1
Financial Information
Consolidated Financial Statements 14
Consolidated Statements of Condition 19
Notes to Consolidated Financial Statements 20
Independent Auditors' Report 43
Management's Discussion and Analysis of
Financial Condition and Results of Operations 44
CORPORATE DIRECTORIES
Sterling Bancorp and Subsidiaries 58
2
STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 43,311,268 $ 40,065,863
Interest-bearing deposits with other banks 515,000 3,010,000
Securities available for sale (at estimated market value) 145,060,902 148,921,006
Securities held to maturity (estimated market value
$185,425,123 and $236,009,925, respectively) 184,745,325 236,030,004
-----------------------------------
Total investment securities 329,806,227 384,951,010
-----------------------------------
Loans, net of unearned discounts 640,206,308 558,481,845
Less allowance for possible loan losses 10,156,077 8,677,610
-----------------------------------
Loans, net 630,050,231 549,804,235
-----------------------------------
Customers' liability under acceptances 609,431 1,125,654
Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 6,294,654 7,330,062
Accrued interest receivable 3,991,914 4,147,008
Other real estate owned 1,044,509 745,436
Other assets 7,663,541 7,641,950
-----------------------------------
$1,044,445,215 $1,019,979,658
===================================
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $ 329,020,287 $ 312,461,489
Interest-bearing deposits 373,782,181 418,946,491
-----------------------------------
Total deposits 702,802,468 731,407,980
Federal funds purchased and securities sold under agreements to repurchase 99,429,027 106,752,546
Commercial paper 41,529,300 24,070,600
Other short-term borrowings 12,771,325 19,891,252
Acceptances outstanding 609,431 1,125,654
Due to factoring clients 32,074,004 30,798,610
Accrued expenses and other liabilities 11,678,336 11,560,450
Other long-term borrowings--FHLB 41,400,000 1,750,000
-----------------------------------
Total liabilities 942,293,891 927,357,092
-----------------------------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, $5 par value ($20 liquidation value) 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 48,817,648 39,590,806
Accumulated other comprehensive income 538,840 197,374
-----------------------------------
105,417,977 95,313,169
Less
Common stock in treasury at cost, 101,693 and 44,593 shares, respectively 1,592,690 441,257
Unearned compensation 1,673,963 2,249,346
-----------------------------------
Total shareholders' equity 102,151,324 92,622,566
-----------------------------------
$1,044,445,215 $1,019,979,658
===================================
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans $ 52,216,562 $ 46,783,503 $ 39,221,330
Deposits with other banks 132,352 225,051 156,922
Investment securities
Available for sale 7,562,173 4,543,430 6,296,121
Held to maturity 13,485,747 15,903,348 15,034,267
Federal funds sold 564,622 370,741 288,388
--------------------------------------------
Total interest income 73,961,456 67,826,073 60,997,028
--------------------------------------------
Interest Expense
Deposits 16,106,218 14,943,623 12,108,336
Federal funds purchased and securities sold under agreements to repurchase 4,002,161 4,480,085 4,611,205
Commercial paper 1,719,857 1,298,916 1,546,997
Other short-term borrowings 921,076 656,570 1,041,821
Long-term convertible subordinated debentures -- 250,060 1,144,261
Other long-term borrowings--FHLB 1,774,228 624,939 881,137
--------------------------------------------
Total interest expense 24,523,540 22,254,193 21,333,757
--------------------------------------------
Net interest income 49,437,916 45,571,880 39,663,271
Provision for loan losses 5,389,000 3,075,000 2,047,005
--------------------------------------------
Net interest income after provision for loan losses 44,048,916 42,496,880 37,616,266
--------------------------------------------
Noninterest Income
Factoring income 4,481,711 4,456,355 3,588,454
Mortgage banking income 4,650,353 3,341,093 1,598,444
Service charges on deposit accounts 3,194,510 2,049,839 1,829,784
Trade finance income 1,976,757 1,553,048 1,189,691
Trust fees 858,934 659,314 662,862
Other service charges and fees 939,636 847,392 1,068,727
Net securities gains/(losses) 86,291 -- (71,254)
Other income 260,149 64,888 41,757
--------------------------------------------
Total noninterest income 16,448,341 12,971,929 9,908,465
--------------------------------------------
Noninterest Expenses
Salaries 18,114,084 17,151,370 14,859,118
Employee benefits 3,671,487 3,401,063 3,217,794
--------------------------------------------
Total personnel expense 21,785,571 20,552,433 18,076,912
Occupancy expense, net 3,321,081 3,084,946 2,504,624
Equipment expense 2,455,347 2,389,691 1,689,291
Other expenses 10,735,564 9,679,249 9,426,552
--------------------------------------------
Total noninterest expenses 38,297,563 35,706,319 31,697,379
--------------------------------------------
Income before income taxes 22,199,694 19,762,490 15,827,352
Provision for income taxes 9,403,151 8,874,087 7,575,498
--------------------------------------------
Net income $ 12,796,543 $ 10,888,403 $ 8,251,854
============================================
Average number of common shares outstanding
Basic 8,231,401 7,874,653 7,015,185
Diluted 8,680,501 8,623,879 8,702,143
Earnings per average common share
Basic $ 1.55 $ 1.38 $ 1.17
Diluted 1.47 1.27 1.01
Dividends per common share .43 .37 .31
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,796,543 $ 10,888,403 $ 8,251,854
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising during the period 388,150 107,373 (490,895)
(Less)/Add: reclassification adjustment for gains/(losses)
included in net income (46,684) -- 37,149
-------------------------------------------------
Comprehensive income, net of tax $ 13,138,009 $ 10,995,776 $ 7,798,108
=================================================
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
Balance at beginning of year $ 2,486,730 $ 2,506,600 $ 2,525,760
Conversions of Series B and Series D shares (22,840) (19,870) (19,160)
-------------------------------------------------
Balance at end of year $ 2,463,890 $ 2,486,730 $ 2,506,600
=================================================
Common Stock
Balance at beginning of year $ 8,262,500 $ 7,725,533 $ 6,496,854
Conversions of subordinated debentures -- 519,480 1,133,084
Conversions of preferred shares into common shares 2,284 1,987 1,916
Options exercised 45,500 15,500 1,500
Common shares issued in acquisition of mortgage company -- -- 92,179
-------------------------------------------------
Balance at end of year $ 8,310,284 $ 8,262,500 $ 7,725,533
=================================================
Capital Surplus
Balance at beginning of year $ 44,775,759 $ 38,619,434 $ 28,091,878
Conversions of subordinated debentures -- 5,975,019 10,050,401
Conversions of preferred shares into common shares 20,556 17,883 17,244
Options exercised 491,000 169,250 9,375
Common shares issued in acquisition of mortgage company -- -- 170,816
Issuance of shares under incentive compensation plan -- -- 286,195
Forfeiture of shares issued under incentive compensation plan -- (5,827) (6,475)
-------------------------------------------------
Balance at end of year $ 45,287,315 $ 44,775,759 $ 38,619,434
=================================================
Retained Earnings
Balance at beginning of year $ 39,590,806 $ 31,648,806 $ 25,641,804
Net income 12,796,543 10,888,403 8,251,854
Cash dividends paid--common shares (3,515,636) (2,900,466) (2,223,721)
--preferred shares (54,065) (45,937) (21,131)
-------------------------------------------------
Balance at end of year $ 48,817,648 $ 39,590,806 $ 31,648,806
=================================================
Accumulated Other Comprehensive Income
Balance at beginning of year $ 197,374 $ 90,001 $ 543,747
-------------------------------------------------
Unrealized holding gains/(losses) arising during the period:
Before tax 717,461 197,779 (909,447)
Tax effect (329,311) (90,406) 418,552
-------------------------------------------------
Net of tax 388,150 107,373 (490,895)
-------------------------------------------------
Reclassification adjustment for (gains)/losses included in net income:
Before tax (86,291) -- 71,254
Tax effect 39,607 -- (34,105)
-------------------------------------------------
Net of tax (46,684) -- 37,149
-------------------------------------------------
Balance at end of year $ 538,840 $ 197,374 $ 90,001
=================================================
Treasury Stock
Balance at beginning of year $ (441,257) $ (418,959) $ (1,489,239)
Purchase of common shares (1,151,433) -- --
Issuance of shares under incentive compensation plan -- -- 1,095,055
Forfeiture of shares issued under incentive compensation plan -- (22,298) (24,775)
-------------------------------------------------
Balance at end of year $ (1,592,690) $ (441,257) $ (418,959)
=================================================
Unearned Compensation
Balance at beginning of year $ (2,249,346) $ (2,993,980) $ (2,153,580)
Issuance of shares under incentive compensation plan -- -- (1,381,250)
Forfeiture of shares issued under incentive compensation plan -- 28,125 31,250
Amortization of unearned compensation 575,383 716,509 509,600
-------------------------------------------------
Balance at end of year $ (1,673,963) $ (2,249,346) $ (2,993,980)
=================================================
Total Shareholders' Equity
Balance at beginning of year $ 92,622,566 $ 77,177,435 $ 59,657,224
Net changes during the year 9,528,758 15,445,131 17,520,211
-------------------------------------------------
Balance at end of year $ 102,151,324 $ 92,622,566 $ 77,177,435
=================================================
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 12,796,543 $ 10,888,403 $ 8,251,854
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,389,000 3,075,000 2,047,005
Depreciation and amortization of premises and equipment 1,686,199 1,465,620 946,233
Deferred income tax (benefit) provision (454,107) (854,612) 32,920
Net change in loans held for sale (12,714,005) (3,846,158) (5,591,000)
Net securities (gains)/losses (86,291) -- 71,254
Amortization of unearned compensation 575,383 716,509 509,600
Amortization of premiums on investment securities 2,107,863 1,357,973 1,666,602
Accretion of discounts on investment securities (637,104) (150,942) (157,134)
Decrease (Increase) in accrued interest receivable 155,094 110,134 (105,192)
Increase in due to factoring clients 1,275,394 7,658,106 544,325
Increase (Decrease) in accrued expenses and other liabilities 117,886 (2,015,388) (3,153,196)
Other, net (3,767,727) (2,505,835) (2,004,736)
-------------------------------------------------
Net cash provided by operating activities 6,444,128 15,898,810 3,058,535
-------------------------------------------------
Investing Activities
Purchase of premises and equipment (650,791) (3,286,942) (3,458,873)
Net decrease (increase) in interest-bearing deposits with other banks 2,495,000 -- (10,000)
Decrease in Federal funds sold -- 3,000,000 2,000,000
Net increase in loans (69,010,458) (89,119,131) (61,863,478)
Increase in other real estate owned (299,073) (364,336) (238,766)
Proceeds from prepayments, redemptions or maturities
of securities--held to maturity 69,459,395 39,933,896 40,548,751
Purchases of securities--held to maturity (19,853,914) (50,284,272) (70,755,029)
Proceeds from sale of securities--available for sale 14,965,434 -- 15,387,010
Proceeds from prepayments, redemptions or maturities--
available for sale 340,067,757 30,680,545 13,390,375
Purchases of securities--available for sale (350,247,181) (101,959,442) (6,083,161)
-------------------------------------------------
Net cash used in investing activities (13,073,831) (171,399,682) (71,083,171)
-------------------------------------------------
Financing Activities
Net increase in noninterest-bearing deposits 16,558,798 82,484,706 5,896,240
Net (decrease) increase in interest-bearing deposits (45,164,310) 74,500,913 17,498,318
Net (decrease) increase in securities sold under agreements
to repurchase (16,323,519) 608,146 29,878,780
Net increase (decrease) in commercial paper and
other short-term borrowings 10,338,773 (19,027,839) 31,050,851
Prepayments and maturities of debentures -- -- (3,773,515)
Increase (Decrease) in other long-term borrowings--FHLB 39,650,000 (12,750,000) (3,500,000)
Increase in Federal funds purchased 9,000,000 18,000,000 7,000,000
Purchase of treasury shares (1,151,433) -- --
Proceeds from exercise of stock options 536,500 184,750 10,875
Cash dividends paid on preferred and common shares (3,569,701) (2,946,403) (2,244,852)
-------------------------------------------------
Net cash provided by financing activities 9,875,108 141,054,273 81,816,697
-------------------------------------------------
Net increase (decrease) in cash and due from banks 3,245,405 (14,446,599) 13,792,061
Cash and due from banks--beginning of year 40,065,863 54,512,462 40,720,401
-------------------------------------------------
Cash and due from banks--end of year $ 43,311,268 $ 40,065,863 $ 54,512,462
=================================================
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $ 22,840 $ 6,408,870 $ 11,202,645
(Forfeiture) Issuance of treasury shares -- (22,298) 1,381,250
Issuance of common stock -- -- 262,995
Supplemental disclosure of cash flow information:
Interest paid 25,256,440 23,607,904 23,225,059
Income taxes paid 7,487,552 9,793,000 10,790,311
See Notes to Consolidated Financial Statements.
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STERLING NATIONAL BANK
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 43,215,888 $ 39,871,111
Interest-bearing deposits with other banks 515,000 3,010,000
Securities available for sale (at estimated market value) 145,000,334 148,862,827
Securities held to maturity (estimated market value $185,425,123 and
$236,009,925, respectively) 184,745,325 236,030,004
--------------------------------
Total investment securities 329,745,659 384,892,831
--------------------------------
Loans, net of unearned discounts 591,076,395 522,332,429
Less allowance for loan losses 7,861,384 6,492,917
--------------------------------
Loans, net 583,215,011 515,839,512
--------------------------------
Receivables from affiliates 669,394 679,722
Customers' liability under acceptances 609,431 1,125,654
Premises and equipment, net 6,157,011 7,181,762
Accrued interest receivable 3,978,189 4,124,777
Other real estate owned 1,044,509 39,592
Other assets 6,570,141 7,622,734
--------------------------------
$975,720,233 $964,387,695
================================
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $330,441,058 $313,171,421
Interest-bearing deposits 382,382,957 424,922,661
--------------------------------
Total deposits 712,824,015 738,094,082
Federal funds purchased and securities sold under agreements to repurchase 99,429,027 106,752,546
Other short-term borrowings 12,771,325 19,891,252
Due to affiliates 906,438 925,405
Acceptances outstanding 609,431 1,125,654
Due to factoring clients 32,074,004 30,798,610
Accrued expenses and other liabilities 11,058,871 9,831,839
Long-term borrowings--FHLB 41,400,000 1,750,000
--------------------------------
Total liabilities 911,073,111 909,169,388
--------------------------------
Commitments and contingent liabilities
Shareholders' Equity
Common stock, $50 par value
Authorized and issued, 358,526 shares 17,926,300 17,926,300
Surplus 19,762,560 19,762,560
Undivided profits 26,428,146 17,339,505
Accumulated other comprehensive income:
Net unrealized appreciation on securities available for sale, net of tax 530,116 189,942
--------------------------------
Total shareholders' equity 64,647,122 55,218,307
--------------------------------
$975,720,233 $964,387,695
================================
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Sterling Bancorp ("the parent company") is a bank holding company, as defined by
the Bank Holding Company Act of 1956, as amended. Throughout the notes, the term
"the Company" refers to Sterling Bancorp and its subsidiaries. The Sterling
companies provide a full range of products and services, including business and
consumer loans, commercial and residential mortgage lending and brokerage,
asset-based financing, accounts receivable management, trade financing, leasing,
trust and estate administration and investment management services. Sterling has
operations in New York and Virginia and conducts business throughout the United
States.
The following summarizes the significant accounting policies of Sterling
Bancorp and its subsidiaries.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company
and its subsidiaries, principally Sterling National Bank ("the bank"), after
elimination of material intercompany transactions.
General Accounting Policies
The Company follows generally accepted accounting principles and prevailing
practices within the banking industry. Any preparation of financial statements
requires management to make assumptions and estimates that impact the amounts
reported in those statements and are, by their nature, subject to change in the
future as additional information becomes available or as circumstances vary.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year presentation.
Investment Securities
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," securities
are designated as available for sale or held to maturity at the time of
acquisition. Securities which the Company will hold for indefinite periods of
time and which might be sold in the future as part of efforts to manage interest
rate risk or in response to changes in interest rates, changes in prepayment
risk, changes in market conditions or changes in economic factors, are
classified as available for sale and carried at estimated market values. Net
aggregate unrealized gains or losses are included in a valuation allowance
account and are reported, net of taxes, as a component of shareholders' equity.
Securities which the Company has the positive intent and ability to hold to
maturity are designated as held to maturity and are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity. Interest and dividends on securities are reported in interest
income. Gains and losses realized on sales of securities are determined on the
specific identification method and are reported in noninterest income as net
securities gains/(losses).
Loans
Loans, other than those held for sale, are reported at their principal amount
outstanding, net of unearned discounts and unamortized nonrefundable fees and
direct costs associated with their origination or acquisition. Interest earned
on loans without discounts is credited to income based on loan principal amounts
outstanding at appropriate interest rates. Material origination fees net of
direct costs and discounts on loans are credited to income over the terms of the
loans using a method which results in an approximate level rate of return.
Mortgage loans held for sale, including deferred fees and costs, are
reported at the lower of cost or market value as determined by outstanding
commitments from investors or current investor yield requirements calculated on
the aggregate loan basis. Gains or losses resulting from sales of mortgage
loans, net of unamortized deferred fees and costs, are recognized when the
proceeds are received from investors and are included under the caption
"Mortgage banking income."
Nonaccrual loans are those on which the accrual of interest has ceased.
Loans, including loans that are individually identified as being impaired under
SFAS No. 114, are generally placed on nonaccrual status immediately if, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more and collateral, if any, is insufficient to cover
principal and interest. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income. Interest income
is recognized on nonaccrual loans only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses, which is available for losses incurred in the
loan portfolio, is increased by a provision charged to expense and decreased by
charge-offs, net of recoveries.
SFAS No. 114 and No. 118 address the accounting for impairment of certain
loans when it is probable that all amounts due pursuant to the contractual terms
of the
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loan will not be collected. Under the provisions of these standards,
individually identified impaired loans are measured based on the present value
of payments expected to be received, using the historical effective loan rate as
the discount rate. Alternatively, measurement may also be based on observable
market prices; or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the collateral. Loans
that are to be foreclosed are measured based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds fair value,
a valuation allowance is required as a component of the allowance for loan
losses. Changes to the valuation allowance are recorded as a component of the
provision for loan losses.
The adequacy of the allowance for loan losses is reviewed regularly by
management. Additions to the allowance for loan losses are made by a provision
charged to the expense. On a quarterly basis, a comprehensive review of the
adequacy of the allowance for loan losses is performed. This assessment is made
in the context of historical losses and other factors, including changes in the
composition and volume of the loan portfolio, current economic conditions and
the relationship of the allowance to the loan portfolio.
Excess Cost Over Equity in Net Assets of the
Banking Subsidiary
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes accounting standards for determining and measuring
the impairment of certain assets, including excess cost over equity in net
assets. Since the bank was acquired by the parent company prior to October 31,
1970 and the excess cost over equity in net assets has a continuing value, this
excess is not being amortized.
Premises and Equipment
Premises and equipment, excluding land, are stated at cost less accumulated
depreciation and amortization. Land is reported at cost. Depreciation is
computed on a straight-line basis and is charged to noninterest expense over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is charged to noninterest expense over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Maintenance, repairs and minor improvements are charged to noninterest expenses
as incurred.
Income Taxes
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," which requires the asset and liability method of accounting for income
taxes. Deferred income tax expense (benefit) is determined by recognizing
deferred tax assets and liabilities for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The realization of
deferred tax assets is assessed and a valuation allowance provided for that
portion of the assets for which it is more likely than not that it will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates and will be adjusted for the effects of future changes in tax laws or
rates, if any.
For income tax purposes, the Company files: a consolidated Federal income
tax return; combined New York City and New York State income tax returns; and
separate state income tax returns for its out-of-state subsidiaries. The parent
company either pays or collects on account of current income taxes to or from
its subsidiaries.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
Stock Incentive Plans
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Earnings Per Average Common Share
The Company follows the provisions of SFAS No. 128, "Earnings per Share," which
require 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.
Off-Balance Sheet Instruments
The Company enters into interest rate floor contracts primarily to manage
interest rate exposure. These instruments are entered into as hedges against
interest rate risk
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associated with certain identified assets. The premiums paid for these
instruments are amortized to interest income over the term of the related asset.
Amounts receivable are accounted for on an accrual basis and are recognized as
adjustments to the interest income of the related assets.
NOTE 2. ACQUISITION
On July 1, 1996, the Company acquired the Real Estate Funding Center (now
operating as Sterling National Mortgage Company, Inc.) for 92,179 shares of
common stock. The acquisition was accounted for as a pooling of interests.
However, prior periods have not been restated as the acquisition was not
material.
NOTE 3. CASH AND DUE FROM BANKS
The bank is required to maintain average reserves, net of vault cash, on deposit
with the Federal Reserve Bank of New York against outstanding domestic deposit
liabilities. The required reserves, which are reported in cash and due from
banks, were $2,786,000 and $10,618,000 at December 31, 1998 and 1997,
respectively. Average required reserves during 1998 and 1997 were $6,914,000 and
$11,413,000, respectively.
NOTE 4. MONEY MARKET INVESTMENTS
The Company's money market investments include interest-bearing deposits with
other banks and Federal funds sold. The following table presents information
regarding money market investments.
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits with other banks
At December 31 --Balance $ 515,000 $ 3,010,000 $ 3,010,000
--Average interest rate 3.59% 5.53% 5.25%
--Average original maturity 182 Days 176 Days 169 Days
During the year --Maximum month-end balance 2,880,000 7,010,000 3,010,000
--Daily average balance 1,070,000 3,285,000 2,999,000
--Average interest rate earned 5.03% 5.68% 5.23%
--Range of interest rates earned 1.00-5.30% 5.38-6.25% 4.25-5.69%
=============================================================
Federal funds sold
At December 31 --Balance $ -- $ -- $ 3,000,000
--Average interest rate -- -- 5.50%
--Average original maturity -- -- 1 Day
During the year --Maximum month-end balance 31,000,000 25,000,000 25,000,000
--Daily average balance 10,356,000 6,718,000 5,153,000
--Average interest rate earned 5.45% 5.52% 5.60%
--Range of interest rates earned 4.25-5.85% 5.06-5.88% 4.75-6.50%
=============================================================
22
11
NOTE 5. INVESTMENT SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 19,735,251 $ -- $ 4,001 $ 19,731,250
Obligations of U.S. government corporations and agencies--
mortgage-backed securities 84,784,200 673,175 135,970 85,321,405
Obligations of state and political institutions 18,770,310 454,857 8,180 19,216,987
Other debt securities 13,993,442 -- -- 13,993,442
Federal Reserve Bank and other equity securities 6,781,691 16,916 789 6,797,818
------------------------------------------------------------
Total $144,064,894 $ 1,144,948 $ 148,940 $145,060,902
============================================================
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 34,747,100 $ 118,876 $ -- $ 34,865,976
Obligations of U.S. government corporations and agencies--
mortgage-backed securities 52,194,376 319,267 150,267 52,363,376
Obligations of state and political subdivisions 3,525,401 63,224 -- 3,588,625
Other debt securities 52,000,000 -- -- 52,000,000
Federal Reserve Bank and other equity securities 6,089,291 13,738 -- 6,103,029
------------------------------------------------------------
Total $148,556,168 $ 515,105 $ 150,267 $148,921,006
============================================================
The carrying value and estimated market value of securities held to
maturity are as follows:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
December 31, 1998 Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies--
mortgage-backed securities $182,745,325 $ 1,800,684 $ 1,120,886 $183,425,123
Debt securities issued by foreign governments 2,000,000 -- -- 2,000,000
------------------------------------------------------------
Total $184,745,325 $ 1,800,684 $ 1,120,886 $185,425,123
============================================================
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies--
mortgage-backed securities $234,030,004 $ 1,584,134 $ 1,604,213 $234,009,925
Debt securities issued by foreign governments 2,000,000 -- -- 2,000,000
------------------------------------------------------------
Total $236,030,004 $ 1,584,134 $ 1,604,213 $236,009,925
============================================================
23
12
The following tables present information regarding securities available
for sale and securities held to maturity at December 31, 1998, based on
contractual maturity. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties. The average yield is based on the ratio
of actual income divided by the average outstanding balances during the year.
The average yield on obligations of state and political subdivisions is not
stated on a tax-equivalent basis.
Estimated
Amortized Market Average
Securities available for sale Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities
Due within 1 year $ 19,735,251 $ 19,731,250 5.89%
---------------------------------
Obligations of U.S. government corporations and agencies--
mortgage-backed securities 84,784,200 85,321,405 6.45
---------------------------------
Obligations of state and political subdivisions
Due after 1 year but within 5 years 1,436,175 1,481,683
Due after 5 years 17,334,135 17,735,304
---------------------------------
Total 18,770,310 19,216,987 4.28
---------------------------------
Other debt securities
Due within one year 13,993,442 13,993,442 5.73
---------------------------------
Federal Reserve Bank and other securities 6,781,691 6,797,818 7.21
---------------------------------
Total $144,064,894 $145,060,902 6.14
=================================
Estimated
Carrying Market Average
Securities held to maturity Value Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies--
mortgage-backed securities $182,745,325 $183,425,123 6.30%
---------------------------------
Debt securities issued by foreign governments
Due after 1 year but within 5 years 1,250,000 1,250,000
Due after 5 years 750,000 750,000
---------------------------------
Total 2,000,000 2,000,000 7.57
---------------------------------
Total $184,745,325 $185,425,123 6.32
=================================
Information regarding securities sales from the available for sale
portfolio is as follows:
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds $14,965,434 $ -- $15,387,010
Gross gains 86,291 -- 22,161
Gross losses -- -- 105,354
During 1996, the Federal Home Loan Bank ("FHLB") issued a call for their
securities maturing December 20, 2001. The carrying value of such securities in
the held to maturity portfolio was $3,488,063. As the result of FHLB decision to
call these securities, a gain of $11,939 was realized and reported under the
caption "Net securities gains/(losses)."
The carrying value of investment securities pledged to secure public funds
on deposit, securities sold under agreements to repurchase, advances from the
Federal Home Loan Bank of New York and for other purposes required by law is as
follows:
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Secure funds on deposit $ 26,955,948 $ 19,834,000
Secure repurchase agreements 60,909,831 85,966,000
Secure Federal Home Loan Bank advances 60,565,313 19,389,000
-----------------------------------------
Total $148,431,092 $125,189,000
=========================================
24
13
NOTE 6. LOANS
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic
Commercial and industrial $465,734,367 $414,298,207
Lease financing 64,696,840 50,725,573
Real estate--mortgage 104,879,473 74,335,454
Real estate--construction -- 8,352,478
Installment 13,860,990 18,465,665
Foreign
Government and official institutions 787,256 789,424
-----------------------------------------
Loans, gross 649,958,926 566,966,801
Less unearned discounts 9,752,618 8,484,956
-----------------------------------------
Loans, net of unearned discounts $640,206,308 $558,481,845
=========================================
The Company originates certain residential mortgage loans with the
intention of reselling those loans, including the servicing rights, without
recourse. Residential mortgage loans held for sale, included in "Real
estate--mortgage," are $22,210,000 and $9,856,000 at December 31, 1998 and 1997,
respectively.
There are no industry concentrations (exceeding 10% of loans, gross) in
the commercial and industrial loan portfolio. Approximately 70% of the Company's
loans are to borrowers located in the metropolitan New York area.
Nonaccrual loans at December 31, 1998 and 1997 totaled $1,214,000 and
$1,388,000, respectively. There were no reduced rate loans at December 31, 1998
or 1997. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 1998, 1997 and 1996 in accordance with their
original terms is estimated to be $88,000, $55,000 and $13,000, respectively,
for the years then ended. The applicable interest income actually realized for
the aforementioned years was $-0-, $-0- and $-0-, respectively, for the years
then ended. At the end of these years there were no commitments to lend
additional funds on nonaccrual loans.
Loans are made at normal lending limits and credit terms to officers or
directors (including their immediate families) of the Company or for the
benefits of corporations in which they have a beneficial interest. There were no
outstanding balances on such loans in excess of $60,000 to any individual or
entity at December 31, 1998 or 1997.
NOTE 7. CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 8,677,610 $ 8,003,392 $ 5,192,203
Provision for loan losses 5,389,000 3,075,000 2,047,005
-------------------------------------------
14,066,610 11,078,392 7,239,208
-------------------------------------------
Less charge-offs, net of recoveries:
Charge-offs 4,350,944 2,724,281 737,961
Recoveries (440,411) (323,499) (1,502,145)
-------------------------------------------
Net charge-offs (recoveries) 3,910,533 2,400,782 (764,184)
-------------------------------------------
Balance at end of year $ 10,156,077 $ 8,677,610 $ 8,003,392
===========================================
During the third quarter of 1996, $1,333,000 was recovered on a previously
charged-off loan in the bank.
The Company follows SFAS No. 114, which establishes new rules for
calculating certain components of the allowance for loan losses. SFAS No. 114
requires that impairment of larger-balance, nonhomogenous loans that are
individually evaluated be measured by comparing the net carrying amount of the
loan to the present values of the expected future principal and interest cash
flows discounted at the loan's effective rate, the secondary market value of the
loan, or the fair value of the collateral for collateral-dependent loans. A
valuation allowance for any shortfall is established within the overall
allowance for loan losses. The net carrying amount of the loan reflects credit
write-offs, cash receipts applied to reduce the recorded investment in the loan,
and unearned fees. SFAS No. 114 does not apply to smaller-balance homogenous
consumer loans that are collectively evaluated for impairment, such as
residential mortgages, and consumer installment loans.
25
14
As of December 31, 1998 and 1997, $286,000 and $808,000, respectively, of
loans were judged to be impaired within the scope of SFAS No. 114 and carried on
a cash-basis. The average recorded investment in impaired loans during the years
ended December 31, 1998 and 1997, was approximately $589,000 and $526,000,
respectively. The application of SFAS No. 114 measurement principles indicated
that these loans required valuation allowances, totaling $100,000 and $250,000
at December 31, 1998 and 1997, respectively, which are included within the
overall allowance for loan losses.
NOTE 8. INTEREST-BEARING DEPOSITS
The following table presents certain information for interest expense on
deposits:
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits in domestic offices
Savings $ 537,798 $ 530,502 $ 535,712
NOW 1,808,972 588,212 312,750
Money market 4,221,286 4,048,343 3,380,952
Time
Three months or less 5,282,470 4,382,256 3,173,086
More than three months through twelve months 3,156,896 4,082,256 3,637,439
More than twelve months through sixty months 953,362 1,154,252 928,708
---------------------------------------
15,960,784 14,785,821 11,968,647
Interest-bearing deposits in foreign offices
Time
Three months or less 73,105 82,057 82,417
More than three months through twelve months 72,329 75,745 57,272
---------------------------------------
Total $16,106,218 $14,943,623 $12,108,336
=======================================
Foreign deposits totaled $2,730,000 and $2,710,000 at December 31, 1998 and
1997, respectively.
The aggregate of time certificates of deposit and other time deposits in
denominations of $100,000 or more by remaining maturity range and related
interest expense is presented below:
December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic
Three months or less $ 78,557,787 $ 70,173,286 $36,405,594
More than three months through six months 6,538,501 13,028,032 25,727,589
More than six months through twelve months 15,044,812 21,722,086 7,402,946
More than twelve months through twenty-four months 246,453 2,698,923 415,862
More than twenty-four months through thirty-six months -- 120,000 706,068
-----------------------------------------------
100,387,553 107,742,327 70,658,059
-----------------------------------------------
Foreign
Three months or less 1,730,000 1,580,000 1,710,000
More than three months through six months 1,000,000 1,000,000 1,000,000
More than six months through twelve months -- 130,000 --
-----------------------------------------------
2,730,000 2,710,000 2,710,000
-----------------------------------------------
Total $103,117,553 $110,453,907 $73,368,059
===============================================
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Domestic $ 5,310,269 $ 4,931,786 $ 3,615,702
Foreign 145,434 157,802 139,689
-----------------------------------------------
Total $ 5,455,703 $ 5,089,588 $ 3,755,391
===============================================
26
15
NOTE 9. SHORT-TERM BORROWINGS
The following table presents information regarding Federal funds purchased,
securities sold under agreements to repurchase, and commercial paper.
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased
At December 31 --Balance $ 34,000,000 $25,000,000 $ 7,000,000
--Average interest rate 5.69% 6.58% 5.75%
--Average original maturity 1 Day 1 Day 1 Day
During the year --Maximum month-end balance 34,000,000 25,000,000 10,000,000
--Daily average balance 1,630,000 3,112,000 2,054,000
--Average interest rate paid 5.34% 5.82% 5.52%
--Range of interest rates paid 4.50-7.00% 5.25-7.00% 5.06-5.75%
=================================================
Securities sold under agreements to repurchase
At December 31 --Balance $ 65,429,027 $81,752,546 $ 81,144,400
--Average interest rate 4.69% 5.51% 5.28%
--Average original maturity 66 Days 72 Days 75 Days
During the year --Maximum month-end balance 102,286,658 89,979,699 112,347,323
--Daily average balance 75,737,000 80,094,000 85,037,000
--Average interest rate paid 5.15% 5.37% 5.29%
--Range of interest rates paid 4.25-5.85% 4.70-6.17% 3.50-6.17%
=================================================
Commercial paper
At December 31 --Balance $ 41,529,300 $24,070,600 $ 32,569,900
--Average interest rate 4.72% 5.22% 5.19%
--Average original maturity 51 Days 111 Days 69 Days
During the year --Maximum month-end balance 43,617,400 27,491,000 32,643,000
--Daily average balance 33,843,000 24,804,000 29,652,000
--Average interest rate paid 5.08% 5.24% 5.22%
--Range of interest rates paid 2.50-5.30% 3.25-5.45% 2.50-5.60%
=================================================
The parent company has agreements with its line banks for back-up lines of
credit for which it pays a fee at the annual rate of 1/4 of 1% times the line of
credit extended. At December 31, 1998, these back-up bank lines of credit
totaled $19,000,000; no lines were used at any time during 1998 and 1997.
Other short-term borrowings include collateralized advances from the
Federal Home Loan Bank of New York due within one year and treasury tax and loan
funds. At December 31, 1998, Federal Home Loan Bank borrowings include an
advance of $10,000,000 payable January 4, 1999 at a rate of 5.125% and an
advance of $350,000 repayable in March, 1998 at a rate of 5.68%.
At December 31, 1997, Federal Home Loan Bank borrowings included an
advance of $3,000,000 payable January 2, 1998 at a rate of 5.63%, an advance of
$250,000 repayable in March, 1998 at a rate of 5.44% and advances of $12,500,000
repayable in October, 1998 at rates between 5.05% and 5.17%.
At December 31, 1996, Federal Home Loan Bank borrowings included an
advance of $22,000,000 payable January 2, 1997 at a rate of 7.375%, an advance
of $250,000 payable in March, 1997 at a rate of 5.20% and an advance of
$3,250,000 payable in October, 1997 at a rate of 4.84%.
27
16
NOTE 10. OTHER LONG-TERM BORROWINGS
These borrowings represent advances from the Federal Home Loan Bank of New York
("FHLB"), as follows:
December 31,
Advance Interest Maturity Initial -----------------------------------
Type Rate Date Call Date 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Term 5.68% 3/5/99 -- $ -- $ 350,000
Term 5.92 3/5/00 -- 350,000 350,000
Term 6.07 3/5/01 -- 350,000 350,000
Term 6.22 3/5/02 -- 350,000 350,000
Term 6.37 3/5/03 -- 350,000 350,000
Callable 4.93 2/17/08 2/17/99 10,000,000 --
Callable 5.06 2/17/08 2/17/00 10,000,000 --
Callable 5.13 2/17/08 2/17/01 10,000,000 --
Callable 5.04 3/25/08 3/25/99 10,000,000 --
----------------------------------
Total $41,400,000 $1,750,000
==================================
Weighted-average interest rate 5.08% 6.05%
==================================
Under the terms of a collateral agreement with the FHLB, advances are
secured by stock in the FHLB and by certain qualifying assets (primarily
mortgage-backed securities) having market values at least equal to 110% of the
advances outstanding. After the initial call date, each callable advance is
callable by the FHLB quarterly from the initial call date.
NOTE 11. PREFERRED STOCK
The parent company is authorized to issue up to 644,389 shares of convertible
preferred stock, $5 par value, in one or more series. At December 31, 1998 and
1997 two series of preferred stock had been issued--Series B and Series D.
The following table presents information regarding the parent company's
preferred stock:
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Series B shares. Authorized 4,389 shares; issued and outstanding--1,230 shares,
at liquidation value $ 24,600 $ 24,600
Series D shares. Authorized 300,000 shares; issued and outstanding--243,929 and
246,213 shares respectively, at liquidation value 2,439,290 2,462,130
-----------------------------
Total $2,463,890 $2,486,730
=============================
Series B
Series B shares may be redeemed, in whole or in part, at the election of the
parent company at a price of $28 per share, plus accrued and unpaid dividends to
the date of redemption. In the event of involuntary liquidation of the parent
company, the holders of these shares are entitled to receive, before any
distribution to the holders of common shares, $20 per share ("liquidation
value"). At the option of holders of these shares, such shares are convertible
into common shares of the parent company at a conversion rate of two common
shares for each Series B share surrendered. There were no conversions during
1998 or 1997. Dividends on the Series B shares are paid at the rate of $.10 per
annum, payable semi-annually and are cumulative. Holders of these shares are
entitled to one vote for each share held and vote together as one class with the
holders of the common shares.
Series D
Series D shares may only be issued to the trustee acting on behalf of an
employee stock ownership plan ("ESOP") or other employee benefit plan of the
Company. The Series D shares are convertible into common shares of the parent
company on a share for share basis. During 1993, the parent company issued
250,000 shares to the trustee of the Company's ESOP. These shares are entitled
to receive cash dividends in the amount of $.6125 per annum (subject to
adjustment), payable quarterly. Participants in the Company's ESOP are entitled
to vote in accordance with the terms of the ESOP and vote together as one class
with the holders of the common shares. The holders of these shares are entitled
to receive $10 per share and certain other preferences on liquidation,
dissolution or winding up. During 1998 and 1997, 2,284 shares and 1,987 shares,
respectively, were converted into common shares. See Footnote 15 for a
discussion of the Company's ESOP.
28
17
NOTE 12. COMMON STOCK
Number of shares reserved for issuance:
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion of Series B preferred shares 2,460 2,460
Conversion of Series D preferred shares 293,929 296,213
---------------------------
296,389 298,673
===========================
Number of shares outstanding at December 31, 8,208,591 8,217,907
===========================
Number of shareholders at December 31, 2,068 2,233
===========================
NOTE 13. RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits (as defined) for that
year to date combined with its retained net profits for the preceding two
calendar years. In addition, from time to time dividends are paid to the parent
company by the finance subsidiaries from their retained earnings without
regulatory restrictions.
NOTE 14. STOCK INCENTIVE PLAN
In April 1992, shareholders approved a Stock Incentive Plan ("the plan")
covering up to 100,000 common shares of the parent company. Under the plan, key
employees of the parent company and its subsidiaries could be granted awards in
the form of incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights ("SARs"), restricted stock or a combination
of these. The plan is administered by committees of the Board of Directors. In
April 1995, shareholders approved amendments to the plan which increased the
number of shares covered under the plan by 300,000 and which provided for the
annual automatic grant of NQSOs to each director who is not an employee or
officer ("outside director") of the Company. Under this provision annual NQSO
awards covering 2,000 common shares of the parent company are granted to each
outside director beginning April 1995 and continuing through April 1999. In
April 1996, 1997 and 1998 shareholders approved amendments to the plan which
increased the number of shares covered under the plan by 300,000, 350,000 and
400,000, respectively. After giving effect to stock option and restricted stock
awards granted, shares available for grant were 595,250, 453,250 and 361,000 at
December 31, 1998, 1997 and 1996, respectively.
Stock Options
The following tables present information on the qualified and non-qualified
stock options outstanding as of December 31, 1998, 1997 and 1996 and changes
during the years then ended:
1998 1997 1996
---------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Qualified Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 381,059 $12.81 199,000 $10.09 97,000 $ 7.54
Granted 123,000 24.75 212,059 15.50 109,500 12.50
Exercised (37,000) 12.26 (13,000) 12.50 --
Forfeit (15,000) 24.75 (17,000) 14.62 (7,500) 12.50
------- ------- -------
Outstanding at end of year 452,059 15.81 381,059 12.81 199,000 10.09
=======================================================================================
Options exercisable at end of year 344,059 181,000 148,000
Weighted-average fair value of options ======= ======= =======
granted during the year $4.95 $4.56 $2.13
======= ======= =======
29
18
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Non-qualified Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 60,941 $12.86 30,500 $ 9.42 16,000 $ 7.25
Granted 182,000 25.15 32,941 15.74 16,000 11.38
Exercised (8,500) 9.76 (2,500) 8.90 (1,500) 7.25
------- ------ ------
Outstanding at end of year 234,441 22.51 60,941 12.86 30,500 9.42
=======================================================================================
Options exercisable at end of year 32,441 8,000 2,500
======= ====== ======
Weighted-average fair value of options
granted during the year $6.77 $4.23 $2.40
======= ====== ======
The following table presents information regarding qualified and
non-qualified stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------------------------
Weighted- Weighted-
Range of Number Average Average Number Weighted-
Exercise Outstanding Remaining Exercise Exercisable Average
Prices at 12/31/98 Contractual Life Price 12/31/98 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Qualified $7-$25 452,059 7.6 years $15.71 344,059 $12.87
Non-qualified 7- 28 234,441 7.3 years 22.51 32,441 13.38
Other than director NQSOs which expire five years from the date of grant
and become exercisable in four annual installments, starting one year from the
date of grant or upon the death or disability of the grantee, stock options
generally expire ten years from the date of grant or, to the extent appropriate
to qualify to the maximum extent possible as ISOs vest in installments, subject
to earlier exercisability upon the death or disability of the grantee or other
specified events. Amounts received upon exercise of options are recorded as
common stock and capital surplus.
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." The statement encourages, but does not require
companies to use a fair value-based method of accounting for stock-based
employee compensation plans, including stock options and stock appreciation
rights. Under this method, compensation expense is measured as of the date the
awards are granted based on the estimated fair value of the awards, and the
expense is generally recognized over the vesting period. If a company elects to
continue using the intrinsic value-based method under APB Opinion No. 25, pro
forma disclosures of net income and net income per share are required as if the
fair value-based method had been applied. Under the intrinsic method,
compensation expense is the excess, if any, of the market price of the stock as
of the grant date over the amount employees must pay to acquire the stock or
over the price established for determining appreciation. Under the Company's
current compensation policies, there is no such excess on the date of grant and
therefore, no compensation expense is recorded.
The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Dividend yield 2.0% 2.5% 2.0%
Volatility 20% 20% 20%
Expected term
Qualified 4 years 3 years 3 years
Non-qualified (Directors) 4 years 4 years 4 years
Non-qualified (Officers) 8 years 8-10 years --
Risk-free interest rate 5.32% 6.45% 5.31%
The Company has elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock incentive plan. Accordingly, no
compensation expense has been recognized in the consolidated statements of
income related to the plan. Had compensation expense been determined based on
the estimated fair value of the awards
30
19
at the grant dates, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated in the table that follows:
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
As reported $ 12,797,000 $ 10,888,000 $ 8,252,000
Pro forma 12,381,000 10,700,000 8,200,000
Basic earnings per share
As reported 1.55 1.38 1.17
Pro forma 1.50 1.36 1.16
Diluted earnings per share
As reported 1.47 1.27 1.01
Pro forma 1.42 1.25 1.01
Pro forma net income reflects only options granted in 1998, 1997 and 1996.
Additionally, the full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net income above,
since such expense is apportioned over the vesting period of those options which
are expected to vest. Compensation expense for options granted prior to 1996 is
also not considered.
Restricted Stock
On January 3, 1996, 110,500 shares of restricted stock were awarded from
Treasury shares. The fair value was $12.50 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year. The plan calls
for the forfeiture of non-vested shares which are restored to the Treasury and
become available for future awards. During 1998 and 1997, -0- and 2,250 shares,
respectively, were forfeited. Unearned compensation resulting from these awards
is amortized as a charge to noninterest expenses over a four year period; such
charges were $320,833, $449,999 and $230,210 in 1998, 1997 and 1996,
respectively. The balance of unearned compensation is shown as a reduction of
shareholders' equity. For income tax purposes, the Company is entitled to a
deduction in an amount equal to the average market value of the shares on
vesting date and dividends paid on shares for which restrictions have not
lapsed.
NOTE 15. EMPLOYEE STOCK OWNERSHIP PLAN
On March 5, 1993, the Company established an Employee Stock Ownership Plan
("ESOP"). This plan covers substantially all employees with one or more years of
service of at least 1,000 hours who are at least 21 years of age. During 1993,
the parent company issued 250,000 shares of Series D preferred stock at a price
of $10.00 per share to the Company's ESOP trust. The trust borrowed $2,500,000
from the bank to pay for the shares. The ESOP loan is at a fixed interest rate
for a term of ten years with quarterly payments of interest only through
December 31, 1995. Quarterly principal payments at an annual rate of $250,000
and $350,000 commence on March 31, 1996 and March 31, 1999, respectively, plus
interest. The bank match-funded the ESOP loan with collateralized advances from
the Federal Home Loan Bank of New York. The ESOP shares, pledged as collateral
for the ESOP loan, are held in a suspense account and released for allocation
among the participants as principal and interest on the ESOP loan are repaid.
Under the terms of the ESOP, participants may vote both allocated and
unallocated shares.
The Company makes quarterly contributions to the ESOP equal to the debt
service on the ESOP loan less dividends paid on the ESOP shares. All dividends
paid are used for debt service. ESOP shares released from the suspense account
are allocated among the participants on the basis of salary in the year of
allocation. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
Accordingly, the Company initially recorded a deduction from shareholders'
equity equal to the purchase price of the shares reflecting such amount as
unearned compensation. The consolidated balance sheets report as unearned
compensation the remaining shares pledged as collateral. The unearned
compensation is reduced as payments are made on the loan and, as shares are
released from the suspense account, the Company recognizes compensation expense
equal to the current market price of the common shares into which the preferred
shares are convertible, and the shares become outstanding for earnings per share
computations. Dividends on unallocated ESOP shares are recorded as a reduction
of accrued interest payable; dividends on allocated ESOP shares are recorded as
a reduction of retained earnings. In addition, because the parent company
guaranteed a liquidation and redemption price of $10.00 per share, the amount,
if any, by which $10.00 exceeds the year-end market price of the parent company
common stock into which the outstanding Series D shares are convertible is
reflected outside shareholders' equity less its related shares of unearned
compensation for the unallocated shares.
31
20
Compensation expense was $254,550, $266,800 and $279,100 for 1998, 1997
and 1996, respectively, with a corresponding reduction in unearned compensation.
As of December 31, 1998, 89,232 shares had been allocated and 25,455 shares had
been released for allocation; 135,314 shares were not released ("unallocated").
The following table presents interest paid on the ESOP loan, dividends paid on
the Series D preferred shares and contributions made by the Company:
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest paid $144,844 $163,919 $183,451
Dividends paid 149,839 151,139 152,915
Company contributions -- 12,780 30,536
NOTE 16. EMPLOYEE BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan that covers
substantially all employees with one or more years of service of at least 1,000
hours who are at least 21 years of age. The quarterly payments to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act funding standards.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures About Pensions and Other Postretirement Benefits."
SFAS No. 132 standardizes the disclosures for pension and other postretirement
benefits by requiring additional information that will facilitate financial
analysis, and by eliminating certain disclosures that are considered no longer
useful. SFAS No. 132 supersedes the disclosure requirements in SFAS Nos. 87, 88
and 106. The following tables set forth the disclosures required under SFAS No.
132:
Pension Benefits 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 13,469,764 $ 11,532,656
Service cost 698,446 688,786
Interest cost 872,194 846,056
Actuarial (gain)/loss (258,119) 1,006,752
Benefits paid (659,926) (604,486)
-------------------------------
Benefit obligation at end of year $ 14,122,359 $ 13,469,764
===============================
Change in Plan Assets
Fair value of assets at beginning of year $ 14,762,254 $ 11,761,815
Actual return on plan assets 2,839,603 2,755,702
Employer contributions 499,853 849,223
Benefits paid (659,926) (604,486)
-------------------------------
Fair value of assets at end of year $ 17,441,784 $ 14,762,254
===============================
Funded Status
Funded Status $ 3,319,425 $ 1,292,490
Unrecognized prior service cost 2,534 (86)
Unrecognized net actuarial (gain)/loss (1,152,636) 588,253
-------------------------------
Prepaid benefit cost $ 2,169,323 $ 1,880,657
===============================
December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average Assumptions
Discount rate 6.75% 7.00% 7.50%
Expected rate of return on plan assets 9.25 8.00 8.00
Rate of compensation increase 4.00 4.50 4.50
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service cost $ 698,446 $ 688,786 $ 631,846
Interest cost 872,194 846,056 755,538
Expected return on plan assets (1,356,833) (957,893) (842,331)
Amortization of prior service cost (2,620) (2,620) (2,620)
Recognized net actuarial gain -- 13,665 77,043
-------------------------------------------------------------
Net periodic benefit cost $ 211,187 $ 587,994 $ 619,476
=============================================================
32
21
NOTE 17. INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Federal
Current $ 7,579,074 $ 6,628,015 $ 4,882,913
Deferred (454,165) (709,948) (377,704)
-----------------------------------------------------------------
Total $ 7,124,909 $ 5,918,067 $ 4,505,209
=================================================================
State and Local
Current $ 2,278,184 $ 3,100,684 $ 2,659,665
Deferred 58 (144,664) 410,624
-----------------------------------------------------------------
Total $ 2,278,242 $ 2,956,020 $ 3,070,289
=================================================================
Total
Current $ 9,857,258 $ 9,728,699 $ 7,542,578
Deferred (454,107) (854,612) 32,920
-----------------------------------------------------------------
Total $ 9,403,151 $ 8,874,087 $ 7,575,498
=================================================================
Reconciliations of income tax provisions with taxes or tax benefits
computed at Federal statutory rates are as follows:
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Federal statutory rate 35% 35% 35%
----------------------------------------------
Computed tax $7,769,893 $6,916,872 $5,539,573
Increase in tax resulting from:
Principally state and local taxes, net of Federal income tax benefit 1,633,258 1,957,215 2,035,925
----------------------------------------------
Total $9,403,151 $8,874,087 $7,575,498
==============================================
The components of the net deferred tax asset, included in other assets,
are as follows:
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Difference between financial statement provision for loan losses and
tax bad debt deduction $ 3,568,637 $ 3,057,392
Nonaccrual and other interest 1,859,115 1,817,774
Deferred compensation 750,859 527,240
Other 163,275 895,110
----------------------------------
Total deferred tax assets 6,341,886 6,297,516
----------------------------------
Deferred tax liabilities
Pension and benefit plans 611,929 541,503
Other 97,446 170,545
----------------------------------
Total deferred tax liabilities 709,375 712,048
----------------------------------
Net deferred tax asset 5,632,511 5,585,468
SFAS No. 115 deferred tax liability (459,575) (167,464)
----------------------------------
Total net deferred tax asset $ 5,172,936 $ 5,418,004
==================================
Management believes, based upon current facts, that more likely than not
there will be sufficient taxable income in future years to realize the deferred
tax assets. However, there can be no assurance about the level of future
earnings.
NOTE 18. EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share," simplified the standards for computing
earnings per share ("EPS") previously found in APB Opinion No. 15 and replaced
the presentation of primary and fully diluted EPS with the presentation of basic
and diluted EPS.
Basic EPS is computed by dividing net income less preferred dividends on
Series B shares and allocated Series D shares, held on behalf of the Employee
Stock Ownership Plan, ("basic net income") by the weighted-average common shares
outstanding during the year.
33
22
Diluted EPS is computed by dividing basic net income plus the after-tax
interest expense on outstanding convertible subordinated debentures by the
weighted-average common shares and common equivalent shares outstanding during
the year. The common equivalent shares outstanding include the weighted-average
number of Series B and Series D (held on behalf of the Employee Stock Ownership
Plan) preferred shares, the weighted-average shares associated with outstanding
subordinated debentures and the dilutive effect of unexercised stock options
using the treasury stock method. When applying the treasury stock method, the
average price of the Company's common stock is utilized.
The following table provides a reconciliation of basic and diluted EPS as
required by SFAS No. 128:
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic EPS
Net income $12,796,543 $10,888,403 $8,251,854
Less: preferred dividends 51,053 38,313 21,218
----------- ----------- ----------
Net income available for
common shareholders 12,745,490 8,231,401 $1.55 10,850,090 7,874,653 $1.38 8,230,636 7,015,185 $1.17
===== ===== =====
Diluted EPS
Options[1] 229,967 140,716 42,920
Convertible
preferred stock 219,133 246,922 249,333
Convertible
subordinated debt -- -- 136,709 361,588 596,502 1,394,705
-------------------------- ------------------------- --------------------------
Net income available
for common
shareholders plus
assumed conversions $12,745,490 8,680,501 $1.47 $10,986,799 8,623,879 $1.27 $8,827,138 8,702,143 $1.01
==========================================================================================================
[1] Options issued with exercise prices greater than the average market price
of the common shares for each of the years ended December 31, 1998, 1997
and 1996 have not been included in computation of diluted EPS for those
respective years. As of December 31, 1998, options to purchase 290,000
shares at prices between $24.75 and $28.00 were not included; as of
December 31, 1997, no options were excluded; as of December 31, 1996,
options to purchase 102,000 shares at $12.50 were not included.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No.107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose the "fair value" of certain financial instruments for
which it is practical to estimate "fair value."
Much of the information used to arrive at fair value is highly subjective
and judgmental in nature and therefore the results may not be precise. The
subjective factors include, among other things, estimated cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. With the exception of investment securities and long-term debt, the
Company's financial instruments are not readily marketable and market prices do
not exist. Since negotiated prices for the instruments which are not readily
marketable depend greatly on the motivation of the buyer and seller, the amounts
which will actually be realized or paid per settlement or maturity of these
instruments could be significantly different.
The following disclosures represent the Company's best estimate of the
"fair value" of both on- and off-balance sheet financial instruments.
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks, interest-bearing deposits with
other banks, Federal funds sold, customers' liabilities under acceptances,
accrued interest receivable, Federal funds purchased and securities sold under
agreements to repurchase, commercial paper, other short-term borrowings,
acceptances outstanding, due to factoring clients, and accrued interest payable,
as a result of their short-term nature, is considered to be equal to fair value.
Investment Securities
For investment securities, fair value has been based upon current market
quotations, where available. If quoted market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
34
23
Loans
The fair value of loans which reprice within 90 days reflecting changes in the
base rate is equal to their carrying amount. For other loans, the estimated fair
value is calculated based on discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality and for similar maturities. These calculations have been adjusted
for credit risk based on the Company's historical credit loss experience.
The estimated fair value for secured nonaccrual loans is the value of the
underlying collateral which is sufficient to repay each loan. For other
nonaccrual loans, the estimated fair value represents book value less a credit
risk adjustment based on the Company's historical credit loss experience.
Deposits
SFAS No. 107 requires that the fair value of demand, savings, NOW and certain
money market deposits be equal to their carrying amount. The Company believes
that the fair value of these deposits is clearly greater than that prescribed by
SFAS No. 107.
For other types of deposits with fixed maturities, fair value has been
estimated based upon interest rates currently being offered on deposits with
similar characteristics and maturities.
Long-Term Debt
For other long-term borrowings, the estimated fair value is calculated based on
discounted cash flow analyses, using interest rates currently being quoted for
similar characteristics and maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees
The notional amount of off-balance sheet commitments to extend credit, standby
letters of credit, and financial guarantees, is considered equal to fair value.
Due to the uncertainty involved in attempting to assess the likelihood and
timing of a commitment being drawn upon, coupled with lack of an established
market and the wide diversity of fee structures, the Company does not believe it
is meaningful to provide an estimate of fair value that differs from the
notional value of the commitment.
Off-Balance Sheet Financial Instruments
The Company enters into interest rate floor contracts to manage interest rate
exposure. These instruments are entered into as hedges against interest rate
risk associated with certain identified assets. At December 31, 1998 the
notional amount of these instruments was $125,000,000. The Company paid up-front
premiums of $879,000 which are amortized over the term of the related assets. At
December 31, 1998 the unamortized premiums on these contracts totaled $307,000
and the amount receivable was $35,000. The estimated fair value of these
contracts generally reflects the amount the Company would receive to terminate
the contracts, thereby taking into account the current unrealized gain on these
contracts. Dealer quotes are available on all of these contracts. At December
31, 1998 the estimated fair value of these contracts was $1,266,000.
The following is a summary of the carrying amounts and estimated fair
values of the Company's financial assets and liabilities:
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------------
Financial Assets
Cash and due from banks $ 43,311,268 $ 43,311,268 $ 40,065,863 $ 40,065,863
Interest-bearing deposits with other banks 515,000 515,000 3,010,000 3,010,000
Investment securities 329,806,227 330,486,025 384,951,010 384,930,931
Loans, net 630,050,231 648,836,020 549,804,235 547,637,000
Customers' liability under acceptances 609,431 609,431 1,125,654 1,125,654
Accrued interest receivable 3,991,914 3,991,914 4,147,008 4,147,008
Financial Liabilities
Demand, NOW, savings and money market deposits 536,724,599 536,724,599 527,442,624 527,442,624
Time deposits 166,077,869 171,973,767 203,965,356 204,411,000
Federal funds purchased and securities sold
under agreements to repurchase 99,429,027 99,429,027 106,752,546 106,752,546
Commercial paper 41,529,300 41,529,300 24,070,600 24,070,600
Other short-term borrowings 12,771,325 12,771,325 19,891,252 19,891,252
Acceptances outstanding 609,431 609,431 1,125,654 1,125,654
Due to factoring clients 32,074,004 32,074,004 30,798,610 30,798,610
Accrued interest payable 2,806,937 2,806,937 3,539,838 3,539,838
Other long-term borrowings--FHLB 41,400,000 42,132,700 1,750,000 1,759,000
35
24
NOTE 20. CAPITAL MATTERS
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations is a leverage
requirement. This requirement establishes a minimum leverage ratio, (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). In addition the 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 December 31, 1998, the Company and the bank
exceeded the requirements for "well capitalized" institutions.
The following tables present information regarding the Company's and the
bank's regulatory capital ratios:
Ratios and Minimums
(Dollars in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
---------------------------------------------------------------------
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk-weighted Assets):
The Company $89,307 12.63% $56,552 8.00% $70,690 10.00%
The bank 71,998 10.93 52,675 8.00 65,844 10.00
Tier 1 Capital (to Risk-weighted Assets):
The Company 80,454 11.38 28,276 4.00 42,414 6.00
The bank 64,117 9.74 26,337 4.00 39,506 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 80,454 8.67 37,109 4.00 46,387 5.00
The bank 64,117 7.20 35,624 4.00 44,530 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
NOTE 21. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." 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 stockholders and establishes standards for
related disclosures about an enterprises's products and services, geographic
areas, and major customers.
The Company provides a full range of financial products and services,
including business and consumer loans, commercial and residential mortgage
lending and brokerage, asset-based financing, accounts receivable management
services, trade financing, equipment leasing, corporate and consumer deposit
services, trust and estate administration and investment
36
25
management services. The Company's primary source of earnings is net interest
income, which represents the difference between interest earned on
interest-earning assets and the interest incurred on interest-bearing
liabilities. The Company's 1998 year-to-date average interest-earning assets
were 59.6% loans (corporate lending was 78.4% and real estate lending was 18.6%
of total loans, respectively) and 40.4% investment securities and money market
investments. There are no industry concentrations (exceeding 10% of loans,
gross, in the corporate loan portfolio). Approximately 70% of loans are to
borrowers located in the metropolitan New York area. In order to comply with the
provisions of SFAS No. 131, the Company has determined that it has three
reportable operating segments: corporate lending, real estate lending and
company-wide treasury. There are no significant differences between the
accounting policies used for these operating segments and those described in
Footnote 1.
The following table provides certain information regarding the Company's
operating segments:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Net interest income $ 24,241,672 $ 8,415,676 $ 13,379,959 $ 46,037,307
Noninterest income 8,583,240 4,395,814 182,135 13,161,189
Depreciation and amortization 100,588 176,751 342 277,681
Segment profit 10,025,072 7,860,500 18,664,500 36,550,072
Segments assets 522,141,693 106,189,496 377,622,851 1,005,954,040
Year Ended December 31, 1997
Net interest income 22,478,567 7,888,284 13,531,404 43,898,255
Noninterest income 7,300,131 3,263,528 63,940 10,627,599
Depreciation and amortization 40,143 124,642 -- 164,785
Segment profit 7,389,675 6,021,500 18,421,900 31,833,075
Segments assets 461,246,372 85,883,745 432,189,638 979,319,755
Year Ended December 31, 1996
Net interest income 19,591,665 5,941,519 12,603,634 38,136,818
Noninterest income 6,204,460 1,476,185 1,809 7,682,454
Depreciation and amortization 27,470 41,806 -- 69,276
Segment profit 5,094,889 4,366,700 17,377,200 26,838,789
Segments assets 438,179,587 2,970,725 399,248,377 840,398,689
The following table sets forth reconciliations of reportable operating
segments net interest income, noninterest income, profits and assets to the
Company's consolidated totals:
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income:
Total for reportable operating segments $ 46,037,307 $ 43,898,255 $ 38,136,818
Other[1] 3,400,609 1,673,625 1,526,453
-------------------------------------------------------------------
Consolidated net interest income $ 49,437,916 $ 45,571,880 $ 39,663,271
===================================================================
Noninterest income:
Total for reportable operating segments $ 13,161,189 $ 10,627,599 $ 7,682,454
Other[1] 3,287,152 2,344,330 2,226,011
-------------------------------------------------------------------
Consolidated noninterest income $ 16,448,341 $ 12,971,929 $ 9,908,465
===================================================================
Profit:
Total for reportable operating segments $ 36,550,072 $ 31,833,075 $ 26,838,789
Other[1] (14,350,378) (12,070,585) (11,011,437)
-------------------------------------------------------------------
Consolidated income before income taxes $ 22,199,694 $ 19,762,490 $ 15,827,352
===================================================================
Assets:
Total for reportable operating segments $ 1,005,954,040 $ 979,319,755 $ 840,398,689
Other[1] 38,491,175 40,659,903 21,206,622
-------------------------------------------------------------------
Consolidated assets $ 1,044,445,215 $ 1,019,979,658 $ 861,605,311
===================================================================
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
37
26
NOTE 22. PARENT COMPANY
CONDENSED BALANCE SHEETS
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 1,491,968 $ 882,222
Interest-bearing deposits--banking subsidiary 8,375,000 5,850,000
Loans, net of unearned discounts 50,879,913 38,149,416
Less allowance for loan losses 2,294,693 2,184,693
-----------------------------------------
Loans, net 48,585,220 35,964,723
-----------------------------------------
Investment in subsidiaries
Banking subsidiary 85,805,562 76,376,747
Other subsidiaries 1,190,454 1,144,658
Due from subsidiaries
Banking subsidiary 906,439 925,405
Other subsidiaries -- 18
Other assets 1,369,868 976,584
-----------------------------------------
$147,724,511 $122,120,357
=========================================
Liabilities and Shareholders' Equity
Commercial paper $ 41,529,300 $ 24,070,600
Other short-term borrowings 350,000 840,000
Due to subsidiaries
Banking subsidiary 669,395 679,722
Other subsidiaries 994,806 995,232
Accrued expenses and other liabilities 629,686 1,162,237
Other long-term debt 1,400,000 1,750,000
Shareholders' equity 102,151,324 92,622,566
-----------------------------------------
$147,724,511 $122,120,357
=========================================
38
27
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Income
Dividends and interest from
Banking subsidiary $ 2,440,305 $ 2,987,442 $ 8,929,861
Other subsidiaries -- 39,515 1,170,336
Management and service fees from
Banking subsidiary 564,605 714,789 1,046,527
Other subsidiaries -- 126,498 111,600
Interest and fees on loans 7,524,416 6,356,532 6,067,638
Other income 72,339 74,950 211,133
------------------------------------------------------
Total income 10,601,665 10,299,726 17,537,095
------------------------------------------------------
Expenses
Interest expense 1,986,694 1,863,594 3,080,443
Provision for loan losses 110,000 495,000 762,500
Salaries and employee benefits 2,136,747 2,270,132 2,053,707
Computer service fees and rent paid to banking subsidiary -- -- 76,006
Other expenses 1,172,072 1,147,966 1,725,400
------------------------------------------------------
Total expenses 5,405,513 5,776,692 7,698,056
------------------------------------------------------
Income before income taxes and equity in undistributed
net income of subsidiaries 5,196,152 4,523,034 9,839,039
Provision for income taxes 1,534,046 1,208,878 456,571
------------------------------------------------------
3,662,106 3,314,156 9,382,468
Equity in undistributed net income/(excess
dividends) of subsidiaries [1] 9,134,437 7,574,247 (1,130,614)
------------------------------------------------------
Net income 12,796,543 10,888,403 8,251,854
Other comprehensive income, net of tax
Unrealized holding gains arising during the period 1,180 6,127 1,416
------------------------------------------------------
Comprehensive income, net of tax $ 12,797,723 $ 10,894,530 $ 8,253,270
======================================================
[1] Reflects the excess of the dividends allowable under applicable bank
regulations over GAAP net income of the banking subsidiary for year ended
December 31, 1996.
39
28
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 12,796,543 $ 10,888,403 $ 8,251,854
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 110,000 495,000 762,500
Amortization of unearned compensation 575,383 716,509 509,600
(Increase) Decrease in accrued interest receivable (30,751) 21,086 2,013
Decrease in accrued expenses and other liabilities (532,551) (3,013,058) (3,527,648)
Decrease in due to subsidiaries, net (10,753) (21,368) (1,146,834)
Decrease (Increase) in due from subsidiaries, net 18,984 (150,697) 6,159,515
Equity in (undistributed net income) excess dividends
of subsidiaries (9,134,437) (7,574,247) 1,130,614
Other, net (361,241) 573,862 907,314
--------------------------------------------------------
Net cash provided by operating activities 3,431,177 1,935,490 13,048,928
--------------------------------------------------------
Investing Activities
Net (increase) decrease in interest-bearing
deposits--banking subsidiary (2,525,000) 6,262,500 (1,587,500)
Net (increase) decrease in loans (12,730,497) 2,313,533 (10,151,036)
--------------------------------------------------------
Net cash (used in) provided by investing activities (15,255,497) 8,576,033 (11,738,536)
--------------------------------------------------------
Financing Activities
Net increase (decrease) in commercial paper 17,458,700 (8,499,300) 5,962,700
Net (decrease) increase in other short-term borrowings (490,000) 590,000 --
Cash dividends paid on preferred and common shares (3,569,701) (2,946,192) (2,244,852)
Prepayments and maturities of debentures -- -- (3,773,515)
Proceeds from exercise of stock options 536,500 184,750 10,875
Purchase of treasury shares (1,151,433) -- --
Purchase of minority interest -- -- (8,418)
Decrease in other long-term borrowings (350,000) (250,000) (250,000)
--------------------------------------------------------
Net cash provided by (used in) financing activities 12,434,066 (10,920,742) (303,210)
--------------------------------------------------------
Net increase (decrease) in cash and due from banks 609,746 (409,219) 1,007,182
Cash and due from banks--beginning of year 882,222 1,291,441 284,259
--------------------------------------------------------
Cash and due from banks--end of year $ 1,491,968 $ 882,222 $ 1,291,441
========================================================
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $ 22,840 $ 6,408,870 $ 11,202,645
(Forfeiture) Issuance of Treasury shares -- (22,298) 1,381,250
Issuance of common shares -- -- 262,995
Supplemental disclosure of cash flow information:
Interest paid 1,976,730 2,020,305 2,432,185
Income taxes paid 7,487,552 9,793,000 10,790,311
The parent company is required to maintain a deposit with the bank in an
amount equal to the unpaid principal balance on the bank's loan to the trustee
of the Employee Stock Ownership Plan. The required deposit which is reported in
interest-bearing deposits on the parent company's condensed balance sheet was
$1,750,000 at December 31, 1998.
40
29
NOTE 23. COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $2,398,083, $2,282,112 and $1,793,433 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The future minimum rental commitments as of December 31, 1998 under
noncancelable leases follow:
Rental
Year(s) Commitments
- ----------------------------------------------------------------
1999 $2,087,988
2000 1,954,564
2001 1,604,981
2002 1,331,180
2003 1,125,210
2004 and thereafter 7,097,274
------------
Total $15,201,197
============
Certain of the leases included above have escalation clauses and/or
provide that the Company pay maintenance, electric, taxes and other operating
expenses applicable to the leased property.
In the normal course of business, there are various commitments and
contingent liabilities outstanding which are properly not recorded on the
balance sheet. Management does not anticipate that losses, if any, as a result
of these transactions would materially affect the financial position of the
Company.
Loan commitments, substantially all of which have an original maturity of
one year or less, were approximately $9,333,000 as of December 31, 1998. These
commitments are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements because
some of the commitments are expected to expire without being drawn upon. The
bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, by the bank upon extension
of credit is based on management's credit evaluation of the borrower. Collateral
held varies but may include cash, U.S. Treasury and other marketable securities,
accounts receivable, inventory and property, plant and equipment.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the bank to guarantee the performance of a customer to a
third party. At December 31, 1998, these commitments totaled $24,343,000 of
which $20,356,000 expired within one year and $3,987,000 within two years.
Approximately 70% of the commitments were automatically renewable for periods of
one year. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. The bank
holds cash or cash equivalents and marketable securities as collateral
supporting those commitments for which collateral is deemed necessary. The
extent of collateral held for those commitments at December 31, 1998 ranged from
0% to 100%; the average amount collateralized is approximately 17%.
The Company uses interest rate floor contracts to manage fluctuating
interest rates. In exchange for the payment of a premium, an interest rate floor
gives the Company the right to receive at specified future dates the amount, if
any, by which the market interest rate specified in the floor falls below the
fixed floor rate, multiplied by the notional amount of the floor. The credit
exposure on a floor is limited to this interest-derived amount. Potential credit
losses are minimized through careful evaluation of counterparty credit standing.
The floors currently held by the Company have an average remaining term of
approximately 1 2/3 years and a total notional amount of $125 million.
In the normal course of business there are various legal proceedings
pending against the Company. Management, after consulting with counsel, is of
the opinion that there should be no material liability with respect to such
proceedings, and accordingly no provision has been made in the accompanying
consolidated financial statements.
41
30
NOTE 24. QUARTERLY DATA (UNAUDITED)
1998 Quarter Mar 31 Jun 30 Sept 30 Dec 31
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income $18,188,490 $18,072,663 $18,756,455 $18,943,848
Total interest expense 6,431,903 6,201,877 6,071,873 5,817,887
Net interest income 11,756,587 11,870,786 12,684,582 13,125,961
Provision for loan losses 844,000 1,267,333 1,069,000 2,208,667
Noninterest income 3,475,325 4,176,301 4,023,489 4,773,226
Noninterest expenses 9,119,667 9,434,253 9,617,124 10,126,519
Income before income taxes 5,268,245 5,345,501 6,021,947 5,564,001
Net income 3,002,965 3,113,472 3,254,405 3,425,701
Earnings per average common share
Basic .36 .38 .39 .42
Diluted .35 .36 .38 .38
Common stock closing price
High 27 7/16 29 3/16 27 25
Low 23 9/16 25 3/4 18 9/16 17
Quarter--end 27 1/8 26 20 1/8 22 13/16
1997 Quarter Mar 31 Jun 30 Sept 30 Dec 31
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income $16,316,315 $16,570,278 $17,094,531 $17,844,949
Total interest expense 5,218,914 5,519,017 5,676,763 5,839,499
Net interest income 11,097,401 11,051,261 11,417,768 12,005,450
Provision for loan losses 771,000 610,000 781,500 912,500
Noninterest income 3,113,389 3,021,847 3,458,825 3,377,868
Noninterest expenses 8,906,055 8,676,940 9,003,588 9,119,736
Income before income taxes 4,533,735 4,786,168 5,091,505 5,351,082
Net income 2,462,476 2,633,116 2,817,717 2,975,094
Earnings per average common share
Basic .32 .33 .36 .37
Diluted .30 .31 .33 .33
Common stock closing price
High 17 3/8 19 23 5/8 24 3/8
Low 14 1/4 14 7/8 18 1/8 21 1/8
Quarter--end 15 1/4 18 5/8 22 3/4 24
42
31
INDEPENDENT AUDITORS' REPORT
[LOGO]
KPMG
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling
Bancorp and Subsidiaries as of December 31, 1998 and 1997, the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998 and the consolidated statements of condition of
Sterling National Bank as of December 31, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sterling
Bancorp and Subsidiaries as of December 31, 1998 and 1997, the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 and the financial position of Sterling National Bank as
of December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
January 20, 1999
43
32
STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
financial condition and results of operations of Sterling Bancorp ("the parent
company"), a 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, Sterling National Mortgage
Company Inc., Sterling National Mortgage Corporation and Sterling Holding
Company of Virginia, Inc. Sterling Holding Company of Virginia, Inc. owns all of
the outstanding common shares of Sterling Real Estate Holding Company Inc.
Throughout this discussion and analysis, the term "the Company" refers to
Sterling Bancorp and its subsidiaries. This discussion and analysis should be
read in conjunction with the consolidated financial statements and supplemental
data contained elsewhere in the report.
SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Total interest income $ 73,962 $ 67,826 $ 60,997 $ 53,484 $ 43,493 $ 32,482
Total interest expense 24,524 22,254 21,334 19,319 14,882 10,168
Net interest income 49,438 45,572 39,663 34,165 28,611 22,314
Provision for loan losses 5,389 3,075 2,047 1,866 1,053 690
Net securities gains/(losses) 86 -- (71) 5 42 --
Noninterest income 16,362 12,972 9,979 5,973 4,429 3,929
Noninterest expenses 38,297 35,707 31,697 26,660 21,998 19,770
Income before taxes 22,200 19,762 15,827 11,617 10,031 5,783
Provision for income taxes 9,403 8,874 7,575 5,979 6,025 2,628
Net income 12,797 10,888 8,252 5,638 4,006 3,155
Per common share--basic 1.55 1.38 1.17 .89 .64 .50
--diluted 1.47 1.27 1.01 .77 .57 .46
Dividends per common share .43 .37 .31 .25 .21 .20
Year End Balance Sheets
Investment securities 329,806 384,951 304,331 299,238 311,782 286,816
Loans, net of unearned discounts and term
Federal funds sold 640,206 558,482 465,517 397,229 312,769 258,751
Total assets 1,044,445 1,019,980 861,605 775,608 706,636 653,039
Noninterest-bearing deposits 329,020 312,462 229,977 224,081 174,897 174,089
Interest-bearing deposits 373,782 418,946 344,445 326,947 342,405 298,897
Long-term convertible subordinated debentures -- -- 6,389 21,346 26,446 26,892
Shareholders' equity 102,151 92,623 77,177 59,657 53,719 52,857
Average Balance Sheets
Investment securities 336,690 304,753 321,957 304,741 321,005 255,079
Loans, net of unearned discounts and term
Federal funds sold 512,711 446,268 376,879 311,119 255,223 228,604
Total assets 935,964 838,354 777,695 695,522 658,884 556,111
Noninterest-bearing deposits 224,780 199,431 175,232 153,244 144,974 125,804
Interest-bearing deposits 409,027 377,301 330,520 327,102 307,747 283,599
Long-term convertible subordinated debentures -- 4,618 16,779 23,975 26,640 27,292
Shareholders' equity 96,644 82,515 65,768 56,401 53,249 51,118
44
33
COMPANY BUSINESS
The Company provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposit services, trust and
estate administration and investment management services. The Company has
operations in 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. The Company competes with banks and other financial institutions.
At December 31, 1998, the bank's year-to-date average earning assets (of which
loans were 58% and investment securities were 41%) 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.
OVERVIEW
The Company reported net income for 1998 of $12.8 million, representing $1.47
per share, calculated on a diluted basis, compared to $10.9 million, or $1.27
per share, calculated on a diluted basis, in 1997. This increase reflects higher
net interest income and continued growth in noninterest income.
Net interest income was $49.4 million for 1998, up from $45.6 million in
1997. This increase was due principally to management's strategy of increasing
the loan portfolio. The net interest margin was 6.12% for 1998 compared to 6.38%
for 1997, reflecting lower prime and other market interest rates in 1998.
The provision for loan losses was $5.4 million in 1998 compared to $3.1
million in 1997, reflecting management's continuing evaluation of the loan
portfolio in light of the growth in the portfolio and to maintain the level of
allowance relative to outstanding loan balances.
Noninterest income rose $3.5 million to $16.4 million in 1998, due
principally to increases from mortgage banking and deposit servicing activities.
Noninterest expenses totaled $38.3 million for 1998 compared to $35.7
million in 1997. The increases in expense categories were incurred to support
growing levels of business activity and continued investments in the business
franchise.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) for the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate, are shown on page 56. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 55.
Net interest income for 1998 increased $3,866,000 to $49,438,000 from
$45,572,000 for the comparable period in 1997.
Total interest income aggregated $73,962,000 up $6,136,000 for 1998 as
compared to $67,826,000 for 1997, due principally to increased loan outstandings
in keeping with management's strategy of building the Company's loan portfolio.
The yield on interest-earning assets was 9.11% for 1998 compared with 9.44% for
the comparable period in 1997. The increase in interest income was due
principally to an increase in income earned on the Company's loan portfolio as a
result of management's strategy of increasing loan outstandings.
Interest earned on the loan portfolio amounted to $52,217,000 up
$5,434,000 from the prior year. Average loan balances amounted to $512,711,000
up $66,443,000 from an average balance of $446,268,000 the prior year period.
The increase in average loans, primarily in the Company's commercial and
industrial loan portfolio, accounted for $3,867,000 or 71% of the increase in
interest earned on loans.
Interest expense increased $2,270,000 to $24,524,000 for 1998 from
$22,254,000 for the comparable period in 1997. The increase in interest expense
was due to the higher average balances.
Interest expense on NOW account deposits amounted to $1,809,000 up
$1,221,000 when compared to a year ago due to increases in average outstandings
and the cost of those funds. Average outstandings increased $26,953,000 to
$62,265,000 in 1998. The average rate paid on NOW account deposits was 2.91% in
1998 compared to 1.67% in the comparable year ago period.
Interest expense associated with borrowed funds increased $1,107,000 in
1998 principally as a result of higher average outstandings.
45
34
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality"), the provision for loan losses increased to $5,389,000 up
$2,314,000 when compared to the prior year. The provision was increased as the
result of growth in the portfolio and to maintain the level of allowance
relative to the outstanding loan balances.
Noninterest Income
Noninterest income for 1998 increased $3,476,000 over the prior year as a result
of increased fees from deposit services and mortgage banking services and higher
income from other fee-based services.
Noninterest Expenses
Noninterest expenses for 1998 increased $2,591,000 over the prior year
reflecting higher personnel and other operating expenses incurred to support
growing levels of business activity and continued investment in the business
franchise.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S. Government
and U.S. Government corporation and agency mortgage-backed securities along with
other debt and equity securities. At December 31, 1998, the Company's portfolio
of securities totaled $329,806,000, of which U.S. Government and U.S. Government
corporation and agency guaranteed mortgage-backed securities (having an average
life of approximately 3.5 years) amounted to $268,067,000. 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 $1,801,000 and $1,121,000, 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 $1,145,000 and gross unrealized
losses of $149,000. Given the generally high credit quality of the portfolio,
management expects to realize all of its investment upon the maturity of such
instruments, and thus believes that any market value impairment is temporary in
nature.
Information regarding book values and range of maturities by type of
security and weighted average yields for totals of each category is presented in
Footnote 5 beginning on page 23.
The following table sets forth the composition of the Company's investment
securities by type, with related carrying values at the end of the most recent
three fiscal years:
December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasury securities $ 19,731 $ 34,866 $ 41,246
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 268,067 286,393 254,243
Obligations of states and political subdivisions 19,217 3,589 --
Debt securities issued by foreign governments 2,000 2,000 2,750
Other debt securities 13,993 52,000 --
Federal Reserve Bank and other equity securities 6,798 6,103 6,092
------------------------------------------------
Total $329,806 $384,951 $304,331
================================================
Loan Portfolio
A management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness of and the
designation of lending limits for each borrower. The portfolio strategies seek
industry or loan size diversification in order to minimize credit exposure and
to originate loans in markets with which the Company is familiar.
46
35
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 and range between $250,000 and $10 million,
and are often collateralized by accounts receivable, inventory and marketable
securities and other liquid collateral. Sources of repayment are from the
borrower's operating profits, cash flows and liquidation of pledged collateral.
Based on underwriting standards, loans may be secured in whole or in part by
collateral such as liquid assets, accounts receivable, equipment, inventory 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 in the State of New York and in the State of Virginia. The collateral
securing any loan may vary in value based on market conditions.
The following table sets forth the composition of the Company's loan
portfolio, net of unearned discounts, at the end of each of the most recent five
fiscal years:
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Balances Total Balances Total Balances Total Balances Total Balances Total
-----------------------------------------------------------------------------------------------------
(dollars in thousands)
Domestic
Commercial
and industrial $465,048 72.64% $413,887 74.11% $350,641 75.32% $309,173 77.83% $245,619 78.53%
Lease financing 56,146 8.77 43,705 7.82 34,750 7.46 24,311 6.12 12,875 4.12
Real estate--mortgage 104,621 16.34 73,878 13.23 63,633 13.67 48,588 12.23 39,997 12.79
Real estate--construction -- -- 8,352 1.50 1,136 0.25 1,040 0.26 1,486 0.47
Installment--individuals 13,604 2.13 17,871 3.20 14,568 3.13 13,328 3.36 12,003 3.84
Foreign government and
official institutions 787 0.12 789 0.14 789 0.17 789 0.20 789 0.25
----------------------------------------------------------------------------------------------------
Loans, net of unearned
discounts $640,206 100.00% $558,482 100.00% $465,517 100.00% $397,229 100.00% $312,769 100.00%
====================================================================================================
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, the realization of collateral, and the credit management process.
The following table sets forth the aggregate amount of domestic nonaccrual
and past due loans of the Company at the end of each of the most recent five
fiscal years; there were no foreign loans accounted for on a nonaccrual basis
and there were no troubled debt restructurings for any types of loans. Loans
contractually past due 90 days or more as to principal or interest and still
accruing are loans which are both well-secured or guaranteed by financially
responsible third parties, and are in the process of collection.
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual basis loans* $1,214 $1,388 $ 442 $ 357 $ 575
Past due 90 days or more (other than the above) 675 245 390 1,961 293
------------------------------------------------------------------
Total $1,889 $1,633 $ 832 $2,318 $ 868
==================================================================
*Interest income that would have been earned on
nonaccrual and reduced rate loans outstanding $ 88 $ 55 $ 13 $ 22 $ 86
==================================================================
Applicable interest income actually realized $ -- $ -- $ -- $ -- $ 18
==================================================================
Nonaccrual and past due loans as a percentage
of total gross loans .29% .29% .18% .58% .27%
==================================================================
47
36
The allowance for loan losses is maintained through the provision for loan
losses, which is a charge to operating earnings. The adequacy of the provision
and the resulting allowance for loan losses is determined by management's
continuing review of the loan portfolio, including identification and review of
individual problem situations that may affect the borrower's ability to repay,
review of overall portfolio quality through an analysis of current charge-offs,
delinquency and nonperforming loan data, estimates of the value of any
underlying collateral, review of regulatory examinations, an assessment of
current and expected economic conditions and changes in the size and character
of the loan portfolio. The allowance reflects management's evaluation of both
loans presenting identified loss potential and of the risk inherent in various
components of the portfolio, including loans identified as impaired as required
by SFAS No. 114.
Thus, an increase in the size of the portfolio or in any of its components
could necessitate an increase in the allowance even though there may not be a
decline in credit quality or an increase in potential problem loans. A
significant change in any of the evaluation factors described above could result
in future additions to the allowance. At December 31, 1998, the ratio of the
allowance to loans, net of unearned discounts, was 1.6% and the allowance was
$10,156,000. At such date, the Company's nonaccrual loans amounted to
$1,214,000; $286,000 of such loans were judged to be impaired within the scope
of SFAS No. 114 and required valuation allowances of $100,000. 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 December 31,
1998. Net losses within the loan portfolio are not statistically predictable and
changes in conditions in the next twelve months could result in future
provisions for loan losses varying from the level taken in 1998. 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
$1,288,000 at December 31, 1998.
The following table sets forth certain information with respect to the
Company's loan loss experience for each of the most recent five fiscal years:
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Average loans outstanding, net of unearned
discounts, during year $ 512,711 $ 446,268 $ 376,879 $ 311,119 $ 255,223
==================================================================
Allowance for loan losses:
Balance at beginning of year $ 8,678 $ 8,003 $ 5,192 $ 4,136 $ 3,414
------------------------------------------------------------------
Charge-offs:
Commercial and industrial 3,328 2,064 561 622 401
Lease financing 616 228 49 344 --
Real estate 146 239 71 16 109
Installment 261 193 57 19 22
------------------------------------------------------------------
Total charge-offs 4,351 2,724 738 1,001 532
------------------------------------------------------------------
Recoveries:
Commercial and industrial 232 240 1,456 144 196
Lease financing 142 56 37 -- 5
Real estate 2 2 -- 47 --
Installment 64 26 9 -- --
------------------------------------------------------------------
Total recoveries 440 324 1,502 191 201
------------------------------------------------------------------
Subtract/(Add):
Net charge-offs/(recoveries) 3,911 2,400 (764) 810 331
------------------------------------------------------------------
Provision for loan losses 5,389 3,075 2,047 1,866 1,053
------------------------------------------------------------------
Balance at end of year $ 10,156 $ 8,678 $ 8,003 $ 5,192 $ 4,136
==================================================================
Ratio of net charge-offs to average loans outstanding,
net of unearned discounts during year .76% .54% 0% .26% .13%
==================================================================
48
37
To comply with a regulatory requirement to provide such an allocation of
the allowance for loan losses, the following table presents the Company's
allocation of the allowance. This allocation is based on subjective estimates by
management and may vary from year to year based on management's evaluation of
the risk characteristics of the loan portfolio. The amount allocated to a
particular loan category may not necessarily be indicative of actual future
charge-offs in a loan category.
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Domestic
Commercial and industrial $ 7,429 1.60% $ 6,013 1.45% $ 5,588 1.59% $ 3,320 1.07% $ 2,885 1.12%
Lease financing 837 1.49 648 1.48 508 1.46 355 1.46 175 1.36
Real estate--mortgage 1,583 1.51 1,059 1.43 820 1.29 619 1.27 631 1.59
Real estate--construction -- -- 70 0.84 8 0.70 8 0.77 12 0.81
Installment--individuals 25 0.18 35 0.20 25 0.17 20 0.15 2 0.02
Unallocated 282 -- 853 -- 1,054 -- 870 -- 431 --
------- ------- ------- ------- -------
Total $10,156 1.59% $ 8,678 1.55% $ 8,003 1.72% $ 5,192 1.31% $ 4,136 1.32%
=========================================================================================
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 for each of the most recent three fiscal years:
December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Domestic
Demand $329,020 $312,462 $229,977
NOW 54,980 54,056 32,761
Savings 25,254 24,856 25,548
Money market 127,470 136,069 133,510
Time deposits by remaining maturity
Within 3 months 110,079 88,658 63,092
After 3 months but within 1 year 42,012 87,580 68,725
After 1 year but within 5 years 11,257 25,017 18,099
----------------------------------------------------
Total domestic deposits 700,072 728,698 571,712
----------------------------------------------------
Foreign
Time deposits by remaining maturity
Within 3 months 1,730 1,580 1,710
After 3 months but within 1 year 1,000 1,130 1,000
----------------------------------------------------
Total foreign deposits 2,730 2,710 2,710
----------------------------------------------------
Total deposits $702,802 $731,408 $574,422
====================================================
Fluctuations of balances in total or among categories at any date can
occur based on the Company's mix of assets and liabilities as well as on a
customer's balance sheet strategies. Historically, however, average balances for
deposits have been relatively stable. Information regarding these average
balances for the most recent three fiscal years is presented on page 55.
49
38
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company unduly to interest
rate fluctuations.
The Company takes a coordinated approach to the management of its
liquidity, capital and interest rate risk. This risk management process is
governed by policies and limits established by senior management which are
reviewed and approved by the Asset/Liability Committee ("ALCO"). ALCO, which is
comprised of members of senior management, meets to review among other things,
economic conditions, interest rates, yield curve, cash flow projections,
expected customer actions, liquidity levels, capital ratios and repricing
characteristics of assets, liabilities and 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 financial and statistical tools including traditional gap
analysis and sophisticated income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest rate sensitive assets exceed interest rate sensitive
liabilities generally will result in 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 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 December 31, 1998, presented on
page 57, 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, approved by the Board of Directors, 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.
The Company purchased interest rate floor contracts to reduce the impact
of falling rates on its floating rate commercial loans. Interest rate floor
contracts require the counterparty to pay the Company at specified future dates
the amount, if any, by which the specified interest rate (3 month LIBOR) falls
below the fixed floor rates, applied to the notional amounts. The Company
utilizes these financial instruments to adjust its interest rate risk position
without exposing itself to principal risk and funding requirements.
At December 31, 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
$25 million and a final maturity of October 10, 1999, another 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
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
50
39
and not for trading purposes. At December 31, 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
$879,000 which are amortized monthly against interest income from the designated
assets. At December 31, 1998, the unamortized premiums on these contracts
totaled $307,000 and are included in other assets. At December 31, 1998, $35,000
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 volatility or sensitivity to
interest rate changes utilizing statistical techniques that allow the Company to
consider various factors which impact net interest income. These factors include
actual maturities, estimated cash flows, repricing characteristics, deposits
growth/retention and, most importantly, the relative sensitivity of the
Company's assets and liabilities to changes in market interest rates. This
relative sensitivity is important to consider as the Company's core deposit base
is not subject to the same degree of interest rate sensitivity as its assets.
The core deposit costs are internally managed and tend to exhibit less
sensitivity to changes in interest rates than the Company's adjustable rate
assets whose yields are based on external indices and change in concert with
market interest rates.
The Company's interest rate sensitivity is determined by identifying the
probable impact of changes in market interest rates on the yields on the
Company's assets and the rates 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
December 31, 1998, the model indicated the impact of a 200 basis point parallel
and pro rata rise in rates over twelve months would approximate a 1.82%
($975,000) increase in net interest income, while the impact of a 200 basis
point decline in rates over the same period would approximate a 2.65%
($1,414,000) decline from an unchanged rate environment.
The preceding sensitivity analysis does not represent a Company forecast
and should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot 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
51
40
adequate to meet the parent company's cash requirements throughout its history.
Various legal restrictions limit the extent to which the bank can supply
funds to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for the year
to date combined with its retained net profits for the preceding two calendar
years.
At December 31, 1998, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $41,529,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$60,807,000 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.
While the past performance is no guarantee of the future, management
believes that the Company's funding sources (including dividends from all its
subsidiaries) and the bank's funding sources will be adequate to meet their
liquidity requirements in the future.
CAPITAL
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations is a leverage
requirement. This requirement establishes a minimum leverage ratio (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). Information regarding the Company's
and the bank's risk-based capital at December 31, 1998 and December 31, 1997, is
presented in Footnote 20 on page 36. 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 December 31, 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 testing of the missions
critical systems as well as certain other significant noninformation technology
systems as part of the renovation phase. In addition, 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. 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 its 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.
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 charged to the Company 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.
52
41
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 unforeseen problems cannot
be accurately quantified at this time because of the uncertainties involved,
such problems could have a material adverse effect on the Company. The Company,
as part of its normal business practice, has comprehensive business resumption
and disaster recovery plans to facilitate timely restoration of services and
processes in the event of a business disruption. The effort to update these
plans to reflect the potential of Year 2000-related failures is underway. In
addition, the Company is developing business resumption, remediation and event
contingency plans to prepare for potential systems failures at critical dates,
failures of critical third parties to effectively remedy and certify their
technologies as well as any other unanticipated events that could arise with the
date change. The development of these plans includes the identification of core
business processes, critical to the Company's business and operations, and
assessment of failure scenarios. The Company expects that its contingency
planning for the year 2000 issue will be substantially complete by the end of
June, 1999.
Market for the Company's Common Stock and
Related Security Holder Matters
The parent company's common stock is traded on The New York Stock Exchange under
the symbol STL. Information regarding the quarterly prices of the common stock
is presented in Footnote 24 on page 42. Information regarding the average common
shares outstanding and dividends per common share is presented in the
Consolidated Statements of Income on page 15. Information regarding legal
restrictions on the ability of the bank to pay dividends is presented in
Footnote 13 on page 29. There are no such restrictions on the ability of the
parent company to pay dividends to its shareholders. Information related to the
parent company's preferred stock is presented in Footnote 11 on page 28.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 required that all derivative
instruments, including certain derivative instruments embedded in other
contracts, be recorded on the balance sheet as either an asset or liability
measured at its fair value. Changes in the derivative's fair value should be
recognized currently in earnings unless the derivative is designated as a hedge.
When designated as a hedge, the fair value should be recognized currently in
earnings or in accumulated other comprehensive income in equity, depending on
whether such designation is as a fair value or as a cash flow hedge. With
respect to fair value hedges, the fair value of the derivative, as well as
changes in the fair value of the hedged item, are reported in the income
statement. With cash flow hedges, changes in the derivative's fair value are
reported in accumulated other comprehensive income in equity and reclassified to
the income statement in periods in which earnings are affected by the hedged
variable cash flows or forecasted transaction. SFAS No. 133 also requires a
company to formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, and cannot be applied retroactively. The Company
intends to adopt the Statement as of January 1, 2000; however, it has not yet
quantified the financial statement impact of adoption, nor determined the method
of adoption. The Company anticipates that adoption could increase volatility in
earnings and accumulated other comprehensive income in equity, and could result
in certain modifications to systems and hedging methodologies.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This standard requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking is no longer required to classify all retained mortgage-backed
securities as trading securities. However, a mortgage banking enterprise must
classify as trading any retained mortgage-backed securities that it commits to
sell before or during the securitization process. This standard is effective for
the first quarter of 1999. The effect of adopting this standard is not expected
to have a material impact on the Company's financial condition or results of
operations.
Forward-Looking Information
This report contains statements that constitute forward-looking statements and
are subject to certain risks and uncertainties that could cause actual facts 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.
53
42
COMPARISON OF YEARS ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1996
OVERVIEW
The Company reported net income for 1997 of $10.9 million, representing $1.27
per share, calculated on a diluted basis, compared to $8.3 million, or $1.01 per
share, calculated on a diluted basis, in 1996. This increase reflects the
improved net interest margin and continued growth in noninterest income.
Net interest income was $45.6 million for 1997, up from $39.7 million in
1996. The net interest margin improved to 6.38% for 1997 compared to 5.93% for
1996. These increases were due principally to management's strategy of
increasing the loan portfolio.
The provision for loan losses increased $1.0 million to $3.1 million in
1997 compared to $2.1 million in 1996, reflecting management's continuing
evaluation of the loan portfolio, principally as the result of the growth in the
portfolio, and the allowance for loan losses appropriate thereto.
Noninterest income rose $3.0 million to $13.0 million in 1997 principally
due to increases from mortgage banking and factoring activities.
Noninterest expenses totaled $35.7 million for 1997 compared to $31.7
million in 1996. The increases in expense categories were incurred to support
growing levels of business activity and continued investments in the business
franchise.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) for the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate are shown on page 56. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 55.
Net interest income for 1997 increased $5,909,000 to $45,572,000 from
$39,663,000 for the comparable period in 1996.
Total interest income aggregated $67,826,000 up $6,829,000 for 1997 as
compared to $60,997,000 for the same period of 1996. The yield on
interest-earning assets was 9.44% for 1997 compared with 9.05% for the
comparable period in 1996. 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.
Interest earned on the loan portfolio amounted to $46,783,000 up
$7,562,000 when compared to a year ago. Average loan balances amounted to
$446,268,000 up $69,389,000 from an average balance of $376,879,000 in the prior
year period. The increase in average loans, primarily in the Company's
commercial and industrial loan portfolio, accounted for $7,158,000 or 95% of the
increase in interest earned on loans.
Interest earned on investment securities amounted to $20,447,000 down
$883,000 when compared to a year ago principally due to lower average
outstandings.
Interest expense increased $920,000 to $22,254,000 for 1997 from
$21,334,000 for the comparable period in 1996. The increase in interest expense
was due to the higher average balances coupled with higher average rates paid
for savings and time deposits.
Interest expense on savings and time deposits amounted to $14,944,000 up
$2,836,000 when compared to a year ago due to increases in average outstandings
and the cost of funds. Average outstandings increased $46,781,000 to
$377,301,000 when comparing 1997 to the same period in 1996. The average rate
paid on interest-bearing deposits was 3.96% in 1997 compared to 3.66% in the
comparable year ago period.
Interest expense associated with borrowed funds decreased $1,916,000 when
comparing 1997 to the same period in 1996 as a result of lower average
outstandings.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality"), and principally as the result of the growth in the loan
portfolios, the provision for loan losses increased to $3,075,000 up $1,028,000
when compared to the same period last year.
Noninterest Income
Noninterest income increased $3,063,000 for 1997 when compared with 1996 as a
result of increased fees from factoring services and mortgage banking services
and higher income from other fee-based services.
Noninterest Expenses
Noninterest expenses increased $4,009,000 for 1997 versus the same period last
year reflecting higher salary and employee benefit costs as well as higher
general business costs and professional fees associated with increased business
development efforts in accordance with a policy of continuing investment in the
Company's 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 in 1997.
54
43
STERLING BANCORP AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS[1]
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
----------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in thousands)
Assets
Interest-bearing deposits with
other banks $ 1,070 $ 132 5.03% $ 3,285 $ 225 5.68% $ 2,999 $ 157 5.23%
Investment securities
Available for sale 111,562 7,063 6.33 67,143 4,496 6.70 93,188 6,289 6.75
Held to maturity 213,532 13,486 6.32 236,581 15,903 6.72 228,656 15,034 6.58
Tax-exempt[2] 11,596 499 4.34 1,029 48 4.68 113 7 5.97
Federal Funds sold 10,356 565 5.45 6,718 371 5.52 5,153 289 5.60
Loans, net of unearned discounts
Domestic[3] 511,923 52,165 11.26 445,479 46,727 11.74 376,090 39,168 11.41
Foreign 788 52 6.65 789 56 7.12 789 53 6.69
------- ------ -------- ------ ------- ------
Total Interest-Earning Assets 860,827 73,962 9.11% 761,024 67,826 9.44% 706,988 60,997 9.05%
------ ===== ------ ===== ------ =====
Cash and due from banks 41,913 44,711 40,402
Allowance for loan losses (9,270) (8,579) (6,422)
Excess cost over equity in
net assets of the bank 21,158 21,158 21,158
Other 21,336 20,040 15,569
-------- -------- --------
Total Assets $935,964 $838,354 $777,695
======== ======== ========
Liabilities and Shareholders' Equity
Interest-bearing deposits
Domestic
Savings $ 23,619 538 2.28% $ 24,288 531 2.18% $26,053 535 2.06%
NOW 62,265 1,809 2.91 35,312 588 1.67 30,703 313 1.02
Money market 136,577 4,222 3.09 130,742 4,048 3.10 117,822 3,381 2.87
Time 183,837 9,393 5.11 183,997 9,619 5.23 153,231 7,740 5.05
Foreign
Time 2,729 145 5.33 2,962 158 5.33 2,711 139 5.14
Borrowings
Federal Funds purchased and securities
sold under agreements to repurchase 77,367 4,002 5.15 83,207 4,480 5.38 87,092 4,611 5.29
Commercial paper 33,843 1,720 5.08 24,804 1,299 5.24 29,652 1,547 5.22
Other short-term debt 13,583 921 5.15 8,221 656 5.19 14,812 1,042 5.27
Long-term debt 35,240 1,774 5.03 16,385 875 5.89 33,920 2,026 6.76
------- ------ ------- ------ ------- ------
Total Interest-Bearing Liabilities 569,060 24,524 4.27% 509,918 22,254 4.32% 495,996 21,334 4.24%
==== ==== ====
Noninterest-bearing demand deposits 224,780 -- 199,431 -- 175,232 --
------- ------ ------- ------ ------- ------
Total including noninterest-bearing
demand deposits 793,840 24,524 3.10% 709,349 22,254 3.10% 671,228 21,334 3.13%
Other liabilities 45,480 ------ ==== 46,490 ------ ==== 40,699 ------ ====
------- ------- -------
Total Liabilities 839,320 755,839 711,927
Shareholders' equity 96,644 82,515 65,768
-------- -------- --------
Total Liabilities and
Shareholders' Equity $935,964 $838,354 $777,695
======== ======== ========
Net interest income/spread $49,438 4.84% $45,572 5.12% $39,663 4.81%
======= ==== ======= ==== ======= ====
Net yield on interest-earning assets 6.12% 6.38% 5.93%
==== ==== ====
[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.
[2] Interest on these securities is not presented on a tax-equivalent basis.
[3] Nonaccrual loans are included in the average balance which reduces the
average yields.
55
44
STERLING BANCORP AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
December 31, 1997 to December 31, 1996 to
Increase (Decrease) from Years Ended, December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Volume Rate Total[1] Volume Rate Total[1]
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Interest Income
Interest-bearing deposits with other banks $ (80) $ (13) $ (93) $ 35 $ 33 $ 68
------------------------------------------------------------------------
Investment securities
Available for sale 2,827 (260) 2,567 (1,761) (32) (1,793)
Held to maturity (1,501) (916) (2,417) 515 354 869
Tax-exempt[2] 454 (3) 451 49 (8) 41
------------------------------------------------------------------------
Total 1,780 (1,179) 601 (1,197) 314 (883)
------------------------------------------------------------------------
Federal funds sold 199 (5) 194 86 (4) 82
------------------------------------------------------------------------
Loans, net of unearned discount
Domestic[3] 7,624 (2,186) 5,438 7,064 495 7,559
Foreign -- (4) (4) -- 3 3
------------------------------------------------------------------------
Total 7,624 (2,190) 5,434 7,064 498 7,562
------------------------------------------------------------------------
Total Interest Income $ 9,523 $(3,387) $ 6,136 $ 5,988 $ 841 $ 6,829
========================================================================
Interest Expense
Savings and time deposits
Domestic
Savings $ (16) $ 23 $ 7 $ (37) $ 33 $ (4)
NOW 619 602 1,221 61 214 275
Money market 187 (13) 174 379 288 667
Time (8) (218) (226) 1,568 311 1,879
Foreign
Time (13) -- (13) 13 6 19
------------------------------------------------------------------------
Total 769 394 1,163 1,984 852 2,836
------------------------------------------------------------------------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase (297) (181) (478) (214) 83 (131)
Commercial paper 462 (41) 421 (256) 8 (248)
Other short-term debt 268 (3) 265 (362) (24) (386)
Long-term debt 1,048 (149) 899 (1,023) (128) (1,151)
------------------------------------------------------------------------
Total 1,481 (374) 1,107 (1,855) (61) (1,916)
------------------------------------------------------------------------
Total Interest Expense $ 2,250 $ 20 $ 2,270 $ 129 $ 791 $ 920
========================================================================
Net Interest Income $ 7,273 $(3,407) $ 3,866 $ 5,859 $ 50 $ 5,909
========================================================================
[1] The rate/volume variance is allocated equally between changes in volume
and rate. The effect of the extra day in 1996 has been included in the
change in volume.
[2] Interest on the securities is not calculated on a tax-equivalent basis.
[3] Nonaccrual loans have been included in the amounts outstanding and income
has been included to the extent earned.
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45
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 classified based on the earliest repricing
period. Based on the interest rate sensitivity analysis shown below, the
Company's net interest income would increase during periods of rising interest
rates and decrease during periods of falling interest rates. Amounts are
presented in thousands.
Repricing Date
------------------------------------------------------------------------------
More than
3 months 3 months 1 year to Over Nonrate
or less to 1 year 5 years 5 years Sensitive Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with other banks $ 515 $ -- $ -- $ -- $ -- $ 515
Investment securities 23,951 16,905 11,899 270,254 6,797 329,806
Loans, net of unearned discounts
Commercial and industrial 464,403 -- 1,217 102 (674) 465,048
Lease financing 705 2,551 60,311 1,130 (8,551) 56,146
Real estate 21,082 15 17,568 66,214 (258) 104,621
Installment 9,185 1,173 2,066 1,450 (270) 13,604
Foreign government and official institutions -- 787 -- -- -- 787
Noninterest-earning assets and allowance
for loan losses -- -- -- -- 73,918 73,918
------------------------------------------------------------------------------
Total Assets 519,841 21,431 93,061 339,150 70,962 1,044,445
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Liabilities and Shareholders' Equity
Interest-bearing deposits
Savings[1] -- -- 25,254 -- -- 25,254
NOW[1] -- -- 54,980 -- -- 54,980
Money market[1] 103,315 -- 24,156 -- -- 127,471
Time--domestic 99,037 49,274 15,024 13 -- 163,348
--foreign 1,730 1,000 -- -- -- 2,730
Securities sold under agreements to repurchase 91,609 7,820 -- -- -- 99,429
Commercial paper 41,529 -- -- -- -- 41,529
Other short-term borrowings 12,771 -- -- -- -- 12,771
Other long-term borrowings--FHLB 20,000 -- 21,400 -- -- 41,400
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 475,533 475,533
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Total Liabilities and Shareholders' Equity 369,991 58,094 140,814 13 475,533 1,044,445
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Net Interest Rate Sensitivity Gap $ 149,850 $ (36,663) $ (47,753) $ 339,137 $(404,571) $ --
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Cumulative Gap at December 31, 1998 $ 149,850 $ 113,187 $ 65,434 $ 404,571 $ -- $ --
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Cumulative Gap at December 31, 1997 $ 158,116 $ 97,742 $ 60,343 $ 377,414 $ -- $ --
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Cumulative Gap at December 31, 1996 $ 67,266 $ 20,475 $ (11,245) $ 261,380 $ -- $ --
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[1] Historically, balances on non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical repricing
practices and runoff experience.
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