1
STERLING BANCORP and Subsidiaries
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 35,975,787 $ 37,168,675
Interest-bearing deposits with other banks 2,970,000 3,630,000
Investment securities (estimated market value
$287,909,188 and $221,627,481, respectively) 286,815,791 219,570,835
Loans, net of unearned discounts 298,750,821 288,790,639
Less allowance for possible loan losses 3,413,947 3,177,121
------------ ------------
Loans, net 295,336,874 285,613,518
------------ ------------
Customers' liability under acceptances 201,669 263,107
Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 2,593,890 2,599,373
Accrued interest receivable 3,501,850 2,872,719
Other assets 4,484,940 5,371,620
------------ ------------
$653,039,241 $578,248,287
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $174,088,971 $159,234,582
Interest-bearing deposits 298,896,955 296,924,857
------------ ------------
Total deposits 472,985,926 456,159,439
Securities sold under agreements to repurchase 37,225,000 6,642,311
Commercial paper 14,320,400 14,081,200
Other short-term borrowings 13,613,964 5,760,664
Acceptances outstanding 201,669 263,107
Due to factoring clients 5,784,952 5,746,349
Accrued expenses and other liabilities 3,635,678 4,279,212
Long-term convertible subordinated debentures 26,892,000 35,166,000
Other long-term borrowings -- FHLB 25,500,000 --
------------ -----------
Total liabilities 600,159,589 528,098,282
------------ -----------
Commitments and contingent liabilities
Convertible preferred stock, Series D -- market value guarantee feature 562,500 --
Less unearned compensation -- unallocated shares 539,523 --
SHAREHOLDERS' EQUITY
Preferred stock 1,963,260 25,760
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 6,496,605 and 6,496,001 shares, respectively 6,496,605 6,496,001
Capital surplus 28,089,487 28,083,276
Retained earnings 18,920,583 17,034,557
Net unrealized appreciation on securities
available for sale, net of tax effect 734,686 --
------------ -----------
56,204,621 51,639,594
Less
Common stock in treasury at cost, 150,393 shares 1,489,589 1,489,589
Unearned compensation 1,858,357 --
------------ ------------
Total shareholders' equity 52,856,675 50,150,005
------------ ------------
$653,039,241 $578,248,287
============ ============
See Notes to Consolidated Financial Statements.
9
2
STERLING BANCORP and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $17,454,018 $15,434,679 $21,626,436
Deposits with other banks 97,504 178,909 449,949
Investment securities 14,849,795 14,432,982 13,382,022
Federal funds sold 138,908 525,218 986,093
----------- ----------- -----------
Total interest income 32,540,225 30,571,788 36,444,500
----------- ----------- -----------
INTEREST EXPENSE
Deposits 6,518,141 7,928,172 14,093,104
Federal funds purchased and securities sold under
agreements to repurchase 896,440 395,124 904,243
Commercial paper 410,552 546,310 1,164,956
Other short-term borrowings 210,846 130,446 219,919
Long-term convertible subordinated debentures 1,823,475 2,509,991 3,825,263
Other long-term borrowings 308,483 -- --
----------- ----------- -----------
Total interest expense 10,167,937 11,510,043 20,207,485
----------- ----------- -----------
Net interest income 22,372,288 19,061,745 16,237,015
Provision for possible loan losses 690,000 1,290,000 8,000,000
----------- ----------- -----------
Net interest income after provision for possible loan losses 21,682,288 17,771,745 8,237,015
----------- ----------- -----------
NONINTEREST INCOME
Commissions on letters of credit 623,019 601,095 381,185
Service charges on deposit accounts 1,104,469 910,939 808,180
Factoring commissions 399,588 465,771 396,968
Trust fees 817,760 675,406 427,190
Gain on sale of securities -- 1,568,454 12,048
Other 926,440 1,028,297 739,819
----------- ----------- -----------
Total noninterest income 3,871,276 5,249,962 2,765,390
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 10,777,240 10,117,719 9,974,156
Net occupancy 2,594,388 2,447,353 2,359,292
Equipment rental 1,094,328 1,040,658 950,923
Other 5,304,486 5,053,447 4,456,522
Total noninterest expenses 19,770,442 18,659,177 17,740,893
----------- ----------- -----------
Income (Loss) before income taxes 5,783,122 4,362,530 (6,738,488)
Provision (Benefit) for income taxes 2,627,725 1,785,316 (2,046,383)
----------- ----------- -----------
Net income (Loss) $ 3,155,397 $ 2,577,214 $(4,692,105)
=========== =========== ===========
Average number of common shares outstanding
Primary 6,351,040 6,342,327 6,323,225
Fully diluted 8,734,423 -- --
Earnings (Loss) per average common share
Primary $ .50 $ .41 $ (.74)
Fully diluted .47 -- --
Dividends per common share .20 .20 .22
See Notes to Consolidated Financial Statements.
10
3
STERLING BANCORP and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at beginning of year $ 25,760 $ 25,760 $ 26,340
Conversions to common shares -- -- (580)
Issuance of Series D shares 2,500,000 -- --
Market value guarantee feature (562,500) -- --
------------ ------------ -----------
Balance at end of year $ 1,963,260 $ 25,760 $ 25,760
============ ============ ===========
COMMON STOCK
Balance at beginning of year $ 6,496,001 $ 6,480,449 $ 6,480,391
Conversions of subordinated debentures and
preferred shares 604 15,552 58
------------ ------------ -----------
Balance at end of year $ 6,496,605 $ 6,496,001 $ 6,480,449
============ ============ ===========
CAPITAL SURPLUS
Balance at beginning of year $ 28,083,276 $ 27,956,849 $27,986,333
Conversions of subordinated debentures and
preferred shares 6,211 124,318 522
Forfeiture (Issuance) of shares under incentive
compensation plan -- 1,560 (30,420)
Net tax benefits of unearned compensation -- 549 414
----------- ----------- -----------
Balance at end of year $ 28,089,487 $ 28,083,276 $27,956,849
============ ============ ===========
RETAINED EARNINGS
Balance at beginning of year $ 17,034,557 $ 15,726,642 $21,809,855
Net income (loss) 3,155,397 2,577,214 (4,692,105)
Cash dividends paid -- common shares (1,269,242) (1,269,170) (1,390,978)
-- preferred shares (129) (129) (130)
----------- ----------- -----------
Balance at end of year $ 18,920,583 $ 17,034,557 $15,726,642
============ =========== ===========
NET UNREALIZED APPRECIATION ON SECURITIES AVAILABLE FOR
Sale, Net of Tax Effect
Balance at beginning of year $ -- $ -- $ --
Valuation account for securities available
for sale, net of tax effect 734,686 -- --
----------- ----------- -----------
Balance at end of year $ 734,686 $ -- $ --
============ =========== ===========
TREASURY STOCK
Balance at beginning of year $ (1,489,589) $ (1,485,629) $(1,562,849)
(Forfeiture) Issuance of shares issued under incentive
compensation plan -- (3,960) 77,220
------------ ------------ ------------
Balance at end of year $ (1,489,589) $ (1,489,589) $(1,485,629)
============ ============ ============
UNEARNED COMPENSATION
Balance at beginning of year $ -- $ (46,800) $ (57,000)
Forfeiture (Issuance) of shares issued under incentive
compensation plan -- 2,400 (46,800)
Issuance of Series D preferred shares (2,500,000) -- --
Amortization of unearned compensation 102,120 44,400 57,000
Market value guarantee
feature -- unallocated shares 539,523 -- --
------------ ---------- -----------
Balance at end of year $ (1,858,357) $ -- $ (46,800)
============ ============ ===========
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of year $ 50,150,005 $ 48,657,271 $54,683,070
Net changes during the year 2,706,670 1,492,734 (6,025,799)
----------- ----------- -----------
Balance at end of year $ 52,856,675 $ 50,150,005 $48,657,271
============ =========== ===========
See Notes to Consolidated Financial Statements.
11
4
STERLING BANCORP and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 3,155,397 $ 2,577,214 $ (4,692,105)
Adjustments to reconcile net income (loss) to net cash from
operating activities
Provision for possible loan losses 690,000 1,290,000 8,000,000
Depreciation and amortization of premises and equipment 445,297 410,930 408,421
Deferred income tax provision (benefit) (22,114) 165,505 (287,122)
Amortization of unearned compensation 102,120 44,400 57,000
Amortization of premiums on investment securities 4,307,679 2,005,188 1,550,734
Accretion of discounts on investment securities (33,345) (179,079) (498,481)
(Increase) Decrease in accrued interest receivable (629,131) 1,063,836 1,119,429
Increase (Decrease) in due to factoring clients 38,603 (314,574) 2,090,006
Decrease in accrued expenses and other liabilities (643,534) (1,027,848) (1,779,583)
Gain on sale of securities -- (1,568,454) (12,048)
Other, net 282,987 15,069 (1,909,044)
------------ ------------ ------------
Net cash provided by operating activities 7,693,959 4,482,187 4,047,207
============ ============ ============
INVESTING ACTIVITIES
Net tax benefits of unearned incentive compensation -- 549 414
Purchase of premises and equipment (439,814) (403,059) (194,751)
Net decrease in interest-bearing deposits with other banks 660,000 1,005,000 802,000
Net decrease in Federal funds sold -- -- 10,000,000
Net (increase) decrease in loans (10,413,356) (63,039,186) 133,325,440
Proceeds from sale of investment securities -- 107,303,906 1,013,980
Proceeds from prepayment, redemption or maturity of
investment securities 134,105,019 100,586,503 62,934,330
Purchase of investment securities (204,263,816) (207,089,755) (197,648,459)
------------ ------------ ------------
Net cash (used) provided by investing activities (80,351,967) (61,636,042) 10,232,954
============ =========== ============
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 14,854,389 45,182,216 13,467,582
Net increase (decrease) in interest-bearing deposits 1,972,098 32,121,071 (32,235,097)
Net increase in Federal funds purchased and securities sold
under repurchase agreements 30,582,689 1,360,061 1,787,250
Net increase (decrease) in commercial paper and other
short-term borrowings 8,092,500 (6,768,476) 813,986
Increase in other long-term borrowings 25,500,000 -- --
Issuance of Series D preferred shares 2,500,000 -- --
Funding provided for purchase of Series D preferred shares (2,500,000) -- --
Cash dividends paid on preferred and common shares (1,269,371) (1,269,299) (1,391,108)
Prepayments and maturities on debentures (8,267,185) (5,845,130) --
------------ ------------ ------------
Net cash provided (used) by financing activities 71,465,120 64,780,443 (17,557,387)
------------ ------------ ------------
Net (decrease) increase in cash and due from banks (1,192,888) 7,626,588 (3,277,226)
Cash and due from banks -- beginning of year 37,168,675 29,542,087 32,819,313
------------ ------------ ------------
Cash and due from banks -- end of year $ 35,975,787 $ 37,168,675 $ 29,542,087
============ ============ ============
Supplemental schedule of non-cash financing activities
Valuation account for securities available for sale, net of tax effect $ 734,686 $ -- $ --
Debenture and preferred stock conversions 6,815 139,870 580
(Forfeiture) Issuance of treasury shares under incentive
compensation plan -- (3,960) 77,220
Supplemental disclosure of cash flow information
Interest paid 10,381,307 12,722,163 21,547,819
Income taxes paid 1,178,884 1,683,080 461,223
Cash paid for assets acquired 7,905,912 -- --
See Notes to Consolidated Financial Statements.
12
5
DECEMBER 31, 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 35,367,959 $ 36,891,211
Interest-bearing deposits with other banks 2,970,000 3,630,000
Investment securities (estimated market value
$287,864,516 and $221,457,804, respectively) 286,771,119 219,522,717
Loans, net of unearned discounts 278,537,938 273,476,523
Less allowance for possible loan losses 3,041,737 3,063,677
------------ ------------
Loans, net 275,496,201 270,412,846
------------ ------------
Receivables from affiliates 1,967,549 2,064,961
Customers' liability under acceptances 201,669 263,107
Premises and equipment, net 2,552,003 2,583,633
Accrued interest receivable 3,329,610 2,865,009
Other assets 2,493,012 2,489,681
$611,149,122 $540,723,165
============ ============
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $174,285,560 $159,418,817
Interest-bearing deposits 310,964,725 320,574,171
------------ ------------
Total deposits 485,250,285 479,992,988
Securities sold under agreements to repurchase 37,225,000 6,642,311
Other short-term borrowings 13,613,964 5,760,664
Acceptances outstanding 201,669 263,107
Due to factoring clients 468,550 822,136
Accrued expenses and other liabilities 1,896,592 1,848,023
Long-term borrowings -- FHLB 25,500,000 --
------------ ------------
Total liabilities 564,156,060 495,329,229
============ ============
Commitments and contingent liabilities
Shareholders' Equity
Common stock, $50 par value
Authorized and issued, 358,526 shares 17,926,300 17,926,300
Surplus 18,414,000 18,414,000
Undivided profits 9,918,272 9,053,636
Net unrealized appreciation on securities
available for sale, net of tax effect 734,490 --
Total shareholders' equity 46,993,062 45,393,936
------------ ------------
$611,149,122 $540,723,165
============ ============
See Notes to Consolidated Financial Statements.
13
6
STERLING BANCORP and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of Sterling
Bancorp ("the parent company") and its subsidiaries. Throughout the notes, the
term "the Company" refers to 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 & Trust Company of New York ("the bank"), after elimination of
material intercompany transactions.
General Accounting Policies The Company follows generally accepted accounting
principles and prevailing practices within the banking industry. Certain
reclassifications have been made to the 1992 and 1991 financial statements to
conform to the current presentation.
Investment Securities The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" as of December 31, 1993. SFAS No. 115 requires, among other
things, that securities designated as available for sale be revalued at each
period end with the unrealized gain or loss, net of tax effect, recorded as an
element of shareholders' equity.
Securities are designated as available for sale or held to maturity at
the time of acquisition. Securities which the Company will hold for an
indefinite period of time and which might be sold in the future as part of
efforts to manage interest rate risk or in response to changes in interest
rates, changes in prepayment risk, changes in market conditions or 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 shown, net of taxes, as a component of shareholders'
equity. Securities which the Company has the positive intent and ability to
hold to maturity are designated as held to maturity and are carried at
amortized cost, adjusted for amortization of premiums and accretion of
discounts over the period to maturity. Interest and dividends on securities are
reported in interest income. Gains and losses realized on sales of securities
are determined on the specific identification method and are reported as gain
on sale of securities in noninterest income.
Loans Loans are reported at their principal amount outstanding, net of unearned
discounts and unamortized nonrefundable fees and direct costs associated with
their origination or acquisition. Interest earned on loans without discounts is
credited to income based on loan principal amounts outstanding at appropriate
interest rates. Material origination fees net of direct costs and discounts on
loans are credited to income over the terms of the loans using a method which
results in an approximate level rate of return. When it is determined as a
result of evaluation procedures that the payment of principal on a loan is
doubtful of collection, or when interest on a loan is 90 days past due, the
loan is placed on a non-accrual basis. At such time, the accrual of interest is
discontinued, and any previously accrued but unpaid interest on such loan is
reversed against interest income of the current period. Subsequent payments are
applied to either principal or recorded as interest income based on
management's assessment of the ultimate collectibility of principal and
interest.
Allowance for Possible Loan Losses The allowance for possible 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.
The provision charged to expense is based on management's evaluation
of the adequacy of the allowance for possible loan losses, which encompasses
consideration of past loss experience and other factors, including changes in
the composition and volume of the loan portfolio, current economic conditions
and the relationship of the allowance to the loan portfolio.
Excess Cost Over Equity in Net Assets of the Banking Subsidiary Since the bank
was acquired by the parent company prior to October 31, 1970 and the excess
cost over equity in net assets has a continuing value, this excess is not being
amortized.
Premises and Equipment Premises and equipment, excluding land, are stated at
cost less accumulated depreciation and amortization. Land is reported at cost.
Depreciation is computed on a straight-line basis and is charged to noninterest
expenses over the estimated useful lives of the related assets. Amortization of
leasehold improvements is charged to noninterest expenses over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Maintenance, repairs and minor improvements are charged to
noninterest expenses as incurred.
Income Taxes The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 109 "Accounting for Income Taxes" as of January 1, 1993. The
adoption of SFAS No. 109 had no effect on the Company's results of operations.
SFAS No. 109 requires a change to the asset and liability method of accounting
for income taxes from deferred method of accounting for income taxes previously
followed. Deferred income tax expense (benefit) under SFAS No. 109 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
14
7
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 expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
For income tax purposes, the Company files: a consolidated Federal
income tax return; combined New York State and New York City income tax
returns; and separate state income tax returns for its out-of-state
subsidiaries. The parent company either pays or collects on account of current
income taxes to or from its subsidiaries. The provision for income taxes for
each subsidiary is recorded as if separate income tax returns had been filed.
Income taxes currently payable or receivable by each subsidiary are paid to or
received from the parent company.
Statements of Cash Flows For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks.
Earnings (Loss) Per Average Common Shares Primary earnings (loss) per average
common share is computed by dividing net income (loss) by the average number of
common and common equivalent shares outstanding during the period. Common
shares outstanding exclude treasury shares. Common equivalent shares include
Series D convertible preferred shares released to participant accounts under
the provisions of the Company's Employee Stock Ownership Plan and the dilutive
effect of outstanding stock options. Series B convertible preferred shares,
considered common stock equivalents, were not significant in any period and
have been excluded.
The average common shares outstanding in the computation of fully
diluted earnings per share includes the common shares outstanding adjusted for
the assumed conversion of convertible subordinated debentures and preferred
shares and the additional dilutive effect of outstanding stock options. Net
income is adjusted for interest and amortization of debt expense (after tax
effect) on the convertible subordinated debentures. Earnings (loss) per average
common share on a fully diluted basis have not been presented for 1992 and 1991
because the effects would be antidilutive.
NOTE 2. CASH AND DUE FROM BANKS
The bank is required to maintain average reserves, net of vault cash, on
deposit with the Federal Reserve Bank of New York against outstanding domestic
deposit liabilities. The required reserves, which are reported in cash and due
from banks, were $11,473,000 and $8,290,000 at December 31, 1993 and 1992,
respectively. Average required reserves during 1993 and 1992 were $7,976,000
and $7,183,000, respectively.
NOTE 3. 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, 1993 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 82,955,173 $1,558,045 $197,877 $ 84,315,341
Federal Reserve Bank and other equity securities 6,809,438 1,360 1,035 6,809,763
------------ ---------- -------- ------------
Total $ 89,764,611 $1,559,405 $198,912 $ 91,125,104
============ ========== ======== ============
The carrying value and estimated market value of securities held to maturity
are as follows:
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1993 VALUE GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations
and agencies $179,051,269 $1,747,037 $672,987 $180,125,319
Obligations of states and political subdivisions 29,964 2,000 -- 31,964
Debt securities issued by foreign governments 4,500,000 -- -- 4,500,000
Corporate debt securities 2,005,131 902 114 2,005,919
Other debt securities 10,104,323 59,726 43,167 10,120,882
------------ ---------- -------- ------------
Total $195,690,687 $1,809,665 $716,268 $196,784,084
============ ========== ======== ============
15
8
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1992 VALUE GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $182,359,785 $1,928,976 $413,040 $183,875,721
Obligations of states and political subdivisions 178,493 1,467 1,569 178,391
Debt securities issued by foreign governments 4,500,000 -- -- 4,500,000
Corporate debt securities 10,654,697 67,652 -- 10,722,349
Other debt securities 18,566,821 350,851 -- 18,917,672
Federal Reserve Bank and other equity securities 3,311,039 128,122 5,813 3,433,348
------------ ---------- -------- ------------
Total $219,570,835 $2,477,068 $420,422 $221,627,481
============ ========== ======== ============
The following tables present information regarding securities
available for sale and securities held to maturity at December 31, 1993, 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.
ESTIMATED
AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government corporations
and agencies
Due within 1 year $ 18,512,752 $ 18,528,563
Due after 1 year but within 5 years 27,514,299 28,788,752
Due after 5 years but within 10 years 36,928,122 36,998,026
------------ ------------
Total 82,955,173 84,315,341
------------ ------------
Federal Reserve Bank and other equity securities 6,809,438 6,809,763
------------ ------------
Total $ 89,764,611 $ 91,125,104
============ ============
ESTIMATED
CARRYING MARKET
SECURITIES HELD TO MATURITY VALUE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
Due after 5 years but within 10 years $179,051,269 $180,125,319
------------ ------------
Obligations of states and political subdivisions
Due after 1 year but within 5 years 29,964 31,964
------------ ------------
Debt securities issued by Foreign governments and corporate and other
debt securities
Due within 1 year 3,505,131 3,505,919
Due after 1 year but within 5 years 13,104,323 13,120,882
------------ ------------
16,609,454 16,626,801
------------ ------------
Total $195,690,687 $196,784,084
============ ============
16
9
The average yield on the investment securities portfolio, presented in
the following table, is based on the ratio of actual income divided by the
average outstanding balances during the year. The average yield on obligations
of states and political subdivisions is not stated on a tax-equivalent basis.
AVERAGE
DECEMBER 31, 1993 YIELD
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government corporations and agencies 5.78%
Obligations of states and political subdivisions 5.74%
Debt securities issued by foreign governments and corporate and other debt securities 6.49%
Total debt securities 5.85%
Federal Reserve Bank and other equity securities 5.07%
Total 5.83%
There were no sales of securities during 1993. The proceeds from sales
of securities were $107,303,906 and $1,013,980 for the years ended December 31,
1992 and 1991, respectively. The gross gains from sales of securities were
$1,568,454 and $12,048 for the years ended December 31, 1992 and 1991,
respectively; there were no gross losses from sales of securities in either
year.
The book value of investment securities pledged to secure public funds
on deposit, securities sold under repurchase agreements, advances from the
Federal Home Loan Bank of New York and for other purposes required by law
amounted to $138,841,000 and $47,910,000 at December 31, 1993 and 1992,
respectively.
NOTE 4. LOANS
DECEMBER 31, 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Domestic
Term Federal funds sold $ 40,000,000 $ 99,000,000
Commercial and industrial 218,558,986 150,681,363
Real estate -- mortgage 34,807,737 36,348,404
Real estate -- construction 1,665,545 1,605,927
Installment 8,402,800 6,257,144
Other -- 982,216
Foreign
Government and official institutions 789,424 789,424
------------ ------------
Loans, gross 304,224,492 295,664,478
Less unearned discounts 5,473,671 6,873,839
------------ ------------
Loans, net of unearned discounts $298,750,821 $288,790,639
============ ============
On June 1, 1993, the parent company purchased, for cash, the assets
(principally loans) of Zenith Financial Corporation, a nationwide provider of
consumer receivable financing. The purchase price was $7,906,000 and was
approximately equal to the book value of the assets acquired.
Term Federal funds sold represent loans to commercial banks in the
United States. There are no industry concentrations (exceeding 10% of loans,
gross) in the commercial and industrial loan portfolio. Approximately 83% of
the bank's loans are to borrowers located in the metropolitan New York area.
Non-accrual loans at December 31, 1993 and 1992 totalled $2,297,320
and $3,309,492 respectively. There were no reduced rate loans at December 31,
1993 or 1992. The interest income that would have been earned on non-accrual
loans outstanding at December 31, 1993, 1992 and 1991 in accordance with their
original terms is estimated to be $169,000, $313,000 and $378,000,
respectively, for the years then ended. The applicable interest income actually
realized for the aforementioned years was $98,000, $72,000 and $16,000,
respectively. At the end of these years there were no commitments to lend
additional funds on non-accrual loans.
Loans are made at normal lending limits and credit terms to officers
or directors (including their immediate families) of the bank, its parent
company, or any of its affiliated companies or for the benefit of corporations
in which they have a beneficial interest. There were no outstanding balances on
such loans at December 31,1993 or 1992. No new loans were made during either
year and $8,000, which represented the outstanding balance at December 31,
1991, was collected during 1992.
17
10
NOTE 5. CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $3,177,121 $3,733,910 $3,373,006
Provision for possible loan losses 690,000 1,290,000 8,000,000
---------- ---------- ----------
3,867,121 5,023,910 11,373,006
---------- ---------- ----------
Less charge-offs, net of recoveries
Charge-offs 714,976 1,918,895 7,690,219
Recoveries (52,175) (72,106) (51,123)
---------- ---------- ----------
Net charge-offs 662,801 1,846,789 7,639,096
---------- ---------- ----------
Allowance - acquired portfolio 209,627 -- --
---------- ---------- ----------
Balance at end of year $3,413,947 $3,177,121 $3,733,910
========== ========== ==========
During the third quarter of 1991, a single large borrower of the bank
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In
light of this and based upon management's continuing evaluation of the
collectibility of the loan portfolio, an $8,000,000 addition was made to the
allowance and $7,275,000 of a loan to this borrower was charged-off.
On June 1, 1993, the parent company purchased for cash the assets
(principally loans) of Zenith Financial Corporation a nationwide provider of
consumer receivables financing. The purchase price included the allowance for
loan losses of $209,627.
NOTE 6. INTEREST-BEARING DEPOSITS
Foreign deposits totalled $2,670,000 and $3,330,000 at December 31, 1993 and
1992, respectively.
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest-bearing deposits in domestic offices $6,438,900 $7,769,930 $13,771,091
Interest-bearing deposits in foreign offices 79,241 158,242 322,013
---------- ---------- -----------
Total $6,518,141 $7,928,172 $14,093,104
========== ========== ===========
The aggregate of domestic time certificates of deposit in
denominations of $100,000 or more by remaining maturity range and related
interest expense is presented below; there were no foreign time certificates of
deposits:
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Remaining Maturity Range
Three months or less $62,391,007 $63,095,562 $52,753,208
More than three months through six months 15,656,912 7,393,317 6,097,018
More than six months through twelve months 1,613,158 2,662,500 899,414
More than twelve months 1,329,289 392,549 284,217
----------- ----------- -----------
Total $80,990,366 $73,543,928 $60,033,857
=========== =========== ===========
Interest expense $ 1,700,241 $ 1,956,149 $ 4,543,771
=========== =========== ===========
18
11
NOTE 7. SHORT-TERM BORROWINGS
1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements
At December 31 -- Balance $37,225,000 $ 6,642,311 $ 5,282,250
-- Average interest rate 2.83% 2.74% 4.40%
-- Average original maturity 100 days 30 days 31 days
During the year -- Maximum month-end balance 52,481,192 14,856,000 18,271,000
-- Daily average balance 31,315,000 11,593,000 15,796,000
-- Average interest rate paid 2.86% 3.41% 5.70%
-- Range of interest rates paid 2.50-3.31% 2.7-4.55% 4.15-7.4%
=========== =========== ===========
Commercial paper
At December 31 -- Balance $14,320,400 $14,081,200 $19,930,900
-- Average interest rate 2.85% 2.98% 4.61%
-- Average original maturity 39 days 48 days 35 days
During the year -- Maximum month-end balance 20,936,500 19,839,000 20,979,000
-- Daily average balance 14,221,000 14,765,000 19,506,000
-- Average interest rate paid 2.89% 3.70% 5.96%
-- Range of interest rates paid 2.50-3.30% 2.55-4.35% 3.65-7.175%
=========== =========== ===========
Other short-term borrowings include collateralized advances from the
Federal Home Loan Bank of New York due within one year and treasury tax and
loan funds. The Federal Home Loan Bank advances are repayable in October, 1994
at rates ranging between 3.74% and 3.80%. At December 31, 1993, the aggregate
of such advances was $6,000,000 at an average rate of 3.75%. There were no
Federal Home Loan Bank advances at December 31, 1992.
The parent company has agreements with its line banks to pay a fee at
the annual rate of 1/4 of 1% times the line of credit extended. At December 31,
1993, these back-up bank lines of credit totalled $15,000,000. No lines were
used at any time during 1993 and 1992.
NOTE 8. LONG-TERM CONVERTIBLE SUBORDINATED DEBENTURES
The parent company's floating interest rate convertible subordinated debentures
are traded on the New York Stock Exchange. A summary of changes in these
debentures follows (amounts in thousands):
MATURITY DATES
-------------------------------------------
JULY 1, NOV. 1,
--------------------------------- -------
1992 1994 1996 1998 Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 $5,851 $7,773 $12,536 $14,991 $41,151
Repayments, conversions and retirements during the year (5,851) (17) -- (117) (5,985)
------ ------ ------- ------- -------
Balance at December 31, 1992 $ -- 7,756 12,536 14,874 35,166
======
Repayments, conversions and retirements during the year (7,756) (476) (42) (8,274)
------ ------- ------- -------
Balance at December 31, 1993 $ -- $12,060 $14,832 $26,892
====== ======= ======= =======
Estimated market value at December 31, 1993 $ -- $11,351 $13,998 $25,349
====== ======= ======= =======
19
12
The debentures bear interest at a floating interest rate equal to one
half of one percent (1/2%) above the daily average reference rate of interest
of a designated major New York City bank, payable semi-annually. The daily
average interest rates for the six month interest periods ended December 31,
1993, June 30, 1993, December 31, 1992, June 30, 1992, December 31, 1991, June
30, 1991 were 6.50% and 6.50%, 6.60% and 7.05%, 8.70% and 9.70%, respectively.
The debentures are convertible into common shares of the parent company. The
conversion rate is subject to anti-dilution provisions of the indenture. The
following table presents selected information regarding the debentures:
AMOUNT
ISSUE MATURITY INITIALLY CONVERSION
DATE DATE ISSUED PRICE
- -------- -------- ---------- -------
6/27/85 7/1/96 $15,000,000 $12.00
10/17/88 11/1/98 15,000,000 $12.50
On January 19, 1993, the parent company prepaid the principal amount,
plus accrued interest, of the convertible subordinated debentures due July 1,
1994.
NOTE 9. OTHER LONG-TERM BORROWINGS
These borrowings represent advances from the Federal Home Loan Bank of New York
(FHLBNY), as follows:
DECEMBER 31,
INTEREST RATES AND MATURITY DATES 1993
- ------------------------------------------------------------
4.33%, due 1995 $ 3,000,000
4.50% to 4.61%, due 1996 4,500,000
4.84% to 5.20%, due 1997 3,500,000
5.05% to 5.44%, due 1998 12,750,000
5.68%, due 1999 350,000
5.92%, due 2000 350,000
6.07%, due 2001 350,000
6.22%, due 2002 350,000
6.37%, due 2003 350,000
-----------
Total $25,500,000
===========
Weighted average interest rate 4.94%
=====
Under the terms of a collateral agreement with the FHLBNY, advances
are secured by stock in the FHLBNY and by certain qualifying assets (primarily
mortgage-backed securities) having market values at least equal to 110% of the
advances outstanding.
NOTE 10. PREFERRED STOCK
The parent company is authorized to issue up to 644,389 shares of convertible
preferred stock, $5 par value, in one or more series. At December 31, 1993,
two series of preferred stock had been issued -- Series B and Series D.
The following table presents information regarding the parent
company's preferred stock:
DECEMBER 31, 1993 1992
- --------------------------------------------------------------------------------
Series B shares. Authorized
4,389 shares; issued and
outstanding - 1,288 shares,
at liquidation value $ 25,760 $25,760
---------- -------
Series D shares. Authorized
300,000 shares; issued and
outstanding - 250,000 shares,
at liquidation value 2,500,000 --
Less market value
guarantee feature 562,500 --
---------- -------
1,937,500 --
---------- -------
Total $1,963,260 $25,760
========== =======
SERIES B
Series B shares may be redeemed, in whole or in part, at the election of the
parent company at a price of $28 per share, plus accrued and unpaid dividends
to the date of redemption. In the event of involuntary liquidation of the
parent company, the holders of these shares are entitled to receive, before any
distribution to the holders of common shares, $20 per share ("liquidation
value"). At the option of holders of these shares, such shares are convertible
into common shares of the parent company at a conversion rate of two common
shares for each Series B share surrendered. In 1993, 1992 and 1991,
respectively, $-0-, $-0- and $580 of Series B shares were converted. Dividends
on the Series B shares are paid at the rate of $.10 per annum, payable
semi-annually and are cumulative. Holders of these shares are entitled to one
vote for each share held and shall vote together as one class with the holders
of the common shares of the parent company.
SERIES D
Series D shares may only be issued to the trustee acting on behalf of an
employee stock ownership plan ("ESOP") or other employee benefit plan of the
Company. The Series D shares are convertible into common shares of the parent
company at the specified conversion price of $10.00 (subject to adjustment).
During 1993, the parent company issued 250,000 shares to the trustee of the
Company's ESOP. A transfer is made out of shareholders' equity to the extent
that the aggregate value of the outstanding Series D shares at the specified
conversion price exceeds the aggregate market value of the same number of
common shares ("market value guarantee feature"). At December 31, 1993 such
amount was $562,500. 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 shall vote together as one class with the holders of the
common shares of the parent company. The holders of these shares are entitled
to receive
20
13
$10 per share and certain other preferences on liquidation, dissolution or
winding up. See note 14 for a discussion of the Company's ESOP.
NOTE 11. COMMON STOCK
Number of shares reserved for issuance:
1993 1992
- --------------------------------------------------------------------------------
Conversion of subordinated
debentures
Floating rate due 7/1/94 -- 705,091
Floating rate due 7/1/96 1,005,000 1,044,667
Floating rate due 11/1/98 1,186,560 1,189,920
Conversion of Series B
preferred shares 2,576 2,576
Conversion of Series D
preferred shares 300,000 --
--------- ---------
2,494,136 2,942,254
========= =========
Number of shares out-
standing at December 31, 6,346,212 6,345,608
========= =========
Number of shareholders at
December 31, 2,797 3,013
========= =========
NOTE 12. RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its non-bank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency (the Comptroller) 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. The bank with the Comptroller's approval paid
dividends aggregating $37,330,000 in 1992 (significantly exceeding net profits)
and in 1993 paid dividends substantially equal to the bank's net profits for
the year ended December 31, 1993.
NOTE 13. STOCK INCENTIVE PLANS
In April 1984, the shareholders approved a Restricted Stock Incentive Plan
which provided for the issuance of a maximum of 250,000 shares to key
employees. The plan calls for the forfeiture of non-vested shares which are
restored to the Treasury and become available for future awards. In 1993, 1992
and 1991 such forfeitures were -0-, 400 and -0- shares, respectively. On
January 2, 1987, 20,000 shares (including some previously forfeited) were
awarded from Treasury shares. These awards vested to recipients over a five
year period at the rate of 20% per year. On December 19, 1991, 7,800 shares
(from previously forfeited) were issued from Treasury shares and vested to
recipients over a one year period. Unearned compensation was amortized as a
charge to noninterest expenses over a five year period for the 1987 awards and
over a one year period for the 1991 awards. The balance of unearned
compensation resulting from these awards was shown as a reduction of
shareholders' equity. For income tax purposes, the Company was entitled to a
deduction in an amount equal to the average market value of the shares on the
vesting date and dividends paid on shares for which restrictions had not
lapsed.
In April 1992, shareholders approved a Stock Incentive Plan covering
up to 100,000 common shares of the Company under which key employees of the
Company and its subsidiaries could be granted options to purchase such common
shares at prices equal to their fair market value on the date of grant. During
1993, options to purchase all 100,000 common shares were granted at prices of
$7.25 or $8.00. Options are exercisable starting one year from the date of
grant or upon the death or disability of the grantee. The plan is administered
by the Incentive Compensation Committee of the Board of Directors. No expense
is required to be recognized in connection with options granted under the plan.
Amounts received upon exercise of options are recorded as common stock and
capital surplus.
NOTE 14. EMPLOYEE STOCK OWNERSHIP PLAN
On March 5, 1993, the Company established an Employee Stock Ownership Plan
("ESOP"). This plan covers substantially all employees with one or more years
of service of at least 1,000 hours who are at least 21 years of age. During
1993, the parent company issued 250,000 shares of Series D preferred stock at a
price of $10.00 per share to the Company's ESOP trust. The trust borrowed
$2,500,000 from the bank to pay for the shares. Since the ESOP trust borrowed
from the bank, a deduction was made from shareholders' equity to reflect the
unearned compensation for the shares. The unearned compensation is reduced as
payments are made on the loan. In addition, because the parent company has
guaranteed a liquidation and conversion price of $10.00 per share, the
difference between $10.00 and the year end market price of the parent company
common stock into which the oustanding Series D shares are convertible
($562,500) has been reflected outside shareholders' equity less its related
share of unearned compensation for the unallocated shares ($539,523).
The ESOP loan is at a fixed interest rate for a term of ten years with
quarterly payments of interest only through December 31, 1995. Quarterly
principal payments at an annual rate of $250,000 and $350,000 commence on March
31, 1996 and March 31, 1999, respectively, plus interest. 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,
21
14
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 shares pledged as collateral are reported as unearned
compensation in the consolidated balance sheet. 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 will be
recorded as a reduction of retained earnings.
Compensation expense was $102,120 for 1993, with a corresponding
reduction in unearned compensation. As of December 31, 1993, no shares had been
allocated; 10,212 shares had been released for allocation and 239,788 shares
were not released ("unallocated"). The fair value of unallocated shares at
December 31, 1993 was $2,397,880. In accordance with the terms of the ESOP
loan, interest payments totalling $156,771 were made for the year ended
December 31, 1993. During 1993, dividends of $127,594 were paid on the Series D
preferred shares and the Company made contributions of $29,177.
NOTE 15. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan that 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. The quarterly payments to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act funding standards.
The following table sets forth the pension plan funded status:
DECEMBER 31, 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Accumulated benefit obligation, including vested benefits
of ($5,621,589) and ($3,976,080), respectively $(6,223,391) $(4,464,595)
=========== ===========
Projected benefit obligations for service rendered to date $(8,673,674) $(6,814,871)
Plan assets at fair value (U.S. Treasury securities, insurance
contract and listed stock) 7,380,868 6,556,449
----------- -----------
Funded status (1,292,806) ( 258,422)
Unrecognized net loss 2,273,477 949,902
----------- -----------
Prepaid pension cost $ 980,671 $ 691,480
=========== ===========
Net pension expense included the following components:
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Service cost $403,074 $410,597 $405,003
Interest cost 582,544 504,358 413,755
Return on assets (265,969) (525,289) (382,358)
Deferral of asset (loss) gain (248,273) 105,643 20,410
-------- -------- --------
Total included in employee benefits $471,376 $495,309 $456,810
======== ======== ========
22
15
In determining the actuarial present value of the projected benefit
obligation, the rate of increase in future compensation levels was 4% and 5%
and the weighted average discount rate used was 7.25% and 8.5% for December 31,
1993 and 1992, respectively. The expected long-term rate of return of
Retirement Plan assets was 8%.
There were no contributions to the profit-sharing plans for the years
ended December 31, 1993, 1992 and 1991. During 1993 in connection with the
establishment of an Employee Stock Ownership Plan, the Company's Board of
Directors determined to cease contributions to the profit sharing plans; all
participants in the plans became fully vested.
In December 1990, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other Pensions." Under Statement 106,
which is effective for fiscal years beginning after December 15, 1992, the cost
of postretirement benefits other than pensions must be recognized on an accrual
basis as employees perform services to earn the benefits. The parent company
and its nonbank subsidiaries provide to all non-union employees, postretirement
life insurance benefits. The Company has adopted SFAS No. 106 as of January 1,
1993 and such adoption has not had a significant impact on its results of
operations.
NOTE 16. INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
FEDERAL
Current $1,549,307 $ 982,225 $(1,923,710)
Deferred (8,825) 175,773 (276,890)
---------- ---------- -----------
Total $1,540,482 $1,157,998 $(2,200,600)
========== ========== ===========
STATE AND LOCAL
Current $1,100,532 $ 637,586 $ 164,449
Deferred (13,289) (10,268) (10,232)
---------- ---------- -----------
Total $1,087,243 $ 627,318 $ 154,217
========== ========== ===========
TOTAL
Current $2,649,839 $1,619,811 $(1,759,261)
Deferred (22,114) 165,505 (287,122)
---------- ---------- -----------
Total $2,627,725 $1,785,316 $(2,046,383)
========== ========== ===========
Reconciliations of income tax provisions with taxes or tax benefits
computed at Federal statutory rates are as follows:
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Federal statutory rate 34% 34% 34%
Computed tax $1,966,261 $1,483,260 $(2,291,086)
Increase (decrease) in tax resulting from
State and local taxes, net of Federal income tax benefit 717,580 414,030 101,784
Other, net (56,116) (111,974) 142,919
---------- ---------- -----------
Total $2,627,725 $1,785,316 $(2,046,383)
========== ========== ===========
The deferred income tax provisions (benefits) result from timing
differences in the recognition of revenue and expense for tax and financial
reporting purposes. The source of these differences and the tax effect of each
are as follows:
YEARS ENDED DECEMBER 31, 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses $ 189,308 $ (263,402)
Accretion of discounts on investment securities (853) (770)
Deferred compensation (22,950) (22,950)
---------- -----------
Total $ 165,505 $ (287,122)
========== ===========
23
16
The components of the net deferred tax asset are as follows:
DECEMBER 31, 1993
- --------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Difference between financial statement provision
for possible loan losses and tax bad debt deduction $1,097,248
Non-accrual interest 1,095,573
Deferred compensation 131,768
Other 2,434
----------
Total deferred tax assets 2,327,023
----------
Deferred tax liabilities
Pension and benefit plans 377,600
Valuation account for securities
available for sale 625,678
Other 214,760
----------
Total deferred tax liabilities 1,218,038
----------
Net deferred tax asset $1,108,985
==========
Federal income tax returns of the Company for all years through
December 31, 1987 have been settled with the Internal Revenue Service.
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" as of
January 1, 1993. The adoption of SFAS No. 109 had no effect on the Company's
results of operations.
Taxes, other than taxes on income, are charged against other expenses
and amounted to $1,160,770, $1,075,774, and $984,413 for the years ended
December 31, 1993, 1992 and 1991, respectively.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENT DISCLOSURES
Statement of Financial Accounting Standards ("SFAS") No.107 "Disclosures about
Fair Value of Financial Instruments" requires the Company to disclose the "fair
values" of certain financial instruments for which it is practical to estimate
"fair value". SFAS No. 107 defines a "financial instrument" as cash, evidence
of ownership in an entity, or a contract that conveys or imposes on an entity
the contractual right or obligation to either receive or deliver cash or
another financial instrument. "Fair value" is defined as the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation, and is best
evidenced by a quoted market price if one exists.
Much of the information used to arrive at fair value is highly
subjective and judgmental in nature and therefore the results may not be
precise. The subjective factors include, among other things, estimated cash
flows, risk characteristics, credit quality and interest rates all of which are
subject to change. With the exception of investment securities and long-term
debt, the Company's financial instruments are not readily marketable and market
prices do not exist. Since negotiated prices for the instruments which are not
readily marketable depend greatly on the motivation of the buyer and seller,
the amounts which will actually be realized or paid per settlement or maturity
of these instruments could be significantly different.
The following disclosures represent the Company's best estimate of the
"fair value" of both on- and off-balance sheet financial instruments. The
tables present, for each class of financial instrument: (1) the assumptions and
methods which were utilized to estimate, where practical to do so, the fair
values, (2) book values and (3) calculated estimates of fair value.
Financial Instruments with Book Value Equal to Fair Value The book value of
cash and due from banks, interest-bearing deposits with other banks, customer
liabilities under acceptances, accrued interest receivable, agreements to
repurchase, commercial paper, other short-term borrowings, acceptances
outstanding, due to factored clients, and accrued interest payable, as a result
of their short-term nature, is considered to be equal to fair value.
Investment Securities For investment securities, fair value has been based upon
current market quotations, where available. If quoted market prices are not
available, fair value has been estimated based upon the quoted price of similar
instruments.
24
17
Loans Substantially all the Company's loans reprice within 90 days reflecting
changes in the base rate. Accordingly, the fair value of these loans, net of
unearned discounts, is equal to their book value. For other loans, the
estimated fair value is calculated based on discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality and for similar maturities. These
calculations have been adjusted for credit risk based on the Company's
historical credit loss experience.
The estimated fair value for secured non-accrual loans is the value of
the underlying collateral which is sufficient to repay each loan. For other
non-accrual loans, the estimated fair value represents book value less a credit
risk adjustment based on the Company's historical credit loss experience.
Deposits SFAS No. 107 requires that the fair value of demand, savings, NOW and
certain money market deposits be equal to their book value. 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 The fair value of the Company's convertible subordinated
debentures is based on current market quotations. 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
borrowings and maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees The notional amount of off-balance sheet commitments to extend
credit, standby letters of credit, and financial guarantees, is considered
equal to fair value. Resulting from 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.
The following is a summary of the book values and estimated fair
values of the Company's financial assets and liabilities:
1993 1992
------------------------------- -------------------------------
BOOK ESTIMATED BOOK ESTIMATED
DECEMBER 31, VALUE FAIR VALUE VALUE FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ 35,975,787 $ 35,975,787 $ 37,168,675 $ 37,168,675
Interest-bearing deposits with other banks 2,970,000 2,970,000 3,630,000 3,630,000
Investment securities 286,815,791 287,909,188 219,570,835 221,627,481
Loans, net 295,336,874 295,580,936 285,613,518 285,983,000
Customers' liability under acceptances 201,669 201,669 263,107 263,107
Accrued interest receivable 3,501,850 3,501,850 2,872,719 2,872,719
FINANCIAL LIABILITIES
Demand, NOW, savings and money market deposits 365,713,170 365,713,170 363,359,371 363,359,371
Time deposits 107,272,756 107,325,000 92,800,068 92,860,000
Securities sold under repurchase agreements 37,225,000 37,225,000 6,642,311 6,642,311
Commercial paper 14,320,400 14,320,400 14,081,200 14,081,200
Other short-term borrowings 13,613,964 13,613,964 5,760,664 5,760,664
Acceptances outstanding 201,669 201,669 263,107 263,107
Due to factoring clients 5,784,952 5,784,952 5,746,349 5,746,349
Accrued interest payable 1,716,143 1,716,143 1,929,513 1,929,513
Long-term convertible subordinated debentures 26,892,000 25,349,000 35,166,000 31,741,000
Other long-term borrowings 25,500,000 25,163,000 -- --
25
18
NOTE 18. PARENT COMPANY
CONDENSED BALANCE SHEETS
DECEMBER 31, 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 163,234 $ 116,748
Interest-bearing deposits -- banking subsidiary 11,951,815 23,171,000
Loans, net of unearned discounts 15,326,201 8,000,000
Less allowance for possible loan losses 259,627 --
------------ ------------
Loans, net 15,066,574 8,000,000
------------ ------------
Investment in subsidiaries
Bank 68,143,245 66,544,400
Others 2,783,154 2,616,021
Due from subsidiaries 1,170,984 1,543,711
Other assets 2,159,066 2,879,901
------------ ------------
$101,438,072 $104,871,781
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper $ 14,320,400 $ 14,081,200
Due to subsidiaries 2,818,442 3,126,562
Accrued expenses and other liabilities 2,050,555 2,348,014
Long-term convertible subordinated debt 26,892,000 35,166,000
Other long-term borrowings 2,500,000 --
Shareholders' equity 52,856,675 50,150,005
------------ ------------
$101,438,072 $104,871,781
============ ============
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends and interest from
Banking subsidiary $2,598,857 $37,323,859 $ 2,688,473
Other subsidiaries -- 245,000 2,910,264
Management and service fees from
Banking subsidiary 1,106,522 479,650 424,397
Other subsidiaries 111,600 111,600 141,600
Interest and fees on loans 1,579,181 171,752 --
Other 363,509 847,348 541,351
---------- ----------- -----------
5,759,669 39,179,209 6,706,085
---------- ----------- -----------
EXPENSES
Interest expense 2,333,077 3,067,361 5,494,992
Provision for possible loan losses 50,000 -- --
Salaries and employee benefits 1,035,811 1,157,517 1,396,575
Computer service fees and rent paid to banking subsidiary 58,688 58,846 62,705
Other 645,596 676,619 749,363
---------- ----------- -----------
4,123,172 4,960,343 7,703,635
---------- ----------- -----------
Income (Loss) before income taxes and equity in undistributed
net income (loss) of subsidiaries 1,636,497 34,218,866 (997,550)
Provision (Benefit) for income taxes (487,283) (1,732,158) (2,203,737)
---------- ----------- -----------
2,123,780 35,951,024 1,206,187
Equity in undistributed net income (loss) of subsidiaries 1,031,617 (33,373,810) (5,898,292)
---------- ----------- -----------
Net income (loss) $3,155,397 $ 2,577,214 $(4,692,105)
========== =========== ===========
26
19
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $3,155,397 $ 2,577,214 $(4,692,105)
Adjustments to reconcile net income (loss) to net cash from
operating activities
Provision for possible loan losses 50,000 -- --
Amortization of unearned compensation 102,120 44,400 57,000
(Increase) Decrease in accrued interest receivable (124,554) (7,586) 550
Decrease in accrued expenses and other liabilities (320,436) (613,240) (561,736)
Decrease in due to subsidiaries, net (308,120) (1,680,536) (59,256)
Equity in undistributed net (income)
loss of subsidiaries (1,031,292) 33,373,810 5,898,292
Other, net 1,218,116 380,019 (1,945,517)
========== =========== ===========
Net cash provided (used) by operating activities 2,741,231 34,074,081 (1,302,772)
========== =========== ===========
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing
deposits with banks 11,219,185 (13,104,000) 1,333,000
Net increase in loans (7,116,574) (8,000,000) --
Distributions from subsidiaries -- -- 3,489,736
Other, net -- 549 28,495
========== =========== ===========
Net cash provided (used) by investing activities 4,102,611 (21,103,451) 4,851,231
========== =========== ===========
FINANCING ACTIVITIES
Net increase (decrease) in commercial paper 239,200 (5,849,700) (2,500,000)
Cash dividends paid on preferred and common shares (1,269,371) (1,269,299) (1,391,108)
Prepayments and maturities on debentures (8,267,185) (5,845,130) --
Issuance of Series D preferred shares 2,500,000 -- --
Funding provided for purchase of Series D preferred shares (2,500,000) -- --
Increase in other long-term borrowings 2,500,000 -- --
--------- -- --
Net cash used by financing activities (6,797,356) (12,964,129) (3,891,108)
========== =========== ===========
Net increase (decrease) in cash and due from banks 46,486 6,501 (342,649)
Cash and due from banks -- beginning of year 116,748 110,247 452,896
========== =========== ===========
Cash and due from banks -- end of year $ 163,234 $ 116,748 $ 110,247
========== =========== ===========
Supplemental schedule of non-cash financing activities
Valuation account for securities
available for sale $ 734,686 $ -- $ --
Debenture and preferred stock conversions 6,815 139,870 580
(Forfeiture) Issuance of treasury shares under
incentive compensation plan -- (3,960) 77,220
Supplemental disclosure of cash flow information
Interest paid 2,811,046 3,715,993 5,882,219
Income taxes paid 1,178,884 1,667,100 461,223
Cash paid for assets acquired 7,905,912 -- --
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 $2,500,000 at December 31, 1993.
27
20
NOTE 19. COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancellable and noncancellable leases for premises
and equipment were $1,644,315, $1,525,297 and $1,444,392, respectively, for the
years ended December 31, 1993, 1992 and 1991.
The future minimum rental commitments as of December 31, 1993 under
noncancellable leases follow:
RENTAL
YEAR(S) COMMITMENTS
- ---------------------------------------------
1994 $1,459,973
1995 1,518,336
1996 1,655,603
1997 773,643
1998 739,041
1999 and thereafter 3,241,710
----------
Total $9,388,306
==========
Certain of the 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 shareholders' equity position
of the Company.
Loan commitments, substantially all of which have an original maturity
of one year or less, were approximately $25,383,000 as of December 31, 1993.
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 termi-nation clauses and may require payment of
a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The bank evaluates each customers' creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, by
the bank upon extension of credit is based on management's credit evaluation of
the borrower. Collateral held varies but may include cash, U.S. Treasury and
other marketable securities, accounts receivable, inventory and property, plant
and equipment.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the bank to guarantee the performance of a
customer to a third party. At December 31, 1993, these commitments totalled
$24,688,388 of which $21,518,646 expired within one year $388,492 within two
years and $2,781,250 within three years. Approximately 7% of the commitments
were automatically renewable for periods 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, 1993 varies from -0- percent to 100 percent; the
average amount collateralized is approximately 46 percent.
Various legal proceedings are 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.
28
21
NOTE 20. QUARTERLY DATA (UNAUDITED)
1993 QUARTER MAR 31 JUN 30 SEPT 30 DEC 31
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income $7,916,257 $7,987,457 $8,120,137 $8,516,374
Total interest expense 2,496,207 2,498,824 2,504,316 2,668,590
Net interest income 5,420,050 5,488,633 5,615,821 5,847,784
Provision for possible loan losses 160,000 160,000 185,000 185,000
Noninterest income 876,966 944,409 1,046,121 1,003,780
Noninterest expenses 4,755,475 4,764,565 5,020,035 5,230,367
Income before income taxes 1,381,541 1,508,477 1,456,907 1,436,197
Net income 741,764 801,958 805,746 805,929
Earnings per average common share
Primary .12 .12 .13 .13
Fully diluted .11 .12 .12 .12
Common stock price
High 9 1/8 8 1/2 8 1/4 8 5/8
Low 8 1/8 7 1/8 6 7/8 7 5/8
Quarter -- end 8 1/4 7 1/8 8 1/4 7 3/4
1992 QUARTER MAR 31 JUN 30 SEPT 30 DEC 31
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income $8,113,351 $7,456,229 $7,663,618 $7,338,590
Total interest expense 3,312,426 2,900,266 2,722,936 2,574,415
Net interest income 4,800,925 4,555,963 4,940,682 4,764,175
Provision for possible loan losses 85,000 910,000 85,000 210,000
Net security gains -- 1,568,454 -- --
Noninterest income 786,210 851,567 956,334 1,087,397
Noninterest expenses 4,434,192 4,682,587 4,769,845 4,772,553
Income before income taxes 1,067,943 1,383,397 1,042,171 869,019
Net income 613,294 762,363 561,861 639,696
Earnings per average common share (1) .10 .12 .09 .10
Common stock price
High 9 1/4 9 3/8 8 3/8 9 1/4
Low 5 7/8 7 1/2 7 1/8 7 5/8
Quarter -- end 8 3/8 7 1/2 8 3/8 8 3/4
(1) Fully diluted earnings per share have not been presented for 1992 because
the effects would be antidilutive.
29
22
INDEPENDENT AUDITORS' REPORT
[KPMG PEAT MARWICK LOGO] KPMG Peat Marwick
Certified Public Accountants
345 Park Avenue
New York, New York 10154
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of
Sterling Bancorp and Subsidiaries as of December 31, 1993 and 1992, the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1993
and the statements of condition of Sterling National Bank & Trust Company of
New York as of December 31, 1993 and 1992. 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 generally accepted auditing
standards. 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 and Subsidiaries as of December 31, 1993 and 1992, the results
of their operations and cash flows for each of the years in the three-year
period ended December 31, 1993 and the financial position of Sterling National
Bank & Trust Company of New York as of December 31, 1993 and 1992 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investment in Debt and Equity Securities" in
1993.
/S/ KPMG PEAT MARWICK
- ----------------------
KPMG Peat Marwick
February 2, 1994
30
23
STERLING BANCORP and Subsidiaries
SELECTED FINANCIAL DATA
(in thousands except per share data)
YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 32,540 $ 30,572 $ 36,445 $44,724 $ 83,858
Total interest expense 10,168 11,510 20,208 26,342 72,884
Net interest income 22,372 19,062 16,237 18,382 10,974
Provision for possible loan losses 690 1,290 8,000(1) -- 150
Gain (Loss) on sale of securities, net -- 1,568 12 1 (595)
Noninterest income 3,871 3,682 2,753 3,023 2,820
Noninterest expenses 19,770 18,659 17,741 17,015 17,650
Income (Loss) before taxes 5,783 4,363 (6,739) 4,391 (4,601)
Provision (Benefit) for income taxes 2,628 1,786 (2,047) 2,521 3,264
Net income (loss) 3,155 2,577 (4,692) 1,870 (7,865)
Per average common share .50 .41 (.74) .30 (1.24)
Dividends per common share .20 .20 .22 .20 .20
AT YEAR END
Interest-bearing deposits with other banks and Federal
funds sold 2,970 3,630 4,635 15,437 100,390
Investment securities 286,816 219,571 220,629 87,969 79,045
Term Federal funds sold 40,000 99,000 75,000 200,000 150,000
Other loans, net of unearned discounts 258,751 189,791 152,598 168,563 174,311
Total assets 653,039 578,248 512,012 533,945 574,030
Noninterest-bearing deposits 174,089 159,234 114,052 100,585 118,033
Interest-bearing deposits 298,897 296,925 264,804 297,039 305,795
Federal funds purchased and securities sold under
repurchase agreements 37,225 6,642 5,282 3,495 6,850
Long-term convertible subordinated debentures and
other long term borrowings 52,392 35,166 41,151 41,151 45,477
Shareholders' equity 52,857 50,150 48,657 54,683 54,020
(1) See "RESULTS OF OPERATIONS" presented on page 34 for a discussion of this
provision.
31
24
STERLING BANCORP and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS
Sterling Bancorp (the parent company) is a bank holding company, as defined by
the Bank Holding Company Act of 1956, as amended, with subsidiaries engaged
principally in commercial banking as well as accounts receivable financing,
factoring and other financial services. The parent company owns virtually 100%
of Sterling National Bank & Trust Company of New York (the bank), its principal
subsidiary, all of the outstanding shares of Standard Factors Corporation,
Universal Finance Corporation, Sterling Banking Corporation and virtually 100%
of Security Industrial Loan Association (finance subsidiaries). As used
throughout this report, "the Company'' refers to Sterling Bancorp and its
subsidiaries.
There is intense competition in all areas in which the Company conducts its
business, including deposits, loans, domestic and international financing and
trust services. In addition to competing with other banks, the Company also
competes in certain areas of its business with many other financial
institutions. At December 31, 1993, the bank's year to date average earning
assets (of which loans were 45% and investment securities were 54%) represented
approximately 97% of the Company's year to date average earning assets. See
page 36 for the composition of the Company's average balance sheets for the
three most recent years.
FINANCIAL CONDITION
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, Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital market funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits,
which historically have been relatively stable. The parent company and the bank
have significant unused borrowing capacity. Contingency plans exist and could
be implemented on a timely basis to minimize the impact of any dramatic change
in market conditions.
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. At December 31,
1993, the parent company had on hand approximately $12,115,000 in cash.
As presented in Footnote 12 on page 21, various legal restrictions limit the
extent to which the bank can supply funds to the parent company and its
non-bank subsidiaries. In addition, from time to time dividends are paid to the
parent company by other subsidiaries from their retained earnings without
regulatory restrictions.
At December 31, 1993, the parent company's outstanding long-term debt,
consisting principally of convertible subordinated debentures (originally
issued pursuant to rights offerings to shareholders of the Company), aggregated
$29,392,000. To the extent convertible subordinated debentures are converted to
common stock of the parent company (as has been the case with $11,000,000
principal amount since 1982), the subordinated debt related thereto is retired
and becomes part of shareholders' equity. The parent company's long-term
indebtedness is also met through funds generated from profits and new
financing. Since becoming a public company in 1946, the parent company and its
predecessors have been able to obtain the financing required and have paid at
maturity all outstanding long-term indebtedness. The parent company expects to
continue to meet its obligations in accordance with their terms.
At December 31, 1993, the parent company's short-term debt, consisting solely
of commercial paper, was $14,320,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$30,236,000 and back-up credit lines with banks of $15,000,000. The parent
company and its predecessor have issued and repaid at maturity approximately
$12 billion of commercial paper since 1955. Since 1979, the parent company has
had no need to use available back-up lines of credit.
32
25
The bank's asset-liability management program is designed to achieve
acceptable yields while managing interest rate risk, maturity distribution and
credit risk. At December 31, 1993, the bank maintained a portfolio of
investment securities totalling $286,771,000 of which U.S. Government and U.S.
Government corporation and agency guaranteed mortgage backed securities having
an average life of approximately 3 years amounted to $263,368,000. As of
December 31, 1993, the bank adopted Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain investment in Debt and Equity
Securities". As a result of the adoption of SFAS No. 115, the bank reclassified
securities in its investment portfolio as either "held to maturity" or
"available for sale". The reclassification of these securities had no effect on
the bank's results of operations for the year end December 31, 1993. The bank
has the intent and ability to hold to maturity investment securities classified
"held to maturity". These securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts. At December 31, 1993 the
carrying and estimated market value of "held to maturity" securities were
$195,691,000 and $196,784,000, respectively. The gross unrealized gains and
losses on these securities were $1,810,000 and $717,000, respectively.
Investment securities classified as "available for sale" may be sold in the
future, prior to maturity. These securities are carried at market value. Net
aggregate unrealized gains or losses on these securities are included in a
valuation allowance account and are shown, net of taxes, as a component of
shareholders' equity. The carrying value of "available for sale" securities was
$91,125,000 which included gross unrealized gains of $1,559,000 and gross
unrealized losses of $199,000. There were no sales of investment securities
during 1993.
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to measure capital against risk-weighted
assets, including off-balance sheet items. These regulations define the
elements of total capital into Tier 1 and Tier 2 components and establish
minimum ratios of 4% for Tier 1 capital and 8% for Total Capital. Supplementing
these regulations, is a leverage requirement. This requirement establishes a
minimum leverage ratio (at least 3%) which is calculated by dividing Tier 1
capital by adjusted average assets (after deducting goodwill). At December 31,
1993, the risk-based capital ratios and the leverage ratio for the Company and
the bank exceeded the most stringent requirements contemplated by these
guidelines. Information regarding the Company's and the bank's risk-based
capital, at December 31, 1993 and 1992 is presented on page 38.
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 and capital requirements in the future.
CREDIT RISK
A key management objective is to maintain the quality of the loan portfolio.
This objective is achieved by maintaining high underwriting standards coupled
with regular evaluation of the creditworthiness of and the designation of
lending limits for each borrower. The portfolio strategies seek to avoid
concentrations by industry or loan size in order to minimize credit exposure
and to originate loans in markets with which it is familiar. See Footnote 4
shown on page 17 for the composition of the loan portfolio.
The strength of the Company's commercial and industrial loan portfolio, which
represents approximately 73% of gross loans, is substantially dependent on the
borrower's ability to repay the loan out of profits and cash flows of the
borrower's business and the assets underlying the borrower's business, such as
accounts receivable, equipment, inventory and real property. The Company's real
estate loan portfolio, which represents approximately 12% of gross loans, is
secured by mortgages on real property located principally in the city of New
York and the state of Virginia. The collateral securing any loan may vary in
value based on the success of the business and economic conditions.
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 is
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
33
26
The allowance for possible loan losses is maintained through the provision
for possible loan losses, which is a charge to operating earnings. The adequacy
of the provision and the resulting allowance for possible loan losses is
determined by management's continuing review of the loan portfolio, including
identification and review of individual problem situations that may affect the
borrower's ability to repay, review of overall portfolio quality through an
analysis of current charge-offs, delinquency and 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. Thus, the allowance
level reflects identified loss potential and inherent risk in the portfolio.
While a significant change in any of the evaluation factors described above
could result in future additions in the allowance, in management's judgment,
the allowance for possible loan losses is adequate to provide for such loss
potential as is inherent in the loan portfolio.
At December 31, 1993, the ratio of the allowance to loans, net of unearned
discounts, was 1.1%. At December 31, 1993, the Company's allowance, after
giving effect to net charge-offs of $663,000, was $3,414,000 and its
non-accrual loans amounted to $2,297,000. Based on the foregoing, as well as
management's judgement as to the current risks inherent in the loan portfolio,
the Company's allow-ance for possible loan losses was deemed adequate to absorb
all reasonably anticipated losses on specifically known and other possible
credit risks associated with the portfolio as of December 31, 1993.
RESULTS OF OPERATIONS
The Company's earnings are primarily dependent on net interest income which can
be affected by changes in interest rates. An analysis of the Company's interest
rate sensitivity is presented on page 39. Net interest income varies with the
mix of interest-earning assets and interest-bearing liabilities and their
respective yields earned and rates paid. 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 37. Informa-tion as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 36.
Comparison of years ended December 31, 1993 and December 31, 1992 Total
interest income increased $1,968,000 due to higher average funds employed
partially offset by reduced yields. An increase in average taxable investment
securities outstandings partially offset by reduced yields, resulted in an
increase in income from investment securities of $417,000. Interest income from
Federal funds sold was $386,000 lower primarily due to lower average
outstandings. Higher average loan outstandings employed at higher rates
resulted in an increase of $2,019,000 in interest and fees on loans. The
acquisition of Zenith's loan portfolio contributed to the loan growth and
accounted for the increase in average rate.
Total interest expense for the year ended December 31, 1993 decreased
$1,342,000 principally due to lower average cost of funds. Lower rates paid
partially offset by higher outstandings, resulted in a decrease of $1,411,000
in interest expense on deposits.
Based on management's continuing evaluation of the collectibility of the loan
portfolio, $690,000 was provided for possible loan losses for the year ended
December 31, 1993.
Notwithstanding higher service charges on deposit accounts and higher volume
for letters of credit and trust services, noninterest income was $1,379,000
lower for the year ended December 31, 1993. Noninterest income for the year
ended December 31, 1992 included $1,568,000 of gains from sales of securities
in connection with the restructuring of the bank's securities portfolio.
Noninterest expenses increased $1,111,000 for the year ended December 31,
1993 versus the same period last year reflecting higher costs associated with
the Company's business development efforts as well as higher general business
costs.
The provision for income taxes increased $842,000 for the twelve months of
1993 when compared with the same period last year based on the level of pre-tax
profitability.
As a result of the above factors, net income increased $578,000 for the year
ended December 31, 1993 when compared with the same period in 1992.
34
27
Comparison of years ended December 31, 1992 and December 31, 1991 Total
interest income decreased $5,873,000 for the year ended December 31, 1992 when
compared with the prior year primarily attributable to reduced yields on all
categories of earning assets. Lower rates earned and reduced average
outstandings employed, principally in term loans to other banks, resulted in a
decrease of $6,192,000 in interest and fees on loans. An increase in average
taxable investment securities outstanding partially offset by reduced yields,
resulted in an increase in income from investment securities of $1,051,000.
Total interest expense for the year ended December 31, 1992 decreased
$8,698,000 when compared with the same period in 1991 due to reduced average
outstandings and lower cost of those funds. Lower rates paid coupled with
reduced outstanding resulted in a decrease of $6,165,000 in interest expense on
time deposits. Interest expense associated with borrowing was $2,533,000 lower
due to lower rates paid and reduced outstandings.
Based on management's analysis of the uncertain business climate and other
factors, $1,290,000 was provided for possible loan losses for the year ended
December 31, 1992. During the third quarter of 1991, a single large borrower of
the bank filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
In light of this and based upon management's continuing evaluation of the
collectibility of the loan portfolio, an $8,000,000 addition to the allowance
was made.
Noninterest income increased $2,485,000 for the year ended December 31, 1992
when compared with the prior year principally as the result of $1,568,000 in
gains, realized in the second quarter, on sale of securities as part of the
portfolio restructuring program.
Noninterest expenses increased $918,000 for the year ended December 31, 1992
versus the prior year reflecting higher general business costs.
The provision for income taxes increased $3,832,000 for the year ended
December 31, 1992 when compared with the prior year based on thelevels of
taxable income for each taxing authority.
As a result of the above factors, net income increased $7,269,000 for the
year ended December 31, 1992 when compared with the prior year.
ACCOUNTING STANDARD NOT YET ADOPTED
In June 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan." The statment is effective for fiscal years beginning
after December 15, 1994, with earlier adoption encouraged.
SFAS No. 114 generally requires all creditors to account for impaired loans
(except for those loans that are accounted for at fair value or at the lower of
cost or fair value) at the present value of the expected future cash flows,
discounted at the loan's effective interest rate, or at the fair value of the
loan's collateral if the loan is collateral-dependent. SFAS No. 114 also
provides that in-substance foreclosed loans should not be included in Real
Estate Owned for financial reporting purposes but, rather, in the loan
portfolio.
This statement is not expected to have a material effect on the Company's
financial condition or results of operation when it is adopted in the first
quarter of 1995.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The parent company's common stock is traded on The New York Stock Exchange
under the symbol STL. Information regarding the quarterly prices of the common
stock is presented in Footnote 20 on page 29. Information regarding the average
common shares outstanding and dividends per common share is presented in the
Consolidated Statements of Operations on page 10. Information regarding legal
restrictions on the ability of the bank to pay dividends to its shareholders is
presented in Footnote 12 on page 21. There are no such restrictions on the
ability of the Company to pay dividends to its shareholders. Information
related to the parent company's preferred stock is presented in Footnote 10 on
page 20.
35
28
STERLING BANCORP and Subsidiaries
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS(1)
YEAR ENDED DECEMBER 31, 1993 YEAR ENDED DECEMBER 31, 1992 YEAR ENDED DECEMBER 31, 1991
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
($ in thousands)
ASSETS
Interest-bearing deposits
with other banks $ 3,119 $ 97 3 .13 $ 4,179 $ 179 4 .28% $ 6,707 $ 450 6 .71%
Investment securities
Taxable 254,815 14,835 5 .83 208,173 14,416 6 .92 181,985 13,364 7 .34
Tax-exempt(2) 264 15 5 .74 290 17 5 .80 309 18 5 .83
Federal funds sold 4,542 139 3 .06 14,339 525 3 .66 17,386 986 5 .67
Loans, net of unearned
discounts
Domestic(3) 227,815 17,420 7 .65 211,128 15,393 7 .29 247,701 21,596 8 .72
Foreign 789 34 4 .29 789 42 5 .37 789 31 3 .93
TOTAL INTEREST ------- -------- ------- --------- ------- -------
EARNING ASSETS
491,344 32,540 6 .62 438,898 30,572 6 .95% 454,877 36,445 8 .01%
-------- ===== --------- ====== ------ =====
Cash and due from banks 35,160 30,588 23,841
Allowance for possible loan
losses (3,175) (3,906) (3,347)
Excess cost over equity
in net assets of the bank 21,158 21,158 21,158
Other 11,624 11,279 11,566
-------- -------- --------
TOTAL ASSETS $556,111 $498,017 $508,095
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $198,772 4,254 2 .14% $171,839 4,954 2 .88% $154,314 7,593 4 .92%
Other time 82,008 2,185 2 .66 82,171 2,816 3 .43 103,938 6,179 5 .94
Foreign
Other time 2,819 79 2 .80 3,972 159 3 .98 5,109 322 6 .30
Borrowings
Federal funds purchased
and securities sold
under agreements to
repurchase 31,315 896 2 .86 11,593 395 3 .41 15,851 904 5 .70
Commercial paper 14,702 411 2 .79 14,765 546 3 .70 19,506 1,165 5 .96
Other short-term debt 6,774 211 3 .11 3,734 130 3 .49 3,799 220 5 .87
Long-term debt 33,204 2,132 6 .42 36,160 2,510 6 .94 41,151 3,825 9 .30
------- ------ ------- ------ ------- ------
TOTAL INTEREST-BEARING
LIABILITIES 369,594 10,168 2 .75% 324,234 11,510 3 .55% 343,668 20,208 5 .88%
===== ===== =====
Noninterest-bearing
demand deposits 125,804 -- 112,025 -- 100,524 --
------- ------ ------- ------ ------- ------ -----
Total including noninterest
bearing demand deposits 495,398 10,168 2 .05% 436,259 11,510 2 .64% 444,192 20,208 4 .55%
------ ===== ------ ===== ------ =====
Other liabilities 9,595 12,076 11,215
------- ------- -------
Total Liabilities 504,993 448,335 455,407
Shareholders' equity 51,118 49,682 52,688
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $556,111 $498,017 $508,095
======== ======== ========
Net interest income/spread $22,372 3 .87% $19,062 3 .40% $16,237 2 .13%
======= ====== ======= ===== ======= =====
Net yield on interest earning
assets 4 .55% 4 .34% 3 .57%
===== ===== ======
(1)The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages for the bank and monthly averages
for the parent company and finance subsidiaries .
(2)Interest on these securities is not presented on a tax equivalent basis.
(3)Non-accrual loans are included in the average balance which reduces the
average yields.
36
29
STERLING BANCORP and Subsidiaries
RATE/VOLUME ANALYSIS
December 31, 1992 to December 31, 1991 to
Increase (Decrease) from Years Ended, December 31, 1993 December 31, 1992
----------------- -----------------
Volume Rate Total(1) Volume Rate Total(1)
------ ---- ------ ------ ---- ------
($ in thousands)
INTEREST INCOME
Interest-bearing deposits with other banks $ (40) $ (42) $ (82) $ (139) $ (132) $ (271)
------- -------- -------- ------- -------- --------
Investment securities
Taxable(2) 2,958 (2,539) 419 1,796 (744) 1,052
Tax-exempt(3) (2) -- (2) (1) -- (1)
------- ------- -------- -------- -------- --------
Total 2,956 (2,539) 417 1,795 (744) 1,051
------- ------- -------- -------- -------- --------
Federal funds sold (330) (56) (386) (140) (321) (461)
------- ------- -------- -------- -------- --------
Loans, net of unearned discount
Domestic 1,241 786 2,027 (2,064) (4,139) (6,203)
Foreign -- (8) (8) -- 11 11
------- ------- -------- ------- ------- -------
Total 1,241 778 2,019 (2,064) (4,128) (6,192)
------- ------- -------- ------- ------- -------
TOTAL INTEREST INCOME $3,827 $ (1,859) $ 1,968 $ (548) $(5,325) $(5,873)
====== ======== ======= ======== ======== ========
INTEREST EXPENSE
Savings and time deposits
Domestic
Savings $ 674 $(1,374) $ (700) $ 700 $(3,339) $(2,639)
Other time (4) (627) (631) (1,012) (2,351) (3,363)
Foreign
Other time (40) (40) (80) (58) (105) (163)
------ ------- -------- -------- -------- --------
Total 630 (2,041) (1,411) (370) (5,795) (6,165)
------ ------- -------- -------- ------- --------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase 618 (117) 501 (193) (316) (509)
Commercial paper (2) (133) (135) (227) (392) (619)
Other short-term debt 101 (20) 81 (2) (88) (90)
Long-term debt (198) (180) (378) (399) (916) (1,315)
------ ------ ------- -------- -------- -------
Total 519 (450) 69 (821) (1,712) (2,533)
------ ------ ------- -------- -------- -------
TOTAL INTEREST EXPENSE $1,149 $ (2,491) $(1,342) $(1,191) $(7,507) $(8,698)
====== ======== ======== ======== ======== ========
NET INTEREST INCOME $2,678 $ 632 $ 3,310 $ 643 $ 2,182 $ 2,825
====== ======== ======== ======== ======== ========
(1)The rate/volume variance is allocated equally between changes in volume and
rate. The effect of the extra day in 1992 has been included in the change in
volume.
(2)Includes Federal Reserve Bank and other stock investments.
(3)Interest on these securities is not presented on a tax equivalent basis.
37
30
STERLING BANCORP and Subsidiaries
CAPITAL COMPONENTS AND RATIOS
THE COMPANY THE BANK
--------------------------- --------------------------
12/31/93 12/31/92 12/31/93 12/31/92
-------- -------- -------- --------
($ IN THOUSANDS)
COMPONENTS
Stockholders' equity $ 52,857 $ 50,150 $ 46,993 $ 45,394
Minority interest 8 8 -- --
Less
Goodwill 21,158 21,158 -- --
Net unrealized appreciation on
securities available for sale, net of tax effect (1) 735 -- 734 --
--- -- --- --
Tier 1 Capital 30,972 29,000 46,259 45,394
------ ------ ------- ------
Allowance for possible loan losses (limited to 1.25%
of total risk-weighted assets) 3,414 3,177 3,042 3,064
Subordinated debt (limited to 50% of Tier 1 Capital) 15,486 14,500 -- --
------ ------ --- --
Tier 2 Capital 18,900 17,677 3,042 3,064
------ ------ ------ -----
Total Risk-based Capital $ 49,872 $ 46,677 $ 49,301 $ 48,458
======== ======== ========= ========
RATIOS
Tier 1 Capital 9.37% 10.22% 14.95% 17.03%
Total Capital 15.08 16.46 15.94 18.18
Leverage 4.90 5.21 7.57 8 .40
Memoranda
Tier 1 Capital minimum requirement $ 13,226 $ 11,346 $ 12,374 $ 10,659
Total Capital minimum requirement 26,451 22,692 24,747 21,318
Risk-weighted assets, net of goodwill 330,641 283,645 309,343 266,477
Total assets, net of goodwill 631,881 557,090 611,149 540,723
(1) As directed by regulatory agencies, this amount must be excluded from the
computation of Tier 1 capital.
38
31
STERLING BANCORP and Subsidiaries
INTEREST RATE SENSITIVITY
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to
confine significant rate sensitivity gaps predominantly to repricing intervals
of a year or less so that adjustments can be made quickly. Assets and
liabilities with predetermined repricing dates are placed in a time of the
earliest repricing period. Based on the interest rate sensitivity analysis
shown below, the Company's net interest income would generally increase during
periods of rising interest rates and generally 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 $ 2,970 $ -- $ -- $ -- $ -- $ 2,970
Investment securities 9,482 12,552 41,923 216,049 6,810 286,816
Loans, net of unearned discounts 269,070 3,540 15,490 15,898 (5,247) 298,751
Noninterest-earning assets and
allowance for possible loan losses -- -- -- -- 64,502 64,502
-------- -------- -------- ------- --------- --------
Total Assets 281,522 16,092 57,413 231,947 66,065 653,039
-------- -------- -------- ------- --------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits 171,995 24,249 102,653 -- -- 298,897
Securities sold under repurchase
agreements 31,225 6,000 -- -- -- 37,225
Commercial paper 14,320 -- -- -- -- 14,320
Other short-term borrowings 7,614 6,000 -- -- -- 13,614
Long-term convertible subordinated
debentures 26,892 -- -- -- -- 26,892
Other long-term borrowings -- -- 23,750 1,750 -- 25,500
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 236,591 236,591
--------- --------- -------- ------- -------- -------
Total Liabilities and Shareholders'
Equity 252,046 36,249 126,403 1,750 236,591 653,039
--------- --------- --------- -------- ---------- -------
Net Interest Rate Sensitivity Gap $ 29,476 $(20,157) $ (68,990) $230,197 $ (170,526) $ --
========= ========= ========= ======== ========== ========
Cumulative Gap at December 31, 1993 $ 29,476 $ 9,319 $ (59,671) $170,526 $ -- $ --
========= ========= ========== ======== ========== ========
Cumulative Gap at December 31, 1992 $ 31,130 $ 31,539 $ 3,313 $156,733 $ -- $ --
========= ========= ========== ======== ========== ========
Cumulative Gap at December 31, 1991 $ 33,976 $ 87,894 $ 86,314 $121,041 $ -- $ --
========= ========= ========== ======== ========== ========
39