -- beginning of year 2,196,721 6,376,410 301,919
------------ ------------ ------------
Cash and due from banks -- end of year $ 15,964,231 $ 2,196,721 $ 6,376,410
============ ============ ============
Supplemental disclosure of non-cash financing activities:
Preferred stock conversions $ 35,180 $ 40,670 $ 29,460
Issuance of treasury shares under incentive compensation plan -- 1,677,025 --
Surrender of treasury shares issued under incentive compensation plan 1,491,715 139,846 --
Issuance of common shares 28,103,095 16,457,429 6,869,312
Supplemental disclosure of cash flow information:
Interest paid 1,565,418 1,741,517 2,438,723
Income taxes paid 11,955,000 10,875,871 8,433,725
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
$700,000 at December 31, 2001.
43
NOTE 22.
COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $3,406,021, $3,015,784 and $2,647,009, respectively, for the
years ended December 31, 2001, 2000 and 1999, respectively.
The future minimum rental commitments as of December 31, 2001 under
noncancelable leases follow:
Rental
Year(s) Commitments
- ------- -----------
2002 $ 3,075,744
2003 2,959,615
2004 2,952,611
2005 2,734,774
2006 2,505,611
2007 and thereafter 16,711,583
-----------
Total $30,939,938
===========
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 $74,540,000 as of December 31, 2001. 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, 2001, these commitments totaled $30,006,000 of
which $25,851,000 expire within one year and $4,155,000 within two years.
Approximately 65% of the commitments are 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, 2001 ranged from
0% to 100%; the average amount collateralized is approximately 50%.
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 $100 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.
44
NOTE 23.
QUARTERLY DATA (UNAUDITED)
2001 QUARTER MAR 31 JUN 30 SEPT 30 DEC 31
- ------------ ------ ------ ------- ------
Total interest income $24,581,500 $24,201,546 $23,676,623 $23,405,825
Total interest expense 7,915,952 7,171,921 6,242,077 5,485,988
Net interest income 16,665,548 17,029,625 17,434,546 17,919,837
Provision for loan losses 1,685,800 1,527,800 2,017,800 2,169,464
Noninterest income 5,349,123 6,119,714 6,517,609 6,137,015
Noninterest expenses 12,615,940 13,919,935 13,521,758 13,638,052
Income before income taxes 7,712,931 7,701,604 8,412,597 8,249,336
Net income 4,536,285 4,705,227 4,992,721 5,153,315
Earnings per average common share:
Basic .45 .46 .49 .50
Diluted .43 .44 .46 .47
Common stock closing price:
High 20.364 27.818 28.455 30.05
Low 17.955 19.182 24.773 24.364
Quarter -- end 19.455 27.818 26.136 29.20
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 .38 .40 .42 .44
Diluted .37 .38 .41 .43
Common stock closing price:
High 14.876 13.585 16.529 19.886
Low 11.829 11.777 12.397 15.289
Quarter -- end 12.397 13.017 16.116 19.886
45
INDEPENDENT AUDITORS' REPORT
[KPMG LOGO]
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling Bancorp
as of December 31, 2001 and 2000, 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, 2001 and the
consolidated statements of condition of Sterling National Bank as of December
31, 2001 and 2000. 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, 2001 and 2000, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2001 and the financial position of Sterling National Bank as of December 31,
2001 and 2000 in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
New York, New York
January 24, 2002
46
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 Financial Services Company, Inc., and Sterling
National Bank ("the bank"). The bank, which is the principal subsidiary, owns
all of the outstanding shares of Sterling Factors Corporation, Sterling National
Mortgage Company, Inc., Sterling National Servicing, Inc., Sterling Trade
Services, Inc. and Sterling Holding Company, of Virginia, Inc. Sterling Trade
Services, Inc. owns all of the outstanding common shares of Sterling National
Asia Limited, Hong Kong. Sterling Holding Company of Virginia, Inc. owns all of
the outstanding common shares of Sterling Real Estate Holding Company, Inc.
Throughout this discussion and analysis, the term "the Company" refers to
Sterling Bancorp and its subsidiaries. This discussion and analysis should be
read in conjunction with the consolidated financial statements and supplemental
data contained elsewhere in this annual 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 2001. In this discussion, information presented in the
"Comparison of Years Ended December 31, 2000 and December 31, 1999" section has
been modified to reflect the effect of the 10% stock dividend paid in December
2001.
SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Total interest income $ 95,866 $ 97,125 $ 79,245 $ 73,779 $ 67,596 $ 60,694
Total interest expense 26,816 34,242 25,783 24,341 22,024 21,031
Net interest income 69,050 62,883 53,462 49,438 45,572 39,663
Provision for loan losses 7,401 6,563 5,584 5,389 3,075 2,047
Net securities gains/(losses) -- -- -- 86 -- (71)
Noninterest income 24,123 22,373 17,944 16,362 12,972 9,979
Noninterest expenses 53,695 50,280 41,582 38,297 35,707 31,697
Income before taxes 32,077 28,413 24,240 22,200 19,762 15,827
Provision for income taxes 12,689 11,854 9,676 9,403 8,874 7,575
Net income 19,388 16,559 14,564 12,797 10,888 8,252
Per common share -- basic 1.90 1.64 1.42 1.23 1.08 0.90
-- diluted 1.80 1.59 1.36 1.17 1.02 0.81
Dividends per common share 0.66 0.58 0.50 0.43 0.37 0.31
YEAR END BALANCE SHEETS
Investment securities 576,028 433,797 457,402 329,806 384,951 304,331
Loans, net of unearned discounts 808,687 750,888 689,096 640,206 558,482 465,517
Total assets 1,482,871 1,270,749 1,218,887 1,044,445 1,019,980 861,605
Noninterest-bearing deposits 356,303 341,039 291,808 329,020 312,462 229,977
Interest-bearing deposits 628,621 525,243 570,712 373,782 418,946 344,446
Long-term debt -- FHLB 95,350 10,700 21,050 41,400 1,750 14,500
Long-term convertible subordinated debentures -- -- -- -- -- 6,389
Shareholders' equity 128,477 117,016 105,240 102,151 92,623 77,177
AVERAGE BALANCE SHEETS
Investment securities 468,861 453,237 379,872 336,690 304,753 321,957
Loans, net of unearned discounts 705,216 634,980 556,630 512,711 446,268 376,879
Total assets 1,267,856 1,165,707 1,022,698 935,964 838,354 777,695
Noninterest-bearing deposits 292,918 258,347 237,324 224,780 199,431 175,232
Interest-bearing deposits 594,303 536,523 452,734 409,027 377,301 330,520
Long-term debt -- FHLB 47,055 12,046 37,275 35,240 11,767 17,141
Long-term convertible subordinated debentures -- -- -- -- 4,618 16,779
Shareholders' equity 123,935 107,584 102,361 96,644 82,515 65,768
RATIOS
Return on average total assets 1.53% 1.42% 1.42% 1.37% 1.30% 1.06%
Return on average tangible shareholders' equity 18.86 19.16 17.94 16.95 17.75 18.50
Return on average shareholders' equity 15.64 15.39 14.23 13.24 13.20 12.55
Dividend payout ratio 32.03 29.57 27.98 27.47 26.64 26.95
Average shareholders' equity to
average total assets 9.78 9.23 10.01 10.33 9.84 8.46
Net interest margin
(Tax-equivalent basis) 6.23 6.13 5.97 6.12 6.37 5.93
Loans/assets, year end 54.54 59.09 56.53 61.30 54.75 54.03
Net charge-offs/loans, year end 0.75 0.67 0.67 0.61 0.43 0.00
Nonperforming loans/loans, year end 0.22 0.27 0.21 0.19 0.25 0.09
Allowance/loans, year end 1.74 1.69 1.61 1.59 1.55 1.72
47
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,
2001, the bank's year-to-date average earning assets (of which loans were 58%
and investment securities were 41%) 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 2001 of $19.4 million, representing $1.80
per share, calculated on a diluted basis, compared to $16.6 million, or $1.59
per share, calculated on a diluted basis, for 2000. This increase reflects
continued growth in both net interest income and noninterest income.
Net interest income, on a tax-equivalent basis, increased to $70.1 million for
2001, up from $63.8 million in 2000, principally due to higher average earning
asset outstandings. The net interest margin, on a tax-equivalent basis, was
6.23% for 2001 compared to 6.13% for 2000. The net interest margin benefitted
from a decrease of 118 basis points in the average costs of funds partially
offset by an 80 basis point decrease in the average yield on earning assets.
Also contributing to the improved net interest margin were increases in loans
(discussed below) and growth of noninterest-bearing deposits. Average
noninterest-bearing deposits for 2001 were $292,918,000 up $34,571,000 from the
prior year.
Noninterest income rose to $24.1 million for 2001 compared to $22.4 million for
2000 principally due to continued growth in fees from factoring, mortgage
banking, and deposit services.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earning. 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 60. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 59.
Net interest income, in a tax-equivalent basis, for 2001 increased $6,238,000
from 2000 to $70,084,000.
Total interest income on a tax-equivalent basis, decreased in 2001 to
$96,900,000 from $98,088,000 in 2000. The tax-equivalent yield on
interest-earning assets was 8.62% for 2001 compared with 9.42% for 2000. The
decrease in interest income was due to a decrease in the yields on loans and
investment securities primarily attributable to a lower interest rate
environment on average in 2001. The other contributing factor was an increase in
the Company's loan portfolio as a result of the continuation of management's
strategy to increase funds employed in this asset category.
Interest earned on the loan portfolio amounted to $65,282,000, down $1,341,000
when compared to a year ago. The decrease in the yield on the domestic loan
portfolio to 10.15% for 2001 from 11.45% for 2000 was primarily attributable to
the lower rate environment in the 2001 period. Average loan balances amounted to
$705,216,000, up $70,236,000 from the average of the prior year period. The
increase in the average loans (across virtually all segments of the Company's
loan portfolio), accounted for the increase in interest earned on loans.
Tax-equivalent interest earned on investment securities increased $160,000 to
$31,305,000 in 2001, due to higher average outstandings partially offset by
lower yields. Average investment securities outstandings increased to
$468,861,000 from $453,237,000 in the prior year period. The increase in average
balances was primarily U.S. Government corporation and agency guaranteed
mortgage-backed securities and collateralized mortgage obligations. The
tax-equivalent yield on investment securities decreased to 6.72% from 6.87% for
the prior year, reflecting a lower rate environment in 2001.
48
Total interest expense decreased $7,426,000 from 2000 to $26,816,000 for 2001.
The decrease in interest expense was principally due to lower rates paid for
interest-bearing liabilities.
Interest expense on deposits decreased $3,667,000 to $19,030,000 for 2001 due to
the lower cost of funds partially offset by increased average outstandings. The
average rate paid on interest-bearing deposits decreased to 3.20% in 2001
compared to 4.23% in the year ago period reflecting the lower interest rate
environment on average in 2001. Average balances increased to $594,303,000 in
2001 from $536,523,000 in 2000, primarily due to higher money market and NOW
account balances.
Interest expense associated with borrowed funds decreased $3,759,000 for 2001
from $ 11,545,000 in 2000, as the result of lower average outstandings and rates
paid for Federal funds purchased and securities sold under agreements to
repurchase partially offset by higher average long-term debt outstandings.
During 2001, as part of its asset/liability management strategy in light of the
lower interest rate environment, the Company implemented a program to lengthen
funding maturities. As a result, average amounts outstanding for long-term
borrowings increased $35,009,000 in 2001 to $47,055,000 and average amounts
outstanding for Federal funds purchased and securities sold under agreements to
repurchase decreased $56,416,000 from $149,428,000 in the prior year. Average
rates paid were lowered for long-term borrowings to 4.37% in 2001 from 5.35% in
2000 and for Federal funds purchased and securities sold under agreements to
repurchase to 4.40% from 5.88%.
PROVISION FOR LOAN 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 loan losses for 2001 increased to $7,401,000,
up $838,000 when compared to the prior year.
NONINTEREST INCOME
Noninterest income increased $1,750,000 for 2001 when compared with 2000,
primarily as a result of increased fees from factoring, mortgage banking, and
deposit services.
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, 2001, the Company's
portfolio of securities totaled $576,028,000 of which U.S. Government
corporation and agency guaranteed mortgage-backed securities and collateralized
mortgage obligations having an average life of approximately 4 1/2 years
amounted to $512,841,000. 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 $5,055,000 and $2,024,000, 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 $2,844,000 and gross unrealized
losses of $775,000. 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 Note 4
beginning on page 25.
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, 2001 2000 1999
-------- -------- --------
(in thousands)
U.S. Treasury securities $ 2,493 $ 2,889 $ 24,847
Obligations of U.S. government
corporations and agencies
-- mortgage-backed
securities 440,135 353,293 361,389
-- collateralized mortgage
obligations 72,706 32,102 29,950
Obligations of states and
political subdivisions 35,477 33,156 27,234
Debt securities issued by
foreign governments 1,500 2,250 2,000
Other debt securities 17,480 3,022 5,000
Federal Reserve Bank and
other equity securities 6,237 7,085 6,982
-------- -------- --------
Total $576,028 $433,797 $457,402
======== ======== ========
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.
49
The Company's commercial and industrial loan portfolio represents approximately
64% 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 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 20% of gross loans, is secured by mortgages on real property
located principally in the states of New York and Virginia. The Company's
leasing portfolio, which consists of finance leases for various types of
business equipment, represents approximately 11% of gross loans. The collateral
securing any loan may vary in value based on market conditions.
The following table sets forth the composition of the Company's loan portfolio,
net of unearned discounts, at the end of each of the most recent five fiscal
years:
December 31, 2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ---------------- ----------------
% OF % of % of % of % of
BALANCES TOTAL Balances Total Balances Total Balances Total Balances Total
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(dollars in thousands)
Domestic
Commercial and
industrial $519,557 64.25% $499,984 66.59% $462,400 67.10% $465,048 72.64% $413,887 74.11%
Lease financing 90,614 11.20 98,349 13.10 81,398 11.81 56,146 8.77 43,705 7.82
Real estate --
mortgage 161,012 19.91 122,272 16.28 96,376 13.99 104,621 16.34 73,878 13.23
Real estate --
construction -- -- -- -- 4,958 0.72 -- -- 8,352 1.50
Installment --
individuals 8,504 1.05 9,506 1.27 13,181 1.91 13,604 2.13 17,871 3.20
Loans to depository
institutions 29,000 3.59 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
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, net of
unearned discounts $808,687 100.00% $750,888 100.00% $689,096 100.00% $640,206 100.00% $558,482 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
The following table sets forth the maturities of the Company's commercial and
industrial loans, as of December 31, 2001:
Due One Due One Due After Total
Year to Five Five Gross
or Less Years Years Loans
------- ----- ----- -----
(in thousands)
Commercial and industrial $510,455 $5,281 $4,504 $520,240
======== ====== ====== ========
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 depend
on current and expected economic conditions, the financial condition of
borrowers, the realization of collateral, and the credit management process.
50
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 that are both well-secured or guaranteed by financially responsible third
parties and are in the process of collection.
December 31, 2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(dollars in thousands)
Nonaccrual basis loans* $1,748 $1,995 $1,417 $1,214 $1,388
Past due 90 days or more
(other than the above) 200 162 59 675 245
------ ------ ------ ------ ------
Total $1,948 $2,157 $1,476 $1,889 $1,633
====== ====== ====== ====== ======
*Interest income that would have been
earned on nonaccrual and reduced
rate loans outstanding $ 61 $ 58 $ 39 $ 88 $ 55
====== ====== ====== ====== ======
Applicable interest income actually realized $ -- $ -- $ -- $ -- $ --
====== ====== ====== ====== ======
Nonaccrual and past due loans as a
percentage of total gross loans 0.24% 0.28% 0.21% 0.29% 0.29%
====== ====== ====== ====== ======
Management views the allowance for loan losses as a critical accounting policy
due to its subjectivity. The allowance for loan losses is maintained through the
provision for loan losses, which is a charge to operating earnings. The adequacy
of the provision and the resulting allowance for loan losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
evaluation of both loans presenting identified loss potential and of the risk
inherent in various components of the portfolio, including loans identified as
impaired as required by SFAS No. 114.
Thus, an increase in the size of the portfolio or in any of its components could
necessitate an increase in the allowance even though there may not be a decline
in credit quality or an increase in potential problem loans. A significant
change in any of the evaluation factors described above could result in future
additions to the allowance. At December 31, 2001, the ratio of the allowance to
loans, net of unearned discounts, was 1.7% and the allowance was $14,038,000. At
such date, the Company's nonaccrual loans amounted to $1,748,000; none of such
loans was judged to be impaired within the scope of SFAS No. 114. Based on the
foregoing, as well as management's judgment as to the current risks inherent in
the loan portfolio, the Company's allowance for loan losses was deemed adequate
to absorb all reasonably anticipated losses on specifically known and other
possible credit risks associated with the portfolio as of December 31, 2001. 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 2001. 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 $655,000 and $966,000 at
December 31, 2001 and 2000, respectively.
51
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, 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(dollars in thousands)
Average loans outstanding, net of
unearned discounts, during year $705,216 $634,980 $556,630 $512,711 $446,268
======== ======== ======== ======== ========
Allowance for loan losses:
Balance at beginning of year $ 12,675 $ 11,117 $ 10,156 $ 8,678 $ 8,003
-------- -------- -------- -------- --------
Charge-offs:
Commercial and industrial 4,899 4,010 4,149 3,328 2,064
Lease financing 1,528 1,075 612 616 228
Real estate 269 313 177 146 239
Installment 103 92 84 261 193
-------- -------- -------- -------- --------
Total charge-offs 6,799 5,490 5,022 4,351 2,724
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial 589 220 169 232 240
Lease financing 84 228 178 142 56
Real estate -- -- 1 2 2
Installment 88 37 51 64 26
-------- -------- -------- -------- --------
Total recoveries 761 485 399 440 324
-------- -------- -------- -------- --------
Subtract:
Net charge-offs 6,038 5,005 4,623 3,911 2,400
-------- -------- -------- -------- --------
Provision for loan losses 7,401 6,563 5,584 5,389 3,075
-------- -------- -------- -------- --------
Balance at end of year $ 14,038 $ 12,675 $ 11,117 $ 10,156 $ 8,678
======== ======== ======== ======== ========
Ratio of net charge-offs to average
loans outstanding, net of
unearned discounts during year 0.86% 0.79% 0.83% 0.76% 0.54%
======== ======== ======== ======== ========
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, 2001 2000 1999 1998 1997
---------------- ----------------- ---------------- ----------------- ----------------
% OF % of % of % of % of
AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(dollars in thousands)
Domestic
Commercial and industrial $ 9,438 1.82% $ 8,968 1.79% $ 8,262 1.79% $ 7,429 1.60% $ 6,013 1.45%
Loans to depository institutions 230 0.79 160 0.80 240 0.80 -- -- -- --
Lease financing 1,736 1.92 1,637 1.66 1,036 1.27 837 1.49 648 1.48
Real estate -- mortgage 2,279 1.42 1,578 1.28 1,223 1.27 1,583 1.51 1,059 1.43
Real estate -- construction -- -- -- -- 30 0.61 -- -- 70 0.84
Installment -- individuals 10 0.12 10 0.11 75 0.56 25 0.18 35 0.20
Unallocated 345 -- 322 -- 251 -- 282 -- 853 --
------- ------- ------- ------- -------
Total $14,038 1.74% $12,675 1.69% $11,117 1.61% $10,156 1.59% $ 8,678 1.55%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
52
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 at the end of each of the most recent three fiscal years:
December 31, 2001 2000 1999
---------------- ---------------- ----------------
% OF % of % of
BALANCES TOTAL Balances Total Balances Total
-------- ----- -------- ----- -------- -----
(in thousands)
Domestic
Demand $356,303 36.2% $341,039 39.4% $291,808 33.8%
NOW 110,309 11.2 68,319 7.9 70,205 8.2
Savings 32,194 3.3 24,836 2.9 23,625 2.8
Money Market 166,597 16.9 168,260 19.4 153,845 17.8
Time deposits by remaining maturity
Within 3 months 179,854 18.3 146,734 16.9 177,964 20.6
After 3 months but within 1 year 73,386 7.4 89,388 10.3 119,613 13.9
After 1 year but within 5 years 63,235 6.4 24,731 2.9 22,630 2.6
After 5 years 71 -- -- -- -- --
-------- ----- -------- ----- -------- -----
Total domestic deposits 981,949 99.7 863,307 99.7 859,690 99.7
-------- ----- -------- ----- -------- -----
Foreign
Time deposits by remaining maturity
Within 3 months 1,795 0.2 150 -- 1,730 0.2
After 3 months but within 1 year 1,180 0.1 2,825 0.3 1,100 0.1
-------- ----- -------- ----- -------- -----
Total foreign deposits 2,975 0.3 2,975 0.3 2,830 0.3
-------- ----- -------- ----- -------- -----
Total deposits $984,924 100.0% $866,282 100.0% $862,520 100.0%
======== ===== ======== ===== ======== =====
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 customers'
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 59.
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 financial instruments.
53
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates. Interest
rate sensitivity is the relationship between market interest rates and net
interest income due to the repricing characteristics of assets and liabilities.
The Company monitors the interest rate sensitivity of its balance sheet
positions by examining its near-term sensitivity and its longer-term gap
position. In its management of interest rate risk, the Company utilizes several
financial and statistical tools including traditional gap analysis and
sophisticated income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time 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, 2001, presented on page 61,
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 financial
instrument derivatives to hedge the interest rate sensitivity of assets with the
corresponding amortization reflected in the yield of the related balance sheet
assets being hedged. The Company has written policy guidelines, approved by the
Board of Directors, governing the use of financial instruments, including
approved counterparties, risk limits and appropriate internal control
procedures. The credit risk of derivatives arises principally from the potential
for a counterparty to fail to meet its obligation to settle a contract on a
timely basis.
The Company purchased interest rate floor contracts to reduce the impact of
falling rates on its floating rate commercial loans. Interest rate floor
contracts require the counterparty to pay the Company at specified future dates
the amount, if any, by which the specified interest rate (3 month LIBOR) falls
below the fixed floor rates, applied to the notional amounts. The Company
utilizes these financial instruments to adjust its interest rate risk position
without exposing itself to principal risk and funding requirements.
At December 31, 2001, the Company's financial instruments consisted of four
interest rate floor contracts having a notional amount totaling $100 million,
consisting of two contracts with a notional amount of $25 million each and a
final maturity of August 14, 2003 and two contracts with a notional amount of
$25 million each and a final maturity of November 15, 2002. These financial
instruments are being used as part of the Company's interest rate risk
management and not for trading purposes. At December 31, 2001, all
counterparties had 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
$305,000 which are amortized monthly against interest income from the designated
assets. At December 31, 2001, the unamortized premiums on these contracts
totaled $144,000 and are included in other assets. At December 31, 2001, there
was $299,000 receivable under these contracts. The estimated fair market value
of the contracts was $2,297,000 at December 31, 2001.
54
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 that would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
can project the impact of changes in interest rates on net interest margin. The
estimated effects of the Company's interest rate floors are included in the
results of the sensitivity analysis. The Company has established certain 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, 2001, the model indicated the impact of a 200 basis point parallel
and pro rata rise in rates over 12 months would approximate a 2.26% ($1,549,000)
increase in net interest income, while the impact of a 200 basis point decline
in rates over the same period would approximate a 3.75% ($2,577,000) 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.
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 which we believe could be implemented on a timely basis to mitigate the
impact of any dramatic change in market conditions.
55
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, 2001, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $42,453,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$41,461,000 and back-up credit lines with banks of $24,000,000. Since 1979, the
parent company has had no need to use available back-up lines of credit. On
February 27, 2002, the Company issued, through a Delaware statutory business
trust, $25,000,000 of Trust Preferred Securities with a 30-year maturity at an
annual dividend rate of 8.375%. The Company expects to use the net proceeds of
the offering for general corporate purposes.
The following table sets forth information regarding the Company's obligations
and commitments to make future payments under contracts as of December 31, 2001:
Payments Due by Period
-----------------------------------------------------------------------------
Contractual Less than 1 - 3 4 - 5 After 5
Obligations Total 1 Year Years Years Years
-------- -------- ------- ------ --------
(in thousands)
Long-Term Debt $ 95,350 $ 0 $ 5,350 $ 0 $ 90,000
Operating Leases 30,940 3,076 5,912 5,240 16,712
-------- -------- ------- ------ --------
Total Contractual Cash Obligations $126,290 $ 3,076 $11,262 $5,240 $106,712
======== ======== ======= ====== ========
The following table sets forth information regarding the Company's obligations
under other commercial commitments as of December 31, 2001:
Amount of Commitment Expiration Per Period
-----------------------------------------------------------------------------
Other Commercial Total Amounts Less than 1 - 3 4 - 5 Over 5
Commitments Committed 1 Year Years Years Years
-------- -------- ------- ------ --------
(in thousands)
Lines of Credit $ 67,858 $ 67,858 $ 0 $ 0 $ 0
Standby Letters of Credit 30,006 25,851 4,155 0 0
Other Commercial Commitments 20,840 16,158 4,622 0 60
-------- -------- ------- ------ --------
Total Commercial Commitments $118,704 $109,867 $ 8,777 $ 0 $ 60
======== ======== ======= ====== ========
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, 2001 and December
31, 2000, is presented in Note 19 beginning on page 39. In addition, the bank is
subject to the provisions of the
56
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, 2001, 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 Note 23 on page 45. Information regarding the average common
shares outstanding and dividends per common share is presented in the
Consolidated Statements of Income on page 17. Information regarding legal
restrictions on the ability of the bank to pay dividends is presented in Note 12
on page 31. 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 Note 10 beginning on page 30.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein, including but not limited to, statements
concerning future results of operations or financial position, borrowing
capacity and future liquidity, future investment results, future credit
exposure, future loan losses and plans and objectives for future operations, and
other statements contained herein regarding matters that are not historical
facts, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead are subject to numerous assumptions, risks and uncertainties,
and represent only our belief regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. Any forward-looking
statements we may make speak only as of the date on which such statements are
made. It is possible that our actual results and financial position may differ,
possibly materially, from the anticipated results and financial condition
indicated in or implied by these forward-looking statements.
Factors that could cause our actual results to differ, possibly materially, from
those in the forward-looking statements include, but are not limited to, the
following: inflation, interest rates, market and monetary fluctuations;
geopolitical developments, including the impact of September 11, 2001 and any
future acts or threats of war or terrorism; the effects of, and changes in,
trade, monetary and fiscal policies and laws, including interest rate policies
of the Board of Governors of the Federal Reserve System; a decline in general
economic conditions and the strength of the local economies in which we operate;
the financial condition of our borrowers; 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; our success 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
forward-looking statement, whether written or oral, that may be made from time
to time.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
OVERVIEW
The Company reported net income for 2000 of $16.6 million, representing $1.59
per share, calculated on a diluted basis, compared to $14.6 million, or $1.36
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
57
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 60. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 59.
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
for 2000 when compared to 1999. 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 2000.
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% for 2000 from 6.35% for the prior year, 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.
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 prior year.
Interest expense associated with borrowed funds increased to $11,545,000 for
2000 from $9,077,000 in 1999, 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.
PROVISION FOR LOAN LOSSES
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" above), and principally as the result of the growth in the
loan portfolio, the provision for loan losses for 2000 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.
58
STERLING BANCORP
CONSOLIDATED AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST EARNINGS[1]
Years Ended December 31, 2001 2000 1999
- ------------------------ -------------------------------- -------------------------------- -----------------------------
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 $ 3,216 $ 97 3.01% $ 2,215 $ 105 4.72% $ 7,180 $ 228 4.38%
Investment securities
Available for sale 174,756 11,235 6.43 123,854 8,363 6.75 118,549 7,387 6.22
Held to maturity 260,085 17,555 6.75 297,515 20,441 6.87 237,696 15,073 6.34
Tax-exempt[2] 34,020 2,515 7.39 31,868 2,341 7.35 23,627 1,677 7.10
Federal funds sold 8,638 216 2.50 3,735 215 5.76 11,049 556 4.96
Loans, net of unearned discounts
Domestic[3] 704,565 65,242 10.15 634,200 66,565 11.45 555,844 54,963 10.77
Foreign 651 40 6.17 780 58 7.46 786 49 6.21
----------- -------- ----------- -------- --------- --------
TOTAL INTEREST-EARNING ASSETS 1,185,931 96,900 8.62% 1,094,167 98,088 9.42% 954,731 79,933 8.80%
-------- ===== -------- ===== ======= =====
Cash and due from banks 45,483 39,295 37,857
Allowance for loan losses (13,588) (12,106) (10,549)
Excess cost over equity in net
assets of the bank 21,158 21,158 21,158
Other 28,872 23,193 19,501
----------- ----------- ---------
TOTAL ASSETS $ 1,267,856 $ 1,165,707 $ 1,022,698
=========== =========== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $ 28,555 557 1.95% $ 24,298 577 2.38% $ 24,405 572 2.35%
NOW 86,737 1,550 1.79 70,704 1,787 2.53 68,326 1,685 2.47
Money market 195,833 4,223 2.16 157,791 4,983 3.16 150,094 4,486 2.99
Time 280,203 12,571 4.49 280,871 15,218 5.42 207,142 9,840 4.75
Foreign
Time 2,975 129 4.33 2,859 132 4.60 2,767 123 4.44
Borrowings
Federal funds purchased and
securities sold under agreements
to repurchase 93,012 4,090 4.40 149,428 8,789 5.88 101,791 5,021 4.93
Commercial paper 36,498 1,489 4.08 28,496 1,490 5.23 37,466 1,780 4.75
Other short-term debt 3,892 151 3.89 10,708 749 5.76 4,273 224 5.19
Long-term debt 47,055 2,056 4.37 12,046 517 5.35 37,275 2,052 5.16
----------- -------- ----------- -------- --------- --------
Total Interest-Bearing
Liabilities 774,760 26,816 3.46% 737,201 34,242 4.64% 633,539 25,783 4.05%
===== ===== =====
Noninterest-bearing
demand deposits 292,918 -- 258,347 -- 237,324 --
----------- -------- ----------- -------- --------- --------
Total including
noninterest-bearing
demand deposits 1,067,678 26,816 2.51% 995,548 34,242 3.44% 870,863 25,783 2.95%
-------- ===== -------- ===== -------- =====
Other liabilities 76,243 62,575 49,474
----------- ----------- ---------
Total Liabilities 1,143,921 1,058,123 920,337
Shareholders' equity 123,935 107,584 102,361
----------- ----------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,267,856 $ 1,165,707 $1,022,698
=========== =========== =========
Net interest income/spread 70,084 5.16% 63,846 4.78% 54,150 4.75%
===== ===== =====
Net yield on interest-earning
assets 6.23% 6.13% 5.97%
===== ===== =====
Less: Tax-equivalent adjustment 1,034 963 688
-------- -------- --------
Net interest income $ 69,050 $ 62,883 $ 53,462
======== ======== ========
[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.
59
Sterling Bancorp
CONSOLIDATED RATE/VOLUME ANALYSIS[1]
DECEMBER 31, 2000 to December 31, 1999 to
Increase (Decrease) from Years Ended, DECEMBER 31, 2001 December 31, 2000
------------------------------------ -----------------------------------
Volume Rate Total[2] Volume Rate Total[2]
------- ------- ------- ------- ------ -------
(in thousands)
INTEREST INCOME
Interest-bearing deposits with other banks $ 38 $ (46) $ (8) $ (143) $ 20 $ (123)
------- ------- ------- ------- ------ -------
Investment securities
Available for sale 3,283 (411) 2,872 400 576 976
Held to maturity (2,541) (345) (2,886) 4,085 1,283 5,368
Tax-exempt 163 11 174 603 61 664
------- ------- ------- ------- ------ -------
Total 905 (745) 160 5,088 1,920 7,008
------- ------- ------- ------- ------ -------
Federal funds sold 171 (170) 1 (380) 39 (341)
------- ------- ------- ------- ------ -------
Loans, net of unearned discounts[3]
Domestic 7,399 (8,722) (1,323) 8,233 3,369 11,602
Foreign (9) (9) (18) 1 8 9
------- ------- ------- ------- ------ -------
Total 7,390 (8,731) (1,341) 8,234 3,377 11,611
------- ------- ------- ------- ------ -------
TOTAL INTEREST INCOME $ 8,504 $(9,692) $(1,188) $12,799 $5,356 $18,155
======= ======= ======= ======= ====== =======
INTEREST EXPENSE
Savings and time deposits
Domestic
Savings $ 92 $ (112) $ (20) $ 2 $ 3 $ 5
NOW 350 (587) (237) 68 34 102
Money market 1,027 (1,787) (760) 267 230 497
Time (77) (2,570) (2,647) 3,895 1,483 5,378
Foreign
Time 5 (8) (3) 5 4 9
------- ------- ------- ------- ------ -------
Total 1,397 (5,064) (3,667) 4,237 1,754 5,991
------- ------- ------- ------- ------ -------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase (2,827) (1,872) (4,699) 2,693 1,075 3,768
Commercial paper 365 (366) (1) (390) 100 (290)
Other short-term debt (397) (201) (598) 490 35 525
Long-term debt 1,670 (131) 1,539 (1,556) 21 (1,535)
------- ------- ------- ------- ------ -------
Total (1,189) (2,570) (3,759) 1,237 1,231 2,468
------- ------- ------- ------- ------ -------
TOTAL INTEREST EXPENSE $ 208 $(7,634) $(7,426) $ 5,474 $2,985 $ 8,459
======= ======= ======= ======= ====== =======
NET INTEREST INCOME $ 8,296 $(2,058) $ 6,238 $ 7,325 $2,371 $ 9,696
======= ======= ======= ======= ====== =======
[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.
60
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 increase during periods of rising interest
rates and decrease 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 $ 2,487 $ -- $ -- $ -- $ -- $ 2,487
Federal funds sold 10,000 -- -- -- -- 10,000
Investment securities 20,074 287 29,605 519,824 6,238 576,028
Loans, net of unearned discounts
Commercial and industrial 506,641 3,814 5,281 4,504 (683) 519,557
Loans to depository institutions 29,000 -- -- -- -- 29,000
Lease financing 26,556 3,373 64,750 9,264 (13,329) 90,614
Real estate 44,845 3,464 28,382 84,356 (35) 161,012
Installment 4,671 22 886 2,960 (35) 8,504
Noninterest-earning assets and
allowance for loan losses -- -- -- -- 85,669 85,669
---------- ---------- ---------- ---------- ---------- ----------
Total Assets 644,274 10,960 128,904 620,908 77,825 1,482,871
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings[1] -- -- 32,194 -- -- 32,194
NOW[1] -- -- 110,309 -- -- 110,309
Money market[1] 136,464 -- 30,133 -- -- 166,597
Time -- domestic 179,854 73,386 63,235 71 -- 316,546
-- foreign 1,795 1,180 -- -- -- 2,975
Securities sold under agreements
to repurchase 146,570 526 -- -- -- 147,096
Commercial paper 42,103 -- -- -- -- 42,103
Other short-term borrowings 8,338 350 -- -- -- 8,688
Other long-term borrowings -- FHLB -- -- 5,350 90,000 -- 95,350
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 561,013 561,013
---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity 515,124 75,442 241,221 90,071 561,013 1,482,871
---------- ---------- ---------- ---------- ---------- ----------
Net Interest Rate Sensitivity Gap $ 129,150 $ (64,482) $ (112,317) $ 530,837 $ (483,188) $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap at December 31, 2001 $ 129,150 $ 64,668 $ (47,649) $ 483,188 $ -- $ --
========== ========== ========== ========== ========== ==========
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 $ -- $ --
========== ========== ========== ========== ========== ==========
[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.
61