1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-----------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________________to_______________________
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)
430 Park Avenue, New York, N.Y. 10022-3505
- ------------------------------------------------------------------------------
(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.
[X] Yes [ ] No
As of September 30, 1998 there were 8,229,491 shares of common stock,
$1.00 par value, outstanding.
2
STERLING BANCORP
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business 11
Results for the Three Months 11
Results for the Nine Months 13
Balance Sheet Analysis 15
Capital 18
Year 2000 Project 18
Average Balance Sheets 20
Rate/Volume Analysis 22
Regulatory Capital and Ratios 24
Item 3.Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 25
Interest Rate Sensitivity 28
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 29
2
3
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
ASSETS 1998 1997
------------ --------------
Cash and due from banks $ 41,185,225 $ 40,065,863
Interest-bearing deposits with other banks 315,000 3,010,000
Federal funds sold 4,000,000 --
Investment securities
Available for sale (at estimated market value) 120,436,252 148,921,006
Held to maturity (estimated market value
$203,182,742 and $236,009,925, respectively) 201,740,865 236,030,004
------------ --------------
Total investment securities 322,177,117 384,951,010
------------ --------------
Loans, net of unearned discounts 586,430,392 558,481,845
Less allowance for credit losses 9,665,415 8,677,610
------------ --------------
Loans, net 576,764,977 549,804,235
------------ --------------
Customers' liability under acceptances 1,140,115 1,125,654
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 6,596,180 7,330,062
Accrued interest receivable 4,098,306 4,147,008
Other assets 7,912,665 8,387,386
------------ --------------
$985,348,025 $1,019,979,658
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $256,969,671 $ 312,461,489
Interest-bearing deposits 388,340,807 418,946,491
------------ --------------
Total deposits 645,310,478 731,407,980
Federal funds purchased and securities
sold under agreements to repurchase 94,675,117 106,752,546
Commercial paper 36,948,600 24,070,600
Other short-term borrowings 16,989,376 19,891,252
Acceptances outstanding 1,140,115 1,125,654
Due to factoring clients 37,579,975 30,798,610
Accrued expenses and other liabilities 11,128,816 11,560,450
------------ --------------
843,772,477 925,607,092
Long-term debt - FHLB 41,400,000 1,750,000
------------ --------------
Total liabilities 885,172,477 927,357,092
------------ --------------
Commitments and contingent liabilities
Shareholders' equity
Preferred stock, $5 par value. Authorized 644,389 shares
Series B ($20 liquidation value), issued 1,230 shares 24,600 24,600
Series D ($10 liquidation value), issued 243,929 and
246,213 shares, respectively 2,439,290 2,462,130
------------ --------------
2,463,890 2,486,730
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 8,310,284 and 8,262,500 shares, respectively 8,310,284 8,262,500
Capital surplus 45,287,315 44,775,759
Retained earnings 46,302,605 39,590,806
Accumulated other comprehensive income, net of tax
Net unrealized holding gains on securities
available for sale 1,018,357 197,374
------------ --------------
103,382,451 95,313,169
Less
Common shares in treasury at cost,
80,793 and 44,593 shares, respectively 1,198,182 441,257
Unearned compensation 2,008,721 2,249,346
------------ --------------
Total shareholders' equity 100,175,548 92,622,566
------------ --------------
$985,348,025 $1,019,979,658
============ ==============
See Notes to Consolidated Financial Statements.
3
4
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
INTEREST INCOME
Loans $13,481,415 $11,861,135 $38,403,119 $34,351,112
Investment securities:
Available for sale 1,871,349 1,038,655 5,670,009 3,439,300
Held to maturity 3,267,157 4,056,425 10,345,958 11,839,527
Federal funds sold 121,882 103,259 478,467 193,000
Deposits with other banks 14,652 35,057 120,055 158,185
----------- ----------- ----------- -----------
Total interest income 18,756,455 17,094,531 55,017,608 49,981,124
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 3,895,247 3,762,009 12,466,134 10,582,238
Federal funds purchased
and securities sold under agreements
to repurchase 919,158 1,168,890 3,006,147 3,519,567
Commercial paper 474,678 323,318 1,223,494 968,780
Other short-term borrowings 259,513 126,010 756,591 431,589
Long-term debt 523,277 296,536 1,253,287 912,520
----------- ----------- ----------- -----------
Total interest expense 6,071,873 5,676,763 18,705,653 16,414,694
----------- ----------- ----------- -----------
Net interest income 12,684,582 11,417,768 36,311,955 33,566,430
Provision for credit losses 1,069,000 781,500 3,180,333 2,162,500
----------- ----------- ----------- -----------
Net interest income after provision
for credit losses 11,615,582 10,636,268 33,131,622 31,403,930
----------- ----------- ----------- -----------
NONINTEREST INCOME
Factoring income 1,210,115 1,206,818 3,521,092 3,302,956
Mortgage banking income 988,401 916,576 2,849,177 2,447,992
Service charges on deposit accounts 839,445 504,575 2,264,397 1,489,289
Trade finance income 482,670 406,047 1,464,032 1,189,237
Trust fees 249,499 226,876 676,787 450,044
Other service charges and fees 196,603 184,606 752,362 650,281
Other income 56,756 13,327 147,268 64,262
----------- ----------- ----------- -----------
Total noninterest income 4,023,489 3,458,825 11,675,115 9,594,061
----------- ----------- ----------- -----------
NONINTEREST EXPENSES
Salaries 4,617,831 4,268,039 13,632,910 12,556,154
Employee benefits 620,360 840,120 2,597,023 2,654,452
----------- ----------- ----------- -----------
Total personnel expenses 5,238,191 5,108,159 16,229,933 15,210,606
Occupancy expense, net 854,712 817,312 2,444,096 2,292,955
Equipment expense 596,157 604,461 1,818,055 1,705,554
Other expenses 2,928,064 2,473,656 7,678,960 7,377,468
----------- ----------- ----------- -----------
Total noninterest expenses 9,617,124 9,003,588 28,171,044 26,586,583
----------- ----------- ----------- -----------
Income before income taxes 6,021,947 5,091,505 16,635,693 14,411,408
Provision for income taxes 2,767,542 2,273,788 7,264,851 6,498,099
----------- ----------- ----------- -----------
Net income $ 3,254,405 $ 2,817,717 $ 9,370,842 $ 7,913,309
=========== =========== =========== ===========
Average number of common shares outstanding
Basic 8,261,166 7,850,616 8,244,125 7,788,820
Diluted 8,723,354 8,658,845 8,583,900 8,604,204
Per average common share
Basic $.39 $.36 $1.13 $1.01
Diluted .38 .33 1.09 .94
Dividends per common share .11 .09 .32 .27
See Notes to Consolidated Financial Statements.
4
5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income $3,254,405 $2,817,717 $ 9,370,842 $7,913,309
Other comprehensive income, net of tax:
Unrealized holding gains
arising during the period 772,206 109,652 820,983 44,372
---------- ---------- ----------- ----------
Comprehensive income $4,026,611 $2,927,369 $10,191,825 $7,957,681
========== ========== =========== ==========
See Notes to Consolidated Financial Statements.
5
6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended
September 30,
1998 1997
------------ -----------
PREFERRED STOCK
Balance at January 1 $ 2,486,730 $ 2,506,600
Conversions of Series D shares (22,840) (19,870)
------------ -----------
Balance at September 30 $ 2,463,890 $ 2,486,730
============ ===========
COMMON STOCK
Balance at January 1 $ 8,262,500 $ 7,725,533
Conversions of subordinated debentures -- 191,760
Conversions of preferred shares
into common shares 2,284 1,987
Options exercised 45,500 15,500
------------ -----------
Balance at September 30 $ 8,310,284 $ 7,934,780
============ ===========
CAPITAL SURPLUS
Balance at January 1 $ 44,775,759 $38,619,434
Conversions of subordinated debentures -- 2,205,240
Conversions of preferred shares
into common shares 20,556 17,883
Options exercised 491,000 169,250
Forfeiture of shares issued
under incentive compensation plan -- (5,827)
------------ -----------
Balance at September 30 $ 45,287,315 $41,005,980
============ ===========
RETAINED EARNINGS
Balance at January 1 $ 39,590,806 $31,648,806
Net income 9,370,842 7,913,309
Cash dividends paid - common shares (2,618,547) (2,086,864)
- preferred shares (40,496) (26,508)
------------ -----------
Balance at September 30 $ 46,302,605 $37,448,743
============ ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at January 1 $ 197,374 $ 90,001
------------ -----------
Unrealized holding gains arising
during the period:
Before tax 1,517,529 83,157
Tax effect (696,546) (38,785)
------------ -----------
Net of tax 820,983 44,372
------------ -----------
Balance at September 30 $ 1,018,357 $ 134,373
============ ===========
TREASURY STOCK
Balance at January 1 $ (441,257) $ (418,959)
Purchases (756,925) --
Forfeiture of shares issued
under incentive compensation plan -- (22,298)
------------ ----------
Balance at September 30 $ (1,198,182) $ (441,257)
============ ===========
UNEARNED COMPENSATION
Balance at January 1 $ (2,249,346) $(2,993,980)
Amortization of unearned compensation 240,625 295,236
Forfeiture of shares issued
under incentive compensation plan -- 28,125
------------ -----------
Balance at September 30 $ (2,008,721) $(2,670,619)
============ ===========
TOTAL SHAREHOLDERS' EQUITY
Balance at January 1 $ 92,622,566 $77,177,435
Net changes during the period 7,552,982 8,721,295
------------ -----------
Balance at September 30 $100,175,548 $85,898,730
============ ===========
See Notes to Consolidated Financial Statements.
6
7
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net income $ 9,370,842 $ 7,913,309
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 3,180,333 2,162,500
Depreciation and amortization of premises and equipment 1,220,434 1,063,196
Deferred income tax (benefit) (297,021) (312,821)
Net change in loans held for sale (9,544,740) (3,837,764)
Amortization of unearned compensation 240,625 295,236
Amortization of premiums on securities 1,677,036 983,823
Accretion of discounts on securities (441,652) (113,031)
Decrease in accrued interest receivable 48,702 334,951
Increase in due to factored clients 6,781,365 13,775,207
Decrease in other liabilities (431,634) (2,505,583)
Other, net (2,117,331) (1,565,220)
------------- ------------
Net cash provided by operating activities 9,686,959 18,193,803
------------- ------------
INVESTING ACTIVITIES
Purchase of premises and equipment (486,552) (2,817,294)
Net decrease in interest-bearing deposits
with other banks 2,695,000 --
Net increase in Federal funds sold (4,000,000) (5,000,000)
Net increase in loans (18,403,807) (10,820,699)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 52,762,664 26,972,962
Purchases of securities - held to maturity (19,853,914) (50,034,272)
Purchases of securities - available for sale (293,774,130) (6,011,743)
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 323,921,417 29,220,902
------------- ------------
Net cash provided by(used in) investing activities 42,860,678 (18,490,144)
------------- ------------
FINANCING ACTIVITIES
Net decrease in noninterest-bearing deposits (55,491,818) (29,595,947)
Net (decrease)increase in interest-bearing deposits (30,605,684) 62,968,388
Net decrease in Federal funds purchased and
securities sold under agreements to repurchase (12,077,429) (23,221,392)
Net increase(decrease) in commercial paper
and other short-term borrowings 9,976,124 (30,638,656)
Increase(Decrease) in other long-term debt 39,650,000 (250,000)
Purchase of treasury shares (756,925) --
Proceeds from exercise of stock options 536,500 184,750
Cash dividends paid on common and preferred stock (2,659,043) (2,113,161)
------------- ------------
Net cash used in financing activities (51,428,275) (22,666,018)
------------- ------------
Net increase (decrease) in cash and due from banks 1,119,362 (22,962,359)
Cash and due from banks - beginning of period 40,065,863 54,512,462
------------- ------------
Cash and due from banks - end of period $ 41,185,225 $ 31,550,103
============= ============
Supplemental schedule of non-cash financing activities:
Debenture and preferred stock conversions $ 22,840 $ 2,396,789
Forfeiture of shares issued under
incentive compensation plan -- 28,125
Supplemental disclosure of cash flow information:
Interest paid $ 18,739,828 $ 17,936,398
Income taxes paid 6,483,332 6,507,233
See Notes to Consolidated Financial Statements.
7
8
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 and its subsidiaries ("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 September 30, 1998 and 1997 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 1997 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, 1997.
2. For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks.
3. The Company's outstanding Preferred Shares as of September 30,
1998 comprise 1,230 Series B shares (of 4,389 Series B shares
authorized) and 243,929 Series D shares (of 300,000 Series D
shares 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. SFAS No. 128, "Earnings per Share," which superseded Accounting
Principles Board Opinion No. 15, "Earnings per Share," established
standards for computing, presenting and disclosing earnings per
share ("EPS"). SFAS No. 128 required the presentation of basic
earnings per share and, for entities with complex capital
structures, diluted earnings per share. Basic earnings per share
is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of
the Company.
The Company has applied the provisions of SFAS No. 128 for the
year ended December 31, 1997 and, in conformity with the
provisions of SFAS No. 128, has restated prior-period EPS data
presented in this report. Adoption of SFAS No. 128 has resulted in
modest changes in EPS data from previously reported amounts.
8
9
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 established
standards for reporting and displaying comprehensive income and
its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. It does not address
issues of recognition or measurement of comprehensive income and
its components. SFAS No. 130 required that all items that are
required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements. Under the requirements of SFAS No. 130, an enterprise
must classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a balance
sheet. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of financial
statements for earlier periods provided for comparative purposes.
The Company has applied the provisions of SFAS No. 130 as of
January 1, 1998, and in conformity with the provisions of SFAS No.
130, has restated prior-period amounts presented in this report.
Adoption of SFAS No. 130 had no effect on previously reported
amounts.
6. In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating
segments in annual financial statements, requires that selected
information about operating segments be reported in interim
financial statements issued to shareholders, and establishes
standards for related disclosures about an enterprise's products
and services, geographic areas and major customers. As defined in
SFAS No. 131, operating segments are components of an enterprise
about which separate financial information is available that is
evaluated regularly by the enterprise's chief operating decision
maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 need not be applied to interim financial
statements in the initial year of its application, but comparative
information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in
the second year of application. SFAS No. 131 is effective for
financial statements for fiscal years beginning after December 15,
1997 and, accordingly, will be adopted by the Company for its
fiscal year ending December 31, 1998.
7. In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). SFAS No. 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the
extent practicable. SFAS No. 132 provides information that assists
users in (a) evaluating the employer's obligations under pension
and other postretirement plans and the effects on the employer's
prospects for future cash flows, (b) analyzing the quality of
currently reported net income, and (c) estimating future reported
net income. SFAS No. 132 addresses disclosure only. SFAS No. 132
is effective for fiscal years beginning after December 15, 1997,
and, as appropriate, will be adopted in the financial statements
of the Company for the year ended December 31, 1998.
9
10
8. In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to
as "derivatives"), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment
in a foreign operations, an unrecognized firm commitment, an
available-for-sale security,or a foreign-currency denominated
forecasted transaction. SFAS No. 133 will become effective for the
Company on January 1, 2000; the Company is in the process of
evaluating the potential impact of this new accounting standard.
10
11
STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analyses of the
consolidated results of operations and financial condition of Sterling Bancorp
(the "parent company"), a bank holding company as defined by the Bank Holding
Company Act of 1956, as amended, and its wholly-owned subsidiaries Sterling
Banking Corporation, Sterling Industrial Loan Association, and Sterling National
Bank (the "Bank"). The Bank, which is the principal subsidiary, owns all of the
outstanding shares of Sterling Factors Corporation ("Factors"), Sterling
National Mortgage Company, Inc.("SNMC-New York"), Sterling National Mortgage
Corp. ("SNMC- Virginia") and Sterling Real Estate Holding Company Inc.
("SREHC"). Throughout this discussion and analysis, the term "the Company"
refers to Sterling Bancorp and its subsidiaries. This discussion and analysis
should be read in conjunction with the Company's annual report on Form 10-K for
the year ended December 31, 1997. This report contains statements that
constitute forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995. Such statements are not historical
facts and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those presented in this report. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date of this report.
COMPANY BUSINESS
The Company provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposits services, trust
and estate administration and, investment management services. The Company has
operations in New York and Virginia and conducts business throughout the United
States.
There is intense competition in all areas in which the Company conducts
its business. In addition to competing with other banks, the Company competes in
certain areas of its business with other financial institutions. At September
30,1998, the Bank's year-to-date average earning assets (of which loans were 57%
and investment securities were 42%)represented approximately 95% of the
Company's year-to-date average earning assets.
The Company regularly evaluates acquisition opportunities and conducts
due diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
Results for the three months ended September 30, 1998 and 1997
OVERVIEW
The Company reported net income for the three months ended September 30,1998 of
$3.2 million, representing $0.38 per share, calculated on a diluted basis,
compared to $2.8 million, or $0.33 per share calculated on a diluted basis, for
the like period in 1997. This increase reflects continued growth in both net
interest income and noninterest income as explained below.
11
12
Net interest income increased to $12.7 million for the third quarter of
1998 compared with $11.4 million for the same period in 1997, principally due to
higher average earning asset outstandings. The net interest margin was 6.10% for
the three months ended September 30, 1998 compared to 6.20% for the like 1997
period. This decrease was due to a decrease in average yield on earning assets
of 27 basis points partially offset by a 15 basis point decrease in the average
cost of funds.
Noninterest income rose to $4.0 million for the three months ended
September 30,1998 compared to $3.5 million for the like 1997 period principally
due to continued growth in fees for mortgage banking, factoring, trust and
deposit services.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) for the
components of quarterly interest income and interest expense, expressed in terms
of fluctuation in average volume and rate are shown on page 22. Information as
to the components of interest income and interest expense and average rates for
the quarter is provided in the Average Balance Sheets shown on page 20.
Net interest income for the three months ended September 30,1998
increased $1,268,000 to $12,685,000 from $11,417,000 for the comparable period
in 1997.
Total interest income aggregated $18,757,000 up $1,663,000 for the
third quarter of 1998 as compared to $17,094,000 for the same period of 1997.
The yield on interest-earning assets was 9.04% for the three months ended
September 30, 1998 compared with 9.31% for the comparable period in 1997. The
increase in interest income was principally due to an increase in income earned
on the Company's loan portfolio as a result of management's strategy of
increasing loan outstandings as a percentage of total assets. The decrease in
yield on earning assets was due to lower yields on loans.
Interest earned on the loan portfolio for the three months ended
September 30, 1998 amounted to $13,481,000 up $1,620,000 when compared to the
like 1997 period. Average loan balances amounted to $523,433,000 up $71,311,000
from an average of $452,122,000 in the prior year period. The increase in the
average loans, primarily in the Company's leasing, mortgage and in the
short-term money market component of commercial and industrial loan portfolio,
accounted for the increase in interest earned on loans. The decrease in the
yield on the domestic loan portfolio to 10.98% for the three months ended
September 30,1998 from 11.30% for the comparable 1997 period was attributable to
a greater proportion of short-term, lower-yielding loans within the portfolio.
Interest expense increased $395,000 to $6,072,000 for the third quarter
of 1998 from $5,677,000 for the comparable period in 1997. The increase in
interest expense was due to higher average funds employed for various
borrowings.
12
13
Interest expense on borrowed funds increased $262,000 for the three
months ended September 30,1998 to $2,177,000 from $1,915,000 for the comparable
1997 period due to increases in average outstandings partially offset by a lower
cost of funds. Average outstandings increased $31,427,000 to $166,055,000 in
1998 from $134,628,000 in 1997. The average rate paid on borrowed funds
decreased to 5.09% in 1998 compared to 5.49% in the comparable year ago period.
Provision for Credit Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), and principally as the result of the growth in the
loan portfolios, the provision for credit losses increased to $1,069,000 up
$288,000 when compared to the same period last year.
Noninterest Income
Noninterest income increased to $4,023,000 for the third quarter of 1998 from
$3,459,000 in the like 1997 period as a result of increased fees for deposit,
mortgage banking, factoring and trust services.
Noninterest Expense
Noninterest expenses increased $614,000 for the third quarter of 1998 when
compared with the like 1997 period due to increases in personnel and other
operating expenses incurred to support growing levels of business activity and
continued investments in the business franchise.
Provision for Income Taxes
The increase in the provision for income taxes was principally due to higher
pretax earnings partially offset by tax strategies implemented during 1997.
Results for the nine months ended September 30, 1998 and 1997
OVERVIEW
The Company reported net income for the nine months ended September 30,1998 of
$9.4 million, representing $1.09 per share, calculated on a diluted basis,
compared to $7.9 million, or $0.94 per share calculated on a diluted basis, for
the like period in 1997. This increase reflects continued growth in both net
interest income and noninterest income as explained below.
Net interest income increased to $36.3 million for the first nine
months of 1998 compared with $33.6 million for the same period in 1997,
principally due to higher average earning asset outstandings. The net interest
margin was 5.96% for the first nine months of 1998 compared to 6.30% for the
like 1997 period. This decrease was due to a decrease in average yield on
earning assets of 35 basis points and a 1 basis point increase in the average
cost of funds.
Noninterest income rose to $11.7 million for the nine months ended
September 30,1998 compared to $9.6 million for the like 1997 period principally
due to continued growth in fees from mortgage banking, factoring, trade finance,
trust and deposit services.
13
14
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) for the
components of interest income and interest expense for the first nine months,
expressed in terms of fluctuation in average volume and rate are shown on page
23. Information as to the components of interest income and interest expense and
average rates for the first nine months is provided in the Average Balance
Sheets shown on page 21.
Net interest income for the nine months ended September 30,1998
increased $2,746,000 to $36,312,000 from $33,566,000 for the comparable period
in 1997.
Total interest income aggregated $55,018,000 up $5,037,000 for the nine
months of 1998 as compared to $49,981,000 for the same period of 1997. The yield
on interest-earning assets was 9.02% for the nine months of 1998 compared with
9.37% for the comparable period in 1997. The increase in interest income was
principally due to an increase in income earned on the Company's loan portfolio
as a result of management's strategy of increasing loan outstandings as a
percentage of total assets. The decrease in yield on earning assets was due to
lower yields on loans and investment securities.
Interest earned on the loan portfolio amounted to $38,403,000 up
$4,052,000 when compared to a year ago. Average loan balances amounted to
$501,490,000 up $66,507,000 from an average of $434,983,000 in the prior year
period. The increase in the average loans, primarily in the Company's leasing,
mortgage and in the short-term money market component of commercial and
industrial loan portfolio, accounted for the increase in interest earned on
loans. The decrease in the yield on the domestic loan portfolio to 11.19% for
the nine months ended September 30,1998 from 11.49% for the comparable 1997
period was attributable to a greater proportion of short-term, lower-yielding
loans within the portfolio.
Interest earned on investment securities increased $737,000 to
$16,016,000 in 1998 principally due to higher average outstandings partially
offset by lower yields due to a flattening of the U.S. Treasury yield curve.
Interest expense increased $2,291,000 to $18,706,000 for the nine
months of 1998 from $16,415,000 for the comparable period in 1997. The increase
in interest expense was principally due to higher average funds employed.
Interest expense on interest-bearing deposits increased $1,884,000 for
the nine months ended September 30,1998 to $12,466,000 from $10,582,000 for the
comparable 1997 period due to increases in average outstandings and the cost of
funds. Average outstandings increased $52,409,000 to $414,900,000 in 1998 from
$362,491,000 in 1997. The average rate paid on interest-bearing deposits rose to
4.02% in 1998 compared to 3.90% in the comparable year ago period.
Provision for Credit Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), and principally as the result of the growth in the
loan portfolios, the provision for credit losses increased to $3,180,000 up
$1,018,000 when compared to the same period last year.
14
15
Noninterest Income
Noninterest income increased $2,081,000 for the nine months of 1998 when
compared with the like 1997 period as a result of increased fees from mortgage
banking, factoring, trust and deposit services.
Noninterest Expense
Noninterest expenses increased $1,584,000 for the third quarter of 1998 when
compared with the like 1997 period primarily due to increased personnel expenses
incurred to support growing levels of business activity and continued
investments in the business franchise.
Provision for Income Taxes
The increase in the provision for income taxes was principally due to higher
pretax earnings partially offset by tax strategies implemented during 1997.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S.
Government, corporation and U.S. agency guaranteed mortgage backed securities
along with other debt and equity securities. At September 30, 1998, the
Company's portfolio of securities totalled $322,177,000 of which U.S.
Government, corporation and U.S. agency guaranteed mortgage-backed securities
having an average life of approximately 4 years amounted to $296,793,000. The
Company has the intent and ability to hold to maturity securities classified as
"held to maturity". These securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts. The gross unrealized gains
and losses on "held to maturity" securities were $2,091,000 and $649,000,
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 $1,997,000 and gross unrealized losses of $114,000. Given the generally
high credit quality of the portfolio, management expects to realize all of its
investment upon the maturity of such instruments, and thus believes that any
market value impairment is temporary in nature.
Loan Portfolio
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.
15
16
The Company's commercial and industrial loan portfolio represents
approximately 72% of gross loans. Loans in this category are typically made to
small and medium sized businesses, ranging between $250,000 and $10 million, and
are often collateralized by accounts receivable, inventory and marketable
securities and other liquid collateral. Sources of repayment are from the
borrower's operating profits, cash flows and liquidation of pledged collateral.
Based on underwriting standards, loans may be secured in whole or in part by
collateral such as liquid assets, accounts receivable, equipment, inventory or
real property. The Company's real estate loan portfolio, which represents
approximately 16% of gross loans, is secured by mortgages on real property
located principally in the metropolitan New York area and the State of Virginia.
The Company's leasing portfolio, which consists of finance leases for various
types of business equipment, represents approximately 9% of gross loans. The
collateral securing any loan may vary in value based on market conditions.
The following table sets forth the composition of the Company's loan
portfolio:
September
---------------------------------------------------
1998 1997
--------------------- --------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
Domestic
Commercial and industrial $430,765 72.4% $351,202 71.9%
Equipment lease financing 55,913 9.4 48,236 9.9
Real estate 94,050 15.8 71,646 14.6
Installment - individuals 13,733 2.3 16,828 3.4
Foreign
Government and official institutions 788 0.1 789 0.2
-------- ----- -------- -----
Gross loans 595,249 100.0% 488,701 100.0%
===== =====
Unearned discounts 8,819 8,526
-------- --------
Loans, net of unearned discounts $586,430 $480,175
======== ========
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times
of economic slowdown, the risk inherent in the Company's portfolio of loans may
be increased. While management endeavors to minimize this risk, it recognizes
that loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
The allowance for credit losses is maintained through the provision
for credit losses, which is a charge to operating earnings. The adequacy of the
allowance for credit 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.
16
17
The allowance reflects management's evaluation of both loans presenting
identified loss potential and of the risk inherent in various components of the
portfolio, including loans identified as impaired as required by SFAS No. 114.
Thus an increase in the size of the portfolio or in any of its components could
necessitate an increase in the allowance even though there may not be a decline
in credit quality or an increase in potential problem loans. A significant
change in any of the evaluation factors described above could result in future
additions to the allowance. At September 30,1998, the ratio of the allowance to
loans, net of unearned discounts, was 1.65% and the allowance was $9,665,000.
At such date, the Company's non-accrual loans amounted to $1,991,000; $524,000
of such loans were judged to be impaired within the scope of SFAS No. 114 and
required valuation allowances of $250,000. Based on the foregoing, as well as
management's judgement as to the current risks inherent in the loan portfolio,
the Company's allowance for credit losses was deemed adequate to absorb all
reasonably anticipated losses on specifically known and other possible credit
risks associated with the portfolio as of September 30,1998.
Deposits
The Company's principal source of funds continues to be deposits, consisting of
demand (noninterest-bearing), NOW, savings, money market and time deposits
(principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
September 30,
--------------------------------------------------------
1998 1997
---------------------- ---------------------
($ in thousands)
% of % of
Balances Total Balances Total
Domestic
Demand $256,969 39.8% $200,381 33.0%
NOW 59,653 9.3 40,082 6.6
Savings 23,433 3.6 23,424 3.8
Money Market 134,168 20.8 125,360 20.6
Time deposits 168,357 26.1 215,838 35.5
-------- ----- -------- -----
Total domestic deposits 642,580 99.6 605,085 99.5
Foreign
Time deposits 2,730 0.4 2,710 0.5
-------- ----- -------- -----
Total deposits $645,310 100.0% $607,795 100.0%
======== ===== ======== =====
Fluctuations of balances in total or among categories at any date may
occur based on the Company's mix of assets and liabilities as well as on
customers' balance sheet strategies. Historically, however, average balances for
deposits have been relatively stable. Information regarding these average
balances is presented on pages 20 and 21.
17
18
CAPITAL
The Company and the Bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against risk-
weighted assets, including off-balance sheet items. These regulations define the
elements of total capital into Tier 1 and Tier 2 components and establish
minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for capital
adequacy purposes. Supplementing these regulations, is a leverage requirement.
This requirement establishes a minimum leverage ratio, (at least 3% to 5%) which
is calculated by dividing Tier 1 capital by adjusted quarterly average assets
(after deducting goodwill). Information regarding the Company's and the Bank's
risk-based capital is presented on page 23. In addition the Company and the
Bank are subject to the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1981 ("FDICIA") which imposes a number of mandatory
supervisory measures. Among other matters, FDICIA established five capital
categories ranging from "well capitalized" to "critically under capitalized".
Such classifications are used by regulatory agencies to determine a bank's
deposit insurance premium, approval of applications authorizing institutions to
increase their asset size or otherwise expand business activities or acquire
other institutions. Under the provisions of FDICIA a "well capitalized"
institution must maintain minimum leverage, Tier 1 and Total Capital ratios of
5%, 6% and 10%, respectively. At September 30,1998, the Company and the Bank
exceeded the requirements for "well capitalized" institutions.
YEAR 2000 PROJECT
Management has initiated a company-wide program to prepare the Company's
computer hardware and software for the year 2000. In this connection, the
Company has established a Year 2000 ("Y2K") Compliance Committee ("the
Committee") to address this important issue. The Committee has undertaken a
project with major emphasis on identifying all hardware and software supporting
the Company's mission critical applications. This project has been divided into
the following five phases: awareness, assessment, renovation, validation and
implementation.
The Committee has completed the awareness and the assessment phases in
which all of the Company's hardware and software have been identified, reviewed
and classified according to their ability to adequately function beyond December
31, 1999. The Committee is currently monitoring the efforts of outside vendors
and company personnel to upgrade all noncompliant hardware and software. All
outside vendors and service providers will be required to certify that they are
or will be Y2K compliant and to provide information on testing procedures so
that the Committee may verify compliance. The Committee is also monitoring the
testing of all mission critical systems. Where necessary, alternate vendors and
service providers have been or will be identified to ensure the Company's
ability to operate after December 31, 1999. The Committee has completed the
Company's Customer Awareness program. The Company sent a questionnaire to its
significant commercial customer base and funding sources to assess their level
of awareness of and compliance with Y2K issues. The Committee will continue
monitoring the progress of significant commercial customer base, funding sources
and vendors and will assess the potential impact of these efforts on the
Company. Management anticipates that the validation and implementation phases
will be completed by mid-1999.
18
19
The Committee has estimated that the cost to complete all phases of the
Y2K project to be approximately $350,000 and will be expensed as incurred. This
estimate does not include any costs to be assessed by outside vendors and
service providers. Many of the expenditures will relate to microcomputer
hardware and software that would have been upgraded in the normal course of the
Company's operations through December 31, 1999.
Despite the best efforts of the Committee, there can be no complete
assurance that the Company will not be adversely affected by unforeseen problems
in its own computer systems or in systems provided by third parties and by other
entities not associated with the Company which are unsuccessful in properly
addressing this issue. While the dollar impact of any unforseen problems cannot
be accurately quantified at this time because of the uncertainties involved,
such problems could have a material adverse effect on the Company. Contingency
plans covering business resumption have been written encompassing a plan of
action in the event of systems failure.
19
20
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended September 30,
1998 1997
-------------------------------------- -------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- --------
Interest-bearing deposits
with other banks $ 315 $ 15 4.87% $ 3,054 $ 35 5.58%
Investment securities
Available for sale [2] 120,549 1,872 6.20 58,280 1,038 6.53
Held to maturity 205,007 3,267 6.37 240,451 4,057 6.75
Federal funds sold 8,745 122 5.45 7,478 103 5.40
Loans, net of unearned discounts
Domestic [3] 522,645 13,468 10.98 451,333 11,845 11.30
Foreign 788 13 6.65 789 16 7.97
-------- -------- -------- -------
TOTAL INTEREST-EARNING
ASSETS 858,049 18,757 9.04 761,385 17,094 9.31
-------- ------- -------- ------
Cash and due from banks 41,451 42,784
Allowance for credit losses (9,147) (8,670)
Goodwill 21,158 21,158
Other assets 20,546 21,501
-------- --------
TOTAL ASSETS $932,057 $838,158
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 22,979 132 2.28 $ 23,411 129 2.19
NOW 66,053 513 3.08 35,224 138 1.56
Money Market 137,565 1,068 3.02 124,493 946 3.01
Time 169,228 2,145 5.03 190,697 2,512 5.23
Foreign
Time 2,730 37 5.40 2,710 37 5.35
-------- -------- -------- --------
Total interest-bearing
deposits 398,555 3,895 3.86 376,535 3,762 3.96
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 70,912 919 5.10 85,133 1,169 5.45
Commercial paper 36,894 475 5.10 24,257 324 5.29
Other short-term debt 16,849 260 5.17 5,850 125 5.01
Long-term debt 41,400 523 5.01 19,388 297 6.07
-------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES 564,610 6,072 4.22 511,163 5,677 4.37
-------- ---- -------- ----
Noninterest-bearing deposits 224,860 196,337
Other liabilities 44,488 47,592
-------- --------
Total liabilities 833,958 755,092
Shareholders' equity 98,099 83,066
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $932,057 $838,158
======== ========
Net interest income/spread $ 12,685 4.82% $ 11,417 4.94%
======== ==== ======== ====
Net yield on interest-earning
assets (margin) 6.10% 6.20%
==== ====
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages. Dollars are presented in
thousands.
[2] Interest on tax-exempt securities included herein is immaterial and is not
presented on a tax equivalent basis.
[3] Non-accrual loans are included in the average balance, which reduces the
average yields.
20
21
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Nine Months Ended September 30,
1998 1997
-------------------------------------- -------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- --------
Interest-bearing deposits
with other banks $ 1,261 $ 120 5.09% $ 3,381 $ 158 5.48%
Investment securities
Available for sale [2] 121,858 5,670 6.21 68,609 3,439 6.68
Held to maturity 219,971 10,346 6.27 234,439 11,840 6.73
Federal funds sold 11,562 479 5.46 4,725 193 5.39
Loans, net of unearned discounts
Domestic [3] 500,701 38,363 11.19 434,194 34,310 11.49
Foreign 789 40 6.74 789 41 7.03
-------- -------- -------- --------
TOTAL INTEREST-EARNING
ASSETS 856,142 55,018 9.02 746,137 49,981 9.37
-------- ------ -------- ------
Cash and due from banks 42,152 46,046
Allowance for credit losses (8,967) (8,383)
Goodwill 21,158 21,158
Other assets 21,154 19,636
-------- --------
TOTAL ASSETS $931,639 $824,594
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 23,402 394 2.25 $ 24,479 398 2.17
NOW 61,762 1,360 2.94 32,459 337 1.39
Money Market 137,616 3,220 3.13 128,404 2,950 3.07
Time 189,391 7,382 5.21 174,102 6,776 5.20
Foreign
Time 2,729 110 5.39 3,047 121 5.32
-------- -------- -------- --------
Total interest-bearing
deposits 414,900 12,466 4.02 362,491 10,582 3.90
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 76,493 3,006 5.25 87,641 3,520 5.37
Commercial paper 31,801 1,224 5.14 24,783 969 5.23
Other short-term debt 15,741 757 5.20 6,705 431 5.15
Long-term debt 33,165 1,253 5.05 20,026 913 6.09
-------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES 572,100 18,706 4.34 501,646 16,415 4.33
-------- ---- -------- ----
Noninterest-bearing deposits 220,552 197,559
Other liabilities 43,490 45,150
-------- --------
Total liabilities 836,142 744,355
Shareholders' equity 95,497 80,239
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $931,639 $824,594
======== ========
Net interest income/spread $ 36,312 4.68% $ 33,566 5.04%
======== ==== ======== ====
Net yield on interest-earning
assets (margin) 5.96% 6.30%
==== ====
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages. Dollars are presented in
thousands.
[2] Interest on tax-exempt securities included herein is immaterial and is not
presented on a tax equivalent basis.
[3] Non-accrual loans are included in the average balance, which reduces the
average yields.
21
22
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis
Three Months Ended September 30,
(000 omitted)
Increase/(Decrease)
Three Months Ended
September 30, 1998 and 1997
Volume Rate Net[1]
------- ------- -------
INTEREST INCOME
Interest-bearing deposits with other banks $ (18) $ (2) $ (20)
------- ------- -------
Investment securities
Available for sale [2] 888 (54) 834
Held to maturity (572) (218) (790)
------- ------- -------
Total 316 (272) 44
------- ------- -------
Federal funds sold 18 1 19
------- ------- -------
Loans, net of unearned discounts [3] 1,994 (374) 1,620
------- ------- -------
TOTAL INTEREST INCOME $ 2,310 $ (647) $ 1,663
======= ======= =======
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ (2) $ 5 $ 3
NOW 177 198 375
Money Market 118 4 122
Time (274) (93) (367)
Foreign
Time -- -- --
------- ------- -------
Total 19 114 133
------- ------- -------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase (181) (69) (250)
Commercial paper 163 (12) 151
Other short-term debt 133 2 135
Long-term debt 286 (60) 226
------- ------- -------
Total 401 (139) 262
------- ------- -------
TOTAL INTEREST EXPENSE $ 420 $ (25) $ 395
======= ======= =======
NET INTEREST INCOME $ 1,890 $ (622) $ 1,268
======= ======= =======
[1] The change in interest income and interest expense due to both rate and
volume has been allocated to change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts of
the changes in each.
[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.
22
23
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis
Nine Months Ended September 30,
(000 omitted)
Increase/(Decrease)
Nine Months Ended
September 30, 1998 and 1997
Volume Rate Net[1]
------- ------- -------
INTEREST INCOME
Interest-bearing deposits with other banks $ (34) $ (4) $ (38)
------- ------- -------
Investment securities
Available for sale [2] 2,488 (257) 2,231
Held to maturity (709) (785) (1,494)
------- ------- -------
Total 1,779 (1,042) 737
------- ------- -------
Federal funds sold 284 2 286
------- ------- -------
Loans, net of unearned discounts [3] 5,127 (1,075) 4,052
------- ------- -------
TOTAL INTEREST INCOME $ 7,156 $(2,119) $ 5,037
======= ======= =======
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ (18) $ 14 $ (4)
NOW 458 565 1,023
Money Market 212 58 270
Time 593 13 606
Foreign
Time (13) 2 (11)
------- ------- -------
Total 1,232 652 1,884
------- ------- -------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase (437) (77) (514)
Commercial paper 272 (17) 255
Other short-term debt 323 3 326
Long-term debt 517 (177) 340
------- ------- -------
Total 675 (268) 407
------- ------- -------
TOTAL INTEREST EXPENSE $ 1,907 $ 384 $ 2,291
======= ======= =======
NET INTEREST INCOME $ 5,249 $(2,503) $ 2,746
======= ======= =======
[1] The change in interest income and interest expense due to both rate and
volume has been allocated to change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts of
the changes in each.
[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.
23
24
STERLING BANCORP AND SUBSIDIARIES
Regulatory Capital and Ratios
RATIOS AND MINIMUMS
(Dollars in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
AS OF SEPTEMBER 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------- --------------- ----------------- ----------------
Total Capital (to Risk Weighted Assets):
The Company $85,966 13.53% $50,845 8.00% $63,556 10.00%
The Bank 70,504 11.85 47,617 8.00 59,521 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 78,000 12.27 25,422 4.00 38,134 6.00
The Bank 63,133 10.61 23,808 4.00 35,713 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 78,000 8.56 36,436 4.00 45,545 5.00
The Bank 63,133 7.26 34,803 4.00 43,504 5.00
AS OF DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets):
The Company $79,698 11.82% $53,935 8.00% $67,419 10.00%
The Bank 61,521 9.64 51,038 8.00 63,798 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 71,268 10.57 26,968 4.00 40,451 6.00
The Bank 55,028 8.63 25,519 4.00 38,279 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 71,268 8.31 34,320 4.00 42,900 5.00
The Bank 55,028 6.66 33,032 4.00 41,290 5.00
24
25
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of market risk, liquidity risk, capital and asset quality. The
Company's net interest income is affected by changes in market interest rates
and by the level and composition of interest-earning assets and interest-bearing
liabilities. The Company's objectives in its asset/liability management are to
utilize its capital effectively, to provide adequate liquidity and to enhance
net interest income, without taking undue risks or subjecting the Company unduly
to interest rate fluctuations.
The Company takes a coordinated approach to the management of market
risk, liquidity and capital. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee ("ALCO"). ALCO, which is comprised of
members of senior management 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.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. The Company monitors the interest rate sensitivity of its on - and
off - balance sheet positions by examining its near-term sensitivity and its
longer term gap position. In its management of interest rate risk, the Company
utilizes several tools including traditional gap analysis and sophisticated
income simulation models.
A traditional gap analysis is prepared based on the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities for selected time bands. The mismatch between repricings or
maturities within a time band is commonly referred to as the "gap" for that
period. A positive gap (asset sensitive) where interest-rate sensitive assets
exceed interest-rate sensitive liabilities generally will result in 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 opposite result 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.
The Company's balance sheet structure is primarily short-term in nature
with a substantial portion of assets and liabilities repricing or maturing
within one year. The Company's gap analysis at September 30,1998, presented on
page 28, reveals that net interest income would increase during periods of
rising interest rates and decrease during periods of falling interest rates.
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 based on
recommendations of 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.
25
26
The Company purchased interest rate floor contracts to reduce the
impact of falling rates on its floating rate commercial loans. Interest rate
floor contracts require the counterparty to pay the Company at specified future
dates the amount, if any, by which the specified interest rate (3 month LIBOR)
falls below the fixed floor rates, applied to the notional amounts. The Company
utilizes these financial instruments to adjust its interest rate risk position
without exposing itself to principal risk and funding requirements.
At September 30,1998, the Company's off-balance sheet financial
instruments consisted of four interest rate floor contracts having a notional
amount totaling $125 million consisting of a contract with a notional amount of
$50 million and a final maturity of February 27, 2000, another contract with a
notional amount of $25 million and a final maturity of October 10, 1999, another
contract with a notional amount of $25 million and a final maturity of February
9, 2001 and another contract with a notional amount of $25 million and a final
maturity of May 1, 2001. These financial instruments are being used as part of
the Company's interest rate risk management and not for trading purposes. At
September 30,1998, all counterparties have investment grade credit ratings from
the major rating agencies. Each counterparty is specifically approved for
applicable credit exposure.
The interest rate floor contracts require the Company to pay a fee for
the right to receive a fixed interest payment. The Company paid up front
premiums of $878,500 which are amortized monthly against interest income from
the designated assets. At September 30,1998, the unamortized premiums on these
contracts totaled $359,000 and are included in other assets. At September
30,1998, $15,000 was receivable under these contracts.
The Company utilizes income simulation models to complement its
traditional gap analysis. While ALCO routinely monitors simulated net interest
income sensitivity over a rolling two-year horizon, it also utilizes additional
tools to monitor potential longer-term interest rate risk. The income simulation
models measure the Company's net interest income 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
estimated effects of the Company's interest rate floors are included in the
results of the sensitivity analysis. The Company has established certain policy
limits for the potential volatility of its net interest margin assuming certain
levels of changes in market interest rates with the objective of maintaining a
stable net interest margin under various probable rate scenarios. Management
generally has maintained a risk position well within the policy limits. As of
September 30, 1998, the model indicated the impact of a 200 basis point
parallel and pro rata rise in rates over 12 months would approximate a 2.08%
($1,108,000) increase in net interest income, while a 200 basis point decline in
rates over the same period would approximate a 3.30% ($1,759,000) from an
unchanged rate environment.
26
27
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cash flows, and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
the Asset/Liability Committee might take in responding to or anticipating
changes in interest rates.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the Bank levels. Liquid assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital markets funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits, which
historically have been relatively stable. The parent company and the Bank 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 equivalents throughout its history.
Various legal restrictions limit the extent to which the Bank can
supply funds to the parent company and its nonbank subsidiaries. All national
banks are limited in the payment of dividends without the approval of the
Comptroller of the Currency to an amount not to exceed the net profits as
defined, for that year to date combined with its retained net profits for the
preceding two calendar years.
At September 30,1998, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $37,199,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$56,238,000 and back-up credit lines with banks of $19,000,000. Since 1979, the
parent company has had no need to use available back-up lines of credit.
27
28
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 analysis shown below, the Company's net interest
income would increase during periods of rising interest rates and decrease
during periods of falling interest rates. Amounts are presented in thousands.
Repricing Date
-----------------------------------------------------------------------------------------
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 $ 315 $ -- $ -- $ -- $ -- $ 315
Investment securities -- 23,127 13,208 279,045 6,797 322,177
Federal funds sold 4,000 -- -- -- -- 4,000
Loans, net of unearned
discounts 469,396 2,886 68,333 54,634 (8,819) 586,430
Noninterest-earning assets
and allowance for
credit losses -- -- -- -- 72,426 72,426
--------- --------- --------- --------- --------- ---------
Total Assets 473,711 26,013 81,541 333,679 70,404 985,348
--------- --------- --------- -------- --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Savings [1] -- -- 23,433 -- -- 23,433
NOW [1] -- -- 59,653 -- -- 59,653
Money market [1] 108,379 -- 25,789 -- -- 134,168
Time - domestic 99,935 50,617 17,805 -- -- 168,357
- foreign 1,000 1,730 -- -- -- 2,730
Federal funds purchased &
securities sold u/a/r 88,675 6,000 -- -- -- 94,675
Commercial paper 36,949 -- -- -- -- 36,949
Other short-term borrowings 16,639 350 -- -- -- 16,989
Long-term borrowings - FHLB -- 20,000 21,400 -- -- 41,400
Noninterest-bearing
liabilities and share-
holders' equity -- -- -- -- 406,994 406,994
--------- --------- --------- --------- --------- ---------
Total Liabilities and
Shareholders' Equity 351,577 78,697 148,080 -- 406,994 985,348
--------- --------- --------- --------- --------- ---------
Net Interest Rate
Sensitivity Gap $ 122,134 $ (52,684) $ (66,539) $ 333,679 $(336,590) $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
September 30, 1998 $ 122,134 $ 69,450 $ 2,911 $ 336,590 $ -- $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
September 30, 1997 $ 61,904 $ 11,651 $ (21,047) $ 273,466 $ -- $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
December 31, 1997 $ 158,116 $ 97,742 $ 60,343 $ 377,414 $ -- $ --
========= ========= ========= ========= ========= =========
[1] Historically, balances in non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical repricing
practices and runoff experience.
28
29
STERLING BANCORP AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
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 11/13/98 /s/ Louis J. Cappelli
--------------- -------------------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 11/13/98 /s/ John W. Tietjen
--------------- -------------------------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
29
30
STERLING BANCORP AND SUBSIDIARIES
Exhibit Index
Exhibit Filed
Number Description Herewith
------ ----------- --------
11 Computation of Per Share Earnings X
27 Financial Data Schedule X