-----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, CkE8wnm6rxoS/eLjr8nehEf98KAPnx4BmHCp6HqCRkO0IMaTZR//eMeGmwVLfs3A d45nWYJ3PmGGZgt5nmnyrA== 0000950123-99-004566.txt : 19990514 0000950123-99-004566.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950123-99-004566 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: SEC FILE NUMBER: 001-05273 FILM NUMBER: 99619238 BUSINESS ADDRESS: STREET 1: 430 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10022-3299 BUSINESS PHONE: 2128268044 MAIL ADDRESS: STREET 1: 430 PARK AVE 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 STERLING BANCORP 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, 1999 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, 1999 THERE WERE 8,154,891 SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING. 2 STERLING BANCORP PART I FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Consolidated Financial Statements 3 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Business 11 Overview 11 Income Statement Analysis 12 Balance Sheet Analysis 13 Capital 15 Average Balance Sheets 17 Rate/Volume Analysis 18 Regulatory Capital and Ratios 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk Asset/Liability Management 20 Interest Rate Sensitivity 23 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 24 EXHIBIT INDEX 25 Exhibit 11 Computation of Per Share Earnings 26 Exhibit 27 Financial Data Schedule 27 2 3 STERLING BANCORP AND SUBSIDIARIES Consolidated Balance Sheets
March 31, December 31, ASSETS 1999 1998 -------------- -------------- Cash and due from banks $ 40,567,607 $ 43,311,268 Interest-bearing deposits with other banks 515,000 515,000 Investment securities Available for sale (at estimated market value) 134,955,232 145,060,902 Held to maturity (estimated market value $190,729,429 and $185,425,123, respectively) 190,304,229 184,745,325 -------------- -------------- Total investment securities 325,259,461 329,806,227 -------------- -------------- Loans, net of unearned discounts 587,839,161 640,206,308 Less allowance for credit losses 10,393,811 10,156,077 -------------- -------------- Loans, net 577,445,350 630,050,231 -------------- -------------- Customers' liability under acceptances 169,529 609,431 Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440 Premises and equipment, net 6,268,690 6,294,654 Accrued interest receivable 4,078,611 3,991,914 Other real estate owned 902,952 1,044,509 Other assets 8,888,792 7,663,541 -------------- -------------- $ 985,254,432 $1,044,445,215 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing deposits $ 259,886,746 $ 329,020,287 Interest-bearing deposits 399,366,547 373,782,181 -------------- -------------- Total deposits 659,253,293 702,802,468 Federal funds purchased and securities sold under agreements to repurchase 85,159,496 99,429,027 Commercial paper 40,513,300 41,529,300 Other short-term borrowings 10,312,105 12,771,325 Acceptances outstanding 169,529 609,431 Due to factoring clients 30,783,615 32,074,004 Accrued expenses and other liabilities 14,942,779 11,678,336 -------------- -------------- 841,134,117 900,893,891 Long-term debt - FHLB 41,050,000 41,400,000 -------------- -------------- Total liabilities 882,184,117 942,293,891 -------------- -------------- 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 243,929 shares 2,439,290 2,439,290 -------------- -------------- 2,463,890 2,463,890 Common stock, $1 par value. Authorized 20,000,000 shares; issued 8,318,284 and 8,310,284 shares, respectively 8,318,284 8,310,284 Capital surplus 45,379,315 45,287,315 Retained earnings 51,287,902 48,817,648 Accumulated other comprehensive income 76,954 538,840 -------------- -------------- 107,526,345 105,417,977 Less Common shares in treasury at cost, 163,393 and 101,693 shares, respectively 2,862,275 1,592,690 Unearned compensation 1,593,755 1,673,963 -------------- -------------- Total shareholders' equity 103,070,315 102,151,324 -------------- -------------- $ 985,254,432 $1,044,445,215 ============== ==============
See Notes to Consolidated Financial Statements. 3 4 STERLING BANCORP AND SUBSIDIARIES Consolidated Statements of Income
Three Months Ended March 31, 1999 1998 ----------- ----------- INTEREST INCOME Loans $13,138,475 $12,259,919 Investment securities: Available for sale 1,964,764 1,878,135 Held to maturity 2,621,355 3,837,126 Federal funds sold 188,277 138,639 Deposits with other banks 24,186 74,671 ----------- ----------- Total interest income 17,937,057 18,188,490 ----------- ----------- INTEREST EXPENSE Deposits 3,308,600 4,404,727 Federal funds purchased and securities sold under agreements to repurchase 972,342 1,217,449 Commercial paper 488,272 361,031 Other short-term borrowings 102,780 244,432 Long-term debt 525,283 204,264 ----------- ----------- Total interest expense 5,397,277 6,431,903 ----------- ----------- Net interest income 12,539,780 11,756,587 Provision for credit losses 1,383,000 844,000 ----------- ----------- Net interest income after provision for credit losses 11,156,780 10,912,587 ----------- ----------- NONINTEREST INCOME Factoring income 1,156,263 1,033,652 Mortgage banking income 1,207,642 859,045 Service charges on deposit accounts 792,595 674,588 Trade finance income 523,606 403,668 Trust income 196,185 189,495 Other service charges and fees 327,526 252,563 Other income 24,071 62,314 ----------- ----------- Total noninterest income 4,227,888 3,475,325 ----------- ----------- NONINTEREST EXPENSES Salaries 4,639,643 4,407,664 Employee benefits 1,011,152 1,006,345 ----------- ----------- Total personnel expenses 5,650,795 5,414,009 Occupancy expense, net 759,645 792,798 Equipment expense 549,942 590,631 Other expenses 2,681,900 2,322,229 ----------- ----------- Total noninterest expenses 9,642,282 9,119,667 ----------- ----------- Income before income taxes 5,742,386 5,268,245 Provision for income taxes 2,277,764 2,265,280 ----------- ----------- Net income $ 3,464,622 $ 3,002,965 =========== =========== Average number of common shares outstanding Basic 8,184,916 8,218,288 Diluted 8,567,736 8,663,144 Per average common share Basic $ .42 $ .36 Diluted .40 .35 Dividends per common share .12 .10
See Notes to Consolidated Financial Statements. 4 5 STERLING BANCORP AND SUBSIDIARIES Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 1999 1998 ----------- ----------- Net income $ 3,464,622 $ 3,002,965 Other comprehensive income, net of tax: Unrealized holding losses arising during the period (461,886) (75,927) ----------- ----------- Comprehensive income $ 3,002,736 $ 2,927,038 =========== ===========
See Notes to Consolidated Financial Statements. 5 6 STERLING BANCORP AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 1999 1998 ------------- ------------- PREFERRED STOCK Balance at January 1 $ 2,463,890 $ 2,486,730 Conversions of Series D shares -- (15,220) ------------- ------------- Balance at March 31 $ 2,463,890 $ 2,471,510 ============= ============= COMMON STOCK Balance at January 1 $ 8,310,284 $ 8,262,500 Conversions of preferred shares into common shares -- 1,522 Options exercised 8,000 500 ------------- ------------- Balance at March 31 $ 8,318,284 $ 8,264,522 ============= ============= CAPITAL SURPLUS Balance at January 1 $ 45,287,315 $ 44,775,759 Conversions of preferred shares into common shares -- 13,698 Options exercised 92,000 3,125 ------------- ------------- Balance at March 31, $ 45,379,315 $ 44,792,582 ============= ============= RETAINED EARNINGS Balance at January 1 $ 48,817,648 $ 39,590,806 Net income 3,464,622 3,002,965 Cash dividends paid - common shares (977,736) (816,616) - preferred shares (16,632) (13,573) ------------- ------------- Balance at March 31 $ 51,287,902 $ 41,763,582 ============= ============= ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at January 1 $ 538,840 $ 197,374 ------------- ------------- Unrealized holding losses arising during the period: Before tax (853,770) (140,346) Tax benefit 391,884 64,419 ------------- ------------- Net of tax (461,886) (75,927) ------------- ------------- Balance at March 31 $ 76,954 $ 121,447 ============= ============= TREASURY STOCK Balance at January 1 $ (1,592,690) $ (441,257) Purchase of common shares (1,269,585) -- ------------- ------------- Balance at March 31 $ (2,862,275) $ (441,257) ============= ============= UNEARNED COMPENSATION Balance at January 1 $ (1,673,963) $ (2,249,346) Amortization of unearned compensation 80,208 80,208 ------------- ------------- Balance at March 31 $ (1,593,755) $ (2,169,138) ============= ============= TOTAL SHAREHOLDERS' EQUITY Balance at January 1 $ 102,151,324 $ 92,622,566 Net changes during the period 918,991 2,180,682 ------------- ------------- Balance at March 31 $ 103,070,315 $ 94,803,248 ============= =============
See Notes to Consolidated Financial Statements. 6 7 STERLING BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 1998 ------------- ------------- OPERATING ACTIVITIES Net income $ 3,464,622 $ 3,002,965 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 1,383,000 844,000 Depreciation and amortization of premises and equipment 447,797 269,577 Deferred income tax provision (75,287) (36,754) Net change in loans held for sale (37,309,657) (3,109,823) Amortization of unearned compensation 80,208 80,208 Amortization of premiums of securities 674,013 441,950 Accretion of discounts on securities (202,610) (221,864) Increase in accrued interest receivable (86,697) (40,382) (Decrease)Increase in due to factored clients (1,290,389) 1,868,654 Increase in other liabilities 3,264,443 454,776 Other, net (1,903,341) (570,632) ------------- ------------- Net cash (used in) provided by operating activities (31,553,898) 2,982,675 ------------- ------------- INVESTING ACTIVITIES Purchase of premises and equipment (421,833) (39,341) Net decrease in interest-bearing deposits with other banks -- 1,710,000 Decrease(Increase) in other real estate owned 141,557 (337,141) Net decrease in loans 89,676,804 29,921,734 Proceeds from prepayments, redemptions or maturities of securities - held to maturity 20,767,320 13,848,623 Purchases of securities - held to maturity (26,868,288) (9,794,813) Purchases of securities - available for sale (65,559,880) (192,995,719) Proceeds from prepayments, redemptions or maturities of securities - available for sale 74,882,436 219,843,131 ------------- ------------- Net cash provided by investing activities 92,618,116 62,156,474 ------------- ------------- FINANCING ACTIVITIES Net decrease in noninterest-bearing deposits (69,133,541) (78,612,265) Net increase in interest-bearing deposits 25,584,366 13,038,030 Net decrease in Federal funds purchased and securities sold under agreements to repurchase (14,269,531) (33,391,371) Net decrease in commercial paper and other short-term borrowings (3,475,220) (808,288) Purchase of Treasury stock (1,269,585) -- (Decrease)Increase in other long-term debt (350,000) 40,000,000 Proceeds from exercise of stock options 100,000 3,625 Cash dividends paid on common and preferred stock (994,368) (830,189) ------------- ------------- Net cash used in financing activities (63,807,879) (60,600,458) ------------- ------------- Net (decrease)increase in cash and due from banks (2,743,661) 4,538,691 Cash and due from banks - beginning of period 43,311,268 40,065,863 ------------- ------------- Cash and due from banks - end of period $ 40,567,607 $ 44,604,554 ============= ============= Supplemental schedule of non-cash financing activities: Debenture and preferred stock conversions $ -- $ 15,220 Supplemental disclosure of cash flow information: Interest paid $ 2,378,563 $ 6,146,435 Income taxes paid 265,000 309,052
See Notes to Consolidated Financial Statements. 7 8 STERLING BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. The consolidated financial statements include the accounts of Sterling Bancorp ("the parent company") and its subsidiaries, principally Sterling National Bank and its subsidiaries ("the bank"), after elimination of material intercompany transactions. The term "the Company" refers to Sterling Bancorp and its subsidiaries. The consolidated financial statements as of and for the interim periods ended March 31, 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 243,929 Series D shares (of 300,000 Series D shares authorized). Each Series B share is entitled to cumulative dividends at the rate of $0.10 per year, to one vote per share and upon liquidation or redemption to an amount equal to accrued and unpaid dividends to the date of redemption or liquidation plus an amount which is $20 in the case of involuntary liquidation and $28 otherwise; each Series D share (all of such shares are owned by the Company's Employee Stock Ownership Trust) is entitled to dividends at the rate of $0.6125 per year, is convertible into one Common Share, and is entitled to a liquidation preference of $10 (together with accrued dividends). All preferred shares are entitled to one vote per share (voting with the Common Shares except as otherwise required by law). 4. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable. SFAS 132 provides information that assists users in (a) evaluating the employer's obligations under pension and other postretirement plans and the effects on the employer's prospects for future cash flows, (b) analyzing the quality of currently reported net income, and (c) estimating future reputed net income. SFAS 132 addresses disclosure only. SFAS 132 is effective for fiscal years beginning after December 15, 1997, and, as appropriated was adopted in the financial statement of the Company for the year ended December 31, 1998. 8 9 STERLING BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 enterprises' products and services, geographic areas, and major customers. The Company provides a full range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, accounts receivable management services, trade financing, equipment leasing, corporate and consumer deposit services, trust and estate administration and investment management services. The Company's primary source of earnings is net interest income, which represents the difference between interest earned on interest-earning assets and the interest incurred on interest-bearing liabilities. The Company's 1999 year-to-date average interest-earning assets were 61.3% loans (corporate lending was 80.0% and real estate lending was 20.0% of total loans, respectively) and 38.7% 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 table provides certain information regarding the Company's operating segments:
Corporate Real Estate Company-wide Lending Lending Treasury Totals ------------ ------------ ------------ ------------ Three months ended March 31, 1999 Net interest income $ 6,599,165 $ 2,301,216 $ 2,721,939 $ 11,622,320 Noninterest income 1,934,843 1,190,889 41,603 3,167,335 Depreciation and amortization 37,443 43,149 171 80,763 Segment profit 2,755,833 2,025,100 4,723,100 9,504,033 Segments assets 471,668,226 104,471,768 371,042,756 947,182,750 Three months ended March 31, 1998 Net interest income $ 5,278,358 $ 1,988,140 $ 3,714,764 $ 11,181,262 Noninterest income 1,837,924 826,912 16,068 2,680,904 Depreciation and amortization 19,374 39,178 86 58,638 Segment profit 1,986,386 1,597,300 5,099,400 8,683,086 Segments assets 433,459,504 88,111,011 404,130,917 925,701,432
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 March 31, 1999 1998 ------------- ------------- Net interest income: Total for reportable operating segments $ 11,622,320 $ 11,181,262 Other [1] 917,460 575,325 ------------- ------------- Consolidated net interest income $ 12,539,780 $ 11,756,587 ============= ============= Noninterest income: Total for reportable operating segments $ 3,167,335 $ 2,680,904 Other [1] 1,060,553 794,421 ------------- ------------- Consolidated noninterest income $ 4,227,888 $ 3,475,325 ============= ============= Profit: Total for reportable operating segments $ 9,504,033 $ 8,683,086 Other [1] (3,761,647) (3,414,841) ------------- ------------- Consolidated income before income taxes $ 5,742,386 $ 5,268,245 ============= ============= Assets: Total for reportable operating segments $ 947,182,750 $ 925,701,432 Other [1] 38,071,682 40,100,696 ------------- ------------- Consolidated assets $ 985,254,432 $ 965,802,128 ============= =============
[1] Represents operations not considered to be a reportable segment and/or general operating expenses of the Company. 6. SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking is no longer required to classify all retained mortgage-backed securities as trading securities. However, a mortgage banking enterprise must classify as trading any retained mortgage-backed securities that it commits to sell before or during the securitization process. As required, the Company adopted the provisions of SFAS 134 on January 1, 1999. The effect of adopting this standard did not have a material impact on the Company's financial condition or results of operations. 10 11 STERLING BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary presents management's discussion and analyses of the consolidated results of operations and financial condition of Sterling Bancorp (the "parent company"), a bank holding company as defined by the Bank Holding Company Act of 1956, as amended, and its wholly-owned subsidiaries Sterling Banking Corporation, Sterling Industrial Loan Association, and Sterling National Bank (the "Bank"). The Bank, which is the principal subsidiary, owns all of the outstanding shares of Sterling Factors Corporation ("Factors"), Sterling National Mortgage Company, Inc.("SNMC-New York"), Sterling National Mortgage Corp. ("SNMC-Virginia") and Sterling 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. 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 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. COMPANY BUSINESS The Company provides a full range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, accounts receivable management services, trade financing, equipment leasing, corporate and consumer deposits services, trust and estate administration, and investment management services. The Company has operations in New York and Virginia and conducts business throughout the United States. There is intense competition in all areas in which the Company conducts its business. In addition to competing with other banks, the Company competes in certain areas of its business with other financial institutions. At March 31, 1999, the Bank's year-to-date average earning assets (of which loans were 60% and investment securities were 39%) represented approximately 93% 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. OVERVIEW The Company reported net income for the three months ended March 31, 1999 of $3.5 million, representing $0.40 per share, calculated on a diluted basis, compared to $3.0 million, or $0.35 per share calculated on a diluted basis, for the like period in 1998. This increase reflects the improvement in net interest income and continued growth in noninterest income. Net interest income increased to $12.5 million for first quarter of 1999 compared with $11.8 million for same period in 1999, principally due to higher average earning assets outstanding. The net interest margin, on a tax equivalent 11 12 basis, was 6.14% for the first three months of 1999 compared to 5.79% for the like 1998 period. This increase was due to a decrease in average cost of funds of 54 basis points partially offset by a 21 basis point decrease in the average yield on earning assets. Noninterest income rose to $4.2 million for the three months ended March 31, 1999 compared to $3.5 million for the like 1998 period principally due to continued growth in fees from mortgage banking, factoring, trade finance and deposit services. INCOME STATEMENT ANALYSIS Net Interest Income Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company's primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders' equity. The increases (decreases) in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate are shown on page 18. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown on page 17. Net interest income for the three months ended March 31, 1999 increased $783,000 to $12,540,000 from $11,757,000 for the comparable period in 1998. Total interest income aggregated $17,937,000 down $251,000 for the first quarter of 1999 as compared to $18,188,000 for the same period of 1998. The tax equivalent yield on interest earning assets was 8.78% for the first three months of 1999 compared with 8.99% 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 loan outstandings as a percentage of total assets. The decrease in yield on earning assets was due to lower yields on loans and investment securities. Interest earned on the loan portfolio amounted to $13,138,000 down $879,000 when compared to a year ago. Average loan balances amounted to $528,546,000 up $43,543,000 from an average of $485,003,000 in the prior year period. The increase in the average loans, primarily in the Company's leasing, mortgage and in the short-term money market component of commercial and industrial loan portfolio, accounted for the increase in interest earned on loans. The decrease in the yield on the loan portfolio to 10.72% for the three months ended March 31, 1999 from 11.10% for the comparable 1998 period was primarily attributable to a lower rate environment. Tax equivalent interest earned on investment securities increased $1,015,000 to $4,737,000 in 1999 due to lower average outstandings and lower yields due to a flattening of the U.S. Treasury yield curve. Interest expense decreased $1,035,000 to $5,397,000 for the first three months of 1999 from $6,432,000 for the comparable period in 1998. The decrease in interest expense was due to the lower average funds employed and average rates paid. Interest expense on savings and time deposits decreased $1,096,000 for the three months ended March 31, 1999 to $3,309,000 from $4,405,000 for the comparable 1998 period due to decreases in average outstandings and the cost of funds. Average outstandings decreased $44,960,000 to $384,512,000 in 1999 from $429,472,000 in 1998. The average rate paid on interest-bearing deposits was reduced to 3.49% in 1999 compared to 4.16% in the comparable year ago period. 12 13 Provision for Credit Losses Based on management's continuing evaluation of the loan portfolio (discussed under "Asset Quality" below), the provision for credit losses increased to $1,383,000 up $539,000 when compared to the same period last year. Noninterest Income Noninterest income increased $753,000 for the first quarter of 1999 when compared with the like 1998 period primarily as a result of increased fees from mortgage banking, factoring, trade finance and deposit services. Noninterest Expense Noninterest expenses increased $523,000 for the first three months of 1999 when compared with the like 1998 period primarily due to increased personnel 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 March 31, 1999, the Company's portfolio of securities totalled $325,259,000 of which U.S. Government and U.S. Government corporation and agency guaranteed mortgage-backed securities having an average life of approximately 3.8 years amounted to $279,332,000. 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 $1,300,000 and $875,000, 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 $642,000 and gross unrealized losses of $500,000. Given the generally high credit quality of the portfolio, management expects to realize all of its investment upon the maturity of such instruments, and thus believes that any market value impairment is temporary in nature. Loan Portfolio A key management objective is to maintain the quality of the loan portfolio. This objective is achieved by maintaining high underwriting standards coupled with regular evaluation of the creditworthiness of and the designation of lending limits for each borrower. The portfolio strategies seek to avoid concentrations by industry or loan size in order to minimize credit exposure and to originate loans in markets with which it is familiar. The Company's commercial and industrial loan portfolio represents approximately 69% of gross loans. Loans in this category are typically made to small and medium sized businesses and range between $250,000 and $10 million. The primary source of repayment is from the borrower's operating profits and cash flows. Based on underwriting standards, loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory or real property. The Company's real estate loan portfolio, which represents 13 14 approximately 17% of gross loans, is secured by mortgages on real property located principally in the State of New York and the State of Virginia. The Company's leasing portfolio, which consists of finance leases for various types of business equipment, represents approximately 11% of gross loans. The collateral securing any loan may vary in value based on market conditions. The following table sets forth the composition of the Company's loan portfolio.
March 31, ------------------------------------------------- 1999 1998 ---------------------- ---------------------- ($ in thousands) % of % of Balances Gross Balances Gross -------- -------- -------- -------- Domestic Commercial and industrial $413,766 69.2% $383,150 70.9% Equipment lease financing 67,199 11.3 52,142 9.7 Real estate 102,897 17.2 87,906 16.3 Installment - individuals 13,114 2.2 16,277 3.0 Foreign Government and official institutions 787 0.1 788 0.1 -------- -------- -------- -------- Gross loan 597,763 100.0% 540,263 100.0% ======== ======== Unearned discounts 9,924 8,593 -------- -------- Loans, net of unearned discounts $587,839 $531,670 ======== ========
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 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 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 March 31, 1999, the ratio of the allowance to loans, net of unearned discounts, was 1.8% and the allowance was $10,394,000. At such date, the Company's non-accrual loans amounted to $1,450,000; no loans were judged to be impaired within the scope of SFAS No. 114. Based on the foregoing, as well as management's judgement as to the current risks inherent in the loan portfolio, the Company's allowance for credit losses was deemed adequate to absorb all reasonably anticipated losses on specifically known and other possible credit risks associated with the portfolio as of March 31, 1999. Potential problem loans, which are loans that are currently performing under present loan repayment terms but where known information about possible credit problems of borrowers cause management to have serious doubts as to the ability of the borrowers to continue to comply with the present repayment terms, aggregated $1,070,000 at March 31, 1999. 14 15 Deposits The Company's principal source of funds continues to be deposits, consisting of demand (noninterest-bearing), NOW, Savings, money market and time deposits (principally certificates of deposit). The following table provides certain information with respect to the Company's deposits:
March 31, --------------------------------------- 1999 1998 ----------------- ----------------- ($ in thousands) % of % of Balances Total Balances Total -------- ----- -------- ----- Domestic Demand $259,887 39.4% $233,849 35.1% NOW 59,118 9.0 63,798 9.6 Savings 23,881 3.6 22,710 3.4 Money Market 123,207 18.7 122,066 18.3 Time deposits 190,430 28.9 220,681 33.2 -------- ----- -------- ----- Total domestic deposits 656,523 99.6 663,104 99.6 Foreign Time deposits 2,730 0.4 2,730 0.4 -------- ----- -------- ----- Total deposits $659,253 100.0% $665,834 100.0% ======== ===== ======== =====
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 page 17. 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 19. 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, 1999, the Company and the bank exceeded the requirements for "well capitalized" institutions. 15 16 YEAR 2000 PROJECT Management has initiated a company-wide program to prepare the Company's computer hardware and software for the year 2000. In this connection, the Company has established a Year 2000 ("Y2K") Compliance Committee ("the Committee") to address this important issue. The Committee has undertaken a project with major emphasis on identifying all hardware and software supporting the Company's mission critical applications. This project has been divided into the following five phases: awareness, assessment, renovation, validation and implementation. The Committee has completed the awareness and the assessment phases in which all of the Company's hardware and software have been identified, reviewed and classified according to their ability to adequately function beyond December 31, 1999. The Committee has also completed the renovation phase for both internal and external mission critical systems, meaning that all of the programming for the Company's mission critical systems has been altered to address Year 2000 dates. As of March 31, 1999, the Committee had completed the testing on approximately 80% of the Company's mission critical systems. The results of these tests were successful without any Year 2000 issues arising. In accordance with the Company's Year 2000 Testing Plan, 100% of the mission critical testing will be complete by June 30, 1999. The Committee has completed the Company's Customer Awareness Program. The Company sent a questionnaire to its significant commercial customer base and funding sources to assess their level of awareness of and compliance with Y2K issues. The Committee will continue monitoring the progress of its significant commercial customer base, funding sources, and vendors, and will assess the potential impact of these efforts on the Company. The Committee has estimated that the cost to complete all phases of the Y2K project to be approximately $350,000 and will be expensed as incurred. This estimate does not include any costs to be charged to the Company by outside vendors and service providers. Many of the expenditures will relate to microcomputer hardware and software that would have been upgraded in the normal course of the Company's operations through December 31, 1999. Despite the best efforts of the Committee, there can be no complete assurance that the Company will not be adversely affected by unforeseen problems in its own computer systems or in systems provided by third parties and by other entities not associated with the Company which are unsuccessful in properly addressing this issue. While the dollar impact of any unforseen problems cannot be accurately quantified at this time because of the uncertainties involved, such problems could have a material adverse effect on the Company. The Company, as part of its normal business practice, has business resumption and disaster recovery plans to facilitate timely restoration of services and processes in the event of a business disruption. The effort to update these plans to reflect the potential of Year 2000-related failures is underway. In addition, the Company is developing business resumption, remediation and event contingency plans to prepare for potential systems failures at critical dates, failures of critical third parties to effectively remedy and certify their technologies as well as any other unanticipated events that could arise with the date change. The development of these plans includes the identification of core business processes, critical to the Company's business and operations, and assessment of failure scenarios. The Company expects that its contingency planning for the year 2000 issue will be complete by the end of June, 1999. 16 17 STERLING BANCORP AND SUBSIDIARIES Average Balance Sheets [1] Three Months Ended March 31, (dollars in thousands)
1999 1998 --------------------------------- --------------------------------- Average Average Average Average ASSETS Balance Interest Rate Balance Interest Rate --------- --------- ------ --------- --------- ------ Interest-bearing deposits with other banks $ 515 $ 24 4.11% $ 2,658 $ 75 5.12% Investment securities Available for sale [2] 135,765 2,116 6.26 122,086 1,915 6.32 Held to maturity 180,961 2,621 5.79 234,149 3,837 6.56 Federal funds sold 16,167 188 4.66 10,171 139 5.45 Loans, net of unearned discounts Domestic [3] 527,759 13,127 10.73 484,214 12,247 11.11 Foreign 787 12 6.20 789 13 6.87 --------- --------- --------- --------- TOTAL INTEREST-EARNING ASSETS 861,954 18,088 8.78% 854,067 18,226 8.99% --------- ====== --------- ====== Cash and due from banks 44,000 41,304 Allowance for credit losses (10,474) (8,999) Goodwill 21,158 21,158 Other assets 20,011 20,979 --------- --------- TOTAL ASSETS $ 936,649 $ 928,509 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits Domestic Savings $ 24,986 145 2.35% $ 23,549 130 2.24% NOW 62,218 378 2.46 53,563 374 2.83 Money Market 125,352 843 2.73 135,128 1,023 3.07 Time 169,226 1,910 4.58 214,506 2,842 5.37 Foreign Time 2,730 33 4.93 2,726 36 5.36 --------- --------- --------- --------- Total interest-bearing deposits 384,512 3,309 3.49 429,472 4,405 4.16 --------- --------- --------- --------- Borrowings Federal funds purchased and securities sold under agreements to repurchase 80,706 972 4.89 91,196 1,217 5.41 Commercial paper 41,904 488 4.73 28,146 361 5.20 Other short-term debt 3,622 103 5.08 14,513 245 5.19 Long-term debt 41,295 525 5.09 16,306 204 5.08 --------- --------- --------- --------- Total borrowings 167,527 2,088 4.90 150,161 2,027 5.32 --------- --------- --------- --------- TOTAL INTEREST-BEARING LIABILITIES 552,039 5,397 3.92% 579,633 6,432 4.46% --------- ====== --------- ====== Noninterest-bearing deposits 241,093 213,851 Other liabilities 41,294 42,162 --------- --------- Total liabilities 834,426 835,646 Shareholders' equity 102,223 92,863 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 936,649 $ 928,509 ========= ========= Net interest income/spread 12,691 4.86% 11,794 4.53% ====== ====== Net yield on interest-earning assets (margin) 6.14% 5.79% ====== ====== Less: Tax equivalent adjustment 151 34 --------- --------- Net interest income $ 12,540 $ 11,757 ========= =========
[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. 17 18 STERLING BANCORP AND SUBSIDIARIES Rate/Volume Analysis [1] Three Months Ended March 31, (dollars in thousands)
Increase/(Decrease) Three Months Ended March 31, 1999 and 1998 ------------------------------- Volume Rate Net[2] ------- ------- ------- INTEREST INCOME Interest-bearing deposits with other banks $ (40) $ (11) $ (51) ------- ------- ------- Investment securities Available for sale 219 (18) 201 Held to maturity (801) (415) (1,216) ------- ------- ------- Total (582) (433) (1,015) ------- ------- ------- Federal funds sold 71 (22) 49 ------- ------- ------- Loans, net of unearned discounts [3] Domestic 1,295 (415) 880 Foreign -- (1) (1) ------- ------- ------- Total 1,295 (1) (879) ------- ------- ------- TOTAL INTEREST INCOME $ 744 $ (882) $ (138) ======= ======= ======= INTEREST EXPENSE Interest-bearing deposits Domestic Savings $ 9 $ 6 $ 15 NOW 61 (57) 4 Money Market (71) (109) (180) Time (549) (383) (932) Foreign Time -- (3) (3) ------- ------- ------- Total (550) (546) (1,096) ------- ------- ------- Borrowings Federal funds purchased and securities sold under agreements to repurchase (133) (112) (245) Commercial paper 163 (36) 127 Other short-term debt (138) (4) (142) Long-term debt 321 -- 321 ------- ------- ------- Total 213 (152) 61 ------- ------- ------- TOTAL INTEREST EXPENSE $ (337) $ (698) $(1,035) ======= ======= ======= NET INTEREST INCOME $ 1,081 $ (184) $ 897 ======= ======= =======
[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. 18 19 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 MARCH 31, 1999 Amount Ratio Amount Ratio Amount Ratio - --------------------- ------ ----- ------ ----- ------ ----- Total Capital (to Risk Weighted Assets): The Company $89,788 14.17% $50,703 8.00% $63,378 10.00% The Bank 74,534 12.79 46,608 8.00 58,260 10.00 Tier 1 Capital (to Risk Weighted Assets): The Company 81,835 12.91 25,351 4.00 38,027 6.00 The Bank 67,241 11.54 23,304 4.00 34,956 6.00 Tier 1 Leverage Capital (to Average Assets): The Company 81,835 8.94 36,620 4.00 45,775 5.00 The Bank 67,241 7.72 34,818 4.00 43,523 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
19 20 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 March 31, 1999, presented on page 23, reveals that net interest income would increase during periods of rising interest rates and decrease during periods of falling interest rates. As part of its interest rate risk strategy, the Company uses off-balance sheet financial instruments (derivatives) to hedge the interest rate sensitivity of assets with the corresponding amortization reflected in the yield of the related on-balance sheet assets being hedged. The Company has written policy guidelines, which have been approved by the Board of Directors based on recommendations of the Asset/Liability Committee, governing the use of off-balance sheet financial instruments, including approved counterparties, risk 20 21 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 March 31, 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 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 March 31, 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 March 31, 1999, the unamortized premiums on these contracts totaled $255,000 and are included in other assets. At March 31, 1999, $46,000 was receivable under these contracts. The Company utilizes income simulation models to complement its traditional gap analysis. While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The income simulation models measure the Company's net interest income sensitivity or volatility to interest rate changes utilizing statistical techniques that allow the Company to consider various factors which impact net interest income. These factors include actual maturities, estimated cash flows, repricing characteristics, deposits growth/retention and, most importantly, the relative sensitivity of the Company's assets and liabilities to changes in market interest rates. This relative sensitivity is important to consider as the Company's core deposit base is not subject to the same degree of interest rate sensitivity as its assets. The core deposits costs are internally managed and tend to exhibit less sensitivity to changes in interest rates than the Company's adjustable rate assets whose yields are based on external indices and change in concert with market interest rates. The Company's interest rate sensitivity is determined by identifying the probable impact of changes in market interest rates on the yields on the Company's assets and the rates which would be paid on its liabilities. This modeling technique involves a degree of estimation based on certain assumptions that management believes to be reasonable. Utilizing this process, management can project the impact of changes in interest rates on net interest margin. The estimated effects of the Company's interest rate floors are included in the results of the sensitivity analysis. The Company has established certain 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 March 31, 1999, the model indicated the impact of a 200 basis point parallel and pro rata rise in rates over twelve months would approximate a 2.14% ($1,122,000) increase in net interest income, while the impact of a 200 basis point decline in rates over the same period would approximate a 1.15% ($606,000) decline from an unchanged rate environment. 21 22 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 too: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that the Asset/Liability Committee might take in responding to or anticipating changes in interest rates. Liquidity Risk Liquidity is the ability to meet cash needs arising from changes in various categories of assets and liabilities. Liquidity is constantly monitored and managed at both the parent company and the bank levels. Liquid assets consist of cash and due from banks, interest-bearing deposits in banks and Federal funds sold and securities available for sale. Primary funding sources include core deposits, capital markets funds and other money market sources. Core deposits include domestic noninterest-bearing and interest-bearing retail deposits, which historically have been relatively stable. The parent company and the bank have significant unused borrowing capacity. Contingency plans exist and could be implemented on a timely basis to minimize the impact of any dramatic change in market conditions. While the parent company generates income from its own operations, it also depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the bank. Such sources have been adequate to meet the parent company's cash equivalents throughout its history. Various legal restrictions limit the extent to which the bank can supply funds to the parent company and its nonbank subsidiaries. All national banks are limited in the payment of dividends without the approval of the Comptroller of the Currency to an amount not to exceed the net profits as defined, for that year to date combined with its retained net profits for the preceding two calendar years. At March 31, 1999, the parent company's short-term debt, consisting principally of commercial paper used to finance ongoing current business activities, was approximately $40,513,000. The parent company had cash, interest-bearing deposits with banks and other current assets aggregating $61,608,000 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. 22 23 STERLING BANCORP AND SUBSIDIARIES Interest Rate Sensitivity To mitigate the vulnerability of earnings to changes in interest rates, the Company manages the repricing characteristics of assets and liabilities in an attempt to control net interest rate sensitivity. Management attempts to confine significant rate sensitivity gaps predominantly to repricing intervals of a year or less so that adjustments can be made quickly. Assets and liabilities with predetermined repricing dates are placed in a time of the earliest repricing period. Based on the analysis shown below, the Company's net interest income would increase during periods of rising interest rates and decrease during periods of falling interest rates. Amounts are presented in thousands.
Repricing Date ----------------------------------------------------------------------------- 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 9,948 9,162 17,667 281,689 6,793 325,259 Loans, net of unearned discounts Commercial and Industrial 409,518 166 1,121 2,959 (670) 413,094 Lease financing 181 3,050 62,091 1,877 (8,829) 58,370 Real estate 19,685 2,332` 19,852 61,028 (225) 102,672 Installment 6,913 1,044 2,049 3,108 (198) 12,916 Foreign government and official institutions -- 787 -- -- -- 787 Noninterest-earning assets and allowance for credit losses -- -- -- -- 71,641 71,641 --------- --------- --------- --------- --------- --------- Total Assets 446,760 16,541 102,780 350,661 68,512 985,254 --------- --------- --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits Savings [1] -- -- 23,881 -- -- 23,881 NOW [1] -- -- 59,118 -- -- 59,118 Money market [1] 100,153 -- 23,054 -- -- 123,207 Time - domestic 110,612 53,168 26,380 270 -- 190,430 - foreign 2,730 -- -- -- -- 2,730 Federal funds purchased & securities sold u/a/r 81,735 3,425 -- -- -- 85,160 Commercial paper 40,513 -- -- -- -- 40,513 Other short-term borrowings 9,962 350 -- -- -- 10,312 Long-term borrowings - FHLB 20,000 10,000 11,050 -- -- 41,050 Noninterest-bearing liabilities and share- holders' equity -- -- -- -- 408,853 408,853 --------- --------- --------- --------- --------- --------- Total Liabilities and Shareholders' Equity 365,705 66,943 143,483 270 408,853 985,254 --------- --------- --------- --------- --------- --------- Net Interest Rate Sensitivity Gap $ 81,055 $ (50,402) $ (40,703) $ 350,391 $(340,341) $ -- ========= ========= ========= ========= ========= ========= Cumulative Gap at March 31, 1999 $ 81,055 $ 30,653 $ (10,050) $ 340,341 $ -- $ -- ========= ========= ========= ========= ========= ========= Cumulative Gap at March 31, 1998 $ 94,996 $ 19,177 $ (43,361) $ 298,206 $ -- $ -- ========= ========= ========= ========= ========= ========= 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 in management's historical repricing practices and runoff experience. 23 24 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 5/12/99 /s/ Louis J. Cappelli ---------------------------------- Louis J. Cappelli Chairman and Chief Executive Officer Date 5/12/99 /s/ John W. Tietjen ---------------------------------- John W. Tietjen Executive Vice President, Treasurer and Chief Financial Officer 24 25 STERLING BANCORP AND SUBSIDIARIES Exhibit Index Incorporated Sequential Exhibit Herein By Filed Page Number Description Reference To Herewith No. ------ ----------- ------------ -------- --- 11 Computation of X 24 Per Share Earnings 27 Financial Data X 25 Schedule 25 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, 1999 1998 ---------- ---------- Net income $3,464,622 $3,002,965 Less: preferred dividends 16,632 12,807 ---------- ---------- NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS 3,447,990 2,990,158 Add: interest on convertible subordinated debt -- -- ---------- ---------- NET INCOME ADJUSTED FOR DILUTED COMPUTATION $3,447,990 $2,990,158 ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,184,916 8,218,288 Add dilutive effect of: Stock options 138,891 200,165 Convertible preferred stock 243,929 244,691 ---------- ---------- ADJUSTED FOR ASSUMED DILUTED COMPUTATION 8,567,736 8,663,144 ========== ========== BASIC EARNINGS PER SHARE $ 0.42 $ 0.36 ========== ========== DILUTED EARNINGS PER SHARE $ 0.40 $ 0.35 ========== ==========
26 EX-27 3 FINANCIAL DATA SCHEDULE
9 STERLING BANCORP AND SUBSIDIARIES Article 9 of Regulation S-X Financial Data Schedule March 31, 1999 ($ in 000's, except per share) 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 40,568 515 0 0 134,955 190,304 190,729 587,839 10,394 985,254 659,253 135,985 45,896 41,050 0 2,464 8,318 92,288 985,254 13,138 4,586 213 17,937 3,309 5,397 12,540 1,383 0 9,642 5,742 3,465 0 0 3,465 0.42 0.40 6.14 1,450 57 0 1,070 10,156 1,218 73 10,394 9,628 0 766 Basic
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