1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996
Commission file number 1-5273-1
Sterling Bancorp
(Exact name of registrant as specified in its charter)
New York 13-2565216
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
540 Madison Avenue, New York, N.Y. 10022-3299
(Address of principal executive offices) (Zip Code)
212-826-8000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
As of March 31, 1996 there were outstanding 6,479,063 shares of common
stock, $1.00 par value, the registrant's only class of common shares
outstanding.
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STERLING BANCORP
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business 9
Financial Condition 9
Asset/Liability Management 10
Securities 13
Credit Risk 13
Results of Operations 14
Average Balance Sheets 16
Rate/Volume Analysis 17
Interest Rate Sensitivity 18
Risk-Based Capital Components and Ratios 19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
EXHIBIT INDEX 21
Exhibit 11 Computation of Per Share Earnings 22
Exhibit 27 Financial Data Schedule 23
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1996 1995
------------ ------------
Cash and due from banks $ 43,024,628 $ 40,720,401
Interest-bearing deposits with other banks 3,010,000 3,000,000
Federal funds sold -- 5,000,000
Securities held to maturity estimated(market value
$230,316,298 and $196,573,342, respectively) 234,989,455 197,567,406
Securities held for sale (at estimated market value) 93,096,902 101,670,466
------------ ------------
Total investment securities 328,086,357 299,237,872
------------ ------------
Loans, net of unearned discounts 361,302,995 397,228,786
Less allowance for possible loan losses 5,766,658 5,192,203
------------ ------------
Loans, net 355,536,337 392,036,583
------------ ------------
Customers' liability under acceptances 554,280 2,395,089
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 3,143,872 2,733,105
Accrued interest receivable 4,512,464 4,151,950
Other assets 8,975,369 5,175,001
------------ ------------
$768,001,747 $775,608,441
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $172,163,337 $224,080,543
Interest-bearing deposits 330,250,217 326,947,260
------------ ------------
Total deposits 502,413,554 551,027,803
Securities sold under agreements to repurchase 75,942,890 51,265,620
Commercial paper 29,583,600 26,607,200
Other short-term borrowings 17,558,487 5,331,640
Acceptances outstanding 554,280 2,395,089
Due to factoring clients 22,885,038 22,596,179
Accrued expenses and other liabilities 19,417,106 17,381,686
------------ ------------
668,354,955 676,605,217
------------ ------------
Long-term convertible subordinated debentures 21,153,000 21,346,000
Other long-term debt 17,750,000 18,000,000
------------ ------------
Total long-term debt 38,903,000 39,346,000
------------ ------------
Total liabilities 707,257,955 715,951,217
------------ ------------
Commitments and contingent liabilities
Shareholders' equity
Preferred stock, $5 par value. Authorized 644,389 shares 2,525,760 2,525,760
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 6,518,906 and 6,496,854 shares 6,518,906 6,496,854
Capital surplus 28,549,021 28,091,878
Retained earnings 26,942,702 25,641,804
Net unrealized appreciation on securities
available for sale, net of tax 113,396 543,747
------------ ------------
64,649,785 63,300,043
Less
Common stock in treasury at cost, 39,843 and
150,343 shares, respectively 394,184 1,489,239
Unearned compensation 3,511,809 2,153,580
------------ ------------
Total shareholders' equity 60,743,792 59,657,224
------------ ------------
$768,001,747 $775,608,441
============ ============
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1996 1995
----------- -----------
INTEREST INCOME
Loans $ 8,531,269 $ 7,314,012
Securities held to maturity 3,565,310 3,922,410
Securities available for sale 1,620,314 1,163,234
Federal funds sold 277,433 119,157
Deposits with other banks 42,093 41,718
----------- -----------
Total interest income 14,036,419 12,560,531
----------- -----------
INTEREST EXPENSE
Deposits 2,951,678 2,804,342
Federal funds purchased and
securities sold under agreements to repurchase 884,721 648,824
Commercial paper 330,543 219,274
Other short-term borrowings 124,456 75,705
Long-term debt 719,108 884,337
----------- -----------
Total interest expense 5,010,506 4,632,482
----------- -----------
Net interest income 9,025,913 7,928,049
Provision for possible loan losses 577,000 315,000
----------- -----------
Net interest income after provision for possible
loan losses 8,448,913 7,613,049
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 372,505 426,394
Factoring commissions 602,512 279,120
Letter of credit commissions 215,411 171,756
Trust fees 150,796 168,189
Gain on sales of loans 32,236 --
Gain on sales of securities 22,161 --
Other income 265,913 292,155
----------- -----------
Total noninterest income 1,661,534 1,337,614
----------- -----------
NONINTEREST EXPENSES
Salaries 3,183,825 2,729,596
Employee benefits 749,966 647,735
----------- -----------
Total personnel expenses 3,933,791 3,377,331
Occupancy expense, net 587,883 723,392
Equipment expense 312,153 363,166
Other expenses 1,909,251 1,808,244
----------- -----------
Total noninterest expenses 6,743,078 6,272,133
----------- -----------
Income before income taxes 3,367,369 2,678,530
Provision for income taxes 1,607,624 1,421,456
----------- -----------
Net income $ 1,759,745 $ 1,257,074
=========== ===========
Average number of common shares outstanding
Primary 6,519,458 6,369,450
Fully diluted 8,664,599 8,951,177
Earnings per average common share
Primary $.27 $.20
Fully diluted .23 .18
Dividends paid per common share .07 .06
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended
March 31, March 31,
1996 1995
------------ -----------
Shareholders' equity at beginning of period $59,657,224 $53,719,314
----------- -----------
Net income 1,759,745 1,257,074
Dividends paid
Common stock - $.07 and $.06 per share,
respectively (453,542) (380,776)
Preferred stock - at prescribed rates (5,305) (343)
Conversions of subordinated debentures
into common stock 193,000 --
Amortization of unearned compensation 23,021 --
Change in valuation account for securities
available for sale, net of tax (430,351) 773,909
----------- -----------
Net change in shareholders' equity 1,086,568 1,649,864
----------- -----------
Shareholders' equity at end of period $60,743,792 $55,369,178
=========== ===========
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1996 1995
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,759,745 $ 1,257,074
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 577,000 315,000
Depreciation and amortization of premises and equipment 162,434 238,504
Deferred income tax (benefit) provision (139,792) 123,256
Gain on sale of securities (22,161) --
Gain on sale of loans (32,236) --
Amortization of unearned compensation 23,021 --
Amortization of premiums on investment securities 418,954 354,036
Accretion of discounts on investment securities (39,040) (20,944)
Increase in accrued interest receivable (360,514) (317,879)
Increase in accrued expenses and other liabilities 2,324,279 3,158,397
Other, net (3,295,455) (849,687)
------------ ------------
Net cash provided by operating activities 1,376,235 4,257,757
------------ ------------
INVESTING ACTIVITIES
Purchase of premises and equipment (573,201) (143,186)
Net increase in interest-bearing deposits
with other banks (10,000) (30,000)
Net decrease in Federal funds sold 5,000,000 3,000,000
Net decrease in loans 35,955,482 13,701,457
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 7,981,976 6,334,922
Purchases of securities - held to maturity (45,650,703) --
Proceeds from sale of securities - available for sale 5,017,969 --
Proceeds from prepayments, redemptions or maturities of
securities - available for sale 2,649,048 1,462,737
Purchase of securities - available for sale -- (5,207,922)
------------ ------------
Net cash provided by investing activities 10,370,571 19,118,008
------------ ------------
FINANCING ACTIVITIES
Net decrease in noninterest-bearing deposits (51,917,206) (18,433,882)
Net increase (decrease) in interest-bearing deposits 3,302,957 (11,521,208)
Net increase in securities sold under
repurchase agreements 24,677,270 1,279,218
Net increase in commercial paper
and other short-term borrowings 15,203,247 314,635
Decrease in long-term debt (250,000) --
Cash dividends paid on common and preferred stock (458,847) (381,119)
Maturities and prepayments on debentures -- (534,000)
------------ -------------
Net cash used by financing activities (9,442,579) (29,276,356)
------------ ------------
Net increase(decrease) in cash and due from banks 2,304,227 (5,900,591)
Cash and due from banks - beginning of period 40,720,401 39,224,764
------------ ------------
Cash and due from banks - end of period $ 43,024,628 $ 33,324,173
============ ============
Supplemental schedule of non-cash financing activities:
Conversion of debentures $ 193,000 --
Issuance of treasury shares 1,381,250 --
Supplemental disclosure of cash flow information:
Interest paid $ 5,480,943 $ 4,622,324
Income taxes paid 518,650 641,088
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The consolidated financial statements include the accounts of Sterling
Bancorp ("the parent company") and its subsidiaries, principally
Sterling National Bank & Trust Company of New York ("the bank"), after
elimination of material intercompany transactions. The term "the
Company" refers to Sterling Bancorp and its subsidiaries. The
consolidated financial statements as of and for the interim periods
ended March 31, 1996 and 1995 are unaudited; however, in the opinion of
management, all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of such periods have been made.
Certain reclassifications have been made to the 1995 financial
statements to conform to current presentation. The interim financial
statements should be read in conjunction with the Company's annual
report on Form 10-K for the year ended December 31, 1995.
2. For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks.
3. The Company's outstanding Preferred Shares, $5 par value, comprise
1,288 Series B shares (of 4,389 authorized) and 250,000 Series D Shares
(of 300,000 authorized). Each Series B share is entitled to cumulative
dividends at the rate of $0.10 per year, to one vote per share and upon
liquidation or redemption to an amount equal to accrued and unpaid
dividends to the date of redemption or liquidation plus an amount which
is $20 in the case of involuntary liquidation and $28 otherwise; each
Series D share (all of such shares are owned by the Company's Employee
Stock Ownership Trust) is entitled to dividends at the rate of $0.6125
per year, is convertible into one Common Share, and is entitled to a
liquidation preference of $10 (together with accrued dividends). All
preferred shares are entitled to one vote per share (voting with the
Common Shares except as otherwise required by law).
4. Under the provisions of the Stock Incentive Plan, on January 3, 1996,
the parent company made restricted stock awards to key employees of
110,500 shares from treasury stock and granted key employees incentive
stock options to purchase 109,500 shares.
The restricted stock awards vest in four equal annual installments
starting one year from the date of the award, with any unvested shares
to revert to the parent company if the holder's employment terminates
other than for certain specified reasons. In connection with the
issuance of the restricted shares, the Company recognized unearned
incentive compensation, equal to the market value of the shares issued
on the date of the award, which will be amortized as a charge to
salaries expense over the vesting period. The balance of unearned
compensation is reported as a reduction of shareholders' equity. For
income tax purposes, the Company is entitled to deductions as each
installment vests in an amount equal to the average market value of the
shares on the vesting date and for dividends paid on unvested shares.
The incentive stock options, awarded at the closing market price on
the date of grant, expire ten years from the date of grant and become
exercisable in four annual installments, starting one year from the
date of grant, or upon death or disability of the grantee. No expense
is required to be recognized in connection with options granted.
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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In October 1995, the Financial Accounting Standards Board, ("FASB")
issued Statements of Financial Accounting Standards No. 123,"Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 established
financial accounting and reporting standards for stock-based
compensation plans. Such plans include all arrangements by which
employees or others receive shares of stock or other equity instruments
of the parent company, or arrangements by which the parent company
incurs liabilities in amounts based on the price of the parent
company's stock. Examples are incentive stock options, non-qualified
stock options, restricted stock, stock appreciation rights or any
combination thereof. SFAS 123 allows two alternative accounting
methods: (1) a fair-value based method, or (2) an intrinsic-value based
method which is already prescribed by Accounting Principles Board
Opinion No.25, "Accounting for Stock Issued to Employees" ("APB25").
Both the accounting and disclosure requirement of SFAS 123 are
effective for fiscal years beginning after December 15, 1995. The
parent company intends to continue accounting for its employee stock
compensation plans under its current method (APB25), and will adopt the
disclosure requirements of SFAS 123 in 1996.
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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 providing a
full range of financial services, including business and consumer loans, asset
based financing, factoring, trade financing, mortgage lending, leasing, and
trust and estate services. The parent company owns all of the outstanding shares
of Sterling National Bank & Trust Company of New York (the bank), its principal
subsidiary, and of Standard Factors Corporation/Sterling Factors, Universal
Finance Corporation, Sterling Banking Corporation and Sterling 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 other financial institutions. At
March 31, 1996, the bank's year to date average earning assets (of which loans
were 46% and securities were 50%) represented approximately 93% of the Company's
year to date average earning assets. See page 16 for the composition of the
Company's average balance sheets for the three months ended March 31, 1996 and
March 31, 1995.
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 and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital market funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits, which
historically have been relatively stable. The parent company and the bank have
significant unused borrowing capacity. Contingency plans exist and could be
implemented on a timely basis to minimize the impact of any dramatic change in
market conditions.
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 March 31, 1996,
the parent company had on hand approximately $12,171,000 in cash.
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency (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. In addition, from time to time dividends are paid
to the parent company by the finance subsidiaries from their retained earnings
without regulatory restrictions.
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STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At March 31, 1996, 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 $23,403,000. 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 March 31, 1996, the parent company's short-term debt, consisting principally
of commercial paper, was approximately $29,834,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$10,858,161 and back-up credit lines with banks of $14,000,000. 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.
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
quarterly average assets (after deducting goodwill). At March 31, 1996, 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 March
31, 1996 and December 31, 1995, is presented on page 19.
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.
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest earning assets and interest bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company unduly to interest
rate fluctuations.
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STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company takes a coordinated approach to the management of its liquidity,
capital and interest rate risk. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee of the Board of Directors ("ALCO").
ALCO, which is comprised of members of senior management and the Board, meets to
review among other things, economic conditions, interest rates, yield curve,
cash flow projections, expected customer actions, liquidity levels, capital
ratios and repricing characteristics of assets, liabilities and off-balance
sheet financial instruments.
The Company's balance sheet structure is primarily short-term in nature with
most assets and liabilities repricing or maturing in less than five years. The
Company monitors the interest rate sensitivity of its on-and off-balance sheet
positions by examining its near-term sensitivity and its longer term gap (as
defined below) position. The Company utilizes several tools in its management of
interest rate risk, primarily utilizing a sophisticated income simulations model
and complementing this with a traditional gap analysis.
The income simulation model measures the Company's net interest income
sensitivity or volatility to interest rate changes utilizing statistical
techniques that allow the Company to consider various factors which impact net
interest income. These factors include actual maturities, estimated cash flows,
repricing characteristics, deposits growth/retention and, most importantly, the
relative sensitivity of the Company's assets and liabilities to changes in
market interest rates. This relative sensitivity is important to consider as the
Company's core deposit base is not subject to the same degree of interest rate
sensitivity as its assets. The core deposits costs are internally managed and
tend to exhibit less sensitivity to changes in interest rates than the Company's
adjustable rate assets whose yields are based on external indices and change in
concert with market interest rates.
The Company's interest rate sensitivity is determined by identifying the
probable impact of changes in market interest rates on the yields on the
Company's assets and the rates which would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
can project the impact of changes in interest rates on net interest margin. The
Company has established certain limits for the potential volatility of its net
interest margin assuming certain levels of changes in market interest rates with
the objective of maintaining a stable net interest margin under various probable
rate scenarios. The Company can also utilize this technique to stress test its
portfolio to determine the impact of various interest rate scenarios on the
Company's net interest income.
The traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest-rate sensitive assets exceed interest-rate sensitive
liabilities generally will result in an institution's net interest margin
increasing in a rising rate environment and decreasing in a falling rate
environment. A negative gap (liability sensitive) will generally have the
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STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
opposite results on an institution's net interest margin. However, the
traditional gap analysis does not assess the relative sensitivity of assets and
liabilities to changes in interest rates. The Company utilizes the gap analysis
to complement its income simulations modeling, primarily focusing on the longer
term structure of the balance sheet.
As part of its interest rate risk strategy, the Company uses off-balance sheet
financial instruments (derivatives) to hedge the interest rate sensitivity of
assets with the corresponding amortization reflected in the yield of the related
on-balance sheet assets being hedged. The Company has written policy guidelines,
which have been approved by the Board of Directors and the Asset/Liability
Committee, governing the use of off-balance sheet financial instruments,
including approved counterparties, risk limits and appropriate internal control
procedures. The credit risk of derivatives arises principally from the potential
for a counterparty to fail to meet its obligation to settle a contract on a
timely basis. At March 31, 1996, all counterparties have investment grade credit
ratings from the major rating agencies. Each counterparty is specifically
approved for applicable credit exposure.
At March 31, 1996, the Company's off-balance sheet financial instruments
consisted of two interest rate floor contracts having a notional amount totaling
$75 million; one contract with a notional amount of $50 million has a final
maturity of February 27, 2000 and the other contract with a notional amount of
$25 million has a final maturity of March 17, 1998. These financial instruments
are being used as part of the Company's interest rate risk management and not
for trading purposes.
Interest rate floor contracts require the counterparty to pay the Company at
specified future dates the amount, if any, by which the specified interest rate
(3-month LIBOR) falls below the fixed floor rates, applied to the notional
amounts. The Company utilizes these financial instruments to adjust its interest
rate risk position without exposing itself to principal risk and funding
requirements. The interest rate floor contracts require the Company to pay a fee
for the right to receive a fixed interest payment.
The Company purchased interest rate floor contracts to reduce the impact of
falling rates on its floating rate commercial loans. The Company paid up front
premiums of $715,000 for the interest rate floor contracts that it entered into
in 1995. These premiums are amortized monthly against interest income from the
designated assets. At March 31, 1996, the unamortized premiums on these
contracts totaled $540,000 and are included in other assets. At March 31, 1996,
$5,000 was receivable under these contracts.
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STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECURITIES
The Company's securities portfolios are comprised principally of U.S. Government
and U.S. Government corporation and agency mortgage backed securities along with
other debt and equity securities. At March 31, 1996, the Company's portfolio of
securities totalled $328,086,000 of which U.S. Government and U.S. Government
corporation and agency guaranteed mortgage backed securities having an average
life of approximately 2 years amounted to $319,618,000. The Company has the
intent and ability to hold to maturity securities classified "held to maturity."
These securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts. The gross unrealized gains and losses on "held to
maturity" securities were $603,000 and $5,324,000 respectively. Securities
classified as "available for sale" may be sold in the future, prior to maturity.
These securities are carried at market value. Net aggregate unrealized gains or
losses on these securities are included in a valuation allowance account and are
shown net of taxes, as a component of shareholders' equity. "Available for sale"
securities included gross unrealized gains of $827,000 and gross unrealized
losses of $617,000. Given the relatively short - term nature of the portfolio
and its generally high credit quality, management expects to realize all of its
investment upon the maturity of such instruments, and thus believes that any
market value impairment is temporary in nature.
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. The composition of the
Company's and the bank's loan portfolio at March 31, 1996 were as follows:
Company Bank
------- --------
(in thousands)
Domestic
Commercial and industrial $300,762 $247,884
Real estate - mortgage 50,783 49,629
Real estate - construction 1,217 1,217
Installment - individuals 14,345 14,345
Foreign
Government and official institutions 789 789
-------- --------
Loans, gross 367,896 313,864
Less unearned discounts 6,593 6,217
-------- --------
Loans, net of unearned discounts $361,303 $307,647
======== ========
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STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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. The allowance reflects
management's evaluation of both loans presenting identified loss potential and
of the risk inherent in various components of the portfolio including loans
identified as impaired as required by SFAS No. 114 and No. 118. Thus an increase
in the size of the portfolio or in any of its components could necessitate an
increase in the allowance even though there may not be a decline in credit
quality or an increase in potential problem loans. A significant change in any
of the evaluation factors described above could result in future additions to
the allowance. At March 31, 1996, the ratio of the allowance to loans, net of
unearned discounts, was 1.6%. At March 31, 1996, the Company's allowance was
$5,767,000 and its non-accrual loans amounted to $398,000. At March 31, 1996,
$340,000 of loans were impaired within the scope of SFAS No. 114 and required
valuation allowances of $194,000. Based on the foregoing, as well as
management's judgement as to the current risks inherent in the loan portfolio,
the Company's allowance for possible loan losses was deemed adequate to absorb
all reasonably anticipated losses on specifically known and other possible
credit risks associated with the portfolio as of March 31, 1996. Potential
problem loans, which are loans that are currently performing under present loan
repayment terms but where known information about possible credit problems of
borrowers cause management to have serious doubts as to the ability of the
borrowers to continue to comply with the present repayment terms, aggregated
$361,000 at March 31, 1996.
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 18. 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 17. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 16.
14
15
STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Total interest income increased $1,426,000 for the three months ended March 31,
1996 when compared with the same period last year principally due to improved
yields as well as higher average outstandings. Interest and fees on loans
increased $1,166,000 principally due to higher average outstandings. An
increase in average securities outstandings coupled with higher yields,
resulted in an increase in income from securities of $101,000.
Total interest expense for the three months ended March 31, 1996 increased
$379,000 when compared with the same period in 1995 principally due to increased
average outstandings. Interest expense on interest-bearing deposits rose
$148,000 as a result of increased rates coupled with an increase in average
outstandings. Interest expense on borrowings increased $231,000 for the three
months ended March 31, 1996 versus the like period a year ago. The increase is
attributable to an increase in average outstandings partially offset by lower
rates paid.
Based on management's continuing evaluation of the loan portfolio (discussed
under "CREDIT RISK" above), and principally as the result of the growth in the
portfolio, $577,000 was provided for possible loan losses for the three months
ended March 31, 1996.
Noninterest income increased $375,000 for the first quarter of 1996 when
compared with the same period in 1995 due primarily to increased factoring
commissions.
Noninterest expenses increased $471,000 for the three months ended March 31,
1996 versus the same period last year reflecting higher salary and employee
benefit costs associated with the Company's higher levels of business activities
as well as higher general business costs.
The provision for income taxes increased $186,000 for the first quarter 1996
when compared with the same period last year principally based on the level of
pre-tax profitability.
As a result of the above factors, net income increased $503,000 for the three
months ended March 31, 1996 when compared with the same period in 1995.
15
16
STERLING BANCORP AND SUBSIDIARIES
AVERAGE BALANCE SHEETS(1)
THREE MONTHS ENDED MARCH 31,
1996 1995
-------------------------------------- --------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- -------
Interest-bearing deposits
with other banks $ 3,025 $ 42 5.60% $ 2,972 $ 42 5.28%
Securities
Held to maturity(2) 217,915 3,565 6.54 241,296 3,922 6.51
Available for sale 97,795 1,621 6.71 71,328 1,163 6.57
Federal funds sold 19,879 278 5.52 7,856 119 6.07
Loans, net of unearned
discounts(3) 340,156 8,531 10.85 286,502 7,365 10.79
-------- -------- -------- --------
TOTAL EARNING ASSETS 678,770 14,037 8.58 609,954 12,611 8.48
-------- ------ -------- ------
Cash and due from banks 39,057 39,692
Allowance for possible
loan losses (5,418) (4,229)
Goodwill 21,158 21,158
Other assets 15,523 12,447
-------- --------
TOTAL ASSETS $749,090 $679,022
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Savings $183,303 1,066 2.34 $179,347 997 2.26
Other time 154,037 1,886 4.92 153,063 1,807 4.78
-------- -------- -------- --------
Total interest-bearing
deposits 337,340 2,952 3.52 332,410 2,804 3.42
-------- -------- -------- --------
Borrowings
Securities sold under
agreements to repurchase 69,012 885 5.16 48,327 649 5.46
Commercial paper 25,944 331 5.12 16,586 219 5.36
Other short-term debt 5,740 124 5.09 6,554 76 4.58
Long-term debt 39,342 719 7.35 48,705 884 7.36
-------- -------- -------- --------
Total borrowings 140,038 2,059 5.76 120,172 1,828 6.17
-------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES 477,378 5,011 4.18 452,582 4,632 4.15
-------- ---- -------- ----
Noninterest-bearing deposits 170,418 150,535
Due to factored clients 21,231 12,434
Other liabilities 19,555 9,289
-------- --------
Total liabilities 688,582 624,840
Shareholders' equity 60,508 54,182
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $749,090 $679,022
======== ========
Net interest income/spread $ 9,026 4.40% $ 7,979 4.33%
======== ==== ======== =====
Net yield on interest-earning
assets 5.51% 5.35%
==== =====
(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 its finance subsidiaries. Dollars
are presented in thousands.
(2) Interest on tax-exempt securities included herein is not presented on a
tax equivalent basis.
(3) Non-accrual loans are included in the average balance which reduces the
average yields.
16
17
STERLING BANCORP AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
THREE MONTHS ENDED MARCH 31,
($ in thousands)
INCREASE/(DECREASE)
THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
--------------------------------------
VOLUME RATE TOTAL(1)
------- ------- -------
INTEREST INCOME
Interest-bearing deposits with other banks $ (1) $ 1 $ --
------- ------- -------
Securities
Held to maturity (359) 2 (357)
Available for sale(2) 440 18 458
------- ------- -------
Total 81 20 101
------- ------- -------
Federal funds sold 177 (18) 159
------- ------- -------
Loans, net of unearned discounts(3) 1,123 43 1,166
------- ------- -------
TOTAL INTEREST INCOME $ 1,380 $ 46 $ 1,426
======= ======= =======
INTEREST EXPENSE
Interest-bearing deposits
Savings $ 33 $ 36 $ 69
Other time 29 50 79
------- ------- -------
Total 62 86 148
------- ------- -------
Borrowings
Securities sold under agreements to repurchase 280 (44) 236
Commercial paper 125 (13) 112
Other short-term debt (9) 57 48
Long-term debt (163) (2) (165)
------- ------- -------
Total 233 (2) 231
------- ------- -------
TOTAL INTEREST EXPENSE $ 295 $ 84 $ 379
======= ======= =======
NET INTEREST INCOME $ 1,085 $ (38) $ 1,047
======= ======= =======
(1) The rate/volume variance is allocated equally between changes in volume
and rate. The extra day in 1996 has been included in the change due to
volume.
(2) Includes Federal Reserve Bank and other stock investments.
(3) Nonaccrual loans have been included in the amounts outstanding and income
has been included to the extent accrued.
17
18
STERLING BANCORP AND SUBSIDIARIES
INTEREST RATE SENSITIVITY
($ in thousands)
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 decrease during periods of rising interest
rates and increase during periods of falling interest rates.
REPRICING DATE
-------------------------------------------------------------------------------------
MORE THAN NON
3 MONTHS 3 MONTHS 1 YEAR TO OVER RATE
OR LESS TO 1 YEAR 5 YEARS 5 YEARS SENSITIVE TOTAL
--------- --------- --------- --------- --------- ---------
ASSETS
Interest-bearing deposits
with other banks $ 1,200 $ 1,810 $ -- $ -- $ -- $ 3,010
Securities -- 24,653 57,933 240,532 4,968 328,086
Loans, net of unearned
discounts 278,912 12,006 41,174 35,804 (6,593) 361,303
Noninterest-earnings assets
and allowance for possible
loan losses -- -- -- -- 75,603 75,603
--------- --------- --------- --------- --------- ---------
Total Assets 280,112 38,469 99,107 276,336 73,978 768,002
--------- --------- --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits 173,074 34,138 123,038 -- -- 330,250
Securities sold under
repurchase agreements 54,153 21,790 -- -- -- 75,943
Commercial paper 29,584 -- -- -- -- 29,584
Other short-term borrowings 13,058 4,500 -- -- -- 17,558
Long-term debt 21,153 -- 17,050 700 -- 38,903
Noninterest-bearing
liabilities and share-
holders' equity -- -- -- -- 275,764 275,764
--------- --------- --------- --------- --------- ---------
Total Liabilities and
Shareholders' Equity $ 291,022 $ 60,428 $ 140,088 $ 700 $ 275,764 $ 768,002
========= ========= ========= ========= ========= =========
Net Interest Rate
Sensitivity Gap $ (10,910) $ (21,959) $ (40,981) $ 275,636 $(201,786) $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
March 31, 1996 $ (10,910) $ (32,869) $ (73,850) $ 201,786 $ -- $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
March 31, 1995 $ 28,043 $ 12,589 $ (66,632) $ 171,967 $ -- $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
December 31, 1995 $ 76,612 $ 53,606 $ 23,820 $ 256,359 $ -- $ --
========= ========= ========= ========= ========= =========
18
19
STERLING BANCORP AND SUBSIDIARIES
RISK-BASED CAPITAL COMPONENTS AND RATIOS
($ in thousands)
THE COMPANY THE BANK
------------------------------------------------------------
3/31/96 12/31/95 3/31/96 12/31/95
-------- -------- -------- --------
COMPONENTS
Stockholders' equity $ 60,744 $ 59,657 $ 48,573 $ 47,940
Add/(Subtract):
Minority interest -- 8 -- --
Goodwill (21,158) (21,158) -- --
Net unrealized appreciation on
securities available for sale,
net of tax effect (1) (114) (544) (111) (541)
-------- -------- -------- --------
Tier 1 Capital 39,472 37,963 48,462 47,399
-------- -------- -------- --------
Allowance for possible loan losses
(limited to 1.25% of total risk-
weighted assets) 5,210 5,192 3,808 3,649
Subordinated debt (limited to 50%
of Tier 1 Capital) 12,557 12,751 -- --
-------- -------- -------- --------
Tier 2 Capital 17,767 17,943 3,808 3,649
-------- -------- -------- --------
Total Risk-based Capital $ 57,239 $ 55,906 $ 52,270 $ 51,048
======== ======== ======== ========
RATIOS
Tier 1 Capital 9.47% 8.54% 13.48% 11.98%
======== ======== ======== ========
Total Capital 13.75% 12.58% 14.54% 12.90%
======== ======== ======== ========
Leverage 5.42% 5.37% 7.14% 7.19%
======== ======== ======== ========
Memoranda
Tier 1 Capital minimum requirement $ 16,672 $ 17,777 $ 14,376 $ 15,826
======== ======== ======== ========
Total Capital minimum requirement $ 33,344 $ 35,554 $ 28,751 $ 31,652
======== ======== ======== ========
Risk-weighted assets, net of goodwill $416,797 $444,425 $359,391 $395,645
======== ======== ======== ========
Quarterly average assets, net of goodwill $727,932 $706,632 $678,542 $659,574
======== ======== ======== ========
(1) As directed by regulatory agencies this amount must be excluded from the
computation of Tier 1 capital.
19
20
STERLING BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(11) Statement Re: Computation of Per Share Earnings
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
STERLING BANCORP
(Registrant)
Date 5/15/96 /s/ Louis J. Cappelli
--------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 5/15/96 /s/ John W. Tietjen
--------------------------------
John W. Tietjen
Senior Vice President, Treasurer
and Chief Financial Officer
20
21
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
- ------- ------------ ------------ -------- --
11 Computation of X 21
Per Share Earnings
27 Financial Data X 22
Schedule
21