.
.
.
EXHIBIT 13
Sterling Bancorp
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 58,173,569 $ 50,362,016
Interest-bearing deposits with other banks 2,872,710 2,487,178
Federal fund sold 5,000,000 10,000,000
Securities available for sale 128,465,512 177,810,042
Securities available for sale--pledged 90,969,577 91,752,370
Securities held to maturity 147,109,430 101,077,406
Securities held to maturity--pledged 222,229,901 205,387,986
--------------------------------
Total investment securities 588,774,420 576,027,804
-------------------------------
Loans held for sale 54,684,987 48,602,841
Loans held in portfolio, net of unearned discounts 791,315,047 760,084,033
Less allowance for loan losses 13,549,297 14,038,322
-------------------------------
Loans, net 777,765,750 746,045,711
-------------------------------
Customers' liability under acceptances 1,545,335 608,660
Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 9,263,172 7,852,362
Other real estate 822,820 809,184
Accrued interest receivable 4,881,937 5,867,121
Bank owned life insurance 20,830,688 --
Other assets 15,347,734 13,049,654
-------------------------------
$1,561,121,562 $1,482,870,971
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $401,553,363 $ 356,303,308
Interest-bearing deposits 645,539,745 628,620,646
-------------------------------
Total deposits 1,047,093,108 984,923,954
Securities sold under agreements to repurchase 100,925,635 147,095,635
Commercial paper 29,318,920 42,103,200
Other short-term borrowings 37,030,404 8,687,671
Acceptances outstanding 1,545,335 608,660
Accrued expenses and other liabilities 75,427,836 75,624,435
Long-term borrowings--FHLB 115,000,000 95,350,000
-------------------------------
Total liabilities 1,406,341,238 1,354,393,555
-------------------------------
Corporation obligated mandatorily redeemable capital securities 25,000,000 --
-------------------------------
Shareholders' Equity
Preferred stock, $5 par value 2,322,060 2,346,060
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 13,124,002 and 10,834,853 shares, respectively 13,124,002 10,834,853
Capital surplus 143,495,362 98,487,765
Retained earnings 3,783,539 32,419,767
Accumulated other comprehensive income 1,330,239 1,119,223
-------------------------------
164,055,202 145,207,668
Less
Common stock in treasury at cost, 1,261,061 and 745,023 shares, respectively 32,400,952 15,542,454
Unearned compensation 1,873,926 1,187,798
-------------------------------
Total shareholders' equity 129,780,324 128,477,416
-------------------------------
$1,561,121,562 $1,482,870,971
===============================
See Notes to Consolidated Financial Statements.
STERLING BANCORP | page 16
Sterling Bancorp
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 57,913,946 $ 65,282,135 $ 66,623,639
Investment securities
Available for sale 16,213,837 12,715,635 9,740,695
Held to maturity 19,758,646 17,554,909 20,441,076
Federal funds sold 276,974 215,973 214,959
Deposits with other banks 33,564 96,842 104,828
------------------------------------------
Total interest income 94,196,967 95,865,494 97,125,197
------------------------------------------
INTEREST EXPENSE
Deposits 12,466,276 19,029,850 22,696,661
Federal funds purchased and securities
sold under agreements to repurchase 1,336,944 4,089,480 8,789,015
Commercial paper 655,355 1,489,137 1,490,402
Other short-term borrowings 572,717 151,368 749,247
Long-term borrowings--FHLB 4,416,121 2,056,103 517,082
------------------------------------------
Total interest expense 19,447,413 26,815,938 34,242,407
------------------------------------------
Net interest income 74,749,554 69,049,556 62,882,790
Provision for loan losses 10,770,900 7,400,864 6,563,000
------------------------------------------
Net interest income after provision for loan losses 63,978,654 61,648,692 56,319,790
------------------------------------------
NONINTEREST INCOME
Factoring income 6,155,897 5,571,178 5,396,750
Mortgage banking income 10,254,430 7,545,079 5,737,456
Service charges on deposit accounts 4,961,897 5,608,733 5,030,622
Trade finance income 2,574,949 2,478,258 2,762,431
Trust fees 664,346 878,106 864,058
Other service charges and fees 1,846,103 1,666,285 2,417,442
Bank owned life insurance income 1,290,316 -- --
Securities gains 996,041 -- --
Other income 511,783 375,822 164,429
------------------------------------------
Total noninterest income 29,255,762 24,123,461 22,373,188
------------------------------------------
NONINTEREST EXPENSE
Salaries 25,993,675 24,255,002 22,889,419
Employee benefits 6,161,254 3,976,926 4,908,620
------------------------------------------
Total personnel expense 32,154,929 28,231,928 27,798,039
Occupancy expense, net 4,920,392 4,711,216 4,123,012
Equipment expense 2,657,571 2,547,288 2,464,174
Advertising and marketing 3,308,915 2,971,206 2,607,137
Professional fees 3,738,163 5,127,067 4,758,483
Data processing fees 1,270,974 1,258,975 1,251,326
Stationery and printing 1,052,394 862,385 815,729
Communications 1,626,467 1,605,626 1,462,839
Capital securities costs 1,802,563 -- --
Other expenses 6,624,474 6,379,994 4,999,092
------------------------------------------
Total noninterest expense 59,156,842 53,695,685 50,279,831
------------------------------------------
Income before income taxes 34,077,574 32,076,468 28,413,147
Provision for income taxes 12,299,848 12,688,920 11,854,490
------------------------------------------
Net income $ 21,777,726 $ 19,387,548 $ 16,558,657
==========================================
Average number of common shares outstanding
Basic 11,964,310 12,106,717 12,031,682
Diluted 12,691,392 12,768,390 12,386,985
Earnings per average common share
Basic $ 1.81 $ 1.59 $ 1.37
Diluted 1.71 1.51 1.33
Dividends per common share .73 .66 .58
See Notes to Consolidated Financial Statements.
02 AR | page 17
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 21,777,726 $ 19,387,548 $ 16,558,657
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the year 3,020,923 1,141,875 2,611,857
Reclassification adjustment for gains included in net income (538,858) -- --
Minimum pension liability adjustment (2,271,049) -- --
------------------------------------------
Comprehensive income $ 21,988,742 $ 20,529,423 $ 19,170,514
==========================================
See Notes to Consolidated Financial Statements.
STERLING BANCORP | page 18
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at beginning of year $ 2,346,060 $ 2,402,760 $ 2,443,430
Conversions of Series B and Series D shares (24,000) (35,180) (40,670)
Redemption of Series B shares -- (21,520) --
------------------------------------------
Balance at end of year $ 2,322,060 $ 2,346,060 $ 2,402,760
==========================================
COMMON STOCK
Balance at beginning of year $ 10,834,853 $ 9,563,329 $ 8,723,051
Conversions of preferred shares into common shares 3,070 4,047 4,067
Options exercised 312,740 331,643 10,760
Common shares issued in connection with stock dividend 1,973,339 935,834 825,451
------------------------------------------
Balance at end of year $ 13,124,002 $ 10,834,853 $ 9,563,329
==========================================
CAPITAL SURPLUS
Balance at beginning of year $ 98,487,765 $ 67,450,110 $ 51,911,883
Conversions of preferred shares into common shares 20,930 31,137 36,603
Options exercised 3,886,119 3,847,869 84,015
Common shares issued in connection with stock dividend 40,724,200 27,167,261 15,631,978
Issuance of shares under incentive compensation plan 386,400 -- (214,369)
Common stock issued in connection with acquisition (10,052) -- --
Redemption of Series B shares -- (8,612) --
------------------------------------------
Balance at end of year $143,495,362 $ 98,487,765 $ 67,450,110
==========================================
RETAINED EARNINGS
Balance at beginning of year $ 32,419,767 $ 47,466,602 $ 52,360,024
Net income 21,777,726 19,387,548 16,558,657
Cash dividends paid--common shares (7,571,667) (6,209,939) (4,897,121)
--preferred shares (112,700) (98,014) (82,563)
Stock dividend paid--common shares (42,697,539) (28,103,095) (16,457,429)
--cash in lieu (32,048) (23,335) (14,966)
------------------------------------------
Balance at end of year $ 3,783,539 $ 32,419,767 $ 47,466,602
==========================================
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year $ 1,119,223 $ (22,652) $ (2,634,509)
------------------------------------------
Unrealized holding gains arising during the period:
Before tax 5,583,963 2,110,676 4,827,835
Tax effect (2,563,040) (968,801) (2,215,978)
------------------------------------------
Net of tax 3,020,923 1,141,875 2,611,857
------------------------------------------
Reclassification adjustment for gains included in net income:
Before tax (996,041) -- --
Tax effect 457,183 -- --
------------------------------------------
Net of tax (538,858) -- --
------------------------------------------
Minimum pension liability adjustment:
Before tax (4,197,872) -- --
Tax effect 1,926,823 -- --
------------------------------------------
Net of tax (2,271,049) -- --
------------------------------------------
Balance at end of year $ 1,330,239 $ 1,119,223 $ (22,652)
==========================================
TREASURY STOCK
Balance at beginning of year $(15,542,454) $ (7,986,763) $ (6,515,522)
Purchase of common shares (15,501,195) (6,063,976) (3,008,420)
Issuance of shares under incentive compensation plan 1,267,200 -- 1,677,025
Surrender of shares issued under incentive compensation plan (3,034,547) (1,491,715) (139,846)
Common shares issued in connection with acquisition 410,044 -- --
------------------------------------------
Balance at end of year $(32,400,952) $(15,542,454) $ (7,986,763)
==========================================
UNEARNED COMPENSATION
Balance at beginning of year $ (1,187,798) $ (1,857,292) $ (1,048,230)
Issuance of shares under incentive compensation plan (1,653,600) -- (1,462,656)
Amortization of unearned compensation 967,472 669,494 653,594
------------------------------------------
Balance at end of year $ (1,873,926) $ (1,187,798) $ (1,857,292)
==========================================
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of year $128,477,416 $117,016,094 $105,240,127
Net changes during the year 1,302,908 11,461,322 11,775,967
------------------------------------------
Balance at end of year $129,780,324 $128,477,416 $117,016,094
==========================================
See Notes to Consolidated Financial Statements.
02 AR | page 19
Sterling Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 21,777,726 $ 19,387,548 $ 16,558,657
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 10,770,900 7,400,864 6,563,000
Depreciation and amortization of premises and equipment 1,735,633 1,758,622 1,746,645
Securities gains (996,041) -- --
Income from bank owned life insurance (1,290,316) -- --
Deferred income tax (benefit) provision (484,211) 1,973,791 (756,817)
Net change in loans held for sale (6,082,146) (36,086,841) 715,006
Amortization of unearned compensation 967,472 669,494 653,594
Amortization of premiums on investment securities 1,516,143 1,312,890 854,215
Accretion of discounts on investment securities (1,152,553) (783,332) (969,566)
Decrease (Increase) in accrued interest receivable 985,184 (671,165) (654,002)
(Decrease) Increase in accrued expenses and other liabilities (196,599) 6,012,658 12,973,725
Increase in other assets (2,298,080) (638,935) (720,024)
Other, net (5,130,142) (4,434,301) (1,599,007)
-------------------------------------------
Net cash provided by (used in) operating activities 20,122,970 (4,098,707) 35,365,426
-------------------------------------------
INVESTING ACTIVITIES
Purchase of premises and equipment (3,146,443) (4,141,522) (1,368,265)
Net (increase) decrease in interest-bearing deposits with other banks (385,532) 674,248 1,203,703
Decrease (Increase) in Federal funds sold 5,000,000 (10,000,000) --
Net increase in loans held in portfolio (42,490,939) (27,749,805) (67,511,544)
Increase in other real estate (13,636) (161,190) (289,819)
Purchase of bank owned life insurance (20,000,000) -- --
Proceeds from sales of securities 44,653,909 -- --
Proceeds from prepayments, redemptions or
maturities of securities--held to maturity 111,703,134 81,874,168 38,062,361
Purchases of securities--held to maturity (175,033,767) (107,147,984) (25,217,337)
Proceeds from prepayments, redemptions or
maturities--available for sale 193,790,227 184,137,834 96,520,193
Purchases of securities--available for sale (182,639,726) (299,513,848) (80,816,457)
-------------------------------------------
Net cash used in investing activities (68,562,773) (182,028,099) (39,417,165)
-------------------------------------------
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 45,250,055 15,263,980 49,231,525
Net increase (decrease) in interest-bearing deposits 16,919,099 103,377,790 (45,469,293)
Net proceeds from issuance of corporation obligated
mandatorily redeemable capital securities 24,062,500 -- --
Net (decrease) increase in securities sold under
agreements to repurchase (46,170,000) (5,667,374) 39,524,591
Net increase (decrease) in commercial paper
and other short-term borrowings 15,558,453 7,402,369 (7,924,061)
Increase (Decrease) in other long-term borrowings--FHLB 19,650,000 84,650,000 (10,350,000)
(Decrease) Increase in Federal funds purchased -- (10,000,000) 5,000,000
Purchase of treasury shares (15,501,195) (6,063,976) (3,008,420)
Redemption of preferred stock -- (30,132) --
Proceeds from exercise of stock options 4,198,859 4,179,512 94,775
Cash dividends paid on preferred and common shares (7,684,367) (6,307,953) (4,979,684)
Cash paid in lieu of fractional shares in connection with stock dividend (32,048) (23,335) (14,966)
-------------------------------------------
Net cash provided by financing activities 56,251,356 186,780,881 22,104,467
-------------------------------------------
Net increase in cash and due from banks 7,811,553 654,075 18,052,728
Cash and due from banks--beginning of year 50,362,016 49,707,941 31,655,213
-------------------------------------------
Cash and due from banks--end of year $ 58,173,569 $ 50,362,016 $ 49,707,941
===========================================
Supplemental disclosure of cash flow information:
Interest paid $ 20,291,854 $ 27,220,986 $ 35,281,653
Income taxes paid 13,078,303 12,212,440 11,097,414
See Notes to Consolidated Financial Statements.
STERLING BANCORP | page 20
Sterling National Bank
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 2002 2001
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 57,771,604 $ 50,097,111
Interest-bearing deposits with other banks 2,137,710 2,487,178
Federal funds sold 5,000,000 10,000,000
Securities available for sale 128,404,514 177,748,847
Securities available for sale--pledged 90,969,577 91,752,370
Securities held to maturity 147,109,430 101,077,406
Securities held to maturity--pledged 222,229,901 205,387,986
---------------------------------
Total investment securities 588,713,422 575,966,609
---------------------------------
Loans held for sale 54,684,987 48,602,841
Loans held in portfolio, net of unearned discounts 750,163,236 709,077,712
Less allowance for loan losses 12,270,071 12,271,899
---------------------------------
Loans, net 737,893,165 696,805,813
---------------------------------
Receivables from affiliates 687,170 686,883
Customers' liability under acceptances 1,545,335 608,660
Premises and equipment, net 9,215,223 7,767,469
Other real estate 822,820 809,184
Accrued interest receivable 4,880,288 5,867,121
Bank owned life insurance 20,830,688 --
Other assets 11,641,364 11,804,849
---------------------------------
$ 1,495,823,776 $ 1,411,503,718
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 406,792,373 $ 374,999,623
Interest-bearing deposits 670,307,106 630,126,853
---------------------------------
Total deposits 1,077,099,479 1,005,126,476
Securities sold under agreements to repurchase 100,925,635 147,095,635
Other short-term borrowings 37,030,404 8,687,671
Due to affiliates 1,239,158 1,195,973
Acceptances outstanding 1,545,335 608,660
Accrued expenses and other liabilities 65,332,947 66,236,084
Long-term borrowings--FHLB 115,000,000 95,350,000
---------------------------------
Total liabilities 1,398,172,958 1,324,300,499
---------------------------------
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 56,369,627 48,404,199
Accumulated other comprehensive income:
Net unrealized appreciation on securities available for sale, net of tax 3,592,331 1,110,160
---------------------------------
Total shareholders' equity 97,650,818 87,203,219
---------------------------------
$ 1,495,823,776 $ 1,411,503,718
=================================
See Notes to Consolidated Financial Statements.
02 AR | page 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 principally in New York 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
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure," amending SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides two additional
alternative transition methods for recognizing an entity's voluntary decision to
change its method of accounting for stock-based employee compensation to the
fair-value method. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 so that entities will have to (1) make more-prominent
disclosures regarding the pro forma effects of using the fair-value method of
accounting for stock-based compensation, (2) present those disclosures in a more
accessible format in the footnotes to the annual financial statements, and (3)
include those disclosures in the interim financial statements. SFAS No. 148's
transition guidance and provisions for annual disclosures are effective for
fiscal years ending after December 15, 2002.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies," relating
to the guarantor's accounting for and disclosure of the issuance of certain
types of guarantees. The disclosure provisions of FIN No. 45 are effective for
financial statements of annual reports that end after December 15, 2002. FIN No.
45 requires the recognition, at fair value, of a liability by a guarantor at
inception of certain guarantees issued or modified after December 31, 2002. This
recognition requirement is not expected to have a material impact on the
Company's consolidated financial statements.
INVESTMENT SECURITIES
Securities are designated as available for sale or held to maturity at the time
of acquisition. Securities that the Company will hold for indefinite periods of
time and that 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 that 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
STERLING BANCORP | page 22
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 that results in an approximate level rate of return.
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 and are included under the caption "Loans held for sale" in the
Consolidated Balance Sheets. Mortgage loans are sold, including servicing
rights, without recourse. 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" in the Consolidated Statements of 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 both of 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
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." 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 ceased upon adoption of SFAS No. 142 on January 1, 2002. The
adoption of SFAS No. 142 had no impact on the Company's balance sheet or
statement of income.
02 AR | page 23
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.
BANK OWNED LIFE INSURANCE
The bank invested in Bank Owned Life Insurance ("BOLI") policies to fund certain
future employee benefit costs. The cash surrender value of the BOLI policies is
recorded in the Consolidated Balance Sheets under the caption "Bank owned life
insurance." Changes in the cash surrender value are recorded in the Consolidated
Statements of Income under the caption "Bank owned life insurance income."
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Deferred income tax expense (benefit) is determined by recognizing
deferred tax assets and liabilities for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The realization of
deferred tax assets is assessed and a valuation allowance provided for that
portion of the assets for which it is more likely than not that it will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates and will be adjusted for the effects of future changes in tax laws or
rates, if any.
For income tax purposes, the Company files: a consolidated Federal income tax
return; combined New York City and New York State income tax returns; and
separate state income tax returns for its out-of-state subsidiaries. The parent
company, under tax sharing agreements, either pays or collects on account of
current income taxes to or from its subsidiaries.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
STOCK INCENTIVE PLANS
At December 31, 2002, the Company has a stock-based employee compensation plan,
which is described more fully in Note 15. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. In accordance with
SFAS No. 148, the following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to the
stock-based employee compensation plans.
Year Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 21,777,726 $ 19,387,548 $ 16,558,657
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (1,002,318) (1,925,589) (1,190,334)
------------------------------------------
Pro forma net income $ 20,775,408 $ 17,461,959 $ 15,368,323
==========================================
Earnings per share:
Basic--as reported $ 1.81 $ 1.59 $ 1.37
Basic--pro forma 1.73 1.43 1.28
Diluted--as reported 1.71 1.51 1.33
Diluted--pro forma 1.63 1.36 1.23
STERLING BANCORP | page 24
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 20% stock dividend on December 9,
2002; a 10% stock dividend on December 10, 2001; and a 10% stock dividend on
December 11, 2000. 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.
ACQUISITION
On December 18, 2002, the Company acquired the assets and business of Capital
Mortgage Funding, Inc. ("Capital") for common stock and cash. The acquisition
was accounted for as a purchase with no resulting goodwill. Future operations of
Capital will be conducted within the Company's subsidiary, Sterling National
Mortgage Company, Inc.
NOTE 3.
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 $16,200,000 and $13,754,000 at December 31, 2002 and
2001, respectively. Average required reserves during 2002 and 2001 were
$14,499,000 and $9,182,000, respectively.
NOTE 4.
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, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Interest-bearing deposits with other banks
At December 31 --Balance $ 2,872,710 $ 2,487,178 $ 3,161,426
--Average interest rate 0.85% 1.31% 4.24%
--Average original maturity 66 DAYS 107 Days 48 Days
During the year --Maximum month-end balance 4,472,980 4,748,678 2,950,097
--Daily average balance 3,494,000 3,216,000 2,215,000
--Average interest rate earned 1.20% 3.01% 4.72%
--Range of interest rates earned 0.55-2.10% 0.50-6.00% 2.00-6.00%
========================================
Federal funds sold
At December 31 --Balance $ 5,000,000 $10,000,000 $ -
--Average interest rate 1.1875% 1.56% -
--Average original maturity 1 DAY 1 Day -
During the year --Maximum month-end balance 50,000,000 30,000,000 20,000,000
--Daily average balance 16,704,000 8,638,000 3,735,000
--Average interest rate earned 1.66% 2.50% 5.76%
--Range of interest rates earned 1.125-1.91% 1.25-5.875% 5.25-6.81%
========================================
02 AR | page 25
NOTE 5.
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, 2002 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 2,493,908 $ 1,248 $ -- $ 2,495,156
Obligations of U.S. government corporations and
agencies--mortgage-backed securities 79,219,960 3,081,030 1,103 82,299,887
Obligations of U.S. government corporations and
agencies--collateralized mortgage obligations 69,591,523 941,153 4,521 70,528,155
Obligations of state and political institutions 32,547,937 2,399,998 -- 34,947,935
Trust preferred securities 3,222,391 222,367 -- 3,444,758
Other debt securities 15,000,000 -- -- 15,000,000
Federal Reserve Bank and other equity securities 10,702,642 17,131 575 10,719,198
----------------------------------------------------
Total $212,778,361 $ 6,662,927 $ 6,199 $219,435,089
====================================================
December 31, 2001
- ----------------------------------------------------------------------------------------------------------------
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
====================================================
The carrying value and estimated market value of securities held to maturity are
as follows:
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
December 31, 2002 VALUE GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and
agencies--mortgage-backed securities $304,873,526 $12,119,220 $ 53,318 $316,939,428
Obligations of U.S. government corporations and
agencies--collateralized mortgage obligations 62,965,805 678,452 -- 63,644,257
Debt securities issued by foreign governments 1,500,000 -- -- 1,500,000
-------------------------------------------------------
Total $369,339,331 $12,797,672 $ 53,318 $382,083,685
=======================================================
December 31, 2001
- ------------------------------------------------------------------------------------------------------------------
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
======================================================
STERLING BANCORP | page 26
The following tables present information regarding securities available for sale
and securities held to maturity at December 31, 2002, 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 $ 2,493,908 $ 2,495,156 1.84%
---------------------------
Obligations of U.S. government corporations and agencies--
mortgage-backed securities 79,219,960 82,299,887 6.74
---------------------------
Obligations of U.S. government corporations and agencies--
collateralized mortgage obligations 69,591,523 70,528,155 6.02
---------------------------
Obligations of state and political subdivisions
Due within 1 year 300,510 305,759 7.46
Due after 1 year but within 5 years 29,540,041 31,763,574 7.40
Due after 5 years 2,707,386 2,878,602 7.42
---------------------------
Total 32,547,937 34,947,935 7.40
---------------------------
Trust preferred securities
Due after 5 years 3,222,391 3,444,758 8.33
---------------------------
Other debt securities
Due within 1 year 15,000,000 15,000,000 2.09
---------------------------
Federal Reserve Bank and other securities 10,702,642 10,719,198 3.80
---------------------------
Total $212,778,361 $219,435,089 6.39
===========================
ESTIMATED
CARRYING MARKET AVERAGE
Securities Held to Maturity VALUE VALUE YIELD
- ------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies--
mortgage-backed securities $304,873,526 $316,939,428 6.28%
---------------------------
Obligations of U.S. government corporations and agencies--
collateralized mortgage obligations 62,965,805 63,644,257 5.45
---------------------------
Debt securities issued by foreign governments
Due after 1 year but within 5 years 1,500,000 1,500,000 6.59
---------------------------
Total $369,339,331 $382,083,685 6.24
===========================
Information regarding securities sales from the available for sale portfolio is
as follows:
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------
Proceeds $44,653,909 $ -- $ --
Gross gains 996,041 -- --
Gross losses -- -- --
Investment securities are pledged to secure trust and public deposits,
securities sold under agreements to repurchase, advances from the Federal Home
Loan Bank of New York and for other purposes required or permitted by law.
02 AR | page 27
NOTE 6.
LOANS
The major components of domestic loans held for sale and loans held in portfolio
are as follows:
December 31, 2002 2001
- --------------------------------------------------------------------------
Loans held for sale
Real estate--mortgage $ 54,684,987 $ 48,602,841
===========================
Loans held in portfolio
Commercial and industrial $500,909,553 $520,240,448
Lease financing 146,347,602 103,942,668
Real estate--mortgage 130,742,377 112,443,485
Real estate--construction 2,400,000 --
Installment 9,146,695 8,539,199
Loans to depository institutions 20,000,000 29,000,000
---------------------------
Loans, gross 809,546,227 774,165,800
Less unearned discounts 18,231,180 14,081,767
---------------------------
Loans, net of unearned discounts $791,315,047 $760,084,033
===========================
There are no industry concentrations (exceeding 10% of loans, gross) in the
commercial and industrial loan portfolio. Approximately 68% of loans are to
borrowers located in the metropolitan New York area.
Nonaccrual loans at December 31, 2002 and 2001 totaled $1,784,000 and
$1,748,000, respectively. There were no reduced rate loans at December 31, 2002
or 2001. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 2002, 2001 and 2000 in accordance with their
original terms is estimated to be $136,000, $153,000 and $163,000, respectively,
for the years then ended. Applicable interest income actually realized was
$83,000, $92,000 and $110,000, respectively, 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, 2002 or 2001.
NOTE 7.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Balance at beginning of year $ 14,038,322 $12,675,052 $ 11,116,848
Provision for loan losses 10,770,900 7,400,864 6,563,000
-----------------------------------------
24,809,222 20,075,916 17,679,848
-----------------------------------------
Less charge-offs, net of recoveries:
Charge-offs 12,048,352 6,798,616 5,490,253
Recoveries (1,024,809) (761,022) (485,457)
-----------------------------------------
Net charge-offs 11,023,543 6,037,594 5,004,796
-----------------------------------------
Less losses on loans transferred to held for sale 236,382 -- --
-----------------------------------------
Balance at end of year $ 13,549,297 $14,038,322 $ 12,675,052
=========================================
The Company follows SFAS No. 114 which establishes rules for calculating certain
components of the allowance for loan losses. As of December 31, 2002, 2001 and
2000, $500,000, $-0- and $470,000, 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, 2002, 2001 and 2000, was approximately $332,000, $282,000 and $513,000,
respectively. The application of SFAS No. 114 indicated that these loans
required valuation allowances, totaling $230,000, $-0- and $200,000 at December
31, 2002, 2001 and 2000, respectively, which are included within the overall
allowance for loan losses.
STERLING BANCORP | page 28
NOTE 8.
INTEREST-BEARING DEPOSITS
The following table presents certain information for interest expense on
deposits:
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Interest expense
Interest-bearing deposits in domestic offices
Savings $ 154,625 $ 557,282 $ 577,467
NOW 879,952 1,549,957 1,786,567
Money Market 1,320,735 4,222,446 4,982,894
Time
Three months or less 5,982,183 7,448,523 8,883,017
More than three months through twelve months 2,024,765 3,239,586 4,735,798
More than twelve months through sixty months 2,045,820 1,883,253 1,599,345
---------------------------------------
12,408,080 18,901,047 22,565,088
Interest-bearing deposits in foreign offices
Time
Three months or less 29,098 64,402 59,111
More than three months through twelve months 29,098 64,401 72,462
---------------------------------------
Total $12,466,276 $19,029,850 $22,696,661
=======================================
Foreign deposits totaled $3,000,000 and $2,975,000 at December 31, 2002 and
2001, respectively.
The aggregate of time certificates of deposit and other time deposits in
denominations of $100,000 or more by remaining maturity range and related
interest expense is presented below:
December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Domestic
Three months or less $174,053,606 $157,412,385 $133,592,022
More than three months through six months 15,537,225 12,707,593 25,559,595
More than six months through twelve months 24,210,705 23,943,301 23,663,118
More than twelve months through twenty-four months 11,268,051 13,760,613 7,190,734
More than twenty-four months through thirty-six months 3,005,849 2,295,180 --
More than thirty-six months through sixty months 4,391,488 -- --
------------------------------------------
232,466,924 210,119,072 190,005,469
------------------------------------------
Foreign
Three months or less 1,820,000 1,795,000 2,975,000
More than three months through six months 1,180,000 1,180,000 --
------------------------------------------
3,000,000 2,975,000 2,975,000
------------------------------------------
Total $235,466,924 $213,094,072 $192,980,469
==========================================
Years Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Interest expense
Domestic $ 6,418,699 $ 8,985,923 $ 10,322,879
Foreign 58,196 128,803 131,573
------------------------------------------
Total $ 6,476,895 $ 9,114,726 $ 10,454,452
==========================================
02 AR | page 29
NOTE 9.
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, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Federal funds purchased
At December 31 --Balance $ - $ - $ 10,000,000
--Average interest rate - - 5.88%
--Average original maturity - - 1 Day
During the year--Maximum month-end balance 30,000,000 28,000,000 24,000,000
--Daily average balance 2,613,000 3,935,000 5,664,000
--Average interest rate paid 1.72% 4.73% 6.50%
--Range of interest rates paid 1.25-2.3125% 1.00-6.375% 5.625-7.375%
==========================================
Securities sold under agreements to repurchase
At December 31 --Balance $100,925,635 $147,095,635 $152,763,009
--Average interest rate 1.29% 2.47% 5.57%
--Average original maturity 26 DAYS 4 Days 33 Days
During the year--Maximum month-end balance 100,925,635 147,095,635 183,782,831
--Daily average balance 70,500,000 89,077,000 143,764,000
--Average interest rate paid 1.83% 4.38% 5.86%
--Range of interest rates paid 1.00-3.95% 1.25-6.55% 3.65-6.65%
==========================================
Commercial paper
At December 31 --Balance $ 29,318,920 $ 42,103,200 $ 25,655,020
--Average interest rate 1.26% 2.25% 5.27%
--Average original maturity 67 DAYS 59 Days 64 Days
During the year--Maximum month-end balance 40,286,500 42,103,200 36,679,000
--Daily average balance 31,885,000 36,498,000 28,496,000
--Average interest rate paid 2.06% 4.08% 5.23%
--Range of interest rates paid 0.95-2.35% 1.75-5.85% 3.90-6.10%
==========================================
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, 2002, these back-up bank lines of credit
totaled $24,000,000; no lines were used at any time during 2002, 2001 or 2000.
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,
2002, Federal Home Loan Bank borrowings included an advance of $5,000,000
payable on January 30, 2003 at a rate of 1.92%, an advance of $15,000,000
payable on January 30, 2003 at a rate of 2.50%, an advance of $350,000 payable
on March 5, 2003 at a rate of 6.37% and an advance of $10,000,000 payable on May
3, 2003 at a rate of 2.65%.
At December 31, 2001, Federal Home Loan Bank borrowings included an advance of
$350,000 payable 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%.
STERLING BANCORP | page 30
NOTE 10.
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 2002 2001
- -----------------------------------------------------------------------------
Term 6.37% 3/5/03 -- $ -- $ 350,000
Term 3.62 10/26/04 -- 5,000,000 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 10,000,000
Callable 4.36 2/13/11 2/13/02 10,000,000 10,000,000
Callable 4.70 2/20/11 2/20/03 10,000,000 10,000,000
Callable 3.17 10/22/11 10/22/03 10,000,000 10,000,000
Callable 2.52 11/14/11 11/14/03 10,000,000 10,000,000
Callable 3.66 10/22/11 10/22/04 10,000,000 10,000,000
Callable 3.62 10/15/11 10/15/04 10,000,000 10,000,000
Callable 4.28 10/15/11 10/15/06 10,000,000 10,000,000
Callable 3.33 1/16/12 1/16/03 10,000,000 -
Callable 2.42 1/16/12 1/16/03 10,000,000 -
--------------------------
Total $115,000,000 $95,350,000
==========================
Weighted-average interest rate 3.76% 3.97%
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 11.
CORPORATION OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY
TRUSTS
In February 2002, the Company completed its issuance of trust capital securities
("Capital Securities") that raised $25,000,000 ($24,062,500 net proceeds after
issuance costs). The 8.375 percent Capital Securities, due March 31, 2032, were
issued by Sterling Bancorp Trust I ("Trust"), a wholly-owned statutory business
trust. The Trust was formed with initial capitalization of common stock and for
the exclusive purpose of issuing the Capital Securities. The Trust used the
proceeds from the issuance of the Capital Securities to acquire junior
subordinated debt securities ("Debt Securities") issued by the parent company.
The Debt Securities are due concurrently with the Capital Securities which may
not be redeemed, except under limited circumstances until March 31, 2007, and
thereafter at a price equal to their principal amount plus interest accrued to
the date of redemption. The Company may also reduce outstanding Capital
Securities through open market purchases. Dividends are paid quarterly.
Capital Securities qualify as Tier 1 or core capital for the Company under the
Federal Reserve Board's risk-based capital guidelines to the extent such Capital
Securities equal 25 percent or less of Tier 1 Capital. The Company is permitted
to deduct interest payments on the Capital Securities under Federal tax law.
If the Company is in default under the Capital or Debt Securities it is
prohibited from repurchasing or making distributions, including dividends, on or
with respect to its common or preferred stock and from making payments on any
debt or guarantee which ranks pari passu or junior to such securities.
02 AR | page 31
NOTE 12.
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, 2002 2001
- ------------------------------------------------------------------------------------------------------
Series D shares. Authorized 300,000 shares; issued and outstanding--
232,206 and 234,606 shares, respectively, at liquidation value $2,322,060 $2,346,060
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 1.5267 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 2002 and 2001, 2,400 shares and 3,272 shares, respectively, were
converted into common shares. See Note 16 for a discussion of the Company's
ESOP.
NOTE 13.
COMMON STOCK
December 31, 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Number of shares reserved for issuance upon conversion of Series D preferred shares 282,206 284,606
=======================
Number of shares outstanding 11,862,941 10,089,830
=======================
Number of shareholders 1,774 1,842
=======================
NOTE 14.
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 15.
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
STERLING BANCORP | page 32
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 20% stock
dividend paid in December 2002, 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 186,643, 506,974 and 106,130 at
December 31, 2002, 2001 and 2000, respectively.
STOCK OPTIONS
The following tables present information on the qualified and non-qualified
stock options outstanding (after the effect of the 20% stock dividend paid in
December 2002, the 10% stock dividends paid in December 2001 and December 2000
and the 5% stock dividend paid in December 1999) as of December 31, 2002, 2001
and 2000 and changes during the years then ended:
2002 2001 2000
------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE Weighted-Average Weighted-Average
Qualified Stock Options SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 754,429 $12.16 1,093,790 $11.09 891,979 $11.14
Granted 177,953 22.97 35,520 16.68 206,167 10.89
Exercised (290,899) 11.06 (357,793) 9.22 - -
Forfeited (7,000) 22.97 (17,088) 14.92 (4,356) 10.89
--------- --------- ---------
Outstanding at end of year 634,483 15.58 754,429 12.16 1,093,790 11.09
==========================================================================================
Options exercisable at end of year 161,193 374,332 532,506
========= ========= =========
Weighted-average fair value of
options granted during the year $ 4.57 $ 3.77 $ 2.38
========= ========= =========
2002 2001 2000
------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE Weighted-Average Weighted-Average
Non-Qualified Stock Options SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 866,495 $14.27 889,275 $13.41 634,144 $14.31
Granted 115,677 25.40 63,017 22.66 270,522 10.88
Exercised (84,389) 11.61 (79,698) 11.04 (15,391) 6.16
Forfeited (20,329) 16.92 (6,099) 17.72 - -
--------- --------- ---------
Outstanding at end of year 877,454 15.93 866,495 14.27 889,275 13.41
==========================================================================================
Options exercisable at end of year 624,897 712,478 531,229
========= ========= =========
Weighted-average fair value of
options granted during the year $ 5.93 $ 4.83 $ 2.87
========= ========= =========
The following table presents information regarding qualified and non-qualified
stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------------------- ------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/02 Contractual Life Price 12/31/02 Price
- -------------------------------------------------------------------------------------------------------------------
Qualified $5.25-22.97 634,483 6.79 years $15.58 161,193 $13.47
Non-Qualified 8.20-29.76 877,454 5.27 years 15.93 624,897 15.07
Other than director NQSOs which expire five years from the date of the grant and
become exercisable in four annual installments, starting one year from the date
of the 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.
02 AR | page 33
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:
2002 2001 2000
- --------------------------------------------------------------
Dividend yield 2.95% 2.56% 3.11%
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) 8 YEARS N/A 8 years
Risk-free interest rate 4.66% 5.15% 6.14%
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, 2002 2001 2000
- ------------------------------------------------------------------------
Net income
As reported $21,778,000 $19,388,000 $16,559,000
Pro forma 20,776,000 17,462,000 15,368,000
Basic earnings per share
As reported 1.81 1.59 1.37
Pro forma 1.73 1.43 1.28
Diluted earnings per share
As reported 1.71 1.51 1.33
Pro forma 1.63 1.36 1.23
Pro forma net income reflects only options granted in 2002, 2001 and 2000.
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.
RESTRICTED STOCK
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.
STERLING BANCORP | page 34
On February 6, 2002, 60,000 shares of restricted stock were awarded from
Treasury shares. The fair value was $27.56 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year.
The plan calls for the forfeiture of non-vested shares which are restored to the
Treasury and become available for future awards. During 2002, 2001 and 2000,
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 $714,032, $398,904 and $365,664 in 2002, 2001 and 2000,
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 16.
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 $253,440, $270,590 and $287,930 for 2002, 2001 and
2000, respectively, with a corresponding reduction in unearned compensation. As
of December 31, 2002, 201,029 shares had been allocated and 25,344 shares had
been released for allocation; 23,627 shares were not released ("unallocated").
There were no contributions made by the Company during the years ended December
31, 2002, 2001 or 2000. The following table presents interest paid on the ESOP
loan and dividends paid on the Series D preferred shares:
Years Ended December 31, 2002 2001 2000
- ------------------------------------------------------------
Interest paid $ 42,984 $ 69,672 $ 96,651
Dividends paid 142,695 144,464 146,645
02 AR | page 35
NOTE 17.
EMPLOYEE BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan that covers the
majority of employees with one or more years of service of at least 1,000 hours
who are at least 21 years of age. The quarterly payments to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act of 1974 funding standards.
The following tables set forth the disclosures required for pension benefits:
Pension Benefits 2002 2001
- -------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $17,030,051 $15,668,987
Service cost 960,581 870,019
Interest cost 1,281,381 1,128,313
Amendments 241,330 18,368
Actuarial loss 1,037,314 85,682
Benefits paid (2,568,276) (741,318)
--------------------------
Benefit obligation at end of year $17,982,381 $17,030,051
==========================
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year $17,840,545 $17,506,167
Actual return on plan assets (761,931) 1,075,696
Employer contributions 2,327,363 -
Benefits paid (2,568,276) (741,318)
--------------------------
Fair value of assets at end of year $16,837,701 $17,840,545
==========================
FUNDED STATUS
Funded status $(1,144,680) $ 810,494
Unrecognized prior service cost 245,211 27,231
Unrecognized net actuarial loss 4,087,432 567,999
--------------------------
Prepaid benefit cost $ 3,187,963 $ 1,405,724
==========================
December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 6.75% 7.25% 7.50%
Expected rate of return on plan assets 9.25 9.75 9.75
Rate of compensation increase 3.00 4.00 4.50
Years Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 960,581 $ 870,019 $ 769,161
Interest cost 1,281,381 1,128,313 1,071,411
Expected return on plan assets (1,720,188) (1,675,485) (1,622,920)
Amortization of prior service cost 23,350 (1,089) (2,620)
-----------------------------------------
Net periodic benefit cost $ 545,124 $ 321,758 $ 215,032
=========================================
STERLING BANCORP | page 36
NOTE 18.
INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
Years Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
FEDERAL
Current $ 10,815,018 $ 8,962,569 $10,972,028
Deferred (231,947) 1,011,960 (630,913)
------------------------------------------
Total $ 10,583,071 $ 9,974,529 $10,341,115
==========================================
STATE AND LOCAL
Current $ 1,969,041 $ 1,752,560 $ 1,639,279
Deferred (252,264) 961,831 (125,904)
------------------------------------------
Total $ 1,716,777 $ 2,714,391 $ 1,513,375
==========================================
TOTAL
Current $ 12,784,059 $10,715,129 $12,611,307
Deferred (484,211) 1,973,791 (756,817)
------------------------------------------
Total $ 12,299,848 $12,688,920 $11,854,490
==========================================
Reconciliations of income tax provisions with taxes computed at Federal
statutory rates are as follows:
Years Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Federal statutory rate 35% 35% 35%
------------------------------------------
Computed tax $ 11,927,151 $11,226,764 $ 9,944,601
Increase (Decrease) in tax resulting from:
Principally state and local taxes, net of Federal income tax benefit 372,697 1,462,156 1,909,889
------------------------------------------
Total $ 12,299,848 $12,688,920 $11,854,490
==========================================
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31, 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Difference between financial statement provision for loan losses and tax bad debt deduction $ 4,742,254 $4,913,413
Deferred compensation 1,860,131 1,248,684
Other 794,521 184,827
-------------------------
Total deferred tax assets 7,396,906 6,346,924
-------------------------
Deferred tax liabilities
Pension and benefit plans 1,447,614 729,039
Other 1,064,624 1,217,428
-------------------------
Total deferred tax liabilities 2,512,238 1,946,467
-------------------------
Net deferred tax asset 4,884,668 4,400,457
SFAS No. 115 deferred tax liability (3,055,440) (949,583)
Minimum pension liability adjustment 1,926,823 --
-------------------------
Total net deferred tax asset $ 3,756,051 $3,450,874
=========================
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.
02 AR | page 37
NOTE 19.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income less preferred dividends on
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 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.
The following table provides a reconciliation of basic and diluted EPS as
required by SFAS No. 128:
For the Year Ended 12/31/02 For the Year Ended 12/31/01
-----------------------------------------------------------------------
PER Per
INCOME SHARES SHARE Income Shares Share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------
BASIC EPS
Net income $21,777,726 $19,387,548
Less preferred dividends 112,685 97,896
----------- -----------
Net income available for
common shareholders 21,665,041 11,964,310 $1.81 19,289,652 12,106,717 $1.59
===== =====
DILUTED EPS
Options[1] 493,880 425,475
Convertible preferred stock 233,202 236,198
----------- ------------ ----------- ----------
Net income available for
common shareholders plus
assumed conversions $21,665,041 12,691,392 $1.71 $19,289,652 12,768,390 $1.51
=======================================================================
For the Year Ended 12/31/00
----------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
- ----------------------------------------------------------------
BASIC EPS
Net income $16,558,657
Less preferred dividends 82,441
-----------
Net income available for
common shareholders 16,476,216 12,031,682 $1.37
=====
DILUTED EPS
Options[1] 115,336
Convertible preferred stock 239,967
----------- -----------
Net income available for
common shareholders plus
assumed conversions $16,476,216 12,386,985 $1.33
=================================
[1] Options issued with exercise prices greater than the average market price
of the common shares for each of the years ended December 31, 2002, 2001
and 2000 have not been included in computation of diluted EPS for those
respective years. As of December 31, 2002, 36,588 options to purchase
shares at a price of $29.76 were not included; as of December 31, 2001,
63,014 options to purchase shares at prices between $21.57 and $23.19 were
not included; as of December 31, 2000, 940,649 options to purchase shares
at prices between $12.48 and $18.38 were not included.
NOTE 20.
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.
STERLING BANCORP | page 38
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, loans held for sale, 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 HELD IN PORTFOLIO
The fair value of loans held in portfolio which reprice within 90 days
reflecting changes in the base rate is equal to their carrying amount. For other
loans held in portfolio, 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.
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 (negotiable
order of withdrawal) 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, 2002, the
notional amount of these instruments was $50,000,000. The Company paid up front
premiums of $110,000 which are amortized over the term of the related assets. At
December 31, 2002, the unamortized premiums on these contracts totaled $34,000
and there was $132,000 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, 2002, the estimated fair value of these contracts was $788,000.
02 AR | page 39
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
December 31, 2002 2001
- ------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
- ------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ 58,173,569 $ 58,173,569 $ 50,362,016 $ 50,362,016
Interest-bearing deposits with other banks 2,872,710 2,872,710 2,487,178 2,487,178
Federal funds sold 5,000,000 5,000,000 10,000,000 10,000,000
Investment securities 588,774,420 601,518,774 576,027,804 579,058,552
Loans held for sale 54,684,987 54,856,055 48,602,841 49,662,277
Loans held in portfolio, net 777,765,750 778,393,886 746,045,711 756,620,914
Customers' liability under acceptances 1,545,335 1,545,335 608,660 608,660
Accrued interest receivable 4,881,937 4,881,937 5,867,121 5,867,121
FINANCIAL LIABILITIES
Demand, NOW, savings and money market deposits 701,461,649 701,461,649 665,402,593 665,402,593
Time deposits 345,631,459 348,697,064 319,521,361 321,870,779
Securities sold under agreements to repurchase 100,925,635 100,925,635 147,095,635 147,095,635
Commercial paper 29,318,920 29,318,920 42,103,200 42,103,200
Other short-term borrowings 37,030,404 37,030,404 8,687,671 8,687,671
Acceptances outstanding 1,545,335 1,545,335 608,660 608,660
Accrued expenses and other liabilities 75,427,836 75,427,836 75,624,435 75,624,435
Other long-term borrowings--FHLB 115,000,000 116,126,518 95,350,000 94,676,561
NOTE 21.
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 1991 ("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, 2002, the Company and the
bank exceeded the requirements for "well capitalized" institutions.
STERLING BANCORP | page 40
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, 2002 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
Total Capital (to Risk-Weighted Assets):
The Company $144,054 15.34% $75,134 8.00% $93,917 10.00%
The bank 105,265 11.76 71,632 8.00 89,540 10.00
Tier 1 Capital (to Risk-Weighted Assets):
The Company 132,292 14.09 37,567 4.00 56,350 6.00
The bank 94,059 10.50 35,816 4.00 53,724 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 132,292 8.95 59,153 4.00 73,942 5.00
The bank 94,059 6.55 57,437 4.00 71,796 5.00
As of December 31, 2001
- ----------------------------------------------------------------------------------------------------------------
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
NOTE 22.
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.
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 2002 year-to-date average
interest-earning assets were 55.0% loans (corporate lending was 75.3% and real
estate lending was 21.6% of total loans, respectively) and 45.0% investment
securities and money market investments. There are no industry concentrations
(exceeding 10% of loans, gross, in the corporate loan portfolio). Approximately
68% 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.
02 AR | page 41
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, 2002
- ------------------------------
Net interest income $ 30,021,774 $ 13,621,274 $ 29,523,869 $ 73,166,917
Noninterest income 12,787,107 10,298,873 2,382,211 25,468,191
Depreciation and amortization 196,049 205,109 - 401,158
Segment profit 16,071,240 10,951,445 31,974,728 58,997,413
Segments assets 618,760,274 193,458,081 700,195,545 1,512,413,900
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
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, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Net interest income:
Total for reportable operating segments $ 73,166,917 $ 67,131,338 $ 60,180,734
Other[1] 1,582,637 1,918,218 2,702,056
-----------------------------------------------------
Consolidated net interest income $ 74,749,554 $ 69,049,556 $ 62,882,790
=====================================================
Noninterest income:
Total for reportable operating segments $ 25,468,191 $ 20,745,115 $ 18,677,626
Other[1] 3,787,571 3,378,346 3,695,562
-----------------------------------------------------
Consolidated noninterest income $ 29,255,762 $ 24,123,461 $ 22,373,188
=====================================================
Profit:
Total for reportable operating segments $ 58,997,413 $ 55,220,944 $ 50,349,459
Other[1] (24,919,839) (23,144,476) (21,936,312)
-----------------------------------------------------
Consolidated income before income taxes $ 34,077,574 $ 32,076,468 $ 28,413,147
=====================================================
Assets:
Total for reportable operating segments $ 1,512,413,900 $ 1,437,736,106 $ 1,228,187,874
Other[1] 48,707,662 45,134,865 42,560,740
-----------------------------------------------------
Consolidated assets $ 1,561,121,562 $ 1,482,870,971 $ 1,270,748,614
=====================================================
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
STERLING BANCORP | page 42
NOTE 23.
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, 2002 2001
- ---------------------------------------------------------------------------
ASSETS
Cash and due from banks
Banking subsidiary $ 2,867,568 $ 15,939,231
Other banks 25,000 25,000
Interest-bearing deposits--banking subsidiary 24,666,727 1,435,838
Investment in subsidiaries
Banking subsidiary 118,809,258 108,361,659
Other subsidiaries 5,621,979 4,086,818
Due from subsidiaries
Banking subsidiary 1,239,158 1,195,973
Other subsidiaries 40,717,492 48,853,991
Other assets 2,404,768 652,875
---------------------------
$196,351,950 $180,551,385
===========================
LIABILITIES AND SHAREHOLDERS'EQUITY
Commercial paper $ 29,318,920 $ 42,103,200
Other short-term borrowings 350,000 350,000
Due to subsidiaries
Banking subsidiary 660,570 660,570
Other subsidiaries 1,008,673 992,467
Accrued expenses and other liabilities 9,459,463 7,617,732
Junior subordinated debt (see Note 11) 25,774,000 --
Other long-term debt -- 350,000
Shareholders' equity 129,780,324 128,477,416
---------------------------
$196,351,950 $180,551,385
===========================
02 AR | page 43
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
INCOME
Dividends and interest from:
Banking subsidiary $ 15,114,920 $ 10,326,789 $ 5,495,523
Other subsidiaries 1,363,501 1,951,446 1,752,663
Other income 54,810 10,888 18,099
--------------------------------------------
Total income 16,533,231 12,289,123 7,266,285
============================================
EXPENSE
Interest expense 707,945 1,563,539 1,585,662
Salaries and employee benefits 1,136,269 1,216,690 2,482,941
Other expenses 3,303,071 2,032,783 1,775,238
--------------------------------------------
Total expense 5,147,285 4,813,012 5,843,841
--------------------------------------------
Income before income taxes and equity in undistributed
net income of subsidiaries 11,385,946 7,476,111 1,422,444
Benefit for income taxes (1,665,193) (1,229,005) (1,648,925)
--------------------------------------------
13,051,139 8,705,116 3,071,369
Equity in undistributed net income of:
Banking subsidiary 7,965,427 8,726,396 11,332,385
Other subsidiaries 761,160 1,956,036 2,154,903
--------------------------------------------
Net income 21,777,726 19,387,548 16,558,657
Other comprehensive income, net of tax:
Unrealized holding (losses) gains arising during the year (107) 2,248 1,473
Minimum pension liability adjustment (2,271,049) - -
--------------------------------------------
Comprehensive income $ 19,506,570 $ 19,389,796 $ 16,560,130
============================================
STERLING BANCORP | page 44
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 21,777,726 $ 19,387,548 $ 16,558,657
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Amortization of unearned compensation 967,472 669,494 653,594
Increase in accrued expenses and other liabilities 1,841,731 286,915 4,712,755
Increase (Decrease) in due to subsidiaries, net 16,206 (3,828) 851
Decrease (Increase) in due from subsidiaries, net 8,093,314 (16,498,746) 8,340,631
Equity in undistributed net income of subsidiaries (8,726,587) (10,682,432) (13,487,288)
Increase (Decrease) in other assets (1,751,893) (33,722) 50,002
Other, net (5,679,712) (1,489,461) (208,034)
--------------------------------------------
Net cash provided by (used in) operating activities 16,538,257 (8,364,232) 16,621,168
--------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits--banking subsidiary (23,230,889) 15,279,446 2,121,618
Capital contributed to subsidiaries - (1,000,000) -
--------------------------------------------
Net cash (used in) provided by investing activities (23,230,889) 14,279,446 2,121,618
--------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in commercial paper (12,784,280) 16,448,180 (14,664,180)
Cash dividends paid on preferred and common shares (7,684,367) (6,307,953) (4,979,684)
Proceeds from exercise of stock options 4,198,859 4,179,512 94,775
Purchase of treasury shares (15,501,195) (6,063,976) (3,008,420)
Increase in junior subordinated debt 25,774,000 - -
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 (32,048) (23,335) (14,966)
--------------------------------------------
Net cash (used in) provided by financing activities (6,379,031) 7,852,296 (22,922,475)
--------------------------------------------
Net (decrease) increase in cash and due from banks (13,071,663) 13,767,510 (4,179,689)
Cash and due from banks--beginning of year 15,964,231 2,196,721 6,376,410
--------------------------------------------
Cash and due from banks--end of year $ 2,892,568 $ 15,964,231 $ 2,196,721
============================================
Supplemental disclosure of cash flow information:
Interest paid $ 792,928 $ 1,565,418 $ 1,741,517
Income taxes paid 12,805,357 11,955,000 10,875,871
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
$350,000 at December 31, 2002.
02 AR | page 45
NOTE 24.
COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $3,647,916, $3,406,021 and $3,015,784 for the years ended
December 31, 2002, 2001 and 2000, respectively.
The future minimum rental commitments as of December 31, 2002 under
noncancelable leases follow:
Rental
Year(s) Commitments
- ------------------------------------------------
2003 $ 3,093,038
2004 3,016,524
2005 2,752,085
2006 2,505,611
2007 2,534,601
2008 and thereafter 14,176,982
-----------
Total $28,078,841
===========
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 $89,140,000 as of December 31, 2002. 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, substantially all of which
are within the scope of FIN No. 45, are written conditional commitments issued
by the bank to guarantee the performance of a customer to a third party. At
December 31, 2002 these commitments totaled $30,107,125 of which $14,511,100
expire within one year, $3,991,956 within two years, $2,121,256 within three
years, $2,329,114 within four years, $5,457,049 within five years and $1,696,650
over five 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,
2002 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 8 1/2 months and total notional amount of $50 million. The maximum
potential future payments the bank could be required to make equals the face
amount of a standby letter of credit which would be offset by any collateral
held.
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.
STERLING BANCORP | page 46
NOTE 25.
QUARTERLY DATA (UNAUDITED)
2002 Quarter MAR 31 JUN 30 SEPT 30 DEC 31
- ------------------------------------------------------------------------------------------
Total interest income $23,443,006 $23,558,731 $23,715,603 $23,479,627
Total interest expense 5,144,119 5,074,409 4,847,500 4,381,385
Net interest income 18,298,887 18,484,322 18,868,103 19,098,242
Provision for loan losses 1,679,300 4,600,000 2,153,100 2,338,500
Noninterest income 6,406,141 8,241,097 7,293,382 7,315,142
Noninterest expenses 14,232,437 15,235,690 14,907,080 14,781,635
Income before income taxes 8,793,291 6,889,729 9,101,305 9,293,249
Net income 5,266,301 5,230,609 5,544,692 5,736,124
Earnings per average common share:
Basic .43 .44 .46 .48
Diluted .41 .40 .44 .46
Common stock closing price:
High 26.6583 29.75 29.3083 27.00
Low 22.2167 25.5667 21.2917 21.6667
Quarter--end 26.583 29.75 22.108 26.32
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 .38 .38 .41 .42
Diluted .36 .37 .38 .40
Common stock closing price:
High 16.9697 23.1818 23.7121 25.0417
Low 14.9621 15.9848 20.6439 20.303
Quarter--end 16.212 23.182 21.78 24.333
02 AR | page 47
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, 2002 and 2001, 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, 2002 and the
consolidated statements of condition of Sterling National Bank as of December
31, 2002 and 2001. 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, 2002 and 2001, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2002 and the financial position of Sterling National Bank as of December 31,
2002 and 2001 in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
KPMG LLP
New York, New York
January 21, 2003
STERLING BANCORP | page 48
Sterling Bancorp
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F
F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F
O P E R A T I O N S
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., Sterling Bancorp
Trust I, 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 20% stock dividend paid in December 2002. In this discussion,
information presented in the "Comparison of Years Ended December 31, 2001 and
December 31, 2000" section has been modified to reflect the effect of the 20%
stock dividend paid in December 2002.
SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
2002 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Total interest income $ 94,197 $ 95,866 $ 97,125 $ 79,245 $ 73,779 $ 67,596
Total interest expense 19,447 26,816 34,242 25,783 24,341 22,024
Net interest income 74,750 69,050 62,883 53,462 49,438 45,572
Provision for loan losses 10,771 7,401 6,563 5,584 5,389 3,075
Net securities gains 996 -- -- -- 86 --
Noninterest income, excluding net securities gains 28,260 24,123 22,373 17,944 16,362 12,972
Noninterest expenses 59,157 53,695 50,280 41,582 38,297 35,707
Income before taxes 34,078 32,077 28,413 24,240 22,200 19,762
Provision for income taxes 12,300 12,689 11,854 9,676 9,403 8,874
Net income 21,778 19,388 16,559 14,564 12,797 10,888
Per common share--basic 1.81 1.59 1.37 1.19 1.03 0.90
--diluted 1.71 1.51 1.33 1.15 0.98 0.86
Dividends per common share 0.73 0.66 0.58 0.50 0.43 0.37
YEAR END BALANCE SHEETS
Investment securities 588,774 576,028 433,797 457,402 329,806 384,951
Loans held for sale 54,685 48,603 12,516 13,231 22,210 9,856
Loans held in portfolio, net of unearned discounts 791,315 760,084 738,372 675,865 617,996 548,626
Total assets 1,561,122 1,482,871 1,270,749 1,218,887 1,044,445 1,019,980
Noninterest-bearing deposits 401,553 356,303 341,039 291,808 329,020 312,462
Interest-bearing deposits 645,540 628,621 525,243 570,712 373,782 418,946
Long-term debt--FHLB 115,000 95,350 10,700 21,050 41,400 1,750
Shareholders' equity 129,780 128,477 117,016 105,240 102,151 92,623
AVERAGE BALANCE SHEETS
Investment securities 589,390 468,861 453,237 379,872 336,690 304,753
Loans held for sale 37,459 30,906 19,830 20,989 22,769 10,527
Loans held in portfolio, net of unearned discounts 708,656 674,310 615,150 535,641 489,942 435,741
Total assets 1,466,269 1,267,856 1,165,707 1,022,698 935,964 838,354
Noninterest-bearing deposits 315,757 292,918 258,347 237,324 224,780 199,431
Interest-bearing deposits 676,296 594,303 536,523 452,734 409,027 377,301
Long-term debt--FHLB 118,404 47,055 12,046 37,275 35,240 11,767
Shareholders' equity 126,274 123,935 107,584 102,361 96,644 82,515
RATIOS
Return on average total assets 1.49% 1.53% 1.42% 1.42% 1.37% 1.30%
Return on average tangible shareholders' equity 20.72 18.86 19.16 17.94 16.95 17.75
Return on average shareholders' equity 17.25 15.64 15.39 14.23 13.24 13.20
Dividend payout ratio 34.77 32.03 29.57 27.98 27.47 26.64
Average shareholders' equity to average total assets 8.61 9.78 9.23 10.01 10.33 9.84
Net interest margin (tax-equivalent basis) 5.88 6.23 6.13 5.97 6.12 6.37
Loans/assets, year end[1] 54.19 54.54 59.09 56.53 61.30 54.75
Net charge-offs/loans, year end[2] 1.39 0.79 0.68 0.68 0.63 0.44
Nonperforming loans/loans, year end[1] 0.21 0.22 0.27 0.21 0.19 0.25
Allowance/loans, year end[2] 1.71 1.85 1.72 1.64 1.64 1.58
[1] The term "loans" includes loans held for sale and loans held in portfolio.
[2] The term "loans" includes loans held for portfolio.
02 AR | page 49
COMPANY BUSINESS
The Company provides a full range of banking and financial products and
services, including business and consumer loans, commercial and residential
mortgage lending and brokerage, asset-based financing, factoring, 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 North Carolina and many
mid-Atlantic states and conducts business throughout the United States.
There is intense competition in all areas in which the Company conducts its
business. The Company competes in certain areas of its business with banks and
other financial institutions. At December 31, 2002, the bank's year-to-date
average earning assets represented approximately 97% of the Company's
year-to-date average earning assets. Loans represented 53% and investment
securities represented 45% of the bank's year-to-date average earning assets at
December 31, 2002.
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 the year ended December 31, 2002 of $21.8
million, representing $1.71 per share, calculated on a diluted basis, compared
to $19.4 million, or $1.51 per share calculated on a diluted basis, for the like
period in 2001. This increase reflects continued growth in both net interest
income and noninterest income, which together with a lower provision for income
taxes, more than offset increases in noninterest expenses and the provision for
loan losses.
Net interest income on a tax-equivalent basis, increased to $75.8 million for
2002 compared with $70.1 million for the same period in 2001, due to higher
average earning assets outstanding coupled with lower average cost of funding.
The net interest margin, on a tax-equivalent basis, was 5.88% for 2002 compared
to 6.23% for the like 2001 period. The decrease in the net interest margin was
the result of a higher proportion of earning assets funded with interest-bearing
liabilities and the decrease of 123 basis points in the average yield on earning
assets partially offset by a decrease of 135 basis points in the average cost of
funds.
Noninterest income rose to $29.3 million for the year ended December 31, 2002
compared to $24.1 million for the like 2001 period principally due to growth in
fees from mortgage banking, factoring and other services, from gains on sales of
available for sale securities, and from a bank owned life insurance program
implemented in January 2002.
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. Net interest spread is the
difference between the average rate earned, on a tax-equivalent basis, on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The net yield on interest-earning assets ("net interest margin") is
calculated by dividing tax-equivalent net interest income by average
interest-earnings assets. Generally, the net interest margin will exceed the net
interest spread because a portion of interest-earning assets are funded by
various noninterest-bearing sources, principally noninterest-bearing deposits
and shareholders' equity. The increases (decreases) in the components of
interest income and interest expense expressed in terms of fluctuation in
average volume and rate are provided in the Rate/Volume Analysis shown on page
63. Information as to the components of interest income and interest expense and
average rates is provided in the Average Balance Sheets shown on page 62.
Net interest income, on a tax-equivalent basis, for the year ended December 31,
2002 increased $5,689,000 to $75,773,000 from $70,084,000 for the comparable
period in 2001.
Total interest income, on a tax-equivalent basis, aggregated $95,220,000 for the
twelve months of 2002, down $1,680,000 from $96,900,000 for the same period of
2001. The tax-equivalent yield on interest-earning assets was 7.39% in 2002
compared with 8.62% for the same period in 2001.
STERLING BANCORP | page 50
Interest earned on the loan portfolio amounted to $57,914,000 for the twelve
months of 2002, down $7,368,000 from a year ago. Average loan balances amounted
to $746,115,000 up $40,899,000 from an average of $705,216,000 in the prior year
period. The increase in the average loans was primarily in the leasing and real
estate loan portfolios. The decrease in the yield on the domestic loan portfolio
to 8.52% for 2002 from 10.15% for the comparable 2001 period was primarily
attributable to the lower interest rate environment in the 2002 period.
Interest earned on the securities portfolio, on a tax-equivalent basis,
increased to $36,996,000 for the twelve months ended December 31, 2002 from
$31,305,000 in the prior year period. Average outstandings increased to
$589,390,000 which were up $120,529,000 from $468,861,000 in the prior year
period. The increase in average securities balances, the result of the
implementation of asset/liability management strategies designed to take
advantage of the steepness of the yield curve principally in the fourth quarter
of 2001 and the first, second, and fourth quarters of 2002, was primarily in
mortgage-backed securities and collateralized mortgage obligations of U.S.
government corporations and agencies. The average life of the securities
portfolio was approximately 2 3/4 years at December 31, 2002 from 4 1/2 years at
December 31, 2001 reflecting the impact of purchases made and greater principal
prepayments, principally during the last four months, during 2002. The decrease
in yields on most of the securities portfolio reflects the impact of the lower
rate environment on average in the 2002 period.
Total interest expense decreased $7,369,000 to $19,447,000 for 2002 from
$26,816,000 for the comparable period in 2001. The decrease in interest expense
was primarily due to lower average rates paid partially offset by higher average
balances principally for domestic time deposits and long-term debt.
Interest expense on deposits decreased $6,564,000 for the year ended December
31, 2002 to $12,466,000 from $19,030,000 for the comparable 2001 period due to
the decrease in the cost of funds partially offset by higher average domestic
time deposit balances. Average savings, NOW, and money market deposits, which
historically have represented a stable funding source, were $302,761,000 for
2002, compared to $311,125,000 in the prior year period. Average time deposits
increased $90,357,000 to $373,535,000 in 2002. The growth in deposit balances
was due to the current economic and interest rate environment, the branch
opening in Great Neck, Long Island, and ongoing business development activities,
including cross-selling of these products to existing customers. Average rate
paid on interest-bearing deposits was 1.84% which was 136 basis points lower
than the prior year period. The decrease in average cost of deposits reflects
the lower interest rate environment during the 2002 period.
Interest expense associated with borrowed funds decreased $805,000 for the
twelve months of 2002 from $7,786,000 in the comparable 2001 period as a result
of lower rates paid partially offset by higher average long-term debt
outstandings. The average cost of borrowings was 2.82% for 2002 compared with
4.31% in the comparable prior year period. Average amounts of long-term debt
outstanding were up $71,349,000 to $118,404,000 from $47,055,000 in the prior
year period. These borrowings were advances from the Federal Home Loan Bank of
New York utilized in connection with the asset/liability management strategies
discussed above.
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 charge-off of
one loan as well as the growth in the loan portfolios, the provision for loan
losses for 2002 increased to $10,771,000 from $7,401,000 for the comparable
prior year period. During the second quarter of 2002, a $5.4 million loan to a
corporate borrower which had become the subject of an involuntary bankruptcy was
charged off.
NONINTEREST INCOME
Noninterest income increased $5,133,000 for the twelve months of 2002 when
compared with the like 2001 period primarily as a result of increased income
from mortgage banking and factoring activities, from fees for various other
services, from gains on sales of available for sale securities, and from a
bank-owned life insurance program implemented in January 2002.
NONINTEREST EXPENSE
Noninterest expense increased $5,462,000 for the twelve months of 2002 when
compared with the like 2001 period primarily due to increased salary expenses,
pension costs, occupancy, equipment, advertising and marketing expenses,
stationery and printing expenses, expenses related to the trust preferred
securities placement completed in February 2002,
02 AR | page 51
and various other expenses incurred to support growing levels of business
activity and continued investment in the business franchise. Partially
offsetting these increases were reductions in fees for various professional
services.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased $389,000 for the twelve months of 2002
when compared with the like 2001 period. During the second quarter of 2002, New
York State completed an examination of Sterling's tax returns through 1998 and
issued a no charge finding. As a result, based on management's review of
required tax reserves with outside professionals, these reserves were reduced
through the provision that quarter by approximately $1.0 million.
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, 2002, the Company's
portfolio of securities totaled $588,774,000 of which U.S. Government
corporation and agency guaranteed mortgage-backed securities and collateralized
mortgage obligations having an average life of approximately 2 3/4 years
amounted to $520,667,000. 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 $12,798,000 and $53,000, 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 $6,663,000 and gross unrealized
losses of $6,000. 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 5
beginning on page 26.
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, 2002 2001 2000
- ---------------------------------------------------------------------
(in thousands)
U.S. Treasury securities $ 2,495 $ 2,493 $ 2,889
Obligations of U.S. government
corporations and agencies
--mortgage-backed
securities 387,173 440,135 353,293
--collateralized mortgage
obligations 133,494 72,706 32,102
Obligations of states and
political subdivisions 34,948 35,477 33,156
Trust preferred securities 3,445 -- --
Debt securities issued by
foreign governments 1,500 1,500 2,250
Other debt securities 15,000 17,480 3,022
Federal Reserve Bank and
other equity securities 10,719 6,237 7,085
------------------------------
Total $588,774 $576,028 $433,797
==============================
LOAN PORTFOLIO
A management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness of and the
designation of lending limits for each borrower. The portfolio strategies
include seeking industry and loan size diversification in order to minimize
credit exposure and the origination of loans in markets with which the Company
is familiar.
The Company's commercial and industrial loan portfolio represents approximately
59% of all 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, marketable securities,
other liquid collateral, equipment and/or other assets. 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 22% of all loans, is secured by mortgages on real
property located principally in the states of New York and Virginia. The
Company's leasing portfolio, which consists of finance leases for various types
of business equipment, represents approximately 15% of all loans. The collateral
securing any loan may vary in value based on market conditions.
STERLING BANCORP | page 52
The following table sets forth the composition of the Company's loans held for
sale and loans held in portfolio, net of unearned discounts, at the end of each
of the most recent five fiscal years:
December 31, 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
% OF % of % of % of % of
BALANCES TOTAL Balances Total Balances Total Balances Total Balances Total
-------------------------------------------------------------------------------------------------------
(dollars in thousands) (dollars in thousands)
Domestic
Commercial and
industrial $500,311 59.14% $519,557 64.25% $499,984 66.59% $462,400 67.10% $465,048 72.64%
Lease financing 128,749 15.22 90,614 11.20 98,349 13.10 81,398 11.81 56,146 8.77
Real estate--
mortgage 185,412 21.92 161,012 19.91 122,272 16.28 96,376 13.99 104,621 16.34
Real estate--
construction 2,400 0.28 -- -- -- -- 4,958 0.72 -- --
Installment--
individuals 9,128 1.08 8,504 1.05 9,506 1.27 13,181 1.91 13,604 2.13
Loans to depository
institutions 20,000 2.36 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
-------------------------------------------------------------------------------------------------------
Total $846,000 100.00% $808,687 100.00% $750,888 100.00% $689,096 100.00% $640,206 100.00%
=======================================================================================================
The following table sets forth the maturities of the Company's commercial and
industrial loans, as of December 31, 2002:
Due One Due One Due After Total
Year to Five Five Gross
or Less Years Years Loans
- --------------------------------------------------------------------------------------------
(in thousands)
Commercial and industrial $493,762 $7,121 $27 $500,910
=======================================================
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.
02 AR | page 53
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, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual basis loans* $1,784 $1,748 $1,995 $1,417 $1,214
Past due 90 days or more
(other than the above) 286 200 162 59 675
----------------------------------------------
Total $2,070 $1,948 $2,157 $1,476 $1,889
==============================================
*Interest income that would have been
earned on nonaccrual and reduced
rate loans outstanding $ 136 $ 153 $ 168 $ 119 $ 128
==============================================
Applicable interest income actually realized $ 83 $ 92 $ 110 $ 80 $ 40
==============================================
Nonaccrual and past due loans as a
percentage of total gross loans 0.25% 0.24% 0.28% 0.21% 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, 2002, the ratio of the allowance to
loans held in portfolio, net of unearned discounts, was 1.7% and the allowance
was $13,549,000. At such date, the Company's nonaccrual loans amounted to
$1,784,000; 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 loans held in portfolio, the Company's allowance for
loan losses was deemed adequate to absorb all reasonably anticipated losses on
specifically known and other possible credit risks associated with the portfolio
as of December 31, 2002. Net losses within loans held in portfolio are not
statistically predictable and changes in conditions in the next twelve months
could result in future provisions for loan losses varying from the level taken
in 2002. 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 $575,000 and $655,000 at December 31, 2002 and 2001, respectively.
STERLING BANCORP | page 54
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, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
Average loans held in portfolio, net of
unearned discounts, during year $708,656 $674,310 $615,150 $535,641 $489,942
========================================================
Allowance for loan losses:
Balance at beginning of year $ 14,038 $ 12,675 $ 11,117 $ 10,156 $ 8,678
--------------------------------------------------------
Charge-offs:
Commercial and industrial 10,205 4,899 4,010 4,149 3,328
Lease financing 930 1,528 1,075 612 616
Real estate 856 269 313 177 146
Installment 58 103 92 84 261
--------------------------------------------------------
Total charge-offs 12,049 6,799 5,490 5,022 4,351
--------------------------------------------------------
Recoveries:
Commercial and industrial 871 589 220 169 232
Lease financing 69 84 228 178 142
Real estate 16 -- -- 1 2
Installment 69 88 37 51 64
--------------------------------------------------------
Total recoveries 1,025 761 485 399 440
--------------------------------------------------------
Subtract:
Net charge-offs 11,024 6,038 5,005 4,623 3,911
--------------------------------------------------------
Provision for loan losses 10,771 7,401 6,563 5,584 5,389
--------------------------------------------------------
Loss on loans transferred to held for sale 236 -- -- -- --
--------------------------------------------------------
Balance at end of year $ 13,549 $ 14,038 $ 12,675 $ 11,117 $ 10,156
========================================================
Ratio of net charge-offs to average
loans held in portfolio, net of
unearned discounts during year 1.56% 0.90% 0.81% 0.86% 0.80%
========================================================
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 of the Company's loans held in portfolio may not necessarily be
indicative of actual future charge-offs in a loan category.
December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------
% OF % of % of
AMOUNT LOANS Amount Loans Amount Loans
-----------------------------------------------------------
(dollars in thousands)
Domestic
Commercial and industrial $ 7,977 1.59% $ 9,438 1.82% $ 8,968 1.79%
Loans to depository institutions 150 0.75 230 0.79 160 0.80
Lease financing 1,961 1.52 1,736 1.92 1,637 1.66
Real estate--mortgage 2,000 1.37 1,613 1.28 1,423 1.22
Real estate--construction 23 0.96 -- -- -- --
Installment--individuals 10 0.11 10 0.12 10 0.11
Unallocated 1,428 -- 1,011 -- 477 --
------- ------- -------
Total $13,549 1.71% $14,038 1.85% $12,675 1.72%
==========================================================
December 31, 1999 1998
- ---------------------------------------------------------------------------
% of % of
Amount Loans Amount Loans
--------------------------------------
(dollars in thousands)
Domestic
Commercial and industrial $ 8,262 1.79% $ 7,429 1.60%
Loans to depository institutions 240 0.80 -- --
Lease financing 1,036 1.27 837 1.49
Real estate--mortgage 1,085 1.15 1,323 1.38
Real estate--construction 30 0.61 -- --
Installment--individuals 75 0.56 25 0.18
Unallocated 389 -- 542 --
------- -------
Total $11,117 1.64% $10,156 1.64%
======================================
02 AR | page 55
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, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
% of % of % of
BALANCES TOTAL Balances Total Balances Total
----------------------------------------------------------------------------
(in thousands)
Domestic
Demand $ 401,553 38.4% $356,303 36.2% $ 341,039 39.4%
NOW 111,869 10.7 110,309 11.2 68,319 7.9
Savings 27,307 2.6 32,194 3.3 24,836 2.9
Money Market 148,157 14.2 166,597 16.9 168,260 19.4
Time deposits by remaining maturity
Within 3 months 200,754 19.2 179,854 18.3 146,734 16.9
After 3 months but within 1 year 87,509 8.3 73,386 7.4 89,388 10.3
After 1 year but within 5 years 66,858 6.3 63,235 6.4 24,731 2.9
After 5 years 86 -- 71 -- -- --
---------------------------------------------------------------------------
Total domestic deposits 1,044,093 99.7 981,949 99.7 863,307 99.7
---------------------------------------------------------------------------
Foreign
Time deposits by remaining maturity
Within 3 months 1,820 0.2 1,795 0.2 150 --
After 3 months but within 1 year 1,180 0.1 1,180 0.1 2,825 0.3
---------------------------------------------------------------------------
Total foreign deposits 3,000 0.3 2,975 0.3 2,975 0.3
---------------------------------------------------------------------------
Total deposits $1,047,093 100.0% $984,924 100.0% $ 866,282 100.0%
===========================================================================
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 62.
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.
STERLING BANCORP | page 56
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, 2002, presented on page 64,
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, 2002, the Company's financial instruments consisted of two
interest rate floor contracts having a notional amount totaling $50 million,
consisting of two contracts with a notional amount of $25 million each and a
final maturity of August 14, 2003. These financial instruments are being used as
part of the Company's interest rate risk management and not for trading
purposes. At December 31, 2002, 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
$110,000 which are amortized monthly against interest income from the designated
assets. At December 31, 2002, the unamortized premiums on these contracts
totaled $34,000 and are included in other assets. At December 31, 2002, there
was $132,000 receivable under these contracts. The estimated fair market value
of the contracts was $788,000 at December 31, 2002.
02 AR | page 57
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, 2002, the model indicated the impact of a 200 basis point parallel
and pro rata rise in rates over 12 months would approximate a 5.32% ($3,865,000)
increase in net interest income, while the impact of a 200 basis point decline
in rates over the same period would approximate a 4.69% ($3,409,000) 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.
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.
STERLING BANCORP | page 58
At December 31, 2002, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $29,669,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$51,620,000 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.
The following table sets forth information regarding the Company's obligations
and commitments to make future payments under contracts as of December 31, 2002:
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 $ 115,00 $ -- $ 5,000 $ -- $110,000
Operating Leases 28,079 3,093 5,769 5,040 14,177
-----------------------------------------------------
Total Contractual Cash Obligations $143,079 $ 3,093 $ 10,769 $ 5,040 $124,177
=====================================================
The following table sets forth information regarding the Company's obligations
under other commercial commitments as of December 31, 2002:
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 $ 71,410 $ 71,410 $ -- $ -- $ --
Standby Letters of Credit 30,107 14,511 6,113 7,786 1,697
Other Commercial Commitments 31,869 14,424 17,445 -- --
----------------------------------------------------------------
Total Commercial Commitments $133,386 $100,345 $ 23,558 $ 7,786 $ 1,697
================================================================
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, 2002 and December
31, 2001, is presented in Note 21 beginning on page 40. In addition, the bank is
subject to the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("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, 2002, the Company and the
bank exceeded the requirements for "well capitalized" institutions.
02 AR | page 59
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 25 on page 47. 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 14
on page 32. 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 12 beginning on page 32.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein, including but not limited to, statements
concerning future results of operations or financial position, borrowing
capacity and future liquidity, future investment results, future credit
exposure, future loan losses and plans and objectives for future operations, and
other statements contained herein regarding matters that are not historical
facts, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead are subject to numerous assumptions, risks and uncertainties,
and represent only our belief regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. Any forward-looking
statements we may make speak only as of the date on which such statements are
made. It is possible that our actual results and financial position may differ,
possibly materially, from the anticipated results and financial condition
indicated in or implied by these forward-looking statements.
Factors that could cause our actual results to differ, possibly materially, from
those in the forward-looking statements include, but are not limited to, the
following: inflation, interest rates, market and monetary fluctuations;
geopolitical developments including acts of war and terrorism and their impact
on economic conditions; the effects of, and changes in, trade, monetary and
fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve; changes, particularly declines, in general
economic conditions and in the local economies in which the Company operates;
the financial condition of the Company's borrowers; competitive pressures on
loan and deposit pricing and demand; changes in technology and their impact on
the marketing of new products and services and the acceptance of these products
and services by new and existing customers; the willingness of customers to
substitute competitors' products and services for the Company's products and
services; the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance); changes in
accounting principles, policies and guidelines; the success of the Company at
managing the risks involved in the foregoing as well as other risks and
uncertainties detailed from time to time in press releases and other public
filings. The foregoing list of important factors is not exclusive, and we will
not update any forward-looking statement, whether written or oral, that may be
made from time to time.
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
OVERVIEW
The Company reported net income for 2001 of $19.4 million, representing $1.51
per share, calculated on a diluted basis, compared to $16.6 million, or $1.33
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.
STERLING BANCORP | page 60
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 63. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 62.
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.
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" above), 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.
02 AR | page 61
Sterling Bancorp
CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS [1]
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 3,494 $ 33 1.20% $ 3,216 $ 97 3.01% $ 2,215 $ 105 4.72%
Investment securities
Available for sale 238,947 14,748 6.17 174,756 11,235 6.43 123,854 8,363 6.75
Held to maturity 316,864 19,759 6.24 260,085 17,555 6.75 297,515 20,441 6.87
Tax-exempt[2] 33,579 2,489 7.41 34,020 2,515 7.39 31,868 2,341 7.35
Federal funds sold 16,704 277 1.66 8,638 216 2.50 3,735 215 5.76
Loans, net of unearned
discounts[3]
Domestic 746,115 57,914 8.52 704,565 65,242 10.15 634,200 66,565 11.45
Foreign -- -- -- 651 40 6.17 780 58 7.46
---------- ------ ---------- ------ ---------- ------
TOTAL INTEREST-
EARNING ASSETS 1,355,703 95,220 7.39% 1,185,931 96,900 8.62% 1,094,167 98,088 9.42%
------- ==== ------- ===== ------- =====
Cash and due from banks 49,994 45,483 39,295
Allowance for loan losses (13,986) (13,588) (12,106)
Excess cost over equity in
net assets of the bank 21,158 21,158 21,158
Other 53,400 28,872 23,193
---------- ---------- ----------
TOTAL ASSETS $1,466,269 $1,267,856 $1,165,707
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $ 25,882 154 0.60% $ 28,555 557 1.95% $ 24,298 577 2.38%
NOW 112,301 880 0.78 86,737 1,550 1.79 70,704 1,787 2.53
Money market 164,578 1,321 0.80 195,833 4,223 2.16 157,791 4,983 3.16
Time 370,536 10,053 2.71 280,203 12,571 4.49 280,871 15,218 5.42
Foreign
Time 2,999 58 1.94 2,975 129 4.33 2,859 132 4.60
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 73,113 1,337 1.83 93,012 4,090 4.40 149,428 8,789 5.88
Commercial paper 31,885 655 2.06 36,498 1,489 4.08 28,496 1,490 5.23
Other short-term debt 23,885 573 2.40 3,892 151 3.89 10,708 749 5.76
Long-term debt 118,404 4,416 3.73 47,055 2,056 4.37 12,046 517 5.35
---------- ----- ---------- ----- ---------- -----
Total Interest-Bearing
Liabilities 923,583 19,447 2.11% 774,760 26,816 3.46% 737,201 34,242 4.64%
==== ==== ====
Noninterest-bearing
demand deposits 315,757 -- 292,918 -- 258,347 --
---------- ------ ---------- ------ ---------- ------
Total including
noninterest-bearing
demand deposits 1,239,340 19,447 1.57% 1,067,678 26,816 2.51% 995,548 34,242 3.44%
------- ==== ------- ===== ------- =====
Other liabilities 79,559 76,243 62,575
--------- --------- ---------
Total Liabilities 1,318,899 1,143,921 1,058,123
Corporation obligated
mandatorily redeemable
preferred securities 21,096 -- --
Shareholders' equity 126,274 123,935 107,584
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,466,269 $1,267,856 $1,165,707
========== ========== ==========
Net interest income/spread 75,773 5.28% 70,084 5.16% 63,846 4.78%
==== ==== ====
Net yield on interest-earning
assets 5.88% 6.23% 6.13%
==== ==== ====
Less: Tax-equivalent
adjustment 1,023 1,034 963
------- ------- -------
Net interest income $74,750 $69,050 $62,883
======= ======= =======
[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] Includes loans held for sale and loans held in portfolio. Nonaccrual
loans are included in amounts outstanding and income has been included
to the extent earned.
STERLING BANCORP page 62
Sterling Bancorp
CONSOLIDATED RATE / VOLUME ANALYSIS [1]
December 31, 2001 to December 31, 2000 to
Increase (Decrease) from Years Ended, December 31, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Volume Rate Total[2] Volume Rate Total[2]
------------------------------------------------------------------------------------
(in thousands)
INTEREST INCOME
Interest-bearing deposits with other banks $ 6 $ (70) $ (64) $ 38 $ (46) $ (8)
------------------------------------------------------------------------------------
Investment securities
Available for sale 3,983 (470) 3,513 3,283 (411) 2,872
Held to maturity 3,608 (1,404) 2,204 (2,541) (345) (2,886)
Tax-exempt (33) 7 (26) 163 11 174
------------------------------------------------------------------------------------
Total 7,558 (1,867) 5,691 905 (745) 160
------------------------------------------------------------------------------------
Federal funds sold 152 (91) 61 171 (170) 1
------------------------------------------------------------------------------------
Loans, net of unearned discounts[3]
Domestic 4,201 (11,529) (7,328) 7,399 (8,722) (1,323)
Foreign (20) (20) (40) (9) (9) (18)
------------------------------------------------------------------------------------
Total 4,181 (11,549) (7,368) 7,390 (8,731) (1,341)
------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 11,897 $(13,577) $ (1,680) $ 8,504 $ (9,692) $ (1,188)
====================================================================================
INTEREST EXPENSE
Savings and time deposits
Domestic
Savings $ (48) $ (355) $ (403) $ 92 $ (112) $ (20)
NOW 371 (1,041) (670) 350 (587) (237)
Money market (587) (2,315) (2,902) 1,027 (1,787) (760)
Time 3,345 (5,863) (2,518) (77) (2,570) (2,647)
Foreign
Time 1 (72) (71) 5 (8) (3)
------------------------------------------------------------------------------------
Total 3,082 (9,646) (6,564) 1,397 (5,064) (3,667)
------------------------------------------------------------------------------------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase (738) (2,015) (2,753) (2,827) (1,872) (4,699)
Commercial paper (170) (664) (834) 365 (366) (1)
Other short-term debt 501 (79) 422 (397) (201) (598)
Long-term debt 2,701 (341) 2,360 1,670 (131) 1,539
------------------------------------------------------------------------------------
Total 2,294 (3,099) (805) (1,189) (2,570) (3,759)
------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 5,376 $(12,745) $ (7,369) $ 208 $ (7,634) $ (7,426)
====================================================================================
NET INTEREST INCOME $ 6,521 $ (832) $ 5,689 $ 8,296 $ (2,058) $ 6,238
====================================================================================
[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.
02 AR page 63
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 $ 2,873 $ -- $ -- $ -- $ -- $ 2,873
Federal funds sold 5,000 -- -- -- -- 5,000
Investment securities 16,749 1,839 59,268 500,199 10,719 588,774
Loans, net of unearned discounts
Commercial and industrial 484,585 9,177 7,121 27 (599) 500,311
Loans to depository institutions 20,000 -- -- -- -- 20,000
Lease financing 74,643 3,373 64,750 3,581 (17,598) 128,749
Real estate 105,724 11,400 40,752 29,952 (16) 187,812
Installment 7,293 146 1,307 400 (18) 9,128
Noninterest-earning assets and
allowance for loan losses -- -- -- -- 118,475 118,475
-------------------------------------------------------------------------------------
Total Assets 716,867 25,935 173,198 534,159 110,963 1,561,122
-------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings[1] -- -- 27,307 -- -- 27,307
NOW[1] -- -- 111,869 -- -- 111,869
Money market[1] 117,094 -- 31,063 -- -- 148,157
Time--domestic 200,754 87,509 66,858 86 -- 355,207
--foreign 1,820 1,180 -- -- -- 3,000
Securities sold under agreements
to repurchase 100,386 540 -- -- -- 100,926
Commercial paper 29,319 -- -- -- -- 29,319
Other short-term borrowings 6,680 30,350 -- -- -- 37,030
Other long-term borrowings--FHLB -- -- 5,000 110,000 -- 115,000
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 633,307 633,307
-------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity 456,053 119,579 242,097 110,086 633,307 1,561,122
-------------------------------------------------------------------------------------
Net Interest Rate Sensitivity Gap $260,814 $(93,644) $(68,899) $424,073 $ (522,344) $ --
=====================================================================================
Cumulative Gap at December 31, 2002 $260,814 $167,170 $ 98,271 $522,344 $ -- $ --
=====================================================================================
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 $ -- $ --
=====================================================================================
[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.
STERLING BANCORP page 64