1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________________ to ___________________
Commission File Number: 1-5273-1
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Sterling Bancorp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2565216
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
430 Park Avenue, New York, N.Y. 10022-3505
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-826-8000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of September 30, 1999 there were 8,001,437 shares of common stock,
$1.00 par value, outstanding.
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STERLING BANCORP
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business 11
Results for Three Months 11
Results for Nine Months 13
Balance Sheet Analysis 15
Capital 17
Average Balance Sheets 19
Rate/Volume Analysis 21
Regulatory Capital and Ratios 23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 24
Interest Rate Sensitivity 27
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 28
EXHIBIT INDEX 29
Exhibit 11 Computation of Per Share Earnings 30
Exhibit 27 Financial Data Schedule 31
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STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
ASSETS 1999 1998
--------------- ---------------
Cash and due from banks $ 45,625,058 $ 43,311,268
Interest-bearing deposits with other banks 515,000 515,000
Investment securities
Available for sale (at estimated market value) 139,177,575 145,060,902
Held to maturity (estimated market value
$275,591,889 and $185,425,123, respectively) 280,519,696 184,745,325
--------------- ---------------
Total investment securities 419,697,271 329,806,227
--------------- ---------------
Loans, net of unearned discounts 647,315,448 640,206,308
Less allowance for credit losses 10,429,645 10,156,077
--------------- ---------------
Loans, net 636,885,803 630,050,231
--------------- ---------------
Customers' liability under acceptances 854,153 609,431
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 6,244,431 6,294,654
Accrued interest receivable 4,762,649 3,991,914
Other real estate owned 493,996 1,044,509
Other assets 10,803,440 7,663,541
--------------- ---------------
$ 1,147,040,241 $ 1,044,445,215
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 276,163,397 $ 329,020,287
Interest-bearing deposits 502,476,102 373,782,181
--------------- ---------------
Total deposits 778,639,499 702,802,468
Federal funds purchased and securities
sold under agreements to repurchase 132,506,471 99,429,027
Commercial paper 34,814,100 41,529,300
Other short-term borrowings 5,808,044 12,771,325
Acceptances outstanding 854,153 609,431
Due to factoring clients 42,576,578 32,074,004
Accrued expenses and other liabilities 17,018,700 11,678,336
--------------- ---------------
1,012,217,545 900,893,891
Long-term debt - FHLB 31,050,000 41,400,000
--------------- ---------------
Total liabilities 1,043,267,545 942,293,891
--------------- ---------------
Commitments and contingent liabilities
Shareholders' equity
Preferred stock, $5 par value. Authorized 644,389 shares
Series B ($20 liquidation value), issued 1,230 shares 24,600 24,600
Series D ($10 liquidation value), issued 241,883 and
243,929 shares, respectively 2,418,830 2,439,290
--------------- ---------------
2,443,430 2,463,890
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 8,324,830 and 8,310,284 shares, respectively 8,324,830 8,310,284
Capital surplus 45,440,792 45,287,315
Retained earnings 56,562,947 48,817,648
Accumulated other comprehensive (loss)income,
net of tax (1,648,635) 538,840
--------------- ---------------
111,123,364 105,417,977
Less
Common shares in treasury at cost, 323,393 and
101,693 shares, respectively 5,917,330 1,592,690
Unearned compensation 1,433,338 1,673,963
--------------- ---------------
Total shareholders' equity 103,772,696 102,151,324
--------------- ---------------
$ 1,147,040,241 $ 1,044,445,215
=============== ===============
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- ------------
INTEREST INCOME
Loans $14,140,542 $13,481,415 $40,715,827 $38,403,119
Investment securities:
Available for sale 2,077,844 1,871,349 6,040,834 5,670,009
Held to maturity 4,182,405 3,267,157 10,208,168 10,345,958
Federal funds sold 23,158 121,882 295,787 478,467
Deposits with other banks 75,707 14,652 150,015 120,055
----------- ----------- ----------- -----------
Total interest income 20,499,656 18,756,455 57,410,631 55,017,608
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 4,322,777 3,895,247 11,300,950 12,466,134
Federal funds purchased
and securities sold under agreements
to repurchase 1,432,218 919,158 3,460,176 3,006,147
Commercial paper 422,781 474,678 1,356,253 1,223,494
Other short-term borrowings 219,768 259,513 572,687 756,591
Long-term debt 481,674 523,277 1,526,800 1,253,287
----------- ----------- ----------- -----------
Total interest expense 6,879,218 6,071,873 18,216,866 18,705,653
----------- ----------- ----------- -----------
Net interest income 13,620,438 12,684,582 39,193,765 36,311,955
Provision for credit losses 1,365,000 1,069,000 4,118,000 3,180,333
----------- ----------- ----------- -----------
Net interest income after provision
for credit losses 12,255,438 11,615,582 35,075,765 33,131,622
----------- ----------- ----------- -----------
NONINTEREST INCOME
Factoring income 1,219,583 1,210,115 3,639,825 3,521,092
Mortgage banking income 1,557,141 996,245 4,238,156 2,890,796
Service charges on deposit accounts 769,303 839,445 2,309,648 2,264,397
Trade finance income 597,928 482,670 1,645,092 1,464,032
Trust fees 181,150 249,499 582,466 676,787
Other service charges and fees 309,479 189,232 991,647 722,306
Other income 23,678 56,283 75,311 135,705
----------- ----------- ----------- -----------
Total noninterest income 4,658,262 4,023,489 13,482,145 11,675,115
----------- ----------- ----------- -----------
NONINTEREST EXPENSES
Salaries 5,151,303 4,617,831 14,805,623 13,632,910
Employee benefits 951,990 620,360 3,108,191 2,597,023
----------- ----------- ----------- -----------
Total personnel expenses 6,103,293 5,238,191 17,913,814 16,229,933
Occupancy expense, net 969,856 854,712 2,532,660 2,444,096
Equipment expense 627,552 596,157 2,027,450 1,818,055
Other expenses 2,981,080 2,928,064 8,308,551 7,678,960
----------- ----------- ----------- -----------
Total noninterest expenses 10,681,781 9,617,124 30,782,475 28,171,044
----------- ----------- ----------- -----------
Income before income taxes 6,231,919 6,021,947 17,775,435 16,635,693
Provision for income taxes 2,547,111 2,767,542 7,074,574 7,264,851
----------- ----------- ----------- -----------
Net income $ 3,684,808 $ 3,254,405 $10,700,861 $ 9,370,842
=========== =========== =========== ===========
Average number of common shares outstanding
Basic 8,040,787 8,261,166 8,116,514 8,244,125
Diluted 8,398,867 8,723,354 8,483,065 8,583,900
Per average common share
Basic $ .45 $ .39 $ 1.31 $ 1.13
Diluted .44 .38 1.26 1.09
Dividends per common share .12 .11 .36 .32
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income $ 3,684,808 $ 3,254,405 $ 10,700,861 $ 9,370,842
Other comprehensive income, net of tax:
Unrealized holding (losses)gains
arising during the period (345,451) 772,206 (2,187,475) 820,983
------------ ------------ ------------ ------------
Comprehensive income $ 3,339,357 $ 4,026,611 $ 8,513,386 $ 10,191,825
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended
September 30,
1999 1998
------------ ------------
PREFERRED STOCK
Balance at January 1 $ 2,463,890 $ 2,486,730
Conversions of Series D shares (20,460) (22,840)
------------ ------------
Balance at September 30 $ 2,443,430 $ 2,463,890
============ ============
COMMON STOCK
Balance at January 1 $ 8,310,284 $ 8,262,500
Conversions of preferred shares
into common shares 2,046 2,284
Options exercised 12,500 45,500
------------ ------------
Balance at September 30 $ 8,324,830 $ 8,310,284
============ ============
CAPITAL SURPLUS
Balance at January 1 $ 45,287,315 $ 44,775,759
Conversions of preferred shares
into common shares 18,414 20,556
Options exercised 135,063 491,000
------------ ------------
Balance at September 30 $ 45,440,792 $ 45,287,315
============ ============
RETAINED EARNINGS
Balance at January 1 $ 48,817,648 $ 39,590,806
Net income 10,700,861 9,370,842
Cash dividends paid - common shares (2,906,230) (2,618,547)
- preferred shares (49,332) (40,496)
------------ ------------
Balance at September 30 $ 56,562,947 $ 46,302,605
============ ============
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX
Balance at January 1 $ 538,840 $ 197,374
------------ ------------
Unrealized holding (losses)gains arising during
the period:
Before tax (4,043,394) 1,517,529
Tax (benefit) expense (1,855,919) 696,546
------------ ------------
Net of tax (2,187,475) 820,983
------------ ------------
Balance at September 30 $ (1,648,635) $ 1,018,357
============ ============
TREASURY STOCK
Balance at January 1 $ (1,592,690) $ (441,257)
Purchase of common shares (4,324,640) (756,925)
------------ ------------
Balance at September 30 $ (5,917,330) $ (1,198,182)
============ ============
UNEARNED COMPENSATION
Balance at January 1 $ (1,673,963) $ (2,249,346)
Amortization of unearned compensation 240,625 240,625
------------ ------------
Balance at September 30 $ (1,433,338) $ (2,008,721)
============ ============
TOTAL SHAREHOLDERS' EQUITY
Balance at January 1 $102,151,324 $ 92,622,566
Net changes during the period 1,621,372 7,552,982
------------ ------------
Balance at September 30 $103,772,696 $100,175,548
============ ============
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
1999 1998
------------- -------------
OPERATING ACTIVITIES
Net income $ 10,700,861 $ 9,370,842
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 4,118,000 3,180,333
Depreciation and amortization of premises and equipment 1,420,816 1,220,434
Deferred income tax benefit (140,054) (297,021)
Net change in loans held for sale 9,307,975 (9,544,740)
Amortization of unearned compensation 240,625 240,625
Amortization of premiums of securities 1,561,063 1,677,036
Accretion of discounts on securities (634,843) (441,652)
(Increase)Decrease in accrued interest receivable (770,735) 48,702
Increase in due to factored clients 10,502,574 6,781,365
Increase(Decrease) in other liabilities 5,340,364 (431,634)
Other, net (4,988,359) (1,715,677)
------------- -------------
Net cash provided by operating activities 36,658,287 10,088,613
------------- -------------
INVESTING ACTIVITIES
Purchase of premises and equipment (1,370,593) (486,552)
Net decrease in interest-bearing deposits
with other banks -- 2,695,000
Net increase in Federal funds sold -- (4,000,000)
Decrease(Increase) in other real estate owned 550,513 (401,654)
Net decrease in loans (16,417,115) (18,403,807)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 49,954,562 52,762,664
Purchases of securities - held to maturity (146,943,929) (19,853,914)
Purchases of securities - available for sale (117,486,978) (293,774,130)
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 119,615,688 323,921,417
------------- -------------
Net cash (used in) provided by investing activities (112,097,852) 42,459,024
------------- -------------
FINANCING ACTIVITIES
Net decrease in noninterest-bearing deposits (52,856,890) (55,491,818)
Net increase(decrease)in interest-bearing deposits 128,693,921 (30,605,684)
Net increase(decrease) in funds purchased and
securities sold under agreements to repurchase 33,077,444 (12,077,429)
Net (decrease)increase in commercial paper
and other short-term borrowings (13,678,481) 9,976,124
Purchase of Treasury stock (4,324,640) (756,925)
(Decrease)Increase in other long-term debt (10,350,000) 39,650,000
Proceeds from exercise of stock options 147,563 536,500
Cash dividends paid on common and preferred stock (2,955,562) (2,659,043)
------------- -------------
Net cash provided by (used in) in financing activities 77,753,355 (51,428,275)
------------- -------------
Net increase in cash and due from banks 2,313,790 1,119,362
Cash and due from banks - beginning of period 43,311,268 40,065,863
------------- -------------
Cash and due from banks - end of period $ 45,625,058 $ 41,185,225
============= =============
Supplemental schedule of non-cash financing activities:
Preferred stock conversions $ 20,460 $ 22,840
Supplemental disclosure of cash flow information:
Interest paid $ 18,420,455 $ 18,739,828
Income taxes paid 6,251,902 6,483,332
See Notes to Consolidated Financial Statements.
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STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The consolidated financial statements include the accounts of Sterling
Bancorp ("the parent company") and its subsidiaries, principally
Sterling National Bank and its subsidiaries ("the bank"), after
elimination of material intercompany transactions. The term "the
Company" refers to Sterling Bancorp and its subsidiaries. The
consolidated financial statements as of and for the interim periods
ended September 30, 1999 and 1998 are unaudited; however, in the
opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of such periods have been
made. Certain reclassifications have been made to the 1998 financial
statements to conform to the current presentation. The interim
financial statements should be read in conjunction with the Company's
annual report on Form 10-K for the year ended December 31, 1998.
2. For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks.
3. The Company's outstanding Preferred Shares comprise 1,230 Series B
shares (of 4,389 Series B shares authorized) and 241,883 Series D
shares (of 300,000 Series D shares authorized). Each Series B share is
entitled to cumulative dividends at the rate of $0.10 per year, to one
vote per share and upon liquidation or redemption to an amount equal to
accrued and unpaid dividends to the date of redemption or liquidation
plus an amount which is $20 in the case of involuntary liquidation and
$28 otherwise; each Series D share (all of such shares are owned by the
Company's Employee Stock Ownership Trust) is entitled to dividends at
the rate of $0.6125 per year, is convertible into one Common Share, and
is entitled to a liquidation preference of $10 (together with accrued
dividends). All preferred shares are entitled to one vote per share
(voting with the Common Shares except as otherwise required by law).
4. Effective January 1, 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." SFAS No. 134, which amends SFAS
No. 65, "Accounting for Certain Mortgage Banking Activities," requires
that, after the securitization of a mortgage loans held for sale, any
retained mortgage-backed security ("MBS") should be classified in
accordance with the provisions of SFAS 115, "Accounting for Certain
Investments In Debt and Equity Securities." However, SFAS No. 134
required that a mortgage banking enterprise classify as trading any
retained MBS that it commits to sell before or during the
securitization process. The adoption of SFAS No. 134 did not materially
impact the Company's financial condition or results of operations.
5. 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 enterprise'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, asset-based financing,
accounts receivable management services, trade financing, equipment
leasing, corporate and consumer deposit services, commercial and
residential mortgage lending and brokerage, trust and estate
administration and investment management services. The Company's
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9
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 1999 year-to-date
average interest-earning assets were 59.6% loans (corporate lending was 77.3%
and real estate lending was 18.9% of total loans, respectively) and 39.4%
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.
The following tables provide certain information regarding the
Company's operating segments for the three and nine month periods ended
September 30, 1999 and 1998:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------- -------------- -------------- --------------
Three Months Ended September 30, 1999
- -------------------------------------
Net interest income $ 6,756,367 $ 2,254,289 $ 3,814,475 $ 12,825,131
Noninterest income 2,296,193 1,513,506 30,074 3,839,773
Depreciation and amortization 45,235 54,121 175 99,531
Segment profit 3,527,646 2,197,500 5,425,200 11,150,346
Segment assets 537,173,996 98,944,050 472,263,765 1,108,381,811
Three Months Ended September 30, 1998
- -------------------------------------
Net interest income $ 6,541,760 $ 2,143,564 $ 3,111,630 $ 11,796,954
Noninterest income 2,325,106 904,018 21,319 3,250,443
Depreciation and amortization 29,537 46,395 87 76,019
Segment profit 4,567,226 1,902,300 4,444,100 10,913,626
Segment assets 482,490,558 94,093,120 371,336,802 947,920,480
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
-------------- -------------- -------------- --------------
Nine Months Ended September 30, 1999
- ------------------------------------
Net interest income $ 20,201,830 $ 6,640,171 $ 9,814,585 $ 36,656,586
Noninterest income 6,347,478 4,176,853 108,152 10,632,483
Depreciation and amortization 122,659 149,818 518 272,995
Segment profit 10,494,908 6,341,200 15,153,900 31,990,008
Segment assets 537,173,996 98,944,050 472,263,765 1,108,381,811
Nine Months Ended September 30, 1998
- ------------------------------------
Net interest income $ 17,422,651 $ 6,111,904 $ 10,414,720 $ 33,949,275
Noninterest income 6,346,128 2,738,850 52,790 9,137,768
Depreciation and amortization 74,990 134,490 259 209,739
Segment profit 10,169,715 5,194,400 14,178,300 29,542,415
Segment assets 482,490,558 94,093,120 371,336,802 947,920,480
9
10
The following table sets forth reconciliations of reportable operating
segments net interest income, noninterest income, profits and assets to the
Company's consolidated totals:
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Net interest income:
Total for reportable operating segments $ 12,825,131 $ 11,796,954 $ 36,656,586 $ 33,949,275
Other [1] 795,307 887,628 2,537,179 2,362,680
--------------- --------------- --------------- ---------------
Consolidated net interest income $ 13,620,438 $ 12,684,582 $ 39,193,765 $ 36,311,955
=============== =============== =============== ===============
Noninterest income:
Total for reportable operating segments $ 3,839,773 $ 3,250,443 $ 10,632,483 $ 9,137,768
Other [1] 818,489 773,046 2,849,662 2,537,347
--------------- --------------- --------------- ---------------
Consolidated noninterest income $ 4,658,262 $ 4,023,489 $ 13,482,145 $ 11,675,115
=============== =============== =============== ===============
Profit:
Total for reportable operating segments $ 11,150,346 $ 10,913,626 $ 31,990,008 $ 29,542,415
Other [1] (4,918,427) (4,891,679) (14,214,573) (12,906,722)
--------------- --------------- --------------- ---------------
Consolidated income before income taxes $ 6,231,919 $ 6,021,947 $ 17,775,435 $ 16,635,693
=============== =============== =============== ===============
Assets:
Total for reportable operating segments $ 1,108,381,811 $ 947,920,480 $ 1,108,381,811 $ 947,920,480
Other [1] 38,658,430 37,427,545 38,658,430 37,427,545
--------------- --------------- --------------- ---------------
Consolidated assets $ 1,147,040,241 $985,348,025 $ 1,147,040,241 $ 985,348,025
=============== =============== =============== ===============
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
6. In June 1998, the Financial Accounting Standard Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statements of financial condition and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative
(that is, unrealized gains and losses) depends on the intended use of
the derivative and the resulting designation. SFAS No. 133 as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement 133," is
effective for fiscal quarters of fiscal years beginning after September
15, 2000 and does not require restatement of prior periods. Management
of the Company believes the implementation of SFAS No. 133 will not
have a material impact on the Company's financial condition or results
of operations.
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11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analyses of the
consolidated results of operations and financial condition of Sterling Bancorp
(the "parent company"), a bank holding company as defined by the Bank Holding
Company Act of 1956, as amended, and its wholly-owned subsidiaries Sterling
Banking Corporation, Sterling Industrial Loan Association, and Sterling National
Bank. Sterling National Bank, which is the principal subsidiary, owns all of the
outstanding shares of Sterling Factors Corporation ("Factors"), Sterling
National Mortgage Company, Inc.("SNMC-New York"), Sterling National Mortgage
Corp. ("SNMC-Virginia") and Sterling Holding Company of Virginia, Inc. Sterling
Holding Company of Virginia, Inc. owns all of the outstanding shares of Sterling
Real Estate Holding Company, Inc. ("SREHC"). Throughout this discussion and
analysis, the term "the Company" refers to Sterling Bancorp and its subsidiaries
and the term "the bank" refers to Sterling National Bank and its subsidiaries.
This discussion and analysis should be read in conjunction with the Company's
annual report on form 10-K for the year ended December 31, 1998. This report
contains statements that may 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.
BUSINESS
The Company provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposits services, trust
and estate administration, and investment management services. The Company has
operations in metropolitan New York and Washington, DC areas, as well as
Virginia and other mid-Atlantic territories and conducts business throughout the
United States.
There is intense competition in all areas in which the Company conducts
its business. In addition to competing with other banks, the Company competes in
certain areas of its business with other financial institutions. At September
30, 1999, the Bank's year-to-date average earning assets (of which loans were
57% 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 acquisition. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
Results for the Three Months Ended September 30, 1999 and 1998
--------------------------------------------------------------
OVERVIEW
The Company reported net income for the three months ended September 30, 1999 of
$3.7 million, representing $0.44 per share, calculated on a diluted basis,
compared to $3.3 million, or $0.38 per share, calculated on a diluted basis, for
the like period in 1998. This increase reflects higher net interest income and
continued growth in noninterest income.
Net interest income increased to $13.6 million for the third quarter of
1999 compared with $12.7 million for the same period in 1998, principally due to
higher average earning assets outstanding. The net interest margin, on a tax
11
12
equivalent basis, was 5.91% for the third quarter of 1999 compared to 6.17% for
the like 1998 period. This decrease was principally due to a decrease of 30
basis points in the average yield on earning assets partially offset by a
decrease in average cost of funds of 14 basis points.
Noninterest income rose to $4.7 million for the three months ended
September 30, 1999 compared to $4.0 million for the like 1998 period principally
due to continued growth in fees from mortgage banking and trade finance.
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) in the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate are shown on page 21. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 19.
Net interest income for the three months ended September 30, 1999
increased $936,000 to $13,621,000 from $12,685,000 for the comparable period in
1998.
Total interest income aggregated $20,500,000 which was up $1,743,000
for the third quarter of 1999 when compared to $18,757,000 for the same period
of 1998. The tax equivalent yield on interest earning assets was 8.81% for the
three months ended September 30, 1999 compared with 9.11% for the comparable
period in 1998. The increase in interest income was due to an increase in
income earned on the Company's investment securities portfolio and on the loan
portfolio as a result of higher average outstandings. The increase in
investment securities balances reflects the implementation of asset/liability
management strategies. Loan balances increased as the result of the
implementation of business plans, including the purchase of portfolios,
designed to increase funds employed in this asset category. The decrease in
yield on earning assets was due to lower yields on loans and investment
securities.
Interest earned on the loan portfolio amounted to $14,141,000 which was
up $660,000 when compared to a year ago. Average loan balances amounted to
$566,415,000 which were up $42,982,000 from an average of $523,433,000 in the
prior year period. The increase in the average loans, primarily in the leasing,
mortgage and commercial and industrial loan segments of the Company's loan
portfolio, accounted for the increase in interest earned on loans. The decrease
in the yield on the domestic loan portfolio to 10.64% for the three months ended
September 30, 1999 from 10.98% for the comparable 1998 period was primarily
attributable to a lower rate environment.
Tax equivalent interest earned on investment securities increased
$1,155,000 to $6,437,000 in 1999 due to higher average outstandings partially
offset by lower yields.
Interest expense increased $807,000 to $6,879,000 for the third quarter
of 1999 from $6,072,000 for the comparable period in 1998. The increase in
interest expense was due to higher average funds employed partially offset by
lower average rates paid for those funds.
Interest expense on deposits increased $427,000 for the three months
ended September 30, 1999 to $4,322,000 from $3,895,000 for the comparable 1998
period due to increases in average outstandings partially offset by lower rates
paid on
12
13
deposits. Average interest-bearing deposit balances amounted to $462,230,000
which were up $63,675,000 from an average of $398,555,000 in the prior year
period. The increase in average balances reflects the implementation of plans,
including raising deposits in the capital markets and lengthening funding
maturities into year 2000, designed to maximize year-end liquidity. The average
rate paid on interest-bearing deposits was reduced to 3.71% in 1999 compared to
3.86% in the comparable year-ago period.
Interest expense on borrowed funds increased $380,000 for the three
months ended September 30, 1999 to $2,557,000 from $2,177,000 for the comparable
prior year period principally due to increases in average outstandings. Average
borrowed funds amounted to $193,005,000 up $26,950,000 from an average of
$166,055,000 in the prior year period. The increase in borrowings reflects the
implementation of plans designed to support asset growth.
Provision for Credit Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), and principally as the result of the growth in the
loan portfolio, the provision for credit losses increased to $1,365,000 up
$296,000 when compared to the same period last year.
Noninterest Income
Noninterest income increased $635,000 for the third quarter of 1999 when
compared with the like 1998 period primarily as a result of increased fees from
mortgage banking and trade finance.
Noninterest Expenses
Noninterest expenses increased $1,065,000 for the third quarter of 1999 when
compared with the like 1998 period primarily due to increased personnel and
equipment expenses incurred to support growing levels of business activity and
continued investment in the business franchise.
Results for the Nine Months Ended September 30, 1999 and 1998
-------------------------------------------------------------
OVERVIEW
The Company reported net income for the nine months ended September 30,1999 of
$10.7 million, representing $1.26 per share, calculated on a diluted basis,
compared to $9.4 million, or $1.09 per share calculated on a diluted basis, for
the like period in 1998. This increase reflects continued growth in both net
interest income and noninterest income as explained below.
Net interest income increased to $39.2 million for the first nine
months of 1999 compared with $36.3 million for the same period in 1998,
principally due to higher average earning asset outstandings. The net interest
margin, on a tax equivalent basis, was 6.12% for the first nine months of 1999
compared to 6.00% for the like 1998 period. This increase was principally due to
a 39 basis point decrease in the average cost of funds partially offset by a 19
basis point decrease in average yield on earning assets.
Noninterest income rose to $13.5 million for the nine months ended
September 30,1999 compared to $11.7 million for the like 1998 period principally
due to continued growth in fees from mortgage banking, factoring, trade finance,
and deposit and various other services.
13
14
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) for the
components of interest income and interest expense for the first nine months,
expressed in terms of fluctuation in average volume and rate are shown on page
22. Information as to the components of interest income and interest expense and
average rates for the first nine months is provided in the Average Balance
Sheets shown on page 20.
Net interest income for the nine months ended September 30,1999
increased $2,882,000 to $39,194,000 from $36,312,000 for the comparable period
in 1998.
Total interest income aggregated $57,411,000 up $2,393,000 for the
first nine months of 1999 as compared to $55,018,000 for the same period of
1998. The tax equivalent yield on interest-earning assets was 8.87% for the nine
months ended September 30, 1999 compared with 9.06% for the comparable period in
1998. 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 loans outstanding. The decrease in yield on earning
assets was due to lower yields on loans and investment securities.
Interest earned on the loan portfolio amounted to $40,716,000 up
$2,313,000 when compared to a year ago. Average loan balances amounted to
$542,830,000 up $41,340,000 from an average of $501,490,000 in the prior year
period. The increase in the average loans, primarily in the Company's leasing,
mortgage and commercial and industrial loan portfolios, accounted for the
increase in interest earned on loans. The decrease in the yield on the domestic
loan portfolio to 10.83% for the nine months ended September 30,1999 from 11.19%
for the comparable 1998 period was primarily attributable to a lower prime rate
in the 1999 period.
Tax equivalent interest earned on investment securities increased
$478,000 to $16,743,000 in 1999 due to higher average outstandings partially
offset by lower yields due to a flattening of the U.S. Treasury yield curve.
Total interest expense decreased $489,000 to $18,217,000 for the first
nine months of 1999 from $18,706,000 for the comparable period in 1998. The
decrease in interest expense was due to lower average rates paid for
interest-bearing deposits and borrowed funds partially offset by higher amounts
of borrowed funds.
Interest expense on deposits decreased $1,165,000 for the nine months
ended September 30,1999 to $11,301,000 from $12,466,000 for the comparable 1998
period primarily due to decreases in rates paid on deposits. The average rate
paid on interest-bearing deposits decreased to 3.56% in 1999 compared to 4.02%
in the comparable year ago period.
Interest expense on borrowed funds increased $676,000 for the first
nine months of 1999 to $6,916,000 from $6,240,000 for the comparable 1998 period
due to increases in average outstandings partially offset by lower average rates
paid for these funds. Average borrowed funds amounted to $178,039,000 up
$20,839,000 from $157,200,000 in the year period. This increase in borrowings
reflects the implementation of plans designed to support asset growth. The
decrease in the average rate paid for borrowed funds to 4.88% for the nine
months ended September 30, 1999 from 5.18% for the comparable 1998 period was
primarily attributable to a lower rate environment.
14
15
Provision for Credit Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), and principally as the result of the growth in the
loan portfolio, the provision for credit losses increased to $4,118,000 up
$938,000 when compared to the same period last year.
Noninterest Income
Noninterest income increased $1,807,000 for the first nine months of 1999 when
compared with the like 1998 period primarily as a result of increased fees from
mortgage banking, factoring, trade finance and deposit and other services.
Noninterest Expenses
Noninterest expenses increased $2,611,000 for the first nine months of 1999 when
compared with the like 1998 period primarily due to increased personnel and
equipment expenses incurred to support growing levels of business activity and
continued investments 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 guaranteed mortgage backed securities
along with other debt and equity securities. At September 30, 1999, the
Company's portfolio of securities totalled $419,697,000 of which U.S. Government
and U.S. Government corporation and agency guaranteed mortgage-backed securities
having an average life of approximately 4.9 years amounted to $386,345,000. The
Company has the intent and ability to hold to maturity securities classified as
"held to maturity." These securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts. The gross unrealized gains
and losses on "held to maturity" securities were $516,000 and $5,444,000,
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 $110,000 and gross unrealized losses of $3,168,000. Given the generally
high credit quality of the portfolio, management expects to realize all of its
investment upon the maturity of such instruments, and thus believes that any
market value impairment is temporary in nature.
Loan Portfolio
A key management objective is to maintain the quality of the loan portfolio. 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
to avoid concentrations by industry or loan size in order to minimize credit
exposure and to originate loans in markets with which it is familiar.
The Company's commercial and industrial loan portfolio represents
approximately 70% of gross loans. Loans in this category are typically made to
small and medium sized businesses and range between $250,000 and $10 million.
The primary source of repayment is from the borrower's operating profits and
cash flows. Based on underwriting standards, loans may be secured in whole or in
part by collateral such as liquid assets, accounts receivable, equipment,
inventory or real property. The Company's real estate loan portfolio, which
15
16
represents approximately 15% of gross loans, is secured by mortgages on real
property located principally in the State of New York and the Commonwealth
of Virginia. The Company's leasing portfolio, which consists of finance leases
for various types of business equipment, represents approximately 12% of gross
loans. The collateral securing any loan may vary in value based on market
conditions.
The following table sets forth the composition of the Company's loan
portfolio.
September 30,
--------------------------------------------
1999 1998
-------------------- --------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- ----- -------- -----
Domestic
Commercial and industrial $461,674 70.1% $430,765 72.4%
Equipment lease financing 80,925 12.3 55,913 9.4
Real estate 100,782 15.3 94,050 15.8
Installment - individuals 14,317 2.2 13,733 2.3
Foreign
Government and official institutions 784 0.1 788 0.1
-------- ----- -------- -----
Gross loan 658,482 100.0% 595,249 100.0%
===== =====
Unearned discounts 11,167 8,819
-------- --------
Loans, net of unearned discounts $647,315 $586,430
======== ========
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Company's portfolio of loans may be
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
The allowance for credit losses is maintained through the provision for
credit losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for credit losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
evaluation of both loans presenting identified loss potential and of the risk
inherent in various components of the portfolio, including loans identified as
impaired as required by SFAS No. 114. Thus, an increase in the size of the
portfolio or in any of its components could necessitate an increase in the
allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance. At September 30, 1999, the ratio of the allowance to loans, net of
unearned discounts, was 1.61% and the allowance was $10,430,000. At such date,
the Company's non-accrual loans amounted to $1,470,000; $468,000 of such loans
were judged to be impaired within the scope of SFAS No. 114 and required
valuation allowances of $200,000. Based on the foregoing, as well as
management's judgment as to the current risks inherent in the loan portfolio,
the Company's allowance for credit losses was deemed adequate to absorb all
estimable losses on specifically known and other possible credit risks
associated with the portfolio as of September 30, 1999. Potential problem
loans, which are loans that are currently performing under present loan
16
17
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
$1,458,000 at September 30, 1999.
Deposits
A significant source of funds for the Company continues to be deposits,
consisting of demand (noninterest-bearing), NOW, Savings, money market and time
deposits (principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
September 30,
---------------------------------------------
1999 1998
--------------------- ---------------------
($ in thousands)
% of % of
Balances Total Balances Total
-------- ----- -------- -----
Domestic
Demand $276,163 35.5% $256,969 39.8%
NOW 77,793 10.0 59,653 9.3
Savings 25,834 3.3 23,433 3.6
Money Market 167,593 21.4 134,168 20.8
Time deposits 228,476 29.4 168,357 26.1
-------- ----- -------- -----
Total domestic deposits 775,859 99.6 642,580 99.6
Foreign
Time deposits 2,780 0.4 2,730 0.4
-------- ----- -------- -----
Total deposits $778,639 100.0% $645,310 100.0%
======== ===== ======== =====
Fluctuations of balances in total or among categories at any date may occur
based on the Company's mix of assets and liabilities as well as on customer's
balance sheet strategies. Historically, however, average balances for deposits
have been relatively stable. Information regarding these average balances is
presented on pages 19 and 20.
CAPITAL
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations is a leverage
requirement. This requirement establishes a minimum leverage ratio (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). Information regarding the Company's
and the bank's risk-based capital is presented on page 23. In addition, the
Company and the bank are subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1981 ("FDICIA") which imposes a number
of mandatory supervisory measures. Among other matters, FDICIA established five
17
18
capital categories ranging from "well capitalized" to "critically under
capitalized." Such classifications are used by regulatory agencies to determine
a bank's deposit insurance premium, approval of applications authorizing
institutions to increase their asset size or otherwise expand business
activities or acquire other institutions. Under the provisions of FDICIA a "well
capitalized" institution must maintain minimum leverage, Tier 1 and Total
Capital ratios of 5%, 6% and 10%, respectively. At September 30, 1999, 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 coordinate all work on this important issue -- with special
emphasis being placed on mission critical systems. The work was divided into the
following phases: awareness, assessment, renovation, validation, and
implementation. The Company continues to take this project very seriously, with
senior management and the board of directors regularly reviewing the entire
process.
As of September 30, 1999, the Company has completed all phases for all of
its mission critical systems. That is, the Committee has completed all phases of
the company-wide program, and has prepared the Company's computer hardware and
software for the Year 2000.
The Company has established a Customer Awareness Program, where
information on consumer related Y2K issues and updates on the Company's Y2K
program have been and will continue to be posted on Sterling Bancorp's website,
enclosed in account statements, and made available at the Company's branch
locations. The Company also has established a Customer Risk Assessment Program
to assess the level of awareness of and compliance with Y2K issues by the
Company's substantial business customers and its significant funding sources.
Questionnaires were sent to such funds takers and funds providers, followed by
personal contact by Company officers. The Committee has reviewed all responses
and assessed the risks associated with any non-compliance. To date, no
mitigating actions have been warranted. The Company will continue to monitor the
progress of its larger customers, funding sources, and vendors and to assess the
potential impact of any non-compliance on the Company.
The cost to date of the Y2K project was $355,000 all of which has been
expensed as incurred. Many of the expenditures relate to microcomputer hardware
and software that would have been upgraded in the normal course of the Company's
operations through December 31, 1999.
The Company, as part of its normal business practice, has business
resumption and disaster recovery plans to facilitate timely restoration on
services and processes in the event of a business disruption. In addition, the
Company has developed Year 2000 business resumption contingency plans to define
the actions that will be taken to insure that critical business functions can
continue to operate in the unlikely event that a system or supplier failure
occurs due to the millennium 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.
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 or of other
entities not associated with the Company that 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.
18
19
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended September 30,
(dollars in thousands)
1999 1998
--------------------------------- -----------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
Interest-bearing deposits
with other banks $ 515 $ 76 6.57% $ 315 $ 15 4.87%
Investment securities
Available for sale [2] 142,495 2,255 6.31 120,549 2,015 6.66
Held to maturity 258,472 4,182 6.47 205,007 3,267 6.38
Federal funds sold 1,707 23 5.31 8,745 122 5.45
Loans, net of unearned discounts
Domestic [3] 565,630 14,129 10.64 522,645 13,468 10.98
Foreign 785 12 5.96 788 13 6.65
---------- -------- -------- --------
TOTAL INTEREST-EARNING
ASSETS 969,604 20,677 8.81% 858,049 18,900 9.11%
-------- ======= -------- =======
Cash and due from banks 37,864 41,451
Allowance for credit losses (10,312) (9,147)
Goodwill 21,158 21,158
Other assets 19,033 20,546
---------- --------
TOTAL ASSETS $1,037,347 $932,057
========== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 24,772 147 2.35% $ 22,979 132 2.28%
NOW 71,892 443 2.45 66,053 513 3.08
Money Market 163,016 1,315 3.20 137,565 1,068 3.02
Time 199,770 2,387 4.74 169,228 2,145 5.03
Foreign
Time 2,780 30 4.25 2,730 37 5.40
---------- -------- -------- -------
Total interest-bearing
deposits 462,230 4,322 3.71 398,555 3,895 3.86
---------- -------- -------- -------
Borrowing
Federal funds purchased and
securities sold under$
agreements to repurchase 115,801 1,432 4.91 70,912 919 5.10
Commercial paper 35,440 423 4.73 36,894 475 5.10
Other short-term debt 5,388 220 5.08 16,849 260 5.17
Long-term debt 36,376 482 5.30 41,400 523 5.01
---------- -------- -------- -------
Total borrowings 193,005 2,557 4.95 166,055 2,177 5.09
---------- -------- -------- -------
TOTAL INTEREST-BEARING
LIABILITIES 655,235 6,879 4.08% 564,610 6,072 4.22%
-------- ======= ------- =======
Noninterest-bearing deposits 227,460 224,860
Other liabilities 53,087 44,488
---------- --------
Total liabilities 935,782 833,958
Shareholders' equity 101,565 98,099
---------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,037,347 $932,057
========== ========
Net interest income/spread 13,798 4.73% 12,828 4.89%
======= =======
Net yield on interest-earning
assets (margin) 5.91% 6.17%
======= =======
Less: Tax equivalent adjustment 177 143
-------- --------
Net interest income $ 13,621 $ 12,685
======== ========
[1] The average balances of assets, liabilities and shareholders' equity
are computed on the basis of daily averages. Average rates are
presented on a tax equivalent basis.
[2] Interest on tax-exempt securities included herein is presented on a tax
equivalent basis.
[3] Nonaccrual loans are included in amounts outstanding and income has
been included to the extent earned.
19
20
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Nine Months Ended September 30,
(dollars in thousands)
1999 1998
---------------------------------------- -------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
---------- -------- ------- ------- -------- ----
Interest-bearing deposits
with other banks $ 515 $ 150 4.91% $ 1,261 $ 120 5.09%
Investment securities
Available for sale [2] 138,741 6,535 6.28 121,858 5,919 6.48
Held to maturity 219,993 10,208 6.19 219,971 10,346 6.27
Federal funds sold 8,330 296 4.68 11,562 479 5.46
Loans, net of unearned discounts
Domestic [3] 542,044 40,680 10.83 500,701 38,363 11.19
Foreign 786 36 6.07 789 40 6.74
---------- -------- -------- --------
TOTAL INTEREST-EARNING
ASSETS 910,409 57,905 8.87% 856,142 55,267 9.06%
-------- ======= -------- =======
Cash and due from banks 43,039 42,152
Allowance for credit losses (10,479) (8,967)
Goodwill 21,158 21,158
Other assets 19,373 21,154
---------- --------
TOTAL ASSETS $ 983,500 $931,639
========== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 24,544 431 2.35% $ 23,402 394 2.25%
NOW 68,039 1,252 2.46 61,762 1,360 2.94
Money Market 144,581 3,142 2.91 137,616 3,220 3.13
Time 184,647 6,383 4.62 189,391 7,382 5.21
Foreign
Time 2,755 93 4.50 2,729 110 5.39
---------- -------- -------- --------
Total interest-bearing
deposits 424,566 11,301 3.56 414,900 12,466 4.02
---------- -------- -------- --------
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 95,824 3,460 4.83 76,493 3,006 5.25
Commercial paper 38,395 1,356 4.72 31,801 1,224 5.14
Other short-term debt 4,264 573 5.07 15,741 757 5.20
Long-term debt 39,556 1,527 5.15 33,165 1,253 5.05
---------- -------- -------- --------
Total borrowings 178,039 6,916 4.88 157,200 6,240 5.18
---------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES 602,605 18,217 3.95% 572,100 18,706 4.34%
-------- ======= -------- ======
Noninterest-bearing deposits 233,153 220,552
Other liabilities 45,746 43,490
---------- --------
Total liabilities 881,504 836,142
Shareholders' equity 101,996 95,497
---------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 983,500 $931,639
========== ========
Net interest income/spread 39,688 4.92% 36,561 4.72%
======= ======
Net yield on interest-earning
assets(margin)
6.12% 6.00%
======= ======
Less: Tax equivalent adjustment 494 249
-------- --------
Net interest income $ 39,194 $ 36,312
======== ========
[1] The average balances of assets, liabilities and shareholders' equity
are computed on the basis of daily averages. Average rates are
presented on a tax equivalent basis.
[2] Interest on tax-exempt securities included herein is presented on a tax
equivalent basis.
[3] Nonaccrual loans are included in amounts outstanding and income has
been included to the extent earned.
20
21
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
Three Months Ended September 30,
(dollars in thousands)
Increase/(Decrease)
Three Months Ended
September 30, 1999 and 1998
--------------------------------
Volume Rate Net[2]
------ ---- ------
INTEREST INCOME
Interest-bearing deposits with other banks $ 41 $ 20 $ 61
------- ------- -------
Investment securities
Available for sale 351 (111) 240
Held to maturity 868 47 915
------- ------- -------
Total 1,219 (64) 1,155
------- ------- -------
Federal funds sold (96) (3) (99)
------- ------- -------
Loans, net of unearned discounts [3]
Domestic 1,131 (470) 661
Foreign -- (1) (1)
------- ------- -------
Total 1,131 (471) 660
------- ------- -------
TOTAL INTEREST INCOME $ 2,295 $ (518) $ 1,777
======= ======= =======
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 11 $ 4 $ 15
NOW 42 (112) (70)
Money Market 187 60 247
Time 371 (129) 242
Foreign
Time 1 (8) (7)
------- ------- -------
Total 612 (185) 427
------- ------- -------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase 549 (36) 513
Commercial paper (19) (33) (52)
Other short-term debt (39) (1) (40)
Long-term debt (68) 27 (41)
------- ------- -------
Total 423 (43) 380
------- ------- -------
TOTAL INTEREST EXPENSE $ 1,035 $ (228) $ 807
======= ======= =======
NET INTEREST INCOME $ 1,260 $ (290) $ 970
======= ======= =======
[1] The above table is presented on tax equivalent basis.
[2] The change in interest income and interest expense due to both rate and
volume has been allocated to change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts
of the changes in each.
[3] Nonaccrual loans have been included in the amounts outstanding and
income has been included to the extent accrued.
21
22
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
Nine Months Ended September 30,
(dollars in thousands)
Increase/(Decrease)
Nine Months Ended
September 30, 1999 and 1998
---------------------------
Volume Rate Net[2]
INTEREST INCOME
Interest-bearing deposits with other banks $ 28 $ 2 $ 30
------- ------- -------
Investment securities
Available for sale 802 (186) 616
Held to maturity 1 (139) (138)
------- ------- -------
Total 803 (325) 478
------- ------- -------
Federal funds sold (121) (62) (183)
------- ------- -------
Loans, net of unearned discounts [3]
Domestic 3,608 (1,291) 2,317
Foreign -- (4) (4)
------- ------- -------
Total 3,608 (1,295) 2,313
------- ------- -------
TOTAL INTEREST INCOME $ 4,318 $(1,680) $ 2,638
======= ======= =======
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 19 $ 18 $ 37
NOW 129 (237) (108)
Money Market 157 (235) (78)
Time (181) (818) (999)
Foreign
Time 1 (18) (17)
------- ------- -------
Total 125 (1,290) (1,165)
------- ------- -------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase 710 (256) 454
Commercial paper 238 (106) 132
Other short-term debt (178) (6) (184)
Long-term debt 248 26 274
------- ------- -------
Total 1,018 (342) 676
------- ------- -------
TOTAL INTEREST EXPENSE $ 1,143 $(1,632) $ (489)
======= ======= =======
NET INTEREST INCOME $ 3,175 $ (48) $ 3,127
======= ======= =======
[1] The above table is presented on tax equivalent basis.
[2] The change in interest income and interest expense due to both rate and
volume has been allocated to change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts
of the changes in each.
[3] Nonaccrual loans have been included in the amounts outstanding and
income has been included to the extent accrued.
22
23
STERLING BANCORP AND SUBSIDIARIES
Regulatory Capital and Ratios
RATIOS AND MINIMUMS
(dollars in thousands)
For Capital To Be Well
Actual Adequacy Minimum Capitalized
------------------- ------------------ --------------------
AS OF SEPTEMBER 30, 1999 Amount Ratio Amount Ratio Amount Ratio
- ------------------------ ------------------- ------------------ --------------------
Total Capital (to Risk Weighted Assets):
The Company $93,296 12.94% $57,691 8.00% $72,114 10.00%
The bank 74,399 10.98 54,227 8.00 67,784 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 84,264 11.68 28,845 4.00 43,268 6.00
The bank 66,264 9.78 27,114 4.00 40,671 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 84,264 8.29 40,468 4.00 50,809 5.00
The bank 66,264 6.81 38,910 4.00 48,638 5.00
AS OF DECEMBER 31, 1998
- -----------------------
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
23
24
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of market risk, liquidity risk, capital and asset quality. The
Company's net interest income is affected by changes in market interest rates
and by the level and composition of interest-earning assets and interest-bearing
liabilities. The Company's objectives in its asset/liability management are to
utilize its capital effectively, to provide adequate liquidity and to enhance
net interest income, without taking undue risks or subjecting the Company unduly
to interest rate fluctuations.
The Company takes a coordinated approach to the management of market risk,
liquidity and capital. This risk management process is governed by policies and
limits established by senior management which are reviewed and approved by the
Asset/Liability Committee ("ALCO"). ALCO, which is comprised of members of
senior management and the Board, meets to review among other things, economic
conditions, interest rates, yield curve, cash flow projections, expected
customer actions, liquidity levels, capital ratios and repricing characteristics
of assets, liabilities and off-balance sheet financial instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. The Company monitors the interest rate sensitivity of its on- and
off-balance sheet positions by examining its near-term sensitivity and its
longer term gap position. In its management of interest rate risk, the Company
utilizes several tools including traditional gap analysis and sophisticated
income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest-rate sensitive assets exceed interest-rate sensitive
liabilities generally will result in an institution's net interest margin
increasing in a rising rate environment and decreasing in a falling rate
environment. A negative gap (liability sensitive) will generally have the
opposite result on an institution's net interest margin. However, the
traditional gap analysis does not assess the relative sensitivity of assets and
liabilities to changes in interest rates. The Company utilizes the gap analysis
to complement its income simulations modeling, primarily focusing on the longer
term structure of the balance sheet.
The Company's balance sheet structure is primarily short-term in nature
with a substantial portion of assets and liabilities repricing or maturing
within one year. The Company's gap analysis at September 30, 1999, is presented
on page 27. The results of both the income simulation analysis and the gap
analysis, reveal that net interest income would increase during periods of
rising interest rates and decrease during periods of falling interest rates.
As part of its interest rate risk strategy, the Company uses off-balance
sheet financial instruments (derivatives) to hedge the interest rate sensitivity
of assets with the corresponding amortization reflected in the yield of the
related on-balance sheet assets being hedged. The Company has written policy
guidelines, which have been approved by the Board of Directors based on
recommendations of the Asset/Liability Committee, governing the use of
off-balance sheet financial instruments, including approved counterparties, risk
24
25
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 September 30, 1999, 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 and not for trading
purposes. At September 30, 1999, 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 September 30, 1999, the unamortized premiums on these contracts
totaled $150,000 and are included in other assets. At September 30, 1999,
$32,000 was receivable under these contracts.
The Company utilizes income simulation models to complement its
traditional gap analysis. While ALCO routinely monitors simulated net interest
income sensitivity over a rolling two-year horizon, it also utilizes additional
tools to monitor potential longer-term interest rate risk. The income simulation
models measure the Company's net interest income sensitivity or volatility to
interest rate changes utilizing statistical techniques that allow the Company to
consider various factors which impact net interest income. These factors include
actual maturities, estimated cash flows, repricing characteristics, deposits
growth/retention and, most importantly, the relative sensitivity of the
Company's assets and liabilities to changes in market interest rates. This
relative sensitivity is important to consider as the Company's core deposit base
is not subject to the same degree of interest rate sensitivity as its assets.
The core 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 limits
for the potential volatility of its net interest margin assuming certain levels
of changes in market interest rates with the objective of maintaining a stable
net interest margin under various probable rate scenarios. Management generally
has maintained a risk position well within the policy limits. As of September
30, 1999, the model indicated the impact of a 200 basis point parallel and pro
rata rise in rates over twelve months would approximate a 1.85% ($1,000,000)
increase in net interest income, while the impact of a 200 basis point decline
in rates over the same period would approximate a 3.48% ($2,000,000) decline
from an unchanged rate environment.
25
26
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 throughout the Company. 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.
The parent company generates income from its own operations. Its cash
requirements are supplemented from funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements.
The bank can supply funds to the parent company and its nonbank
subsidiaries subject to various legal restrictions. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for that
year to date combined with its retained net profits for the preceding two
calendar years.
At September 30, 1999, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $34,814,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$59,138,000 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 and capital requirements in the future.
26
27
STERLING BANCORP AND SUBSIDIARIES
Interest Rate Sensitivity
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are placed in a time of the earliest repricing
period. Amounts are presented in thousands.
Repricing Date
----------------------------------------------------------------------------------
More than More than Non
3 months 3 months 1 year to Over Rate
or less to 1 year 5 years 5 years sensitive Total
-------- --------- --------- ------- --------- -----
ASSETS
Interest-bearing deposits
with other banks $ 515 $ -- $ -- $ -- $ -- $ 515
Investment securities 9,956 8,717 15,559 378,632 6,834 419,698
Loans, net of unearned
discounts
Commercial and Industrial 460,247 231 4,853 2,898 (485) 467,744
Lease financing 730 3,256 74,618 1,264 (10,327) 69,541
Real estate 18,612 3,555 24,843 49,064 (160) 95,914
Installment 9,648 106 2,185 1,551 (158) 13,332
Foreign government and
official institutions 784 -- -- -- -- 784
Noninterest-earning assets
and allowance for
credit losses -- -- -- -- 79,512 79,512
---------- ---------- ---------- ---------- ---------- ----------
Total Assets 500,492 15,865 122,058 433,409 75,216 1,147,040
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Savings [1] -- -- 25,834 -- -- 25,834
NOW [1] -- -- 77,793 -- -- 77,793
Money Market [1] 135,660 -- 31,934 -- -- 167,594
Time - domestic 86,381 119,613 22,181 300 -- 228,475
- foreign 150 2,630 -- -- -- 2,780
Federal funds purchased &
securities sold under
agreements to repurchase 125,506 7,000 -- -- -- 132,506
Commercial paper 34,814 -- -- -- -- 34,814
Other short-term borrowings 5,458 350 -- -- -- 5,808
Long-term borrowings - FHLB 20,000 10,000 1,050 -- -- 31,050
Noninterest-bearing
liabilities and share-
holders' equity -- -- -- -- 440,386 440,386
---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity 407,969 139,593 158,792 300 440,386 1,147,040
---------- ---------- ---------- ---------- ---------- ----------
Net Interest Rate
Sensitivity Gap $ 92,523 $ (123,728) $ (36,734) $ 433,109 $ (365,170) $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap at
September 30, 1999 $ 92,523 $ (31,205) $ (67,939) $ 365,170 $ -- $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap at
September 30, 1998 $ 122,134 $ 69,450 $ 2,911 $ 336,590 $ -- $ --
========== ========== ========== ========== ========== ==========
Cumulative Gap at
December 31, 1998 $ 149,850 $ 113,187 $ 65,434 $ 404,571 $ -- $ --
========== ========== ========== ========== ========== ==========
[1] Historically, balances in non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical
repricing practices and runoff experience.
27
28
STERLING BANCORP AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(11) Statement Re: Computation of Per Share Earnings
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING BANCORP
----------------
(Registrant)
Date 11/12/99 /s/ Louis J. Cappelli
- ----------------------- ----------------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 11/12/99 /s/ John W. Tietjen
- ----------------------- ----------------------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
28
29
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
------ ----------- ------------ -------- ----------
11 Computation of X 31
Per Share Earnings
27 Financial Data X 32
Schedule
29