-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OOmyKmO6lPtQpzQcwba96mpehZKzO18+Xa8BnSZyZDg+EVjUffI7+ATLHso1hwYF vCFQONUDuSJl0j6oGM9rkg== 0000950123-97-004311.txt : 19970515 0000950123-97-004311.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950123-97-004311 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING BANCORP CENTRAL INDEX KEY: 0000093451 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132565216 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05273 FILM NUMBER: 97605775 BUSINESS ADDRESS: STREET 1: 540 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022-3299 BUSINESS PHONE: 2128268000 MAIL ADDRESS: STREET 1: 540 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022-3299 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD PRUDENTIAL CORP /NEW/ DATE OF NAME CHANGE: 19781210 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD PRUDENTIAL UNITED CORP DATE OF NAME CHANGE: 19681125 10-Q 1 FORM 10-Q 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 MARCH 31, 1997 ------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 1-5273-1 STERLING BANCORP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-2565216 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION) 430 PARK AVENUE, NEW YORK, N.Y. 10022-3505 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 212-826-8000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) N/A (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [] NO AS OF MARCH 31, 1997 THERE WERE 7,744,091 SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING. 2 STERLING BANCORP
PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Financial Statements 3 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Business 8 Financial Condition 8 Asset/Liability Management 10 Securities 12 Credit Risk 12 Results of Operations 13 Average Balance Sheets 15 Rate/Volume Analysis 16 Interest Rate Sensitivity 17 Risk-Based Capital Components and Ratios 18 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 19 EXHIBIT INDEX 20 Exhibit 11 Computation of Per Share Earnings 21 Exhibit 27 Financial Data Schedule 22
2 3 STERLING BANCORP AND SUBSIDIARIES Consolidated Balance Sheets
March 31, December 31, ASSETS 1997 1996 ------------ ----------- Cash and due from banks $ 37,668,258 $ 54,512,462 Interest-bearing deposits with other banks 3,010,000 3,010,000 Federal funds sold -- 3,000,000 Investment securities Available for sale (at estimated market value) 76,315,917 77,597,117 Held to maturity (estimated market value $224,158,427 and $223,668,650, respectively) 230,239,405 226,733,888 ------------- ------------ Total investment securities 306,555,322 304,331,005 ------------- ------------ Loans, net of unearned discounts 451,960,314 465,516,556 Less allowance for possible loan losses 7,883,345 8,003,392 ------------- ------------ Loans, net 444,076,969 457,513,164 ------------- ------------ Customers' liability under acceptances 789,220 613,430 Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440 Premises and equipment, net 6,612,703 5,508,740 Accrued interest receivable 4,254,789 4,257,142 Other assets 8,403,341 7,700,928 ------------- ------------ $ 832,529,042 $861,605,311 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing deposits $ 220,642,922 $229,976,783 Interest-bearing deposits 356,648,187 344,445,578 ------------- ------------ Total deposits 577,291,109 574,422,361 Federal funds purchased and securities sold under agreements to repurchase 82,586,572 88,144,400 Commercial paper 21,093,400 32,569,900 Other short-term borrowings 6,695,962 30,419,791 Acceptances outstanding 789,220 613,430 Due to factoring clients 27,495,186 23,140,504 Accrued expenses and other liabilities 16,260,829 14,228,490 ------------- ------------ 732,212,278 763,538,876 ------------- ------------ Long-term convertible subordinated debentures 6,261,000 6,389,000 Other long-term debt 14,500,000 14,500,000 ------------- ------------ Total long-term debt 20,761,000 20,889,000 ------------- ------------ Total liabilities 752,973,278 784,427,876 ------------- ------------ Commitments and contingent liabilities Shareholders' equity Preferred stock, $5 par value. Authorized 644,389 shares 2,501,790 2,506,600 Common stock, $1 par value. Authorized 20,000,000 shares; issued 7,786,434 and 7,725,533 shares, respectively 7,786,434 7,725,533 Capital surplus 39,315,968 38,619,434 Retained earnings 33,412,014 31,648,806 Net unrealized (depreciation) appreciation on securities available for sale, net of tax (145,915) 90,001 ------------- ------------ 82,870,291 80,590,374 Less Common shares in treasury at cost, 42,343 shares 418,959 418,959 Unearned compensation 2,895,568 2,993,980 ------------- ------------ Total shareholders' equity 79,555,764 77,177,435 ------------- ------------ $ 832,529,042 $861,605,311 ============= ============
See Notes to Consolidated Financial Statements. 3 4 STERLING BANCORP AND SUBSIDIARIES Consolidated Statements of Income
Three Months Ended March 31, 1997 1996 ----------- ----------- INTEREST INCOME Investment loans $11,083,522 $ 8,531,269 Investment securities Available for sale 1,317,517 1,620,314 Held to maturity 3,782,856 3,565,310 Federal funds sold 74,113 277,433 Deposits with other banks 58,307 42,093 ----------- ----------- Total interest income 16,316,315 14,036,419 ----------- ----------- INTEREST EXPENSE Deposits 3,318,730 2,951,678 Federal funds purchased and securities sold under agreements to repurchase 1,092,076 884,721 Commercial paper 330,693 330,543 Other short-term borrowings 146,069 124,456 Long-term debt 331,346 719,108 ----------- ----------- Total interest expense 5,218,914 5,010,506 ----------- ----------- Net interest income 11,097,401 9,025,913 Provision for possible loan losses 771,000 577,000 ----------- ----------- Net interest income after provision for possible loan losses 10,326,401 8,448,913 ----------- ----------- NONINTEREST INCOME Service charges on deposit accounts 509,920 372,505 Factoring commissions 928,395 602,512 Letter of credit commissions 240,079 215,411 Trust fees 192,949 150,796 Mortgage banking income 692,698 32,236 Gain on sale of securities -- 22,161 Other income 549,348 265,913 ----------- ----------- Total noninterest income 3,113,389 1,661,534 ----------- ----------- NONINTEREST EXPENSES Salaries 4,143,598 3,183,825 Employee benefits 887,617 749,966 ----------- ----------- Total personnel expenses 5,031,215 3,933,791 Occupancy expense, net 732,779 587,883 Equipment expense 565,391 312,153 Other expenses 2,576,670 1,909,251 ----------- ----------- Total noninterest expenses 8,906,055 6,743,078 ----------- ----------- Income before income taxes 4,533,735 3,367,369 Provision for income taxes 2,071,259 1,607,624 ----------- ----------- Net income $ 2,462,476 $ 1,759,745 =========== =========== Average number of common shares outstanding Primary 7,872,366 6,519,458 Fully diluted 8,616,748 8,664,599 Per average common share Primary $ .31 $ .27 Fully diluted .29 .23 Dividends per common share .09 .07
See Notes to Consolidated Financial Statements. 4 5 STERLING BANCORP AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 1997 1996 ------------ ------------ Shareholders' equity at beginning of period $ 77,177,435 $ 59,657,224 ------------ ------------ Net income 2,462,476 1,759,745 Dividends paid Common stock- $.09 and $.07 per share, respectively (689,479) (453,542) Preferred stock - at prescribed rates (9,578) (5,305) Conversions of subordinated debentures into common stock 749,000 193,000 Options exercised 3,625 -- Amortization of unearned compensation 98,201 23,021 Change in valuation account for securities available for sale, net of tax (235,916) (430,351) ------------ ------------ Net change in shareholders' equity 2,378,329 1,086,568 ------------ ------------ Shareholders' equity at end of period $ 79,555,764 $ 60,743,792 ============ ============
See Notes to Consolidated Financial Statements. 5 6 STERLING BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 1996 ------------ ------------ OPERATING ACTIVITIES Net income $ 2,462,476 $ 1,759,745 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 771,000 577,000 Depreciation and amortization of premises and equipment 314,789 162,434 Deferred income tax provision/(benefit) 64,350 (139,792) Gain on sale of securities -- (22,161) Net change in loans held for sale (3,515,264) -- Amortization of unearned compensation 98,201 23,021 Amortization of premiums of securities 326,796 418,954 Accretion of discounts on securities (40,058) (39,040) Decrease/(Increase) in accrued interest receivable 2,353 (360,514) Increase in due to factored clients 4,354,682 288,859 Increase in other liabilities 2,032,339 2,035,420 Other, net (836,039) (3,327,691) ------------ ------------ Net cash provided by operating activities 6,035,625 1,376,235 ------------ ------------ INVESTING ACTIVITIES Purchase of premises and equipment (1,418,753) (573,201) Net increase in interest-bearing deposits with other banks -- (10,000) Net decrease in Federal funds sold 3,000,000 5,000,000 Proceeds from sale of loans Net decrease in loans 17,071,242 35,955,482 Proceeds from prepayments, redemptions or maturities of securities - held to maturity 7,853,630 7,981,976 Purchases of securities - held to maturity (11,570,419) (45,650,703) Proceeds from sale of securities-available for sale -- 5,017,969 Proceeds from prepayments, redemptions or maturities of securities - available for sale 769,322 2,649,048 ------------ ------------ Net cash provided by investing activities 15,705,022 10,370,571 ------------ ------------ FINANCING ACTIVITIES Net decrease in noninterest-bearing deposits (9,333,861) (51,917,206) Net increase in interest-bearing deposits 12,202,609 3,302,957 Net (decrease)/increase in Federal funds purchased and securities sold under agreements to repurchase (5,557,828) 24,677,270 Net (decrease)/increase in commercial paper and other short-term borrowings (35,200,329) 15,203,247 Prepayments of debentures, net (128,000) -- Decrease in other long-term debt -- (250,000) Proceeds from exercise of stock options 3,625 -- Cash dividends paid on common and preferred stock (699,057) (458,847) ------------ ------------ Net cash used in financing activities (38,584,851) (9,442,579) ------------ ------------ Net (decrease)/increase in cash and due from banks (16,844,204) 2,304,227 Cash and due from banks - beginning of period 54,512,462 40,720,401 ------------ ------------ Cash and due from banks - end of period $ 37,668,258 $ 43,024,628 ============ ============ Supplemental schedule of non-cash financing activities: Debenture and preferred stock conversions $ 753,810 $ 193,000 Issuance of treasury shares -- 1,381,250 Supplemental disclosure of cash flow information: Interest paid $ 4,951,378 $ 5,480,943 Income taxes paid 981,012 518,650
See Notes to Consolidated Financial Statements 6 7 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 March 31, 1997 and 1996 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 1996 financial statements to conform to current presentation. The interim financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1996. 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 authorized) and 247,719 Series D shares (of 300,000 authorized). Each Series B share is entitled to cumulative dividends at the rate of $0.10 per year, to one vote per share and upon liquidation or redemption to an amount equal to accrued and unpaid dividends to the date of redemption or liquidation plus an amount which is $20 in the case of involuntary liquidation and $28 otherwise; each Series D share (all of such shares are owned by the Company's Employee Stock Ownership Trust) is entitled to dividends at the rate of $0.6125 per year, is convertible into one Common Share, and is entitled to a liquidation preference of $10 (together with accrued dividends). All preferred shares are entitled to one vote per share (voting with the Common Shares except as otherwise required by law). 4. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128, which supersedes Accounting Principles Board Opinion NO. 15, "Earnings per Share," establishes standards for computing, presenting and disclosing earnings per share. SFAS 128 requires 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 entity. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. Earlier application of SFAS 128 is not permitted and all prior period earnings per share data must be restated upon its adoption. 7 8 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS Sterling Bancorp ("the parent company") is a bank holding company, as defined by the Bank Holding Company Act of 1956("the BHCA"), as amended. Throughout the report, 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, factoring, 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 parent company owns all of the outstanding shares of Sterling National Bank ("the bank"), its principal subsidiary, and all of the outstanding shares of Universal Finance Corporation, Sterling Industrial Loan Association and Sterling Banking Corporation ("finance subsidiaries"). On January 1, 1997, a new subsidiary - Sterling National Mortgage Corp. ("SNMC - Virginia") - was formed. On March 1, 1997, a wholly-owned subsidiary of the bank- Sterling Real Estate Holding Company Inc. - was formed. Sterling National Mortgage Company, Inc. ("SNMC-New York"), Sterling National Mortgage Corp. ("SNMC-Virginia") and Sterling Factors Corporation ("Factors") are wholly owned subsidiaries of the bank. Until 1997, Factors was a finance subsidiary of the parent company. There is intense competition in all areas in which the Company conducts its business, including deposits, loans, domestic and international financing and trust services. In addition to competing with other banks, the Company also competes in certain areas of its business with other financial institutions. At March 31, 1997, the bank's year-to-date average earning assets (of which loans were 48% and securities were 43%) represented approximately 96% of the Company's year-to-date average earning assets. See page 15 for the composition of the Company's average balance sheets for the three months ended March 31, 1997 and March 31, 1996. FINANCIAL CONDITION Liquidity is the ability to meet cash needs arising from changes in various categories of assets and liabilities. Liquidity is constantly monitored and managed at both the parent company and the bank levels. Liquid assets consist of cash and due from banks, interest-bearing deposits in banks and Federal funds sold and securities available for sale. Primary funding sources include core deposits, capital market funds and other money market sources. Core deposits include domestic noninterest-bearing and interest-bearing retail deposits, which historically have been relatively stable. The parent company and the bank have significant unused borrowing capacity. Contingency plans exist and could be implemented on a timely basis to minimize the impact of any dramatic change in market conditions. While the parent company generates income from its own operations, it also depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the bank. Such sources have been adequate to meet the parent company's cash requirements throughout its history. At March 31, 1997, the parent company had on hand approximately $10,232,000 in cash. Various legal restrictions limit the extent to which the bank can supply funds to the parent company and its nonbank subsidiaries. All national banks are limited in the payment of dividends without the approval of the Comptroller of the Currency (the Comptroller) to an amount not to exceed the net profits (as defined) for that year to date combined with its retained net profits for the preceding two calendar years. In addition, from time to time dividends are paid to the parent company by the finance subsidiaries from their retained earnings without regulatory restrictions. 8 9 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At March 31, 1997, the parent company's outstanding long-term debt, consisting principally of convertible subordinated debentures (originally issued pursuant to rights offerings to shareholders of the Company), aggregated $8,199,000. To the extent convertible subordinated debentures are converted to common stock of the parent company (as has been the case with approximately $22 million principal amount since 1982), the subordinated debt related thereto is retired and becomes part of shareholders' equity. The parent company's indebtedness is also met through funds generated from profits and new financing. Since becoming a public company in 1946, the parent company and its predecessors have been able to obtain the financing required and have paid at maturity all outstanding long-term indebtedness. The parent company expects to continue to meet its obligations in accordance with their terms. At March 31, 1997, the parent company's short-term debt, consisting principally of commercial paper, was approximately $21,343,000. The parent company had cash, interest-bearing deposits with banks and other current assets aggregating $43,030,000 and back-up credit lines with banks of $24,000,000. The parent company and its predecessor have issued and repaid at maturity approximately $12 billion of commercial paper since 1955. Since 1979, the parent company has had no need to use available back-up lines of credit. The Company and the bank are subject to risk-based capital regulations. The purpose of these regulations is to measure capital against risk-weighted assets, including off-balance sheet items. These regulations define the elements of total capital into Tier 1 and Tier 2 components and establish minimum ratios of 4% for Tier 1 Capital and 8% for Total Capital. Supplementing these regulations, is a leverage requirement. This requirement establishes a minimum leverage ratio, (at least 4%) 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 March 31, 1997, the Company and the bank exceeded the requirements for "well capitalized" institutions. Information regarding the Company's and the bank's risk-based capital, at March 31, 1997 and December 31, 1996, is presented on page 18. While 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. The parent company regularly evaluates acquisition opportunities and regularly conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, is some cases negotiations, regularly take place and future acquisitions could occur. 9 10 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 of the Board of Directors ("ALCO"). ALCO, which is comprised of members of senior management and the Board, meets to review among other things, economic conditions, interest rates, yield curve, cash flow projections, expected customer actions, liquidity levels, capital ratios and repricing characteristics of assets, liabilities and off-balance sheet financial instruments. The Company's balance sheet structure is primarily short-term in nature with most assets and liabilities repricing or maturing in less than five years. The Company monitors the interest rate sensitivity of its on-and off-balance sheet positions by examining its near-term sensitivity and its longer term gap (as defined below) position. The Company utilizes various tools in its management of interest rate risk, primarily utilizing a sophisticated income simulation model and complementing this with a traditional gap analysis. The income simulation model measures the Company's net interest income sensitivity or volatility to interest rate changes utilizing statistical techniques that allow the Company to consider various factors which impact net interest income. These factors include actual maturities, estimated cash flows, repricing characteristics, deposits growth/retention and, most importantly, the relative sensitivity of the Company's assets and liabilities to changes in market interest rates. This relative sensitivity is important to consider as the Company's core deposit base is not subject to the same degree of interest rate sensitivity as its assets. The core deposits costs are internally managed and tend to exhibit less sensitivity to changes in interest rates than the Company's adjustable rate assets whose yields are based on external indices and change in tandem with market interest rates. The Company's interest rate sensitivity is determined by identifying the probable impact of changes in market interest rates on the yields on the Company's assets and the rates which would be paid on its liabilities. This modeling technique involves a degree of estimation based on certain assumptions that management believes to be reasonable. Utilizing this process, management can project the impact of changes in interest rates on net interest margin. The Company has established certain limits for the potential volatility of its net interest margin, assuming certain levels of changes in market interest rates, with the objective of maintaining a stable net interest margin under various probable rate scenarios. The Company can also utilize this technique to stress test its portfolio to determine the impact of various interest rate scenarios on the Company's net interest income. 10 11 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The traditional gap analysis is prepared based on the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities for selected time bands. The mismatch between repricings or maturities within a time band is commonly referred to as the "gap" for that period. A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in an institution's net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on an institution's net interest margin. However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates. The Company utilizes the gap analysis to complement its income simulations modeling, primarily focusing on the longer term structure of the balance sheet. As part of its interest rate risk strategy, the Company uses off-balance sheet financial instruments (derivatives) to hedge the interest rate sensitivity of assets with the corresponding amortization reflected in the yield of the related on-balance sheet assets being hedged. The Company has written policy guidelines, which have been approved by the Board of Directors and the Asset/Liability Committee, governing the use of off-balance sheet financial instruments, including approved counterparties, risk limits and appropriate internal control procedures. The credit risk of derivatives arises principally from the potential for a counterparty to fail to meet its obligation to settle a contract on a timely basis. At March 31, 1997, all counterparties have investment grade credit ratings from the major rating agencies. Each counterparty is specifically approved for applicable credit exposure. At March 31, 1997, the Company's off-balance sheet financial instruments consisted of three interest rate floor contracts having a notional amount totaling $100 million; one contract with a notional amount of $50 million has a final maturity of February 27, 2000, another contract with a notional amount of $25 million has a final maturity of October 10, 1999 and another contract with a notional amount of $25 million has a final maturity of March 17, 1998. These financial instruments are being used as part of the Company's interest rate risk management and not for trading purposes. Interest rate floor contracts require the counterparty to pay the Company at specified future dates the amount, if any, by which the specified interest rate (3-month LIBOR) falls below the fixed floor rates, applied to the notional amounts. The Company utilizes these financial instruments to adjust its interest rate risk position without exposing itself to principal risk and funding requirements. The interest rate floor contracts require the Company to pay a fee for the right to receive a fixed interest payment. The Company purchased interest rate floor contracts to reduce the impact of falling rates on its floating rate commercial loans. The Company paid up-front premiums of $807,000 for the interest rate floor contracts which are amortized monthly against interest income from the designated assets. At March 31, 1997, the unamortized premiums on these contracts totaled $452,000 and are included in other assets. At March 31, 1997, $24,000 was receivable under the contracts. 11 12 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 March 31, 1997, the Company's portfolio of securities totalled $306,507,000, of which U.S. Government and U.S. Government corporation and agency guaranteed mortgage-backed securities having an average life of approximately 2.5 years amounted to $297,712,000. 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 $348,000 and $6,477,000, 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 $161,000 and gross unrealized losses of $433,000. Given the relatively short-term nature of the portfolio and its generally high credit quality, management expects to realize all of its investment upon the maturity of such instruments, and thus believes that any market value impairment is temporary in nature. CREDIT RISK A key management objective is to maintain the quality of the loan portfolio. This objective is achieved by maintaining high underwriting standards coupled with regular evaluation of the creditworthiness of and the designation of lending limits for each borrower. The portfolio strategies seek to avoid concentrations by industry or loan size in order to minimize credit exposure and to originate loans in markets with which it is familiar. The composition of the Company's and the bank's loan portfolio at March 31, 1997 were as follows:
Company Bank -------- -------- (in thousands) Domestic Commercial and industrial $331,006 $301,007 Real estate - mortgage 69,439 69,439 Real estate - construction 1,189 1,189 Installment - individuals 15,443 15,443 Lease financing 42,009 42,009 Foreign Government and official institutions 789 789 -------- -------- Loans, gross 459,875 429,876 Less unearned discounts 7,915 7,735 -------- -------- Loans, net of unearned discounts $451,960 $422,141 ======== ========
12 13 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Intrinsic to the lending process is the possibility of loss. In times of economic slowdown, the risk inherent in the Company's portfolio of loans is increased. While management endeavors to minimize this risk, it recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio which, in turn, depends on current and expected economic conditions, the financial condition of borrowers and the credit management process. The allowance for possible loan losses is maintained through the provision for possible loan losses, which is a charge to operating earnings. The adequacy of the provision and the resulting allowance for possible loan losses is determined by management's continuing review of the loan portfolio, including identification and review of individual problem situations that may affect the borrower's ability to repay, review of overall portfolio quality through an analysis of current charge-offs, delinquency and nonperforming loan data, estimates of the value of any underlying collateral, review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and character of the loan portfolio. The allowance reflects management's evaluation of both loans presenting identified loss potential and of the risk inherent in various components of the portfolio including loans identified as impaired as required by SFAS No. 114 and No. 118. Thus an increase in the size of the portfolio or in any of its components could necessitate an increase in the allowance even though there may not be a decline in credit quality or an increase in potential problem loans. A significant change in any of the evaluation factors described above could result in future additions to the allowance. At March 31, 1997, the Company's allowance was $7,883,000; the ratio of the allowance to loans, net of unearned discount, was 1.7%. At March 31, 1997, $57,000 of loans were impaired within the scope of SFAS No. 114 and required a valuation allowance of $28,000. The average recorded investment in impaired loans during the three months ended March 31, 1997 was approximately $89,000. 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 $220,000 at March 31, 1997. At March 31, 1997, non-accrual loans amounted to $1,345,000. Based on the foregoing, as well as management's judgement as to the current risks inherent in the loan portfolio, the Company's allowance for possible loan losses was deemed adequate to absorb all reasonably anticipated losses on specifically known and other possible credit risks associated with the portfolio as of March 31, 1997. RESULTS OF OPERATIONS 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 interest-earning assets and interest-bearing liabilities. An analysis of the Company's interest rate sensitivity is presented on page 17. 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 16. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown on page 15. 13 14 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 Total interest income increased $2,279,000 for the three months ended March 31, 1997 when compared with the same period last year principally due to higher average outstandings. Interest and fees on loans increased $2,553,000 principally due to higher average outstandings. A decrease in average Federal funds sold outstandings produced a decrease in related income of $204,000. Total interest expense for the three months ended March 31, 1997 increased $208,000 when compared with the same period in 1996 principally due to higher rates paid for those funds. Interest expense on interest-bearing deposits rose $367,000 as a result of increased rates coupled with an increase in average outstandings. Interest expense on borrowings increased $159,000 for the three months ended March 31, 1997 versus the like period a year ago due to a decrease in average outstandings coupled with lower rates paid for those funds. Based on management's continuing evaluation of the loan portfolio (discussed under "CREDIT RISK" above), and principally as the result of the growth in the loan portfolios, $771,000 was provided for possible loan losses for the three months ended March 31, 1997. Noninterest income increased $1,452,000 for the third quarter of 1997 when compared with the same period in 1996 due primarily to increased factoring commissions and mortgage banking income. Noninterest expenses increased $2,163,000 for the three months ended March 31, 1997 versus the same period last year reflecting higher personnel and general business costs associated with the Company's higher levels of business activities. The provision for income taxes increased $464,000 for the first quarter of 1997 when compared with the same period last year principally based on the level of pre-tax profitability. As a result of the above factors, net income increased $702,000 for the three months ended March 31, 1997 when compared with the same period in 1996. 14 15 STERLING BANCORP AND SUBSIDIARIES Average Balance Sheets [1] Three Months Ended March 31,
1997 1996 -------------------------------------- -------------------------------------- Average Average Average Average ASSETS Balance Interest Rate Balance Interest Rate -------- -------- -------- -------- -------- ------ Interest-bearing deposits with other banks $ 3,010 $ 58 5.16% $ 3,025 $ 42 5.60% Investment securities Available for sale [2] 76,956 1,317 6.71 97,795 1,621 6.71 Held to maturity 225,536 3,783 6.91 217,915 3,565 6.54 Federal funds sold 5,544 74 5.42 19,879 278 5.52 Loans, net of unearned discounts [3] 427,226 11,084 11.26 340,156 8,531 10.85 -------- -------- -------- -------- TOTAL INTEREST-EARNING ASSETS 738,272 16,316 9.24 678,770 14,037 8.58 -------- ------ -------- ------ Cash and due from banks 48,410 39,057 Allowance for possible loan losses (8,367) (5,418) Goodwill 21,158 21,158 Other assets 17,255 15,523 -------- -------- TOTAL ASSETS $816,728 $749,090 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits Savings $191,997 1,243 2.63 $183,303 1,066 2.34 Other time 162,025 2,076 5.20 154,037 1,886 4.92 -------- -------- -------- -------- Total interest-bearing deposits 354,022 3,319 3.80 337,340 2,952 3.52 -------- -------- -------- -------- Borrowings Federal funds purchased and securities sold under agreements to repurchase 84,899 1,092 5.21 69,012 885 5.16 Commercial paper 26,521 331 5.06 25,944 331 5.12 Other short-term debt 7,209 146 4.86 5,740 124 5.09 Long-term debt 20,670 331 6.50 39,342 719 7.35 -------- -------- -------- -------- Total borrowings 139,299 1,900 5.36 140,038 2,059 5.76 -------- -------- -------- -------- TOTAL INTEREST-BEARING LIABILITIES 493,321 5,219 4.24 477,378 5,011 4.18 -------- ---- -------- ---- Noninterest-bearing deposits 200,987 170,418 Other liabilities 44,673 40,786 -------- -------- Total liabilities 738,981 688,582 Shareholders' equity 77,747 60,508 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $816,728 $749,090 ======== ======== Net interest income/spread $ 11,097 5.00% $9,026 4.40% ======== ==== ====== ==== Net yield on interest-earning assets (margin) 6.26% 5.51% ==== ====
[1] The average balances of assets, liabilities and shareholders' equity are computed on the basis of daily averages for the bank and monthly averages for the parent company and its finance subsidiaries. Dollars are presented in thousands. [2] Interest on tax-exempt securities included herein is immaterial and is not presented on a tax equivalent basis. [3] Non-accrual loans are included in the average balance, which reduces the average yields. 15 16 STERLING BANCORP AND SUBSIDIARIES Rate/Volume Analysis Three Months Ended March 31, (000 omitted)
Increase/(Decrease) Three Months Ended March 31, 1997 and 1996 -------------------------------- Volume Rate Total[1] ------- ----- ------- INTEREST INCOME Interest-bearing deposits with other banks $ 9 $ 7 $ 16 ------- ----- ------- Investment securities Available for sale [2] (333) 29 (304) Held to maturity 51 167 218 ------- ----- ------- Total (282) 196 (86) ------- ----- ------- Federal funds sold (199) (5) (204) ------- ----- ------- Loans, net of unearned discounts [3] 2,222 331 2,553 ------- ----- ------- TOTAL INTEREST INCOME $ 1,750 $ 529 $ 2,279 ======= ===== ======= INTEREST EXPENSE Interest-bearing deposits Savings $ 42 $ 135 $ 177 Other time 80 110 190 ------- ----- ------- Total 122 245 367 ------- ----- ------- Borrowings Federal funds purchased and securities sold under agreements to repurchase 188 19 207 Commercial paper 4 (4) -- Other short-term debt 21 1 22 Long-term debt (326) (62) (388) ------- ----- ------- Total (113) (46) (159) ------- ----- ------- TOTAL INTEREST EXPENSE $ 9 $ 199 $ 208 ======= ===== ======= NET INTEREST INCOME $ 1,741 $ 330 $ 2,071 ======= ===== =======
[1] The rate/volume variance is allocated equally between changes in volume and rate. The variance due to one less day in 1997 has been included in the change due to volume. [2] Includes Federal Reserve Bank and other stock investments. [3] Nonaccrual loans have been included in the amounts outstanding and income has been included to the extent accrued. 16 17 STERLING BANCORP AND SUBSIDIARIES Interest Rate Sensitivity To mitigate the vulnerability of earnings to changes in interest rates, the Company manages the repricing characteristics of assets and liabilities in an attempt to control net interest rate sensitivity. Management attempts to confine significant rate sensitivity gaps predominantly to repricing intervals of a year or less so that adjustments can be made quickly. Assets and liabilities with predetermined repricing dates are placed in a time of the earliest repricing period. Based on the interest rate sensitivity analysis shown below, the Company's net interest income would increase during periods of rising interest rates and decrease during periods of falling interest rates. Amounts are presented in thousands.
Repricing Date -------------------------------------------------------------------------------- More than Non 3 months 3 months 1 year to Over Rate or less to 1 year 5 years 5 years sensitive Total --------- --------- --------- --------- --------- ------- ASSETS Interest-bearing deposits with other banks $ 1,430 $ 1,580 $ -- $ -- $ -- $ 3,010 Investment securities 31,358 7,296 29,904 231,904 6,093 306,555 Loans, net of unearned discounts 331,232 28,055 54,884 45,704 (7,915) 451,960 Noninterest-earning assets and allowance for possible loan losses -- -- -- -- 71,004 71,004 --------- -------- --------- -------- --------- -------- Total Assets 364,020 36,931 84,788 277,608 69,182 832,529 --------- -------- --------- -------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits 223,298 43,641 89,709 -- -- 356,648 Securities sold under agreements to repurchase 80,315 2,272 -- -- -- 82,587 Commercial paper 21,093 -- -- -- -- 21,093 Other short-term borrowings 3,446 3,250 -- -- -- 6,696 Long-term debt 6,261 -- 14,150 350 -- 20,761 Noninterest-bearing liabilities and share- holders' equity -- -- -- -- 344,744 344,744 --------- -------- --------- -------- --------- -------- Total Liabilities and Shareholders' Equity $ 334,413 $ 49,163 $ 103,859 $ 350 $ 344,744 $832,529 ========= ======== ========= ======== ========= ======== Net Interest Rate Sensitivity Gap $ 29,607 $(12,232) $ (19,071) $277,258 $(275,562) $ -- ========= ======== ========= ======== ========= ======== Cumulative Gap at March 31, 1997 $ 29,607 $ 17,375 $ (1,696) $275,562 $ -- $ -- ========= ======== ========= ======== ========= ======== Cumulative Gap at March 31, 1996 $ (10,910) $(32,869) $ (73,850) $201,786 $ -- $ -- ========= ======== ========= ======== ========= ======== Cumulative Gap at December 31, 1996 $ 67,266 $ 20,475 $ (11,245) $261,380 $ -- $ -- ========= ======== ========= ======== ========= ========
17 18 STERLING BANCORP AND SUBSIDIARIES Risk-Based Capital Components and Ratios
The Company The Bank ----------------------- ---------------------- 3/31/97 12/31/96 3/31/97 12/31/96 -------- -------- ------- -------- ($ in thousands) COMPONENTS Stockholders' equity $ 79,556 $ 77,177 $49,660 $ 46,503 Add/(Subtract): Goodwill (21,158) (21,158) -- -- Net unrealized depreciation(appreciation) on securities available for sale, net of tax effect (1) 146 (90) 148 (89) -------- -------- ------- -------- Tier 1 Capital 58,544 55,929 49,808 46,414 -------- -------- ------- -------- Allowance for possible loan losses (limited to 1.25% of total risk- weighted assets) 6,382 6,580 5,934 5,014 Subordinated debt (limited to 50% of Tier 1 Capital) 1,252 1,278 -- -- -------- -------- ------- -------- Tier 2 Capital 7,634 7,858 5,934 5,014 -------- -------- ------- -------- Total Risk-based Capital $ 66,178 $ 63,787 $55,742 $ 51,428 ======== ======== ======= ========
RATIOS AND MINIMUMS Capital Well Capital Well As of As of Adequacy Capitalized Adequacy Capitalized March 31, December 31, Minimum Minimum Minimum Minimum 1997 1996 Requirement Requirement Capital Capital - ---------------------------------------------------------------------------------------------------------------------------------- ($ in thousands) Tier 1 Leverage The Company 7.36% 6.89% $31,823 $39,779 } 4.00% 5.00% The bank 6.50 6.13 30,654 38,317 Tier 1 Risk-based Capital The Company 11.50% 10.65% $20,363 $30,544 } 4.00% 6.00% The bank 10.37 9.63 19,218 28,827 Total Risk-based Capital The Company 13.00% 12.15% $40,725 $50,907 } 8.00% 10.00% The bank 11.60 10.67 38,437 48,045
(1) As directed by regulatory agencies this amount must be excluded from the computation of Tier 1 Capital. 18 19 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 5/ /97 /s/ Louis J. Cappelli -------------------- ------------------------------- Louis J. Cappelli Chairman and Chief Executive Officer Date 5/ /97 /s/ John W. Tietjen -------------------- ------------------------------- John W. Tietjen Senior Vice President, Treasurer and Chief Financial Officer 19 20 STERLING BANCORP AND SUBSIDIARIES Exhibit Index
Incorporated Sequential Exhibit Herein By Filed Page Number Description Reference To Herewith No. ------ ----------- ------------ -------- --- 11 Computation of X 21 Per Share Earnings 27 Financial Data X 22 Schedule
20 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit (11) STERLING BANCORP AND SUBSIDIARIES Statement Re: Computation of Per Share Earnings
Three Months Ended March 31, ------------------------------ 1997 1996 ---------- ---------- Income for primary earnings per share: Net income A $2,462,476 $1,759,745 ========== ========== Income for fully diluted earnings per share: Net income $2,462,476 $1,759,745 Add expenses, net of tax effect on assumed conversion of Convertible Subordinated Debentures: Interest 73,364 246,516 Amortization of bond discount and expense 1,132 2,991 ---------- ---------- Income for fully diluted shares B $2,536,972 $2,009,252 ========== ========== Common shares for primary earnings per share: Average shares issued 7,763,908 6,505,595 Add assumed conversion at the beginning of the period or issuance date if later: Stock options 86,562 44,947 ESOP shares allocated 64,239 36,384 Less: Average Treasury shares 42,343 67,468 ---------- ---------- Average common shares for compu- tation of primary earnings per share (See Note below) C 7,872,366 6,519,458 ========== ========== Common shares for fully diluted earnings per share: Average common shares 7,872,366 6,519,458 Add assumed conversion at the beginning of the period of issuance date if later: Convertible Subordinated Debentures 500,880 1,926,309 Series B preferred shares 2,576 2,576 ESOP shares unallocated 183,483 213,616 Stock options 57,443 2,640 ---------- ---------- Average common shares for computation of fully diluted earnings per share (See Note below) D 8,616,748 8,664,599 ========== ========== Per average common share: Net income (A + C) $ 0.31 $ 0.27 ========== ========== Net income assuming full dilution (B + D) $ 0.29 $ 0.23 ========== ==========
Note: Based on shares at end of each month. 21 EX-27 3 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-1997 MAR-31-1997 37,668 3,010 0 0 76,316 230,239 224,158 451,960 7,883 832,529 577,291 110,376 44,545 20,761 0 2,502 7,786 69,268 832,529 11,084 5,100 132 16,316 3,319 5,219 11,097 771 0 8,906 4,534 2,462 0 0 2,462 0.31 0.29 6.26 1,345 303 0 220 8,003 1,059 168 7,883 4,659 0 3,224
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