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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, 2003
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 No.)
650 Fifth Avenue, New York, N.Y. 10019-6108
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-757-3300
- --------------------------------------------------------------------------------
(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
As of April 30, 2003 there were 11,853,908 shares of common stock,
$1.00 par value, outstanding.
STERLING BANCORP
Page
----
PART I FINANCIAL INFORMATION
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 13
Results for Three Months 13
Income Statement Analysis 14
Balance Sheet Analysis 15
Capital 19
Average Balance Sheets 20
Rate/Volume Analysis 21
Regulatory Capital and Ratios 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 23
Interest Rate Sensitivity 26
Item 4. Controls and Procedures 27
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
EXHIBIT INDEX 31
Exhibit 11 Computation of Per Share Earnings 32
2
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2003 2002
-------------- --------------
ASSETS
Cash and due from banks $ 56,276,214 $ 58,173,569
Interest-bearing deposits with other banks 2,136,949 2,872,710
Federal funds sold - 5,000,000
Securities available for sale 101,485,091 128,465,512
Securities available for sale - pledged 90,470,088 90,969,577
Securities held to maturity 171,744,063 147,109,430
Securities held to maturity - pledged 237,161,819 222,229,901
-------------- --------------
Total investment securities 600,861,061 588,774,420
-------------- --------------
Loans held for sale 56,891,837 54,684,987
-------------- --------------
Loans held in portfolio, net of unearned discounts 779,751,771 791,315,047
Less allowance for loan losses 13,818,979 13,549,297
-------------- --------------
Loans, net 765,932,792 777,765,750
-------------- --------------
Customers' liability under acceptances 3,767,585 1,545,335
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 9,514,657 9,263,172
Other real estate 946,166 822,820
Accrued interest receivable 5,295,353 4,881,937
Bank owned life insurance 21,091,519 20,830,688
Other assets 18,354,995 15,347,734
-------------- --------------
$1,562,227,568 $1,561,121,562
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 354,158,962 $ 401,553,363
Interest-bearing deposits 686,816,057 645,539,745
-------------- --------------
Total deposits 1,040,975,019 1,047,093,108
Federal funds purchased and securities
sold under agreements to repurchase 119,522,509 100,925,635
Commercial paper 18,592,907 29,318,920
Other short-term borrowings 30,018,115 37,030,404
Acceptances outstanding 3,767,585 1,545,335
Accrued expenses and other liabilities 76,801,853 75,427,836
Long-term debt - FHLB 115,000,000 115,000,000
-------------- --------------
Total liabilities 1,404,677,988 1,406,341,238
-------------- --------------
Corporation Obligated Mandatorily Redeemable
Capital Securities of Subsidiary Trust 25,000,000 25,000,000
-------------- --------------
Shareholders' equity
Preferred stock, $5 par value. Authorized
644,389 shares; Series D issued 231,255
and 232,206 shares, respectively 2,312,550 2,322,060
Common stock, $1 par value. Authorized
20,000,000 shares; issued 13,136,659
and 13,124,002 shares, respectively 13,136,659 13,124,002
Capital surplus 143,675,725 143,495,362
Retained earnings 7,366,807 3,783,539
Accumulated other comprehensive income, net of tax 758,499 1,330,239
-------------- --------------
Less 167,250,240 164,055,202
Common shares in treasury at cost, 1,285,212
and 1,261,061 shares, respectively 33,012,404 32,400,952
Unearned compensation 1,688,256 1,873,926
-------------- --------------
Total shareholders' equity 132,549,580 129,780,324
-------------- --------------
$1,562,227,568 $1,561,121,562
============== ==============
See Notes to Consolidated Financial Statements.
3
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2003 2002
----------- -----------
INTEREST INCOME
Loans $14,759,913 $14,166,374
Investment securities
Available for sale 2,511,777 4,176,250
Held to maturity 5,330,999 4,942,518
Federal funds sold 21,976 8,681
Deposits with other banks 8,553 149,183
----------- -----------
Total interest income 22,633,218 23,443,006
----------- -----------
INTEREST EXPENSE
Deposits 2,201,635 3,323,204
Federal funds purchased and
securities sold under agreements
to repurchase 310,417 446,650
Commercial paper 70,651 206,601
Other short-term borrowings 189,768 107,689
Long-term debt 1,080,880 1,059,975
----------- ------------
Total interest expense 3,853,351 5,144,119
----------- ------------
Net interest income 18,779,867 18,298,887
Provision for loan losses 1,791,300 1,679,300
----------- ------------
Net interest income after provision
for loan losses 16,988,567 16,619,587
----------- ------------
NONINTEREST INCOME
Factoring income 1,352,502 1,376,891
Mortgage banking income 3,242,648 2,530,339
Service charges on deposit accounts 1,231,998 1,148,235
Trade finance income 573,013 451,257
Trust fees 165,397 177,118
Other service charges and fees 435,210 431,042
Bank owned life insurance income 260,830 222,356
Securities gains 95,992 -
Other income 96,707 68,903
----------- -----------
Total noninterest income 7,454,297 6,406,141
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 8,483,655 8,044,425
Occupancy expenses, net 1,295,721 1,176,349
Equipment expenses 646,514 567,989
Advertising and marketing 790,818 690,930
Professional fees 726,632 799,942
Data processing fees 265,032 357,184
Stationery and printing 208,318 213,170
Communications 442,690 404,727
Capital securities costs 535,117 221,218
Other expenses 1,521,159 1,756,503
----------- -----------
Total noninterest expenses 14,915,656 14,232,437
----------- -----------
Income before income taxes 9,527,208 8,793,291
Provision for income taxes 3,680,785 3,526,990
----------- -----------
Net income $ 5,846,423 $ 5,266,301
=========== ===========
Average number of common
shares outstanding
Basic 11,856,325 12,077,821
Diluted 12,588,597 12,860,946
Earnings per average common share
Basic $ 0.49 $ 0.43
Diluted 0.46 0.41
Dividends per common share 0.19 0.18
See Notes to Consolidated Financial Statements.
4
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
2003 2002
------------- -------------
Net Income $ 5,846,423 $ 5,266,301
Other comprehensive income,
net of tax:
Unrealized holding losses
arising during the period (519,808) (926,055)
Reclassification adjustment for
gains included in net income (51,932) -
------------- -------------
Comprehensive income $ 5,274,683 $ 4,340,246
============= =============
See Notes to Consolidated Financial Statements.
5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Three Months Ended
March 31,
2003 2002
------------ ------------
Preferred Stock
Balance at January 1 $ 2,322,060 $ 2,346,060
Conversions of Series B shares (9,510) (4,440)
------------ ------------
Balance at March 31 $ 2,312,550 $ 2,341,620
============ ============
Common Stock
Balance at January 1 $ 13,124,002 $ 10,834,853
Conversions of preferred shares into common shares 1,450 562
Options exercised 11,207 175,780
------------ ------------
Balance at March 31 $ 13,136,659 $ 11,011,195
============ ============
Capital Surplus
Balance at January 1 $143,495,362 $ 98,487,765
Conversions of preferred shares into common shares 8,060 3,878
Issuance of shares under incentive compensation plan - 386,400
Options exercised 172,303 2,022,459
------------ ------------
Balance at March 31 $143,675,725 $100,900,502
============ ============
Retained Earnings
Balance at January 1 $ 3,783,539 $ 32,419,767
Net Income 5,846,423 5,266,301
Cash dividends paid - common shares (2,231,362) (1,797,947)
- preferred shares (31,793) (28,376)
------------ ------------
Balance at March 31 $ 7,366,807 $ 35,859,745
============ ============
Accumulated Other Comprehensive Income
Balance at January 1 $ 1,330,239 $ 1,119,223
------------ ------------
Unrealized holding gains
arising during the period:
Before tax (960,829) (1,711,748)
Tax effect 441,021 785,693
------------ ------------
Net of tax (519,808) (926,055)
------------ ------------
Reclassification adjustment for gains
included in net income:
Before tax (95,992) -
Tax effect 44,060 -
------------ ------------
Net of tax (51,932) -
------------ ------------
Balance at March 31 $ 758,499 $ 193,168
============ ============
Treasury Stock
Balance at January 1 $(32,400,952) $(15,542,454)
Issuance of shares under incentive compensation plan - 1,267,200
Surrender of shares issued under incentive
compensation plan (493,654) (1,655,315)
Purchase of common shares (117,798) (5,863,054)
------------ ------------
Balance at March 31 $(33,012,404) $(21,793,623)
============ ============
Unearned Compensation
Balance at January 1 $ (1,873,926) $ (1,187,798)
Issuance of shares under incentive compensation plan - (1,653,600)
Amortization of unearned compensation 185,670 157,022
------------ ------------
Balance at March 31 $ (1,688,256) $ (2,684,376)
============ ============
Total Shareholders' Equity
Balance at January 1 $129,780,324 $128,477,416
Net changes during the period 2,769,256 (2,649,185)
------------ ------------
Balance at March 31 $132,549,580 $125,828,231
============ ============
See Notes to Consolidated Financial Statements.
6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2003 2002
------------ -------------
Operating Activities
Net Income $ 5,846,423 $ 5,266,301
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,791,300 1,679,300
Depreciation and amortization of premises and equipment 420,313 381,907
Securities gains (95,992) -
Income from bank owned life insurance (260,830) (222,356)
Deferred income tax benefit (77,608) (116,793)
Net change in loans held for sale (2,206,850) 15,377,415
Amortization of unearned compensation 185,670 157,022
Amortization of premiums on securities 487,138 394,818
Accretion of discounts on securities (393,779) (237,145)
Increase in accrued interest receivable (413,416) (566,475)
Increase in accrued expenses and
other liabilities 1,374,017 2,253,519
Increase in other assets (2,455,581) (2,516,138)
Issuance cost for preferred securities,
net of amortization - 937,500
Other, net (482,643) (1,655,315)
------------ -------------
Net cash provided by operating activities 3,718,162 21,133,560
------------ -------------
Investing Activities
Purchase of premises and equipment (671,798) (673,003)
Decrease in interest-bearing deposits with other banks 735,761 636,317
Decrease in Federal funds sold 5,000,000 10,000,000
Increase in other real estate (123,346) (160,183)
Net increase in loans 10,041,658 12,979,545
Purchase of investment in bank owned life insurance - (20,000,000)
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 46,132,302 26,830,723
Purchases of securities - held to maturity (85,864,790) (29,117,445)
Purchases of securities - available for sale (94,236,576) (116,687,877)
Proceeds from sales of securities - available for sale 3,707,515 -
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 117,120,717 77,209,694
------------ -------------
Net cash provided by (used in) investing activities 1,841,443 (38,982,229)
------------ -------------
Financing Activities
Decrease in noninterest-bearing deposits (47,394,401) (48,686,721)
Increase in interest-bearing deposits 41,276,312 64,049,018
Net proceeds from issuance of Corporation Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trust - 24,062,500
Increase (Decrease) in Federal funds purchased
and securities sold under agreements to repurchase 18,596,874 (57,766,896)
(Decrease) Increase in commercial paper and
other short-term borrowings (17,738,302) 2,948,904
Purchase of treasury stock (117,798) (5,863,054)
Increase in other long-term debt - 19,650,000
Proceeds from exercise of stock options 183,510 2,198,239
Cash dividends paid on common and preferred stock (2,263,155) (1,826,323)
------------ -------------
Net cash used in financing activities (7,456,960) (1,234,333)
------------ -------------
Net decrease in cash and due from banks (1,897,355) (19,083,002)
Cash and due from banks - beginning of period 58,173,569 50,362,016
------------ -------------
Cash and due from banks - end of period $ 56,276,214 $ 31,279,014
============ =============
Supplemental disclosures:
Interest paid $ 3,846,231 $ 4,811,675
Income taxes paid 2,346,594 4,870,000
See Notes to Consolidated Financial Statements.
7
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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, 2003 and 2002
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 2002 consolidated financial statements to conform to the current
presentation. The interim consolidated financial statements should be read
in conjunction with the Company's annual report on Form 10-K for the year
ended December 31, 2002. The Company paid stock dividends as follows: a 20%
stock dividend on December 9, 2002; a 10% stock dividend on December
10,2001; a 10% stock dividend on December 11, 2000; and a 5% stock dividend
on December 14, 1999. Fractional shares were cashed-out and payments were
made to shareholders in lieu of fractional shares. The basic and diluted
average number of shares outstanding and earnings per share information for
all prior reporting periods shown have been restated to reflect the effect
of the stock dividends.
2. At March 31, 2003, the Company has a stock-based employee compensation
plan, which is described more fully in Note 15 of the Company's annual
report on Form 10-K for the year ended December 31, 2002. The Company
accounts for this plan under the recognition and measurement principles of
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 148, the following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to the stock-based employee compensation plans.
Three Months Ended March 31, 2003 2002
- ---------------------------- ----------- -----------
Net income, as reported $ 5,846,423 $ 5,266,301
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (288,987) (200,518)
----------- -----------
Pro forma, net income $ 5,557,436 $ 5,065,783
=========== ===========
Earnings per share:
Basic- as reported $ 0.49 $ 0.43
Basic- pro forma 0.47 0.42
Diluted- as reported 0.46 0.41
Diluted- pro forma 0.44 0.39
8
3. The major components of domestic loans held for sale and loans held in
portfolio are as follows:
March 31,
------------------------------
2003 2002
------------ ------------
Loans held for sale
Real estate-mortgage $ 56,891,837 $ 33,225,426
============ ============
Loans held in portfolio
Commercial and industrial $481,855,068 $489,589,824
Lease financing 150,516,210 109,366,769
Real estate-mortgage 133,891,771 117,864,529
Real estate-construction 2,400,000 -
Installment 9,582,449 8,296,909
Loans to depository institutions 20,000,000 34,000,000
------------ ------------
Loans, gross 798,245,498 759,118,031
Less unearned discounts 18,493,727 13,416,217
------------ ------------
Loans, net of unearned discounts $779,751,771 $745,701,814
============ ============
4. The Company's outstanding preferred shares comprise 231,255 Series D shares
(of 300,000 Series D shares authorized). 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
1.5267 common shares, 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).
5. In July 2001, the Financial Accounting Standards Board issued SFAS No.
142,"Goodwill and Other Intangible Assets." SFAS No. 142 changed the
accounting for goodwill, including goodwill recorded in past business
combinations. The previous accounting principles governing goodwill
generated from a business combination ceased upon adoption of SFAS No. 142
on January 1, 2002. The adoption of SFAS No. 142 had no impact on the
Company's balance sheet or statement of income.
9
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
6. The Financial Accounting Standards Board SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," established standards
for the way that public business enterprises report and disclose selected
information about operating segments in interim financial statements issued
to stockholders.
The Company provides a full range of financial products and services,
including commercial loans, asset-based financing, factoring and accounts
receivable management services, trade financing, equipment leasing,
corporate and consumer deposit services, commercial and residential
mortgage lending and brokerage, trust and estate administration and
investment management services. The Company's 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 2003 year-to-date average
interest-earning assets were 58.1% loans (corporate lending was 73.1% and
real estate lending was 24.1% of total loans, respectively) and 41.9%
investment securities and money market investments. There are no industry
concentrations exceeding 10% of loans, gross, in the corporate loan
portfolio. Approximately 68% of loans are to borrowers located in the
metropolitan New York area. In order to comply with the provisions of SFAS
No. 131, the Company has determined that it has three reportable operating
segments: corporate lending, real estate lending and company-wide treasury.
The following tables provide certain information regarding the
Company's operating segments for the three-month periods ended March 31,
2003 and 2002:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
------------ ------------- ------------- --------------
Three Months Ended March 31, 2003
Net interest income $ 8,323,536 $ 3,752,090 $ 6,293,831 $ 18,369,457
Noninterest income 3,004,572 3,305,157 377,133 6,686,862
Depreciation and amortization 50,165 76,256 - 126,421
Segment income before taxes 3,734,854 3,321,350 6,536,128 13,592,332
Segment assets 610,359,525 196,423,973 707,502,555 1,514,286,053
Three Months Ended March 31, 2002
Net interest income $ 7,031,978 $ 3,378,369 $ 7,499,200 $ 17,909,547
Noninterest income 2,836,498 2,518,008 240,552 5,595,058
Depreciation and amortization 45,352 47,040 - 92,392
Segment income before taxes 3,650,887 2,877,163 7,942,111 14,470,161
Segment assets 576,023,598 154,896,313 711,856,145 1,442,776,056
10
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table sets forth reconciliations of net interest income,
noninterest income, profits and assets of reportable operating segments to the
Company's consolidated totals:
Three Months Ended March 31,
-----------------------------------
2003 2002
--------------- ---------------
Net interest income:
Total for reportable operating segments $ 18,369,457 $ 17,909,547
Other (1) 410,410 389,340
--------------- ---------------
Consolidated net interest income $ 18,779,867 $ 18,298,887
=============== ===============
Noninterest income:
Total for reportable operating segments $ 6,686,862 $ 5,595,058
Other (1) 767,435 811,083
--------------- ---------------
Consolidated noninterest income $ 7,454,297 $ 6,406,141
=============== ===============
Income before taxes:
Total for reportable operating segments $ 13,592,332 $ 14,470,161
Other (1) (4,065,124) (5,676,870)
--------------- ---------------
Consolidated income before income taxes $ 9,527,208 $ 8,793,291
=============== ===============
Assets:
Total for reportable operating segments $ 1,514,286,053 $ 1,442,776,056
Other (1) 47,941,515 45,827,985
--------------- ---------------
Consolidated assets $ 1,562,227,568 $ 1,488,604,041
=============== ===============
(1) Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
consolidated results of operations and financial condition of Sterling Bancorp
(the "parent company"), a financial holding company pursuant to an election made
under the Gramm-Leach-Bliley Act of 1999, and its wholly-owned subsidiaries
Sterling Banking Corporation, Sterling Financial Services Company, Inc.,
Sterling Bancorp Trust I, and Sterling National Bank ("the bank"). The bank,
which is the principal subsidiary, owns all of the outstanding shares of
Sterling Factors Corporation, Sterling National Mortgage Company, Inc., Sterling
National Servicing, Inc., Sterling Trade Services, Inc., and Sterling Holding
Company of Virginia, Inc. Sterling Trade Services, Inc. owns all of the
outstanding common shares of Sterling National Asia Limited, Hong Kong. Sterling
Holding Company of Virginia, Inc. owns all of the outstanding common shares of
Sterling Real Estate Holding Company, Inc. Throughout this discussion and
analysis, the term, "the Company" refers to Sterling Bancorp and its
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and supplemental data combined elsewhere
in this quarterly report as well as the Company's annual report on Form 10-K
for the year ended December 31, 2002.
Our Internet address is www.sterlingbancorp.com and the investor
relations section of our web site is located at
www.sterlingbancorp.com/ir/investor.cfm. We make available free of charge, on or
through the investor relations section of our web site, annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein, including but not limited to, statements
concerning future results of operations or financial position, borrowing
capacity and future liquidity, future investment results, future credit
exposure, future loan losses and plans and objectives for future operations, and
other statements contained herein regarding matters that are not historical
facts, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead are subject to numerous assumptions, risks and uncertainties,
and represent only our belief regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. Any forward-looking
statements we may make speak only as of the date on which such statements are
made. It is possible that our actual results and financial position may differ,
possibly materially, from the anticipated results and financial condition
indicated in or implied by these forward-looking statements.
Factors that could cause our actual results to differ, possibly
materially, from those in the forward-looking statements include, but are not
limited to, the following: inflation, interest rates, market and monetary
fluctuations; geopolitical developments including acts of war and terrorism and
their impact on economic conditions; the effects of, and changes in, trade,
monetary and fiscal policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve; changes, particularly declines, in
general
12
economic conditions and in the local economies in which the Company operates;
the financial condition of the Company's borrowers; competitive pressures on
loan and deposit pricing and demand; changes in technology and their impact on
the marketing of new products and services and the acceptance of these products
and services by new and existing customers; the willingness of customers to
substitute competitors' products and services for the Company's products and
services; the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance); changes in
accounting principles, policies and guidelines; the success of the Company at
managing the risks involved in the foregoing as well as other risks and
uncertainties detailed from time to time in press releases and other public
filings. The foregoing list of important factors is not exclusive, and we will
not update any forward-looking statement, whether written or oral, that may be
made from time to time.
BUSINESS
Sterling provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, factoring/accounts receivable management
services, trade financing, equipment leasing, deposit services, trust and estate
administration and investment management services. The Company has operations in
the metropolitan New York area, North Carolina and many mid-Atlantic states, and
conducts business throughout the United States.
There is intense competition in all areas in which the Company conducts
its business. The Company competes with banks and other financial institutions,
including savings and loan associations, savings banks, finance companies, and
credit unions. To a limited extent, the company also competes with other
providers of financial services, such as money market mutual funds, brokerage
firms, consumer finance companies and insurance companies. Competition is based
on a number of factors, including prices, interest rates, service, availability
of products, and geographic location. At March 31, 2003, the bank's year-to-date
average earning assets represented approximately 97% of the Company's
year-to-date average earning assets. Loans represented 57% and investment
securities represented 42% of the bank's year-to-date average earning assets at
March 31, 2003.
The Company regularly evaluates acquisition opportunities and conducts
due diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
Results for the Three Months Ended March 31, 2003 and 2002
OVERVIEW
The Company reported net income for the three months ended March 31, 2003 of
$5.8 million, representing $0.46 per share, calculated on a diluted basis,
compared to $5.3 million, or $0.41 per share, calculated on a diluted basis, for
the like period in 2002. This increase reflects higher net interest income and
continued growth in noninterest income which more than offset increases in
noninterest expenses and the provision for loan losses.
13
Net interest income, on a tax equivalent basis, increased to $19.0
million for the first quarter of 2003 compared with $18.6 million for the same
period in 2002, principally due to higher average earning assets outstanding
coupled with lower funding costs. Partially offsetting these beneficial factors
was the impact of the lower yield on earning assets. The net interest margin, on
a tax equivalent basis, was 5.62% for the first quarter of 2003 compared to
5.69% for the like 2002 period. The net interest margin benefitted from a
decrease of 57 basis points in the cost of funds partially offset by a decrease
of 52 basis points in the average yield on earning assets. Also contributing to
the decrease was a lower proportion of earning assets funded from
noninterest-bearing sources.
Noninterest income rose to $7.5 million for the three months ended
March 31, 2003 compared to $6.4 million for the like 2002 period, principally
due to continued growth in income from mortgage banking and trade finance
activities, from services charges on deposit accounts, from a bank-owned life
insurance program, and from gains on sales of securities.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) in the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate, are shown on page 21. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 20.
Net interest income, on a tax equivalent basis, for the three months
ended March 31, 2003 increased to $19,029,000 from $18,563,000 for the
comparable period in 2002.
Total interest income, on a tax equivalent basis, aggregated
$22,882,000 for the first quarter of 2003 down from $23,707,000 for the same
period of 2002. The tax equivalent yield on interest earning assets was 6.80%
for the three months ended March 31, 2003 compared with 7.32% for the comparable
period in 2002.
Interest earned on the loan portfolio amounted to $14,760,000 which was
up $594,000 when compared to a year ago. Average loan balances amounted to
$802,795,000 which were up $93,977,000 from an average of $708,818,000 in the
prior year period. The increase in average loans was primarily in the real
estate loan segment of the Company's loan portfolio. The decrease in yield
on the domestic loan portfolio to 7.73% for the three months ended March 31,
2003 from 8.52% for the comparable 2002 period was primarily attributable to the
mix in the various categories of the loan portfolio.
14
Interest earned on the securities portfolio, on a tax equivalent basis,
decreased to $8,092,000 for the three months ended March 31, 2003 from
$9,383,000 in the prior year period. Average outstandings decreased to
$568,010,000 from $589,090,000 in the prior year period. The decrease in average
securities balances reflects faster prepayments in mortgage-backed securities
and collateralized mortgage obligations of U.S. government corporations and
agencies. The average yield on investment securities decreased to 5.72% from
6.38% in the prior year period, reflecting the impact of the reinvestment of a
portion of the principal prepayments in a lower interest rate environment.
Interest expense on deposits decreased $1,121,000 for the three months
ended March 31, 2003 to $2,202,000 from $3,323,000 for the comparable 2002
period principally due to lower rates paid. Average rate paid on
interest-bearing deposits was 1.36%, which was 70 basis points lower than the
prior year period. The decrease in average cost of deposits reflects the lower
interest rate environment during the 2003 period.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for loan losses for the first three
months of 2003 was $1,791,000 compared with $1,679,000 in the like 2002 period.
Noninterest Income
Noninterest income increased $1,048,000 for the first quarter of 2003 when
compared with the like 2002 period, primarily as a result of increased income
from mortgage banking and trade finance activities, from service charges on
deposit accounts, from a bank-owned life insurance program and from gains on
sales of securities.
Noninterest Expenses
Noninterest expenses increased $683,000 for the first quarter of 2003 when
compared with the like 2002 period primarily due to increased salary expenses,
occupancy costs, expenses related to the trust preferred securities placement,
and advertising and marketing expenses incurred to support growing levels of
business activity and continued investment in the business franchise. Partially
offsetting these increases were reductions in fees for data processing,
professional services and various other expenses.
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, 2003, the Company's
portfolio of securities totalled $600,861,000 of which U.S. Government and U.S.
Government corporations and agencies guaranteed mortgage-backed and
collateralized mortgage obligations securities having an average life of
approximately 2.5 years amounted to $528,558,000.
15
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. The following table presents information regarding
securities available for sale:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
MARCH 31, 2003 Cost Gains Losses Value
-------------- ------------- ----------- ----------- ------------
U.S. Treasury securities $ 2,498,512 $ 238 $ - $ 2,498,750
Obligations of U.S. govern-
ment corporations and
agencies--mortgage-backed
securities 72,308,055 2,693,779 34,414 74,967,420
Obligations of U.S. govern-
ment corporations and
agencies-collateralized
mortgage obligations 45,730,433 315,804 111,871 45,934,366
Obligations of state and
political institutions 32,531,376 2,417,277 - 34,948,653
Trust preferred securities 3,222,154 303,359 - 3,525,513
Other debt securities 20,000,000 - - 20,000,000
Federal Reserve Bank and
other equity securities 10,064,742 16,312 577 10,080,477
------------- ----------- ----------- ------------
Total $ 186,355,272 $ 5,746,769 $ 146,862 $191,955,179
============= =========== =========== ============
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.
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 following table
presents information regarding securities held to maturity:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
MARCH 31, 2003 Value Gains Losses Value
-------------- ------------- ----------- ----------- ------------
Obligations of U.S. govern-
ment corporations and
agencies--mortgage-backed
securities $ 287,399,661 $11,153,476 $ 31,234 $298,521,903
Obligations of U.S. govern-
ment corporations and
agencies-collateralized
mortgage obligations 120,256,221 424,213 1,216,181 119,464,253
Debt securities issued by
foreign governments 1,250,000 - - 1,250,000
------------- ----------- ----------- ------------
Total $ 408,905,882 $11,577,689 $ 1,247,415 $419,236,156
============= =========== =========== ============
Loan Portfolio
A key management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness 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.
16
The Company's commercial and industrial loan portfolio represents
approximately 57% of loans, net of unearned discounts. Loans in this category
are typically made to small and medium sized businesses and range between
$250,000 and $10 million. The primary source of repayment is from the borrower's
operating profits and cash flows. Based on underwriting standards, loans may be
secured in whole or in part by collateral such as accounts receivable,
inventory, marketable securities, other liquid collateral, equipment and/or
other assets. The Company's real estate loan portfolio, which represents
approximately 23% of loans, net of unearned discounts, is secured by mortgages
on real property located principally in the states of New York and Virginia. The
Company's leasing portfolio, which consists of finance leases for various types
of business equipment, represents approximately 16% of loans, net of unearned
income. The collateral securing any loan may vary in value based on market
conditions. The following table sets forth the major components of the Company's
loans held for sale and loans held in portfolio:
March 31,
--------------------------------------------------
2003 2002
-------------------- --------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- ----- -------- -----
Commercial and industrial $481,183 57.5% $488,850 62.7%
Equipment lease financing 132,720 15.9 96,746 12.4
Real estate 193,174 23.1 151,062 19.4
Installment - individuals 9,567 1.1 8,269 1.1
Loans to depository institutions 20,000 2.4 34,000 4.4
------- ----- -------- -----
Loans, net of unearned discounts $836,644 100.0% $778,927 100.0%
======== ===== ======== =====
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Company's portfolio of loans may be
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
The allowance for loan losses is maintained through the provision for
loan losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for loan losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
17
evaluation both of 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, 2003, the ratio of the allowance to loans held in
portfolio, net of unearned discounts, was 1.77% and the allowance was
$13,819,000. At such date, the Company's non-accrual loans amounted to
$2,074,000; $619,000 of such loans were judged to be impaired within the scope
of SFAS No. 114 and required valuation allowances of $210,000. Based on the
foregoing, as well as management's judgment as to the current risks inherent in
the loan portfolio, the Company's allowance for loan losses was deemed adequate
to absorb all estimable losses on specifically known and other possible credit
risks associated with the portfolio as of March 31, 2003. 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
$1,555,000 at March 31, 2003.
Deposits
A significant source of funds for the Company continues to be deposits,
consisting of demand (noninterest-bearing), NOW, Savings, money market and time
deposits (principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
March 31,
----------------------------------------------------------
2003 2002
----------------------- ------------------------
($ in thousands)
% of % of
Balances Total Balances Total
---------- ----- ---------- -----
Domestic
Demand $ 354,159 34.0% $ 307,617 30.8%
NOW 114,971 11.0 107,896 10.8
Savings 26,959 2.6 26,902 2.7
Money Market 173,851 16.7 171,443 17.1
Time deposits 368,035 35.4 383,428 38.3
---------- ----- ---------- -----
Total domestic deposits 1,037,975 99.7 997,286 99.7
Foreign
Time deposits 3,000 0.3 3,000 0.3
---------- ----- ---------- -----
Total deposits $1,040,975 100.0% $1,000,286 100.0%
========== ===== ========== =====
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 20.
18
CAPITAL
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations is a leverage
requirement. This requirement establishes a minimum leverage ratio (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). Information regarding the Company's
and the bank's risk-based capital is presented on page 22. 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, 2003, the Company
and the bank exceeded the requirements for "well capitalized" institutions.
19
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended March 31,
(dollars in thousands)
2003 2002
------------------------------------------ ------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Interest-bearing deposits
with other banks $ 3,700 $ 8 0.94% $ 3,500 $ 9 1.01%
Investment securities:
Available for sale 155,407 2,155 5.55 245,262 3,799 6.20
Held to maturity 379,948 5,331 5.61 309,223 4,943 6.39
Tax-exempt [2] 32,655 606 7.52 34,605 641 7.51
Federal funds sold 7,244 22 1.21 36,033 149 1.66
Loans, net of unearned discounts
Domestic [3] 802,795 14,760 7.73 708,818 14,166 8.52
------------ ------------ ------------ ------------
TOTAL INTEREST-EARNING ASSETS 1,381,749 22,882 6.80% 1,337,441 23,707 7.32%
------------ ============ ------------ ============
Cash and due from banks 53,842 49,515
Allowance for loan losses (14,244) 14,481
Goodwill 21,158 21,158
Other assets 62,753 47,690
------------ ------------
TOTAL ASSETS $ 1,505,258 $ 1,441,323
============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 26,211 26 0.40% $ 27,344 43 0.63%
NOW 114,727 137 0.48 100,402 229 0.93
Money market 151,143 175 0.47 170,025 396 0.95
Time 360,263 1,852 2.08 354,522 2,637 3.02
Foreign - - -
Time 3,000 12 1.66 2,998 18 2.39
Total interest-bearing ------------ ------------ ------------ ------------
deposits 655,344 2,202 1.36 655,291 3,323 2.06
------------ ------------ ------------ ------------
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 97,491 310 1.29 95,287 447 1.90
Commercial paper 24,005 70 1.19 38,634 206 2.17
Other short-term debt 31,357 190 2.45 18,983 108 2.30
Long-term debt 115,000 1,081 3.76 111,920 1,060 3.79
------------ ------------ ------------ ------------
Total borrowings 267,853 1,651 2.48 264,824 1,821 2.77
------------ ------------ ------------ ------------
TOTAL INTEREST-BEARING LIABILITIES 923,197 3,853 1.69% 920,115 5,144 2.26%
------------ ============ ------------ ============
Noninterest-bearing deposits 345,519 304,879
Other liabilities 81,098 79,035
------------ ------------
Total liabilities 1,349,814 1,304,029
------------ ------------
Corporation Obligated Mandatorily
Redeemable Preferred Securities 25,000 9,167
------------ ------------
Shareholders' equity 130,444 128,127
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,505,258 $ 1,441,323
============ ============
Net interest income/spread 19,029 5.11% 18,563 5.06%
============ ============
Net yield on interest-earning
assets (margin) 5.62% 5.69%
============ ============
Less: Tax equivalent adjustment 249 264
------------ ------------
Net interest income $ 18,780 $ 18,299
============ ============
[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. Certain reclassifications have been made to 2002
amounts to conform to the current presentation.
[2] Interest on tax-exempt securities is presented on a tax equivalent basis.
[3] Includes loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent collected.
20
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
(in thousands)
Increase/ (Decrease)
Three Months Ended
March 31, 2003 to March 31, 2002
---------------------------------
Volume Rate Net [2]
--------- --------- ---------
INTEREST INCOME
Interest-bearing deposits with other banks $ - $ (1) $ (1)
--------- --------- ---------
Investment securities
Available for sale (1,278) (366) (1,644)
Held to maturity 1,029 (641) 388
Tax-exempt (36) 1 (35)
--------- --------- ---------
Total investment securities (285) (1,006) (1,291)
--------- --------- ---------
Federal funds sold (95) (32) (127)
--------- --------- ---------
Loans, net of unearned discounts
Domestic [3] 1,975 (1,381) 594
--------- --------- ---------
Total loans, net of unearned discount 1,975 (1,381) 594
--------- --------- ---------
TOTAL INTEREST INCOME $ 1,595 $ (2,420) $ (825)
========= ========= =========
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ (2) $ (15) $ (17)
NOW 30 (122) (92)
Money market (40) (181) (221)
Time 43 (828) (785)
Foreign
Time - (6) (6)
--------- --------- ---------
Total interest-bearing deposits 31 (1,152) (1,121)
--------- --------- ---------
Borrowings
Federal funds purchased and securities sold
under agreements to repurchase 10 (147) (137)
Commercial paper (62) (74) (136)
Other short-term debt 75 7 82
Long-term debt 29 (8) 21
--------- --------- ---------
Total borrowings 52 (222) (170)
--------- --------- ---------
TOTAL INTEREST EXPENSE $ 83 $ (1,374) $ (1,291)
========= ========= =========
NET INTEREST INCOME $ 1,512 $ (1,046) $ 466
========= ========= =========
[1] The above table is presented on a tax equivalent basis.
[2] Changes in interest income and interest expense due to a combination of
both volume and rate have been allocated to the change due to volume and
the change due to rate in proportion to the relationship of the change due
solely to each.
[3] Includes loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent collected.
21
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, 2002 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------- ---------- ----- --------- ----- --------- -----
Total Capital (to Risk Weighted Assets):
The Company $ 147,431 15.65% $ 75,344 8.00% $ 94,180 10.00%
The bank 111,063 12.39 71,724 8.00 89,656 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 135,633 14.40 37,672 4.00 56,508 6.00
The bank 99,840 11.14 35,862 4.00 53,793 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 135,633 9.14 59,364 4.00 74,205 5.00
The bank 99,840 6.93 57,608 4.00 72,010 5.00
As of December 31, 2002
Total Capital (to Risk Weighted Assets):
The Company $ 144,054 15.34% $ 75,134 8.00% $ 93,917 10.00%
The bank 105,265 11.76 71,632 8.00 89,540 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 132,292 14.09 37,567 4.00 56,350 6.00
The bank 94,059 10.50 35,816 4.00 53,724 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 132,292 8.95 59,153 4.00 73,942 5.00
The bank 94,059 6.55 57,437 4.00 71,796 5.00
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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, 2003, is presented on
page 26. The results of both the income simulation analysis and the gap
analysis, reveal that net interest income would increase during periods of
rising interest rates and decrease during periods of falling interest rates.
As part of its interest rate risk strategy, the Company uses certain
financial instruments (derivatives) to hedge the interest rate sensitivity of
assets with the corresponding amortization reflected in the yield of the related
on-balance sheet assets being hedged. The Company has written policy guidelines,
which have been approved by the Board of Directors based on recommendations of
the Asset/Liability Committee, governing the use of off-balance sheet financial
instruments, including approved counterparties, risk limits and appropriate
23
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, 2003, the Company's financial instruments consisted of two
interest rate floor contracts each having a notional amount of $25 million and a
final maturity of August 14, 2003. These financial instruments are being used as
part of the Company's interest rate risk management and not for trading
purposes. At March 31, 2003, 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 $110,000 which are amortized monthly against interest income from
the designated assets. At March 31, 2003, the unamortized premiums on these
contracts totaled $20,000 and are included in other assets. At March 31, 2003,
there was $127,000 receivable under these contracts.
The Company utilizes income simulation models to complement its
traditional gap analysis. While ALCO routinely monitors simulated net interest
income sensitivity over a rolling two-year horizon, it also utilizes additional
tools to monitor potential longer-term interest rate risk. The income simulation
models measure the Company's net interest income sensitivity or volatility to
interest rate changes utilizing statistical techniques that allow the Company to
consider various factors which impact net interest income. These factors include
actual maturities, estimated cash flows, repricing characteristics, deposits
growth/retention and, most importantly, the relative sensitivity of the
Company's assets and liabilities to changes in market interest rates. This
relative sensitivity is important to consider as the Company's core deposit base
is not subject to the same degree of interest rate sensitivity as its assets.
The core deposit costs are internally managed and tend to exhibit less
sensitivity to changes in interest rates than the Company's adjustable rate
assets whose yields are based on external indices and change in concert with
market interest rates.
The Company's interest rate sensitivity is determined by identifying
the probable impact of changes in market interest rates on the yields on the
Company's assets and the rates which would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
can project the impact of changes in interest rates on net interest margin. The
estimated effects of the Company's interest rate floors are included in the
results of the sensitivity analysis. The Company has established certain limits
for the potential volatility of its net interest margin assuming certain levels
of changes in market interest rates with the objective of maintaining a stable
net interest margin under various probable rate scenarios. Management generally
has maintained a risk position well within the policy limits. As of March 31,
2003, the model indicated the impact of a 200 basis point parallel and pro rata
rise in rates over twelve months would approximate a 4.51% ($3,188,000) increase
in net interest income, while the impact of a 200 basis point decline in rates
over the same period would approximate a 4.98% ($3,516,000) decline from an
unchanged rate environment.
24
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cash flows, and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
"caps" or "floors" on adjustable rate assets, the potential effect of changing
debt service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
the Asset/Liability Committee might take in responding to or anticipating
changes in interest rates.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed throughout the Company. Liquid assets consist of cash and due from
banks, interest-bearing deposits in banks and Federal funds sold and securities
available for sale. Primary funding sources include core deposits, capital
markets funds and other money market sources. Core deposits include domestic
noninterest-bearing and interest-bearing retail deposits, which historically
have been relatively stable. The parent company and the bank have significant
unused borrowing capacity. Contingency plans exist and could be implemented on a
timely basis to minimize the impact of any dramatic change in market conditions.
The parent company generates income from its own operations. Its cash
requirements are supplemented from funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements.
The bank's ability to supply funds to the parent company and its
nonbank subsidiaries is subject to various legal restrictions. All national
banks are limited in the payment of dividends without the approval of the
Comptroller of the Currency to an amount not to exceed the net profits as
defined, for that year to date combined with its retained net profits for the
preceding two calendar years.
At March 31, 2003, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $18,855,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$38,424,000 and back-up credit lines with banks of $24,000,000. Since 1979, the
parent company has had no need to use available back-up lines of credit.
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.
25
STERLING BANCORP AND SUBSIDIARIES
Interest Rate Sensitivity
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are classified based on the earliest repricing
period. Amounts are presented in thousands.
Repricing Date
-----------------------------------------------------------------------------------------
More than More than
3 Months 3 Months 1 Year to Over Nonrate
or Less to 1 Year 5 Years 5 Years Sensitive Total
---------- ---------- ---------- ------------ ------------ ------------
ASSETS
Interest-bearing deposits
with other banks $ 2,137 $ - $ - $ - $ - $ 2,137
Investment securities 22,850 997 47,495 519,439 10,080 600,861
Loans, net of unearned
discounts
Commercial and industrial 469,817 4,755 7,256 27 (672) 481,183
Loans to depository
institutions 20,000 - - - - 20,000
Lease financing 759 7,642 138,376 3,739 (17,796) 132,720
Real estate 110,052 9,474 43,297 30,361 (10) 193,174
Installment 7,981 102 1,191 309 (16) 9,567
Noninterest-earning
assets and allowance
for loan losses - - - - 122,586 122,586
---------- ---------- ---------- ------------ ------------ ------------
Total Assets 633,596 22,970 237,615 553,875 114,172 1,562,228
---------- ---------- ---------- ------------ ------------ ------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings [1] - - 26,959 - - 26,959
NOW [1] - - 114,971 - - 114,971
Money market [1] 140,725 33,126 - - 173,851
Time - domestic 214,901 94,722 58,222 190 - 368,035
- foreign 1,180 1,820 - - - 3,000
Federal funds purchased &
securities sold u/a/r 118,443 1,080 - - - 119,523
Commercial paper 18,593 - - - - 18,593
Other short-term borrowings 10,018 20,000 - - - 30,018
Long-term borrowings - FHLB - - 15,000 100,000 - 115,000
Noninterest-bearing liabilities
and shareholders' equity - - - - 592,278 592,278
---------- ---------- ---------- ------------ ------------ ------------
Total Liabilities and
Shareholders' Equity 503,860 117,622 248,278 100,190 592,278 1,562,228
---------- ---------- ---------- ------------ ------------ ------------
Net Interest Rate
Sensitivity Gap $ 129,736 $ (94,652) $ (10,663) $ 453,685 $ (478,106) $ -
========== ========== ========== ============ ============ ============
Cumulative Gap
March 31, 2003 $ 129,736 $ 35,084 $ 24,421 $ 478,106 $ - $ -
========== ========== ========== ============ ============ ============
Cumulative Gap
March 31, 2002 $ 110,941 $ 39,798 $ (71,514) $ 453,158 $ - $ -
========== ========== ========== ============ ============ ============
Cumulative Gap
December 31, 2002 $ 260,814 $ 167,170 $ 98,271 $ 522,344 $ - $ -
========== ========== ========== ============ ============ ============
(1) Historically, balances in non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances are
shown in repricing periods based on management's historical repricing
practices and run-off experience.
26
STERLING BANCORP AND SUBSIDIARIES
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c) and
15d-14(c) under the Securities and Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective. No significant changes were made in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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
(b) Reports on Form 8-K:
In a report on Form 8-K dated January 21, 2003 and filed on January 23,
2003, the Company reported, under Item 5. "Other Events" and under Item 7.
"Financial Statements, Pro Forma Financial Information and Exhibits", the
press release announcing results for the quarter and twelve months ended
December 31, 2002.
In a report on Form 8-K dated February 20, 2003 and filed on February 28,
2003, the Company reported, under Item 5. "Other Events" and under Item 7.
"Financial Statements, Pro Forma Financial Information and Exhibits", the
press release announcing the declaration of its 229th consecutive quarterly
cash dividend of $0.19 payable March 31, 2003 to shareholders of record on
March 15, 2003.
In a report on Form 8-K dated March 31, 2003 and filed on March 31, 2003,
the Company reported, under Item 9. "Regulation FD Disclosure", the filing
by the Company's Chief Executive Officer and Chief Financial Officer of
Certifications required to accompany the Company's Annual Report on Form
10-K for the year ended December 31, 2002 required pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
27
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 05/14/03 /s/ Louis J. Cappelli
-----------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 05/14/03 /s/ John W. Tietjen
----------------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
28
CERTIFICATIONS
I, Louis J. Cappelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sterling Bancorp
(the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 5/14/03
/s/ Louis J. Cappelli
-----------------------
Name: Louis J. Cappelli
Title: Chairman and Chief Executive Officer
29
CERTIFICATIONS
I, John W. Tietjen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sterling Bancorp
(the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 5/14/03
/s/ John W. Tietjen
--------------------
Name: John W. Tietjen
Title: Executive Vice President, Treasurer
and Chief Financial Officer
30
STERLING BANCORP AND SUBSIDIARIES
EXHIBIT INDEX
Sequential
Exhibit Filed Page
Number Description Herewith No.
- ------- ----------- -------- ---
11. Computation of Per Share Earnings X
31