<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission File No. 1-5273-1
----------
STERLING BANCORP
(Exact Name of Registrant as specified in charter)
New York 13-2565216
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
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)
----------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Shares, $1 par value New York Stock Exchange
Floating Interest Rate Convertible Subordinated
Debentures, 4th Series, due November 1, 1998 New York Stock Exchange
----------
Securities Registered Pursuant to Section 12(g) of the Act:
None
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. Yes /x/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]
On February 28, 1997 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $120,089,385.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
The Registrant has one class of common stock of which 7,743,859 shares were
outstanding at March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Specified portions of the Sterling Bancorp 1996 Annual Report are
incorporated by reference in Parts I and II.
(2) Specified portions of the Sterling Bancorp definitive Proxy Statement dated
March 14, 1997 are incorporated by reference in Part III.
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<PAGE> 2
STERLING BANCORP
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1. BUSINESS........................................... I- 1
Item 2. PROPERTIES......................................... I-12
Item 3. LEGAL PROCEEDINGS.................................. I-12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................ I-12
Part II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.................... II-1
Item 6. SELECTED FINANCIAL DATA............................ II-1
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............ II-1
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ II-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ II-1
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..................................... III-1
Item 11. EXECUTIVE COMPENSATION............................. III-1
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................... III-1
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... III-1
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K........................ IV-1
SIGNATURES
Exhibits Submitted in a Separate Volume.
<PAGE> 3
Part I
Item 1. BUSINESS
General
Sterling Bancorp ("the parent company") is a bank holding company, as
defined by the Bank Holding Company Act of 1956 ("the BHCA"), as amended.
Throughout the report, the term "the Company" refers to Sterling Bancorp and
its subsidiaries. The Sterling companies provide a full range of products and
services, including business and consumer loans, commercial and residential
mortgage lending and brokerage, asset-based financing, factoring, trade
financing, leasing, trust and estate administration and investment management
services. Sterling has operations in New York and Virginia and conducts
business throughout the United States. The parent company owns all of the
outstanding shares of Sterling National Bank ("the bank"), its principal
subsidiary, and all of the outstanding shares of Universal Finance Corporation,
Sterling Industrial Loan Association and Sterling Banking Corporation ("finance
subsidiaries"). On January 1, 1997, a new subsidiary - Sterling National
Mortgage Corp ("SNMC - Virginia") - was formed. Sterling National Mortgage
Company, Inc. ("SNMC-New York"), Sterling National Mortgage Corp.
("SNMC-Virginia") and Sterling Factors Corporation ("Factors") are wholly owned
subsidiaries of the bank. Until 1997, Factors was a finance subsidiary of the
Registrant. 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.
The following table presents the components of the loan portfolio for both the
Company and the bank as of December 31, 1996 and 1995. Reference is made to the
information beginning on page 43 of the Company's Annual Report (pages 11 to 49
of which are incorporated by reference herein) under the caption "CREDIT RISK".
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------ -----------------------------
The Company The bank The Company The bank
----------- --------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C>
Domestic
Commercial and industrial $351,281 $307,705 $313,118 $265,015
Lease Financing 40,489 40,489 24,311 24,311
Real estate - mortgage 64,368 64,368 49,790 49,790
Real estate - construction 1,136 1,136 1,040 1,040
Installment - individuals 15,537 15,537 14,876 14,876
Foreign
Governments and official
institutions 789 789 789 789
-------- -------- -------- --------
Loans, gross 473,600 430,024 403,924 355,821
Less: Unearned discounts 8,083 7,820 6,695 6,357
-------- -------- -------- --------
Loans, net of unearned
discounts $465,517 $422,204 $397,229 $349,464
======== ======== ======== ========
</TABLE>
The BHCA requires the prior approval of the Federal Reserve Board for the
acquisition by a bank holding company of more than 5% of the voting stock or
substantially all of the assets of any bank or bank holding company. Also, under
the BHCA, bank holding companies are prohibited, with certain exceptions, from
engaging in, or from acquiring more than 5% of the voting stock of any company
engaging in, activities other than banking or managing or controlling banks or
furnishing services to or performing services for their subsidiaries. The BHCA
also authorized the Federal Reserve Board to permit bank holding companies to
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<PAGE> 4
engage in, and to acquire or retain shares of companies that engage in,
activities which the Federal Reserve Board determines to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
The Federal Reserve Board has ruled on a number of activities and found some of
them to come within such standard while finding that other activities do not
fall within the permissible scope of such standard; other activities have been
proposed by the Federal Reserve Board for consideration. The effect of the
Federal Reserve Board's findings under the standard has been to expand the
financially related activities in which bank holding companies may engage.
Revisions of the Federal Reserve Board's principal regulation (Regulation Y)
affecting bank holding companies have expanded the scope of permissible
bank-related activities and liberalized procedures to allow the entry into such
activities.
There are also various requirements and restrictions imposed by the laws
of the United States and the State of New York and by regulations of the Federal
Reserve System, of which the bank is a member, affecting the operations of the
Company including the requirement to maintain reserves against deposits,
restrictions relating to: (a) the nature and amount of loans that may be made by
the bank and the interest that may be charged thereon; (b) extensions of credit
by subsidiary banks of a bank holding company to the bank holding company or
certain of its subsidiaries; (c) on investments in the stock or other securities
thereof, and on the taking of such stock or securities as collateral for loans
to any borrower; and (d) other investments, branching and other activities of
the Company and the bank. Regulatory limitations on the payment of dividends to
the Registrant by the bank are discussed in the "FINANCIAL CONDITION" section
beginning on page 40 of the Company's 1996 Annual Report. The Registrant and its
finance subsidiaries are subject to supervision and regulation by the Federal
Reserve Board; Sterling Industrial Loan Association is subject to supervision
and regulation by the Bureau of Financial Institutions of the State Corporation
Commission of the Commonwealth of Virginia; Sterling Banking Corporation is
subject to supervision and regulation by the Banking Department of the State of
New York; the bank is subject to supervision and regulation by the Office of the
Comptroller of the Currency ("the Comptroller") and, by reason of the insurance
of its deposits to the extent permitted by law, to the regulations of the
Federal Deposit Insurance Corporation.
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
4%) which is calculated by dividing Tier 1 capital by adjusted quarterly average
assets (after deducting goodwill). In addition, the Company and the bank are
subject to the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1981 ("FDICIA") which imposes a number of mandatory
supervisory measures. Among other
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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, and to
consider applications authorizing institutions to increase their asset size or
otherwise expand business activities or acquire other institutions. Under the
provisions of FDICIA, a "well capitalized" institution must maintain minimum
leverage, Tier 1 and Total Capital ratios of 5%, 6% and 10%, respectively. At
December 31, 1996, the Company and the bank exceeded the requirements for "well
capitalized" institutions. The capital components and ratios for the Company and
the bank are presented in the Company's 1996 Annual Report on page 35.
There have been a number of legislative and regulatory proposals that would have
an impact on the operations of bank holding companies and their banks. While the
changing legislation and regulatory environment does not permit forecasts to be
made with any degree of certainty, the Company is unaware of any pending
legislative reforms or regulatory activities which would materially affect its
financial position or operating results in the foreseeable future.
The Federal Reserve Board has issued regulations under the BHCA that require a
bank holding company to serve as a source of financial and managerial strength
to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to
such regulations, may require the parent company to stand ready to use its
resources to provide adequate capital funds to its banking subsidiaries during
periods of financial stress or adversity. This support may be required at times
when, absent such regulations, the bank holding company might not otherwise
provide such support.
The earnings of the parent company and its finance subsidiaries and the bank are
affected by legislative changes and by regulations and policies of various
governmental authorities, including the Federal Reserve System, the Comptroller,
and the states in which the Registrant's subsidiaries operate. Such changes and
policies significantly affect the growth of deposits as well as the cost of
purchased funds and the return on earning assets.
Changing conditions in the national economy and in the money markets make it
impossible to predict future changes in interest rates, deposit levels, loan
demand or their effects on the business and earnings of the Registrant and its
subsidiaries. Foreign activities of the Company are not considered to be
material.
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<PAGE> 6
The bank
Sterling National Bank was organized in 1929 under the National Bank Act and
commenced operations in New York City. The bank maintains six offices in New
York City (three branches and an International Banking Facility in Manhattan and
two branches in Queens). The executive office is located at 430 Park Avenue, New
York, New York. There are regional representatives located in Los Angeles,
California and Richmond, Virginia.
The bank provides a range of banking services to businesses and individuals
including checking, savings and money market accounts, certificates of deposit,
business loans, personal and installment loans, VISA/MASTERCARD, safe deposit
and night depository facilities. Business lending, depository and related
financial services are furnished to a wide range of customers in diverse
industries, including commercial, industrial and financial companies of all
sizes as well as government and non-profit agencies. Loan facilities available
to these customers include short-term revolving credit arrangements, term loans,
letters of credit, factoring, accounts receivable financing, equipment
financing, real estate and mortgage loans, leasing and lock box services.
Through its international division and International Banking Facility, the bank
offers financial services to its customers and correspondents in the world's
major financial centers. These services consist of financing import and export
transactions, issuance of letters of credit and creation of bankers acceptances.
In addition to its direct worldwide correspondent banking relationships, active
bank account relationships are maintained with leading foreign banking
institutions in major financial centers. The bank's trust division provides a
variety of fiduciary, investment management, advisory and corporate agency
services to individuals, corporations and foundations. The bank acts as trustee
for pension, profit-sharing and other employee benefit plans and personal trusts
and estates. For corporations, the bank acts as trustee, transfer agent,
registrar and in other corporate agency capacities.
Factors provides factoring services. Factors purchases client's accounts
receivable, assumes credit risk on approved orders and handles credit and
collection details and bookkeeping requirements. Income for these services is
derived from commissions charged for receivables serviced and interest charged
on advances to the client. For these services, Factors receives a portion of
factoring commissions paid by the clients plus a portion of interest charged on
advances. The accounts receivable factored are for clients primarily engaged in
the apparel and textile industries.
Sterling's mortgage banking and brokerage business is conducted through
companies located in Virginia and New York. SNMC-Virginia originates and
services non-conforming mortgages, for its own portfolio and resale, on
residential properties in Virginia and several adjoining states. SNMC-New York
originates conforming, residential mortgage loans throughout the tri-state
metropolitan area, and has offices on Long Island and in Westchester.
Loans to companies in the textile and apparel industry represent 14% of the
commercial and industrial loan portfolio. There are no other industry
concentrations (exceeding 10% of loans, gross) in the commercial and industrial
loan portfolio. Approximately 75% of the bank's loans are to borrowers located
in the metropolitan New York area.
I-4
<PAGE> 7
The composition of income from the operations of the bank and its subsidiaries
for the years ended: [1] December 31, 1996 included interest and fees on
commercial and other loans (52%), interest and dividends on investment
securities (35%) and other (13%); [2] December 31, 1995 included interest and
fees on commercial and other loans (52%), interest and dividends on investment
securities (38%), and other (10%); [3] December 31, 1994 included interest and
fees on commercial and other loans (47%), interest and dividends on investment
securities (44%), and other (9%).
At December 31, 1996, the bank had 242 employees, consisting of 96 officers and
146 supervisory and clerical employees. The bank considers its relations with
its employees to be satisfactory.
Parent Company and Finance Subsidiaries
The parent company and its finance subsidiaries engage in various types of
secured financing activities such as asset based financing, consumer receivables
financing and service certain such accounts for the bank.
Asset based financing services rendered by the Registrant and its finance
subsidiaries include new business referral, collection, supervisory, examination
and bookkeeping to the bank for fees; and the bank assumes all credit risks.
The parent company and its finance subsidiaries make business and consumer
loans. The loans are usually secured by real estate, personal property, accounts
receivable or other collateral; occasionally unsecured working capital advances
are provided to its customers.
Sterling Financial Services Company("Sterling Financial"), a nationwide provider
of consumer receivables financing, is a division of the parent company. Sterling
Financial engages in asset based lending with independent dealers who market
products (i.e., housewares, appliances, automobiles, educational material, et
al) to consumers on an installment basis with repayment terms between 12 and 48
months. Sterling Financial administers these installment contracts for the
dealer, providing billing, payment processing and other bookkeeping services.
Sterling Financial makes advances to each dealer of up to 80% of the discounted
aggregate value of the dealer's installment contracts.
I-5
<PAGE> 8
The composition of income (excluding equity in undistributed net income of the
banking subsidiary) of the parent company and its finance subsidiaries for the
years ended: [1] December 31, 1996 included interest and fees on loans (42%),
interest and fees on accounts receivable factored (20%), dividends, interest and
service fees (31%) and other (7%); [2] December 31, 1995 included interest and
fees on loans (47%), interest and fees on accounts receivable factored (19%),
dividends, interest and service fees (33%), and other (1%); [3] December 31,
1994 included interest and fees on loans (46%), interest and fees on accounts
receivable factored (18%), dividends, interest and service fees (35%), and other
(1%). During these years, Factors and SNMC-Virginia were finance subsidiaries,
and the results of their operations were included in the foregoing and in all
financial statements relating to these years.
At December 31, 1996, the parent company and its finance subsidiaries employed
73 persons consisting of 18 officers with the balance of the employees
performing supervisory and clerical functions. The parent company and its
finance subsidiaries consider employee relations to be satisfactory.
SELECTED CONSOLIDATED STATISTICAL INFORMATION
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential.
The information appearing on pages 47, 48, and 49 of the Company's 1996 Annual
Report is incorporated by reference herein.
II. Investment Portfolio
Shown below is a summary of the Company's investment securities by type with
related carrying values:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury securities $ 41,246 52,373 $ 41,022
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 254,243 238,397 261,433
Obligations of states and political sub-
divisions -- -- 30
Debt securities issued by foreign governments 2,750 3,500 4,000
Other debt securities -- -- 1,118
Federal Reserve Bank and other equity securities 6,092 4,968 4,179
-------- -------- --------
Total $304,331 $299,238 $311,782
======== ======== ========
</TABLE>
Information regarding book values and range of maturities by type of security
and weighted average yields for totals of each category is presented in the
Company's 1996 Annual Report on pages 20 and 21 and is incorporated by reference
herein. The average yield by maturity range is not available.
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<PAGE> 9
III. Loan Portfolio
The following table sets forth the composition of the Company's loan portfolio,
net of unearned discounts, at the end of each of the most recent five fiscal
years:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
Balances Total Balances Total Balances Total Balances Total Balances Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Term Federal funds
sold $ -- -- $ -- --% $ -- --% $ 40,000 13.39% $ 99,000 34.28%
Commercial and
industrial 350,641 75.32 309,173 77.83 258,494 82.65 216,677 72.53 149,273 51.69
Lease financing 34,750 7.46 24,311 6.12 -- -- -- -- -- --
Real estate -
mortgage 63,633 13.67 48,588 12.23 39,997 12.79 31,474 10.54 30,987 10.73
Real estate -
construction 1,136 0.25 1,040 0.26 1,486 0.48 1,666 0.56 1,606 0.56
Installment -
individuals 14,568 3.13 13,328 3.36 12,003 3.84 8,145 2.73 7,136 2.47
Foreign
Government and
official insti-
tutions 789 0.17 789 0.20 789 0.25 789 0.26 789 0.27
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Loans, net of
unearned
discounts $465,517 100.00% $397,229 100.00% $312,769 100.00% $298,751 100.00% $288,791 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the maturities and sensitivity to changes in
interest rates of loans, excluding "installment - individuals" loans, of the
Company's loan portfolio at December 31, 1996:
<TABLE>
<CAPTION>
Due One Due One Due After Total
Year to Five Five Gross
or Less Years Years Loans
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial $344,367 $ 855 $ 6,059 $351,281
Lease financing 1,514 38,975 -- 40,489
Real estate - mortgage 19,378 8,592 36,398 64,368
Real estate - construction 1,136 -- -- 1,136
Foreign 789 -- -- 789
-------- -------- -------- --------
Total $367,184 $ 48,422 $ 42,457 $458,063
======== ======== ======== ========
Loans due after one year, which have:
Predetermined interest
rates $ 38,975 $ 42,457 $ 81,432
Floating or adjustable
interest rates 9,447 -- 9,447
-------- -------- --------
Total $ 48,422 $ 42,457 $ 90,879
======== ======== ========
</TABLE>
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It is the policy of the Company to consider all customer requests for extensions
of original maturity dates (rollovers), whether in whole or in part, as though
each was an application for a new loan subject to standard approval criteria,
including credit evaluation. The information appearing in the Company's 1996
Annual Report beginning on page 43 under the caption "CREDIT RISK", beginning on
page 22 in footnote 6 and on page 17 in footnote 1 under the caption "Loans" is
incorporated by reference herein.
The following table sets forth the aggregate amount of domestic nonaccrual,
past due and restructured loans of the Company at the end of each of the most
recent five fiscal years; as of December 31, 1996, there were no foreign loans
accounted for on a nonaccrual basis or which were troubled debt restructurings:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual basis loans* $ 442 $ 357 $ 575 $2,297[1] $3,309[1]
Past due 90 days or more
(other than the above)[2] 390 1,961 293 146 619
--------- --------- --------- --------- ------
Total $ 832 $ 2,318 $ 868 $ 2,443 $3,928
========= ========= ========= ========= ======
Note:Includes restructured
debt of $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ======
*Interest income that would
have been earned on non-
accrual and reduced rate
loans outstanding $ 13 $ 22 $ 86 $ 169 $ 313
========= ========= ========= ========= ======
Applicable interest income
actually realized $ -- $ -- $ 18 $ 98 $ 72
========= ========= ========= ========= ======
Nonaccrual, past due and
restructured loans as a
percentage of total gross
loans .18% .58% .27% .80% 1.33%
========= ========= ========= ========= ======
</TABLE>
[1] Includes $1.4 and $1.9 million at December 31, 1993, and 1992,
respectively, representing the balance of a loan to a single borrower who
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code
during the third quarter of 1991.
[2] Loans contractually past due 90 days or more as to principal or interest
and still accruing are loans which are both well secured or guaranteed by
financially responsible third parties and are in the process of collection.
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<PAGE> 11
IV. Summary of Loan Loss Experience
The information appearing in the Company's 1996 Annual Report beginning on page
23 in footnote 7 is incorporated by reference herein. The following table sets
forth certain information with respect to the Company's loan loss experience for
each of the most recent five fiscal years:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net
of unearned discounts, during
year $ 376,879 $ 311,119 $ 255,223 $ 228,604 $ 211,917
========= ========= ========= ========= =========
Allowance for possible loan losses:
Balance at beginning of year $ 5,192 $ 4,136 $ 3,414 $ 3,177 $ 3,734
--------- --------- --------- --------- ---------
Charge-offs:
Commercial and industrial 561 622 401 670 1,461
Lease financing 49 344 -- -- 338
Real estate 71 16 109 -- --
Installment 57 19 22 45 120
--------- --------- --------- --------- ---------
Total charge-offs 738 1,001 532 715 1,919
--------- --------- --------- --------- ---------
Recoveries:
Commercial and industrial 1,456 144 196 28 20
Lease financing 37 -- 5 13 5
Real estate -- 47 -- -- --
Installment 9 -- -- 11 47
--------- --------- --------- --------- ---------
Total recoveries 1,502 191 201 52 72
--------- --------- --------- --------- ---------
(Add)/Subtract:
Net (recovery) charge-offs (764) 810 331 663 1,847
--------- --------- --------- --------- ---------
Provision for possible loan losses 2,047 1,866 1,053 690 1,290
--------- --------- --------- --------- ---------
Allowance - acquired portfolio -- -- -- 210 --
--------- --------- --------- --------- ---------
Balance at end of year $ 8,003 $ 5,192 $ 4,136 $ 3,414 $ 3,177
========= ========= ========= ========= =========
Ratio of net charge-offs to
average loans outstanding, net
of unearned discounts during
year -0-% .26% .13% .29% .87%
========= ========= ========= ========= =========
</TABLE>
On June 1, 1993 the parent company purchased for cash the assets (principally
loans) of Zenith Financial Corporation, a nationwide provider of consumer
receivables financing. The purchase price included the allowance for loan losses
of $209,627.
The Company considers its allowance for possible loan losses to be adequate
based upon the size and risk characteristics of the outstanding loan portfolio
at December 31, 1996. Net losses within the loan portfolio are not statistically
predictable and changes in conditions in the next twelve months could result in
future provisions for loan losses varying from the level taken in 1996.
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<PAGE> 12
To comply with a regulatory requirement to provide an allocation of the
allowance for possible loan losses, the following table presents the Company's
allocation of the allowance. This allocation is based on subjective estimates by
management and may vary from year to year based on management's evaluation of
the risk characteristics of the loan portfolio. The information appearing in the
Company's 1996 Annual Report beginning on page 43 under the caption "CREDIT
RISK" is incorporated by reference herein. The amount allocated to a particular
loan category may not necessarily be indicative of actual future charge-offs in
a loan category. Management believes that the allowance must be viewed in its
entirety and is therefore available for future charge-offs in any loan category.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- -------------- ---------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Commercial and
industrial $3,369 0.96% $2,457 0.79% $2,487 0.96% $1,757 0.81% $1,135 0.76%
Lease financing 508 1.46 355 1.46 -- -- -- -- -- --
Real estate -
mortgage 566 0.89 472 0.97 434 1.09 291 0.92 323 1.04
Real estate -
construction 8 0.70 8 0.77 12 0.81 63 3.78 63 3.92
Installment -
individuals 279 1.92 167 1.25 142 1.18 94 1.15 98 1.37
Unallocated 3,273 -- 1,733 -- 1,061 -- 1,209 -- 1,558 --
------ ------ ------ ------ ------
Loans, net of
unearned
discounts $8,003 1.72% $5,192 1.31% $4,136 1.32% $3,414 1.14% $3,177 1.10%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
V. Deposits
Average deposits and average rates paid for each of the most recent three years
is presented in the Company's 1996 Annual Report on page 47 and is incorporated
by reference herein.
Outstanding time certificates of deposit issued from domestic offices in amounts
of $100,000 or more and interest expense on domestic and foreign deposits are
presented in the Company's 1996 Annual Report beginning on page 23 in footnote 8
and is incorporated by reference herein.
The following table provides certain information with respect to the Company's
deposits for each of the most recent three fiscal years:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Domestic
Demand $229,977 $224,081 $174,897
NOW 32,761 30,150 34,055
Savings 25,548 26,967 29,201
Money Market 133,510 120,655 118,571
Time deposits, by remaining maturity
Within 3 months 63,092 68,689 58,527
After 3 months but within 1 year 68,725 49,715 23,172
After 1 but within 5 years 18,099 27,531 76,210
-------- -------- --------
Total domestic deposits 571,712 547,788 514,633
-------- -------- --------
Foreign
Time deposits, by remaining maturity
Within 3 months 1,710 2,240 1,670
After 3 months but within 1 year 1,000 1,000 1,000
-------- -------- --------
Total foreign deposits 2,710 3,240 2,670
-------- -------- --------
Total deposits $574,422 $551,028 $517,303
======== ======== ========
</TABLE>
I-10
<PAGE> 13
Interest expense for the most recent three fiscal years is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
NOW $ 313 $ 286 $ 273
Savings 535 565 685
Money market 3,381 3,206 2,353
Time--domestic 7,740 7,328 5,058
--foreign 139 155 104
------- ------- -------
Total interest expense $12,108 $11,540 $ 8,473
======= ======= =======
</TABLE>
VI. Return on Assets and Equity
The Company's returns on average total assets and average shareholders' equity,
dividend payout ratio and average shareholders' equity to average total assets
for each of the most recent three years follow:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Return on average total assets (Net income
divided by average total assets) 1.06% .81% .61%
Return on average shareholders' equity (Net
income divided by average equity) 12.55% 10.00% 7.52%
Dividend payout ratio (Dividends declared per
share divided by net income per share) 27.20% 28.41% 33.33%
Average shareholders' equity to average total
assets (Average equity divided by average
total assets) 8.46% 8.11% 8.08%
</TABLE>
VII. Short-Term Borrowings
Balance and rate data for significant categories of the Company's Short-Term
Borrowings, for each of the most recent three years is presented in the
Company's 1996 Annual Report on page 24 in footnote 9 and is incorporated by
reference herein.
I-11
<PAGE> 14
Item 2. PROPERTIES
The principal offices of the Company occupy one floor at 430 Park Avenue,
New York, N.Y. consisting of approximately 15,000 square feet. The lease for
these premises expires June 29, 2001. Annual rental commitments approximate
$441,000. Certain finance subsidiaries maintain offices in Great Neck, New York
and Richmond, Virginia
In addition to the principal offices, the bank maintains operating leases for
four branch offices, the International Banking Facility, additional office space
and an Operations Center with an aggregate of approximately 89,200 square feet.
The annual office rental commitments for these premises approximates $1,050,000.
The leases have expiration dates ranging from 1998 through 2015 with varying
additional renewal options. The bank also maintains a branch located in Forest
Hills owned by the bank (and not subject to a mortgage).
Item 3. LEGAL PROCEEDINGS
Neither Registrant nor any of its subsidiaries is party to any material legal
proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information beginning on page 9 of the Sterling Bancorp Proxy Statement
dated March 14, 1997 under the caption "APPROVAL OF STOCK INCENTIVE PLAN
AMENDMENT" is incorporated by reference herein.
I-12
<PAGE> 15
Part II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information appearing on page 46 of the Sterling Bancorp 1996 Annual Report
under the caption "MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS" is incorporated by reference herein.
Item 6. SELECTED FINANCIAL DATA
The information appearing on page 39 of the 1996 Annual Report under the caption
"SELECTED FINANCIAL DATA" is incorporated by reference herein.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing on pages 40 - 46 of the 1996 Annual Report under the
caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" is incorporated herein by reference. Supplementary data appearing
on page 37 footnote 23 of the 1996 Annual Report is incorporated by reference
herein.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 1996 and 1995
and for each of the years in the three-year period ended December 31, 1996 and
the statements of condition of Sterling National Bank as of December 31, 1996
and 1995, notes thereto and Independent Auditors' Report thereon appearing on
pages 12 - 38 of the 1996 Annual Report, are incorporated by reference herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-1
<PAGE> 16
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning on page 1 of the Sterling Bancorp Proxy Statement
dated March 14, 1997 under the caption "ELECTION OF DIRECTORS" and beginning on
page 8 of the same proxy statement under the caption "Security Ownership of
Directors and Executive Officers and Certain Beneficial Owners" are incorporated
by reference herein.
Executive Officers - This information is included pursuant to Instruction 3 to
Item 401 (b) and (c) of Regulation S-K:
<TABLE>
<CAPTION>
Held Executive Office
Name of Executive Title Age Since
- ----------------- ----- --- -----
<S> <C> <C> <C>
Louis J. Cappelli Chairman of the Board and
Chief Executive Officer,
Director 66 1967
John C. Millman President, Director 54 1986
Jerrold Gilbert Executive Vice President, General
Counsel & Secretary 60 1974
John W. Tietjen Senior Vice President, Treasurer
and Chief Financial Officer 52 1989
John A. Aloisio Vice President 54 1992
Leonard Rudolph Vice President 49 1992
Frank J. Voso Vice President 53 1989
</TABLE>
All executive officers are elected annually by the Board of Directors and serve
at the pleasure of the Board. There are no arrangements or understandings
between any of the foregoing officers and any other person or persons pursuant
to which he was selected as an executive officer.
Item 11. EXECUTIVE COMPENSATION
The information beginning on page 3 of the Sterling Bancorp Proxy Statement
dated March 14, 1997 under the caption " Executive Compensation and Related
Matters" and on page 7 of the same Proxy Statement under the caption
"Transactions with the Company and Other Matters" are incorporated by reference
herein.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information beginning on page 8 of the Sterling Bancorp Proxy Statement
dated March 14, 1997 under the caption "Security Ownership of Directors and
Executive Officers and Certain Beneficial Owners" is incorporated by reference
herein.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing on page 7 of the Sterling Bancorp Proxy Statement
dated March 14, 1997 under the caption "Transactions with the Company and Other
Matters" is incorporated by reference herein.
III-1
<PAGE> 17
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The documents filed as a part of this report are listed below:
1. Financial Statements
Annual Report to security holders, Sterling Bancorp 1996 Annual
Report (This document is filed only to the extent of pages 11
through 49 which are incorporated by reference herein).
2. Financial Statement Schedules
None
3. Exhibits
3(i)(A) Amended and restated Certificate of Incorporation filed
with the State of New York, Department of State, August
14, 1986 (Filed as Exhibit 3.3 to Registrant's Form
10-K for the fiscal year ended December 31, 1986 and
incorporated by reference herein).
(i)(B) Certificate of Amendment of The Certificate of
Incorporation filed with the State of New York
Department of State, June 13, 1988 (Filed as Exhibit
3.5 to Registrant's Form 10-K for the fiscal year ended
December 31, 1988 and incorporated by reference
herein).
(i)(C) Certificate of Amendment of the Certificate of
Incorporation filed with the State of New York
Department of State, March 5, 1993 (Filed as Exhibit
4.1 to Registrant's Form 8-K dated March 5, 1993 and
incorporated by reference herein).
(ii) By-Laws as in effect on March 15, 1993 (Filed as
Exhibit 3.3 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1992 and incorporated by
reference herein).
4(a) Indenture relating to floating interest rate
convertible subordinated debentures, 4th series, due
November 1, 1998 (Filed as Exhibit 4(a) to Registrant's
Registration Statement 33-23877 and incorporated by
reference herein).
(b) Indenture dated as of August 1, 1995 relating to
floating interest rate convertible subordinated
debentures, series V, due July 1, 2001 (Filed as
Exhibit T3C to Registrant's Application for
Qualification of Indenture No. 022-22183 and
incorporated by reference herein).
10(i) Employment Agreements, dated as of February 19, 1993
(Filed as Exhibits 3.4(a) and 3.4(b), respectively, to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1992 and incorporated by reference
herein).
(a) For Louis J. Cappelli
(b) For John C. Millman
(ii) Amendments to Employment Agreements dated February 14,
1995 (Filed as Exhibits 3.10(ii)(a) and 3.10(ii)(b),
respectively to the Registrant's Form 10-K for the
fiscal year ended December 31, 1994 and incorporated by
reference herein).
(a) For Louis J. Cappelli
(b) For John C. Millman
(iii) Amendments to Employment Agreements dated February 8,
1996 (Filed as Exhibits 3.10(iii)(a) and 3.10(iii)(b),
respectively to the Registrant's Form 10-K for the
fiscal year ended December 31, 1995 and incorporated by
reference herein).
(a) For Louis J. Cappelli
(b) For John C. Millman
(iv) Amendments to Employment Agreements dated February 28,
1997
(a) For Louis J. Cappelli
(b) For John C. Millman
IV-1
<PAGE> 18
11 Statement re Computation of Per Share Earnings.
13 Annual Report to security holders, Sterling Bancorp
1996 Annual Report (This document is filed only to the
extent of pages 11 through 49 which are incorporated by
reference herein).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
IV-2
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Louis J. Cappelli
-------------------------------------------
Louis J. Cappelli, Chairman
(Principal Executive Officer)
March 27, 1997
-------------------------------------------
Date
/s/ John W. Tietjen
-------------------------------------------
John W. Tietjen, Treasurer
(Principal Financial and Accounting Officer)
March 27, 1997
-------------------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 27, 1997 /s/ Louis J. Cappelli Director
- -------------- ------------------------- ------------
(Date) (Signature) (Title)
March 27, 1997 /s/ John C. Millman Director
- -------------- ------------------------- ------------
(Date) (Signature) (Title)
March 27, 1997 /s/ William C. Warren Director
- -------------- ------------------------- ------------
(Date) (Signature) (Title)
March 27, 1997 /s/ Allan F. Hershfield Director
- -------------- ------------------------- ------------
(Date) (Signature) (Title)
March 27, 1997 /s/ Lillian Berkman Director
- -------------- ------------------------- ------------
(Date) (Signature) (Title)
March 27, 1997 /s/ Henry J. Humphreys Director
- -------------- ------------------------- ------------
(Date) (Signature) (Title)
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number
- ------
3(i)(A) Amended and Restated Certificate of Incorporation filed with the
State of New York, Department of State, August 14, 1986 (Filed as
Exhibit 3.3 to Registrant's Form 10-K for the fiscal year ended
December 31, 1986 and incorporated by reference herein).
(i)(B) Certificate of Amendment of The Certificate of Incorporation filed
with the State of New York Department of State, June 13, 1988 (Filed
as Exhibit 3.5 to Registrant's Form 10-K for the fiscal year ended
December 31, 1988 and incorporated by reference herein).
(i)(C) Certificate of Amendment of the Certificate of Incorporation filed
with the State of New York Department of State, March 5, 1993 (Filed
as Exhibit 4.1 to Registrant's Form 8-K dated March 5, 1993 and
incorporated by reference herein).
(ii) By-Laws as in effect on March 15, 1993 (Filed as Exhibit 3.3 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1992
and incorporated by reference herein).
4(a) Indenture relating to floating interest rate convertible subordinated
debentures, 4th series, due November 1, 1998 (Filed as Exhibit 4(a)
to Registrant's Registration Statement 33-23877 and incorporated by
reference herein).
(b) Indenture dated as of August 1, 1995 relating to floating interest
rate convertible subordinated debentures, series V, due July 1, 2001
(Filed as Exhibit T3C to Registrant's Application for Qualification
of Indenture No. 022-22183 and incorporated by reference herein).
10(i) Employment Agreements, dated as of February 19, 1993 (Filed as
Exhibits 3.4(a) and 3.4(b), respectively, to the Registrant's Form
10-K for the fiscal year ended December 31, 1992 and incorporated by
reference herein).
(a) For Louis J. Cappelli
(b) For John C. Millman
(ii) Amendments to Employment Agreements dated February 14, 1995 (Filed as
Exhibits 3.10(ii)(a) and 3.10(ii)(b), respectively, to the
Registrant's Form 10-K for the fiscal year ended December 31, 1994
and incorporated by reference herein).
(a) For Louis J. Cappelli
(b) For John C. Millman
(iii) Amendments to Employment Agreements dated February 8, 1996 (Filed as
Exhibits 3.10(iii)(a) and 3.10(iii)(b), respectively to the
Registrant's Form 10-K for the fiscal year ended December 31, 1995
and incorporated by reference herein).
(a) For Louis J. Cappelli
(b) For John C. Millman
(iv) Amendments to Employment Agreements dated February 28, 1997
(a) For Louis J. Cappelli
(b) For John C. Millman
11 Statement re Computation of Per Share Earnings.
13 Annual Report to security holders, Sterling Bancorp 1996 Annual
Report (This document is filed only to the extent of pages 11 through
49 which are filed herewith).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
<PAGE> 1
[LETTERHEAD OF STERLING BANCORP]
February 28, 1997
Mr. Louis J. Cappelli
Chairman
Sterling Bancorp
430 Park Avenue
New York, New York 10022
Dear Mr. Cappelli:
This will confirm the following amendment to your employment agreement, dated
February 19, 1993 (as amended, February 14, 1995 and February 8, 1996), with our
Company;
The date in the third line of Paragraph 1 (captioned "Term") is amended to
December 31, 2001.
The foregoing amendment was recommended by the Compensation Committee and was
approved by the Board of Directors at its February 20, 1997 meeting.
Kindly sign and return the enclosed copy to the Company in order to confirm your
understanding and acceptance of the foregoing amendment.
Sincerely,
STERLING BANCORP
By /s/
----------------------------
Executive Vice President
Agreed:
/s/ Louis J. Cappelli
- ---------------------------
Louis J. Cappelli
<PAGE> 2
[LETTERHEAD OF STERLING BANCORP]
February 28, 1997
John C. Millman
President
Sterling Bancorp
540 Madison Avenue
New York, New York 10022
Dear Mr. Millman:
This will confirm the following amendment to your employment agreement, dated
February 19, 1993 (as amended, February 14, 1995 and February 8, 1996), with our
Company;
The date in the third line of Paragraph 1 (captioned "Term") is amended to
December 31, 1999.
The foregoing amendment was recommended by the Compensation Committee and was
approved by the Board of Directors at its February 20, 1997 meeting.
Kindly sign and return the enclosed copy to the Company in order to confirm your
understanding and acceptance of the foregoing amendment.
Sincerely,
STERLING BANCORP
By /s/
----------------------------
Executive Vice President
Agreed:
/s/ John C. Millman
- ---------------------------
John C. Millman
<PAGE> 1
Exhibit 11
STERLING BANCORP AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C> <C>
Income for primary earnings per share:
Net income A $ 8,251,854 $ 5,637,666 $ 4,005,869
=========== =========== ===========
Income for fully diluted earnings per share:
Net income $ 8,251,854 $ 5,637,666 $ 4,005,869
Add expenses, net of tax effect
on assumed conversion of
convertible subordinated
debentures:
Interest 562,032 1,183,255 1,061,345
Amortization of bond discount
and expense 34,470 14,814 17,841
----------- ----------- -----------
Income for fully diluted
shares B $ 8,848,356 $ 6,835,735 $ 5,085,055
=========== =========== ===========
Common shares for primary earnings per share:
Average shares issued (note a) 7,063,720 6,496,739 6,496,605
Add assumed conversion at the beginning
of the period of issuance date if later:
Stock options 50,108 13,094 598
ESOP shares allocated 46,507 27,582 15,410
Less average treasury shares (note b) 48,535 150,343 150,393
----------- ----------- -----------
Average common shares for compu-
tation of primary earnings
per share C 7,111,800 6,387,072 6,362,220
=========== =========== ===========
Common shares for fully diluted earnings per share:
Average common shares 7,111,800 6,387,072 6,362,220
Add assumed conversion at the beginning
of the period or issuance date if later:
Convertible subordinated debentures 1,097,397 1,948,366 2,372,913
Series B preferred shares 2,514 2,576 2,576
ESOP shares unallocated 202,826 222,418 234,590
Stock options 6,853 2,459 79
----------- ----------- -----------
Average common shares for
computation of fully di-
luted earnings per share D 8,421,390 8,562,891 8,972,378
=========== =========== ===========
Net income per average
common share (A / C) $ 1.16 $ .88 $ .63
====== ====== ======
Net income per average common
share assuming full dilution (B / D) $ 1.05 $ .80 $ .57
====== ====== ======
</TABLE>
(a) Based on shares issued as at end of each month.
(b) Based on shares in treasury as at end of each month.
<PAGE> 1
Exhibit 13
FINANCIAL INFORMATION
Consolidated Financial Statements
of Sterling Bancorp and Subsidiaries 12
Consolidated Statements of Condition
of Sterling National Bank 16
Notes to Consolidated Financial Statements 17
Independent Auditors' Report 38
Selected Financial Data 39
Management's Discussion and
Analysis of Financial Condition and
Results of Operations 40
CORPORATE DIRECTORIES
Sterling Bancorp and Subsidiaries 50
11
<PAGE> 2
<TABLE>
<CAPTION>
STERLING BANCORP and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 54,512,462 $ 40,720,401
Interest-bearing deposits with other banks 3,010,000 3,000,000
Federal funds sold 3,000,000 5,000,000
Securities available for sale (at estimated market value) 77,597,117 101,670,466
Securities held to maturity (estimated market value $223,668,650 and
$196,573,342, respectively) 226,733,888 197,567,406
-----------------------------
Total investment securities 304,331,005 299,237,872
-----------------------------
Loans, net of unearned discounts 465,516,556 397,228,786
Less allowance for possible loan losses 8,003,392 5,192,203
-----------------------------
Loans, net 457,513,164 392,036,583
-----------------------------
Customers' liability under acceptances 613,430 2,395,089
Excess cost over equity in net assets of the banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 5,508,740 2,733,105
Accrued interest receivable 4,257,142 4,151,950
Other assets 7,700,928 5,175,001
-----------------------------
$861,605,311 $775,608,441
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $229,976,783 $224,080,543
Interest-bearing deposits 344,445,578 326,947,260
-----------------------------
Total deposits 574,422,361 551,027,803
Federal funds purchased and securities sold under agreements to repurchase 88,144,400 51,265,620
Commercial paper 32,569,900 26,607,200
Other short-term borrowings 30,419,791 5,331,640
Acceptances outstanding 613,430 2,395,089
Due to factoring clients 23,140,504 22,596,179
Accrued expenses and other liabilities 14,228,490 17,381,686
Long-term convertible subordinated debentures 6,389,000 21,346,000
Other long-term borrowings--FHLB 14,500,000 18,000,000
-----------------------------
Total liabilities 784,427,876 715,951,217
-----------------------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, $5 par value 2,506,600 2,525,760
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 7,725,533 and 6,496,854 shares, respectively 7,725,533 6,496,854
Capital surplus 38,619,434 28,091,878
Retained earnings 31,648,806 25,641,804
Net unrealized appreciation on securities available for sale, net of taxes 90,001 543,747
-----------------------------
80,590,374 63,300,043
Less
Common stock in treasury at cost, 42,343 and 150,343 shares, respectively 418,959 1,489,239
Unearned compensation 2,993,980 2,153,580
-----------------------------
Total shareholders' equity 77,177,435 59,657,224
-----------------------------
$861,605,311 $775,608,441
=============================
See Notes to Consolidated Financial Statements.
</TABLE>
12
<PAGE> 3
<TABLE>
<CAPTION>
STERLING BANCORP and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $39,221,330 $32,725,860 $23,732,841
Deposits with other banks 156,922 183,230 123,632
Investment securities
Available for sale 6,296,121 4,689,687 4,487,600
Held to maturity 15,034,267 15,350,549 14,826,875
Federal funds sold 288,388 534,255 322,714
-------------------------------------------
Total interest income 60,997,028 53,483,581 43,493,662
-------------------------------------------
INTEREST EXPENSE
Deposits 12,108,336 11,540,344 8,473,494
Federal funds purchased and securities sold under
agreements to repurchase 4,611,205 2,967,516 2,076,395
Commercial paper 1,546,997 1,176,269 523,648
Other short-term borrowings 1,041,821 316,192 553,369
Long-term convertible subordinated debentures 1,144,261 2,234,786 2,016,417
Other long-term borrowings--FHLB 881,137 1,083,911 1,239,073
-------------------------------------------
Total interest expense 21,333,757 19,319,018 14,882,396
-------------------------------------------
Net interest income 39,663,271 34,164,563 28,611,266
Provision for possible loan losses 2,047,005 1,866,000 1,053,000
-------------------------------------------
Net interest income after provision for
possible loan losses 37,616,266 32,298,563 27,558,266
-------------------------------------------
NONINTEREST INCOME
Commissions on letters of credit 828,004 741,189 811,372
Service charges on deposit accounts 1,829,784 1,684,300 1,419,475
Factoring commissions 3,432,977 1,650,761 755,794
Trust fees 662,862 657,318 564,318
Mortgage banking income 1,473,644 59,782 --
Net securities (losses)/gains (71,254) 4,801 41,931
Other income 1,752,448 1,180,060 878,158
-------------------------------------------
Total noninterest income 9,908,465 5,978,211 4,471,048
-------------------------------------------
NONINTEREST EXPENSES
Salaries 14,859,118 11,116,147 9,604,384
Employee benefits 3,217,794 2,654,956 2,497,197
-------------------------------------------
Total personnel expense 18,076,912 13,771,103 12,101,581
Occupancy expense, net 2,504,624 3,380,095 2,515,084
Equipment expense 1,689,291 1,795,052 1,341,366
Other expenses 9,426,552 7,714,006 6,040,638
-------------------------------------------
Total noninterest expenses 31,697,379 26,660,256 21,998,669
-------------------------------------------
Income before income taxes 15,827,352 11,616,518 10,030,645
Provision for income taxes 7,575,498 5,978,852 6,024,776
-------------------------------------------
Net income $ 8,251,854 $ 5,637,666 $ 4,005,869
===========================================
Average number of common shares outstanding
Primary 7,111,800 6,387,072 6,362,220
Fully diluted 8,421,390 8,562,891 8,972,378
Earnings per average common share
Primary $ 1.16 $ .88 $ .63
Fully diluted 1.05 .80 .57
Dividends per common share .31 .25 .21
See Notes to Consolidated Financial Statements.
</TABLE>
13
<PAGE> 4
<TABLE>
<CAPTION>
STERLING BANCORP and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of year $ 2,525,760 $ 1,650,760 $ 1,963,260
Conversions of Series B and Series D shares (19,160) -- --
Market value guarantee feature -- 875,000 (312,500)
-----------------------------------------
Balance at end of year $ 2,506,600 $ 2,525,760 $ 1,650,760
=========================================
COMMON STOCK
Balance at beginning of year $ 6,496,854 $ 6,496,605 $ 6,496,605
Conversions of subordinated debentures 1,133,084 249 --
Conversion of preferred shares into common shares 1,916 -- --
Options exercised 1,500 -- --
Common shares issued in acquisition of mortgage company 92,179 -- --
-----------------------------------------
Balance at end of year $ 7,725,533 $ 6,496,854 $ 6,496,605
=========================================
CAPITAL SURPLUS
Balance at beginning of year $28,091,878 $28,089,137 $28,089,487
Common stock issued from treasury stock -- -- (350)
Conversions of subordinated debentures 10,050,401 2,741 --
Conversion of preferred shares into common shares 17,244 -- --
Options exercised 9,375 -- --
Common shares issued in acquisition of mortgage company 170,816 -- --
Issuance of shares under incentive compensation plan 286,195 -- --
Forfeitures of shares issued under incentive compensation plan (6,475) -- --
-----------------------------------------
Balance at end of year $38,619,434 $28,091,878 $28,089,137
=========================================
RETAINED EARNINGS
Balance at beginning of year $25,641,804 $21,592,244 $18,920,583
Net income 8,251,854 5,637,666 4,005,869
Cash dividends paid--common shares (2,223,721) (1,586,603) (1,332,707)
preferred shares (21,131) (1,503) (1,501)
-----------------------------------------
Balance at end of year $31,648,806 $25,641,804 $21,592,244
=========================================
NET UNREALIZED APPRECIATION (DEPRECIATION)
ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES
Balance at beginning of year $ 543,747 $(1,140,969) $ 734,686
Change in valuation account for securities available for sale, net of taxes (453,746) 1,502,081 (1,875,655)
Net unrealized gain on securities transferred from held to maturity to
available for sale, net of taxes -- 182,635 --
-----------------------------------------
Balance at end of year $ 90,001 $ 543,747 $(1,140,969)
=========================================
TREASURY STOCK
Balance at beginning of year $(1,489,239) $(1,489,239) $(1,489,589)
Issuance of shares under incentive compensation plan 1,095,055 -- --
Forfeiture of shares issued under incentive compensation plan (24,775) -- --
Common stock issued from treasury stock -- -- 350
-----------------------------------------
Balance at end of year $ (418,959) $(1,489,239) $(1,489,239)
=========================================
UNEARNED COMPENSATION
Balance at beginning of year $ (2,153,580) $ (1,479,224) $ (1,858,357)
Issuance of shares under incentive compensation plan (1,381,250) -- --
Forfeiture of shares issued under incentive compensation plan 31,250 -- --
Amortization of unearned compensation 509,600 122,150 122,150
Market value guarantee feature--unallocated shares -- (796,506) 256,983
-----------------------------------------
Balance at end of year $(2,993,980) $ (2,153,580) $ (1,479,224)
==========================================
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of year $59,657,224 $53,719,314 $52,856,675
Net changes during the year 17,520,211 5,937,910 862,639
-----------------------------------------
Balance at end of year $77,177,435 $59,657,224 $53,719,314
=========================================
See Notes to Consolidated Financial Statements.
</TABLE>
14
<PAGE> 5
<TABLE>
<CAPTION>
STERLING BANCORP and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,251,854 $ 5,637,666 $ 4,005,869
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses 2,047,005 1,866,000 1,053,000
Depreciation and amortization of premises and equipment 946,233 1,405,813 526,351
Deferred income tax provision/(benefit) 32,920 (877,554) (2,146,314)
Gain on sale of loans, net (69,108) (59,782) --
Net securities losses/(gains) 71,254 (4,801) (41,931)
Amortization of unearned compensation 509,600 122,150 122,150
Amortization of premiums on investment securities 1,666,602 1,494,661 2,750,640
Accretion of discounts on investment securities (157,134) (137,407) (136,021)
Increase in accrued interest receivable (105,192) (166,660) (483,440)
Increase in due to factoring clients 544,325 11,213,858 5,597,369
(Decrease) Increase in accrued expenses and other liabilities (3,153,196) 8,626,554 5,119,454
Other, net (2,174,394) 1,107,225 1,390,453
---------------------------------------------
Net cash provided by operating activities 8,410,769 30,227,723 17,757,580
---------------------------------------------
INVESTING ACTIVITIES
Purchase of premises and equipment (3,458,873) (715,598) (1,355,781)
Net increase in interest-bearing deposits with other banks (10,000) (30,000) --
Decrease (Increase) in Federal funds sold 2,000,000 3,000,000 (8,000,000)
Proceeds from sale of loans 3,534,848 2,234,425 --
Net increase in loans (70,989,326) (87,443,857) (14,349,495)
Proceeds from prepayments, redemptions or maturities of securities--
held to maturity 40,548,751 31,047,989 53,830,442
Purchases of securities--held to maturity (70,755,029) (20,534,657) (104,202,276)
Proceeds from sale of securities--available for sale 15,387,010 8,977,432 9,955,694
Proceeds from prepayments, redemptions or maturities of securities--
available for sale 13,390,375 5,734,390 54,912,931
Purchases of securities--available for sale (6,083,161) (10,918,982) (45,504,995)
---------------------------------------------
Net cash used in investing activities (76,435,405) (68,648,858) (54,713,480)
---------------------------------------------
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 5,896,240 49,183,400 808,172
Net increase (decrease) in interest-bearing deposits 17,498,318 (15,458,112) 43,508,417
Net increase in securities sold under agreements to repurchase 29,878,780 7,214,784 6,825,836
Net increase (decrease) in commercial paper and other
short-term borrowings 31,050,851 10,161,816 (6,157,340)
Issuance of debentures -- -- 7,020,000
Prepayments and maturities of debentures (3,773,515) (5,097,010) (7,466,000)
Decrease in other long-term borrowings--FHLB (3,500,000) (4,500,000) (3,000,000)
Increase in Federal funds purchased 7,000,000 -- --
Proceeds from exercise of stock options 10,875 -- --
Cash dividends paid on preferred and common shares (2,244,852) (1,588,106) (1,334,208)
---------------------------------------------
Net cash provided by financing activities 81,816,697 39,916,772 40,204,877
---------------------------------------------
Net increase in cash and due from banks 13,792,061 1,495,637 3,248,977
Cash and due from banks--beginning of year 40,720,401 39,224,764 35,975,787
---------------------------------------------
Cash and due from banks--end of year $54,512,462 $40,720,401 $39,224,764
=============================================
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $11,202,645 $ 2,990 $ --
Issuance of treasury shares 1,381,250 -- 350
Issuance of common stock 262,995 -- --
Supplemental disclosure of non-cash investing activities:
Net unrealized gain on securities transferred from held to maturity
to available for sale -- 354,424 --
Amortized cost of securities transferred from held to maturity to
available for sale -- 35,436,261 --
Supplemental disclosure of cash flow information:
Interest paid 23,225,059 16,627,551 12,505,156
Income taxes paid 10,790,311 7,105,020 4,928,459
See Notes to Consolidated Financial Statements.
</TABLE>
15
<PAGE> 6
<TABLE>
<CAPTION>
STERLING NATIONAL BANK
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 53,327,089 $ 40,472,572
Interest-bearing deposits with other banks 3,010,000 3,000,000
Federal funds sold 3,000,000 5,000,000
Securities available for sale (at estimated market value) 77,550,047 101,621,564
Securities held to maturity (estimated market value $223,668,650
and $196,573,342, respectively) 226,733,888 197,567,406
-----------------------------
Total investment securities 304,283,935 299,188,970
-----------------------------
Loans, net of unearned discounts 422,204,265 349,464,192
Less allowance for possible loan losses 5,013,857 3,649,003
-----------------------------
Loans, net 417,190,408 345,815,189
-----------------------------
Receivables from affiliates 660,570 660,570
Customers' liability under acceptances 613,430 2,395,089
Premises and equipment, net 5,385,998 2,646,716
Accrued interest receivable 4,248,142 4,129,541
Other assets 6,464,743 3,610,213
-----------------------------
$798,184,315 $706,918,860
=============================
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest-bearing deposits $231,415,215 $224,691,191
Interest-bearing deposits 359,587,160 337,787,544
-----------------------------
Total deposits 591,002,375 562,478,735
Federal funds purchased and securities sold under agreements to repurchase 88,144,400 51,265,620
Other short-term borrowings 30,419,791 5,331,640
Due to affiliates 841,460 596,694
Acceptances outstanding 613,430 2,395,089
Due to factoring clients 16,301,640 9,041,535
Accrued expenses and other liabilities 9,858,109 9,868,906
Long-term borrowings--FHLB 14,500,000 18,000,000
-----------------------------
Total liabilities 751,681,205 658,978,219
-----------------------------
Commitments and contingent liabilities
Shareholder's Equity
Common stock, $50 par value
Authorized and issued, 358,526 shares 17,926,300 17,926,300
Surplus 18,676,995 18,414,000
Undivided profits 9,810,852 11,058,904
Net unrealized appreciation on securities available for sale, net of taxes 88,963 541,437
-----------------------------
Total shareholder's equity 46,503,110 47,940,641
-----------------------------
$798,184,315 $706,918,860
=============================
See Notes to Consolidated Financial Statements.
</TABLE>
16
<PAGE> 7
STERLING BANCORP and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Sterling Bancorp ("the parent company") is a bank holding company, as defined by
the Bank Holding Company Act of 1956, as amended. Throughout the notes, the term
"the Company" refers to Sterling Bancorp and its subsidiaries. The Sterling
companies provide a full range of products and services, including business and
consumer loans, commercial and residential mortgage lending and brokerage,
asset-based financing, factoring, trade financing, leasing, trust and estate
administration and investment management services. Sterling has operations in
New York and Virginia and conducts business throughout the United States.
The following summarizes the significant accounting policies of Sterling Bancorp
and its subsidiaries.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company
and its subsidiaries, principally Sterling National Bank ("the bank"), after
elimination of material intercompany transactions.
General Accounting Policies
The Company follows generally accepted accounting principles and prevailing
practices within the banking industry. Any preparation of financial statements
requires management to make assumptions and estimates that impact the amounts
reported in those statements and are, by their nature, subject to change in the
future as additional information becomes available or as circumstances vary.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current presentation.
Investment Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires, among other things,
that securities designated as available for sale be reported at estimated market
value at each period end with the unrealized gain or loss, net of tax effect,
recorded as a component of shareholders' equity.
Securities are designated as available for sale or held to maturity at the time
of acquisition. Securities which the Company will hold for indefinite periods
of time and which might be sold in the future as part of efforts to manage
interest rate risk or in response to changes in interest rates, changes in
prepayment risk, changes in market conditions or changes in economic factors,
are classified as available for sale and carried at estimated market values.
Net aggregate unrealized gains or losses are included in a valuation allowance
account and are reported, net of taxes, as a component of shareholders' equity.
Securities which the Company has the positive intent and ability to hold to
maturity are designated as held to maturity and are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts over the
period to maturity. Interest and dividends on securities are reported in
interest income. Gains and losses realized on sales of securities are
determined on the specific identification method and are reported in
noninterest income as net securities (losses)/gains.
Loans
Loans, other than those held for sale, are reported at their principal amount
outstanding, net of unearned discounts and unamortized nonrefundable fees and
direct costs associated with their origination or acquisition. Interest earned
on loans without discounts is credited to income based on loan principal amounts
outstanding at appropriate interest rates. Material origination fees net of
direct costs and discounts on loans are credited to income over the terms of the
loans using a method which results in an approximate level rate of return.
Mortgage loans held for sale, including deferred fees and costs, are reported at
the lower of cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
loan basis. Gains or losses resulting from sales of mortgage loans, net of
unamortized deferred fees and costs, are recognized when the proceeds are
received from investors and are included under the caption "Mortgage banking
income".
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures". The
provisions of these statements are discussed more fully below under "Allowance
for Possible Loan Losses".
17
<PAGE> 8
Nonaccrual loans are those on which the accrual of interest has ceased.
Loans, including loans that are individually identified as being impaired under
SFAS No. 114, are generally placed on nonaccrual status immediately if, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more and collateral, if any, is insufficient to cover
principal and interest. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income. Interest income
is recognized on nonaccrual loans only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Allowance for Possible Loan Losses
The allowance for possible loan losses, which is available for losses incurred
in the loan portfolio, is increased by a provision charged to expense and
decreased by charge-offs, net of recoveries.
SFAS No. 114 and SFAS No. 118 address the accounting for impairment of
certain loans when it is probable that all amounts due pursuant to the
contractual terms of the loan will not be collected. Adoption of these standards
entailed the identification of commercial and industrial, real estate-mortgage,
real estate-construction and foreign loans which were considered impaired under
the provisions of SFAS No. 114. Adoption did not have a material impact on the
Company's financial position or results of operations.
Under the provisions of these standards, individually identified impaired
loans are measured based on the present value of payments expected to be
received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices or for
loans that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. Loans that are to be foreclosed
are measured based on the fair value of the collateral. If the recorded
investment in the impaired loan exceeds fair value, a valuation allowance is
required as a component of the allowance for possible loan losses. Changes to
the valuation allowance are recorded as a component of the provision for
possible loan losses.
The adequacy of the allowance for possible loan losses is reviewed
regularly by management. Additions to the allowance for possible loan losses are
made by a provision charged to expense. On a quarterly basis, a comprehensive
review of the adequacy of the allowance for possible loan losses is performed.
This assessment is made in the context of historical losses and other factors,
including changes in the composition and volume of the loan portfolio, current
economic conditions and the relationship of the allowance to the loan portfolio.
Excess Cost Over Equity in Net Assets of the Banking Subsidiary
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". This statement establishes
accounting standards for determining and measuring the impairment of certain
assets, including excess cost over equity in net assets.
Since the bank was acquired by the parent company prior to October 31, 1970
and the excess cost over equity in net assets has a continuing value, this
excess is not being amortized.
Premises and Equipment
Premises and equipment, excluding land, are stated at cost less accumulated
depreciation and amortization. Land is reported at cost. Depreciation is
computed on a straight-line basis and is charged to noninterest expense over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is charged to noninterest expense over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Maintenance, repairs and minor improvements are charged to noninterest expenses
as incurred.
Income Taxes
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes" requires the asset and liability method of accounting for income
taxes. Deferred income tax expense (benefit) under SFAS No. 109 is determined by
recognizing deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
18
<PAGE> 9
The realization of deferred tax assets is assessed and a valuation allowance
provided for that portion of the assets for which it is more likely than not
that it will not be realized. Deferred tax assets and liabilities are measured
using enacted tax rates and will be adjusted for the effects of future changes
in tax laws or rates, if any.
For income tax purposes, the Company files: a consolidated Federal income
tax return; combined New York City and New York State income tax returns; and
separate state income tax returns for its out-of-state subsidiaries. The parent
company either pays or collects on account of current income taxes to or from
its subsidiaries.
The provision for income taxes for each subsidiary is recorded as if
separate income tax returns had been filed. Income taxes currently payable or
receivable by each subsidiary are paid to or received from the parent company.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
Stock Incentive Plans
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock options grants made in 1995 and future years as if the fair-value based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Earnings Per Average Common Share
Primary earnings per average common share is computed by dividing net income by
the average number of common and common equivalent shares outstanding during the
period. Common shares outstanding exclude treasury shares. Common equivalent
shares include Series D convertible preferred shares released to participant
accounts under the provisions of the Company's Employee Stock Ownership Plan and
the dilutive effect of outstanding stock options. Series B convertible preferred
shares, considered common stock equivalents, were not significant in any period
and have been excluded.
The average common shares outstanding in the computation of fully diluted
earnings per share includes the common shares outstanding adjusted for the
assumed conversion of convertible subordinated debentures and preferred shares
and the additional dilutive effect of outstanding stock options. Net income is
adjusted for interest and amortization of debt expense (after tax effect) on the
convertible subordinated debentures.
Off-Balance Sheet Instruments
The Company enters into interest rate floor contracts primarily to manage
interest rate exposure. These instruments are entered into as hedges against
interest rate risk associated with certain identified assets. The premiums paid
for these instruments are amortized to interest income over the term of the
related asset. Amounts receivable are accounted for on an accrual basis and are
recognized as adjustments to the interest income of the related assets.
NOTE 2. ACQUISITION
On July 1, 1996, the Company acquired the Real Estate Funding Center (now
operating as Sterling National Mortgage Company, Inc.) for 92,179 shares of
common stock. The acquisition was accounted for as a pooling of interests.
However, prior periods have not been restated as the acquisition was not
material.
NOTE 3. CASH AND DUE FROM BANKS
The bank is required to maintain average reserves, net of vault cash, on deposit
with the Federal Reserve Bank of New York against outstanding domestic deposit
liabilities. The required reserves, which are reported in cash and due from
banks, were $17,273,000 and $16,204,000 at December 31, 1996 and 1995,
respectively. Average required reserves during 1996 and 1995 were $13,115,000
and $11,053,000, respectively.
19
<PAGE> 10
NOTE 4. MONEY MARKET INVESTMENTS
The Company's money market investments include interest-bearing deposits with
other banks and Federal funds sold. The following table presents information
regarding money market investments.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits with other banks
<S> <C> <C> <C> <C>
At December 31 --Balance $3,010,000 $3,000,000 $2,970,000
--Average interest rate 5.25% 5.57% 5.10%
--Average original maturity 69 Days 181 Days 181 Days
During the year --Maximum month-end balance 3,010,000 3,540,000 2,970,000
--Daily average balance 2,999,000 3,037,000 2,963,000
--Average interest rate earned 5.23% 5.53% 4.17%
--Range of interest rates earned 4.25-5.69% 3.05-6.16% 3.05-6.31%
===============================================
Federal funds sold
At December 31--Balance $3,000,000 $5,000,000 $8,000,000
--Average interest rate 5.50% 4.00% 5.75%
--Average original maturity 1 Day 1 Day 1 Day
During the year --Maximum month-end balance 25,000,000 30,000,000 20,000,000
--Daily average balance 5,153,000 9,153,000 7,033,000
--Average interest rate earned 5.60% 5.92% 4.59%
--Range of interest rates earned 4.75-6.50% 4.00-6.38% 2.94-6.00%
===============================================
</TABLE>
NOTE 5. INVESTMENT SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 40,963,427 $ 282,824 $ -- $ 41,246,251
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 30,377,325 113,067 231,447 30,258,945
Federal Reserve Bank and other equity securities 6,089,306 3,895 1,280 6,091,921
------------------------------------------------------------
Total $ 77,430,058 $ 399,786 $232,727 $ 77,597,117
============================================================
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 51,153,545 $1,219,655 $ -- $ 52,373,200
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 44,548,562 263,964 482,813 44,329,713
Federal Reserve Bank and other equity securities 4,963,107 5,240 794 4,967,553
------------------------------------------------------------
Total $100,665,214 $1,488,859 $483,607 $101,670,466
============================================================
</TABLE>
20
<PAGE> 11
The carrying value and estimated market value of securities held to maturity
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 VALUE GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S. government corporations
and agencies--mortgage-backed securities $223,983,888 $ 692,968 $3,758,206 $220,918,650
Debt securities issued by foreign governments 2,750,000 -- -- 2,750,000
------------------------------------------------------------
Total $226,733,888 $ 692,968 $3,758,206 $223,668,650
============================================================
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations
and agencies--mortgage-backed securities $194,067,406 $1,078,113 $2,072,177 $193,073,342
Debt securities issued by foreign governments 3,500,000 -- -- 3,500,000
------------------------------------------------------------
Total $197,567,406 $1,078,113 $2,072,177 $196,573,342
============================================================
</TABLE>
The following tables present information regarding securities available for
sale and securities held to maturity at December 31, 1996, based on contractual
maturity. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. The average yield is based on the ratio of actual income
divided by the average outstanding balances during the year. The average yield
on obligations of states and political subdivisions is not stated on a
tax-equivalent basis.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET AVERAGE
SECURITIES AVAILABLE FOR SALE COST VALUE YIELD
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury securities
Due within 1 year $ 26,107,757 $ 26,224,375
Due after 1 year but within 5 years 14,855,670 15,021,876
---------------------------------
40,963,427 41,246,251 6.80%
Obligations of U.S. government corporations
and agencies--mortgage-backed securities 30,377,325 30,258,945 6.57
Federal Reserve Bank and other equity securities 6,089,306 6,091,921 7.60
---------------------------------
Total $ 77,430,058 $ 77,597,117 6.77
=================================
ESTIMATED
CARRYING MARKET AVERAGE
SECURITIES HELD TO MATURITY VALUE VALUE YIELD
- ------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations
and agencies--mortgage-backed securities $223,983,888 $220,918,650 6.67%
----------------------------------
Debt securities issued by foreign governments
Due within 1 year 1,000,000 1,000,000
Due after 1 year but within 5 years 1,000,000 1,000,000
Due after 5 years 750,000 750,000
2,750,000 2,750,000 7.60
----------------------------------
Total $226,733,888 $223,668,650 6.68
==================================
</TABLE>
21
<PAGE> 12
Based on a decision by the Financial Accounting Standards Board to allow
companies a one-time opportunity to reassess their investment securities
classifications, in December 1995, the Company transferred certain U.S. Treasury
securities and certain mortgage-backed securities with an amortized cost of
$35,436,261 and an estimated fair value of $35,790,685 from held to maturity to
available for sale. This action was taken by management in connection with its
Asset/Liability Management process and was designed to provide flexibility in
the management of interest rate risk, yield and collateral requirements. The net
unrealized gain after tax effect on the transferred securities was $182,635
($354,424 before tax effect) and is included in shareholders' equity.
Information regarding securities sales from the available for sale
portfolio is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31, 1996 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C>
Proceeds $15,387,010 $8,977,432 $9,955,694
Gross gains 22,161 85,221 63,136
Gross losses 105,354 80,420 21,205
</TABLE>
During 1996, the Federal Home Loan Bank ("FHLB") issued a call for their
securities maturing December 20, 2001. The carrying value of such securities in
the held to maturity portfolio was $3,488,063. As the result of FHLB decision to
call these securities, a gain of $11,939 was realized and reported under the
caption "Net securities (losses)/gains".
The carrying value of investment securities pledged to secure public funds
on deposit, securities sold under agreements to repurchase, advances from the
Federal Home Loan Bank of New York and for other purposes required by law is as
follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------
<S> <C> <C>
Secure funds
on deposit $ 21,751,000 $ 28,865,000
Secure repurchase
agreements 91,452,000 74,449,000
Secure Federal
Home Loan
Bank advances 20,129,000 25,266,000
------------ ------------
Total $133,332,000 $128,580,000
============ ============
</TABLE>
NOTE 6. LOANS
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------
Domestic
<S> <C> <C>
Commercial and
industrial $351,280,247 $313,118,052
Lease financing 40,488,618 24,311,355
Real estate--
mortgage 64,368,209 49,789,721
Real estate--
construction 1,136,253 1,039,546
Installment 15,536,413 14,876,277
Foreign
Government
and official
institutions 789,424 789,424
----------------------------
Loans, gross 473,599,164 403,924,375
Less unearned
discounts 8,082,608 6,695,589
----------------------------
Loans, net of
unearned discounts $465,516,556 $397,228,786
============================
</TABLE>
The Company originates certain residential mortgage loans with the
intention of reselling those loans, including the servicing rights, without
recourse. Residential mortgage loans held for sale, included in "Real
estate--mortgage", are $6,010,000 and $419,000 at December 31, 1996 and 1995,
respectively.
Loans to companies in the textile and apparel industry represent 14% of the
commercial and industrial loan portfolio. There are no other industry
concentrations (exceeding 10% of loans, gross) in the commercial and industrial
loan portfolio. Approximately 75% of the bank's loans are to borrowers located
in the metropolitan New York area.
Nonaccrual loans at December 31, 1996 and 1995 totalled $442,000 and
$357,000, respectively. There were no reduced rate loans at December 31, 1996 or
1995. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 1996, 1995 and 1994 in accordance with their
original terms is estimated to be $13,000, $22,000 and $86,000, respectively,
for the years then ended. The applicable interest income actually realized for
the aforementioned years was $-0-, $-0- and $18,000, respectively, for the years
then ended. At the end of these years there were no commitments to lend
additional funds on nonaccrual loans.
22
<PAGE> 13
Loans are made at normal lending limits and credit terms to officers or
directors (including their immediate families) of the Company or for the benefit
of corporations in which they have a beneficial interest. There were no
outstanding balances on such loans in excess of $60,000 to any individual or
entity at December 31, 1996 or 1995.
NOTE 7. CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,192,203 $4,135,810 $3,413,947
Provision for possible loan losses 2,047,005 1,866,000 1,053,000
-----------------------------------------------
7,239,208 6,001,810 4,466,947
-----------------------------------------------
Less charge-offs, net of recoveries:
Charge-offs 737,961 1,000,751 532,345
Recoveries (1,502,145) (191,144) (201,208)
-----------------------------------------------
Net (recoveries) charge-offs (764,184) 809,607 331,137
-----------------------------------------------
Balance at end of year $ 8,003,392 $5,192,203 $4,135,810
===============================================
</TABLE>
During the third quarter of 1996, $1,333,000 was recovered on a previously
charged-off loan in the bank.
Effective January 1, 1995, the Company adopted SFAS No. 114, which
established new rules for calculating certain components of the allowance for
possible loan losses. Adoption of SFAS No. 114 had no impact on the level of the
overall allowance for possible loan losses or on operating results, and does not
affect the Company's policies regarding charge-offs, recoveries, or income
recognition.
SFAS No. 114 requires that impairment of larger-balance, non-homogenous
loans that are individually evaluated be measured by comparing the net carrying
amount of the loan to the present values of the expected future principal and
interest cash flows discounted at the loan's effective rate, the secondary
market value of the loan, or the fair value of the collateral for
collateral-dependent loans. A valuation allowance for any shortfall is
established within the overall allowance for possible loan losses. The net
carrying amount of the loan reflects credit write-offs, cash receipts applied to
reduce the recorded investment in the loan, and unearned fees. SFAS No. 114 does
not apply to smaller-balance homogenous consumer loans that are collectively
evaluated for impairment, such as residential mortgages, and consumer
installment loans.
As of December 31, 1996 and 1995, $121,000 and $316,000, respectively, of
loans were judged to be impaired within the scope of SFAS No. 114 and carried on
a cash-basis. The average recorded investment in impaired loans during the years
ended December 31, 1996 and 1995, was approximately $219,000 and $857,000,
respectively. The application of SFAS No. 114 measurement principles indicated
that these loans required valuation allowances, totalling $69,000 and $160,000
at December 31, 1996 and 1995, respectively, which are included within the
overall allowance for possible loan losses.
NOTE 8. INTEREST-BEARING DEPOSITS
Foreign deposits totalled $2,710,000 and $3,240,000 at December 31, 1996 and
1995, respectively.
Interest expense for deposits in domestic and foreign offices is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Interest expense
<S> <C> <C> <C>
Interest-bearing deposits in domestic offices $11,968,647 $11,385,646 $8,369,984
Interest-bearing deposits in foreign offices 139,689 154,698 103,510
-------------------------------------------------
Total $12,108,336 $11,540,344 $8,473,494
=================================================
</TABLE>
23
<PAGE> 14
The aggregate of domestic time certificates of deposit in denominations of
$100,000 or more by remaining maturity range and related interest expense is
presented below; there were no foreign time certificates of deposits:
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Remaining maturity range
Three months or less $36,405,594 $50,130,956 $52,758,925
More than three months through six months 25,727,589 10,377,893 6,878,526
More than six months through twelve months 7,402,946 5,157,534 6,742,806
More than twelve months through twenty-four months 415,862 4,503,102 9,699,636
More than twenty-four months through thirty-six months 706,068 -- --
--------------------------------------------------
Total $70,658,059 $70,169,485 $76,079,893
==================================================
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Interest Expense $ 3,615,702 $ 3,644,778 $ 2,429,283
==================================================
</TABLE>
NOTE 9. SHORT-TERM BORROWINGS
The following table presents information regarding securities sold under
agreements to repurchase and commercial paper.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase
<S> <C> <C> <C> <C>
At December 31 --Balance $ 81,144,400 $51,265,620 $44,050,836
--Average interest rate 5.28% 5.36% 5.37%
--Average original maturity 75 Days 86 Days 44 Days
During the year --Maximum month-end balance 112,347,383 71,063,346 62,756,854
--Daily average balance 85,037,000 53,295,000 55,813,000
--Average interest rate paid 5.29% 5.56% 3.72%
--Range of interest rates paid 3.50-6.17% 2.55-6.00% 2.25-5.85%
====================================================
Commercial paper
At December 31--Balance $ 32,569,900 $26,607,200 $14,672,800
--Average interest rate 5.19% 5.11% 4.50%
--Average original maturity 69 Days 68 Days 47 Days
During the year --Maximum month-end balance 32,643,000 26,627,500 17,872,500
--Daily average balance 29,652,000 21,850,000 14,491,000
--Average interest rate paid 5.22% 5.38% 3.62%
--Range of interest rates paid 2.50-5.60% 3.50-6.08% 2.50-6.05%
====================================================
</TABLE>
Federal funds purchased at December 31, 1996 are $7,000,000 at a rate of
5.75%. The daily average balance for the year is $2,054,000 at an average rate
of 5.52%. During the year, the maximum month-end balance was $10,000,000 and the
range of rates paid was 5.06-5.75%.
Other short-term borrowings include collateralized advances from the
Federal Home Loan Bank of New York due within one year and treasury tax and loan
funds. Federal Home Loan Bank borrowings include an advance of $22,000,000
payable January 2, 1997 at a rate of 7.375%, an advance of $250,000 repayable in
March, 1997 at a rate of 5.20% and an advance of $3,250,000 repayable in
October, 1997 at a rate of 4.84%.
The parent company has agreements with its line banks for back-up lines of
credit for which it pays a fee at the annual rate of 1/4 of 1% times the line of
credit extended. At December 31, 1996, these back-up bank lines of credit
totalled $14,000,000. No lines were used at any time during 1996 and 1995.
24
<PAGE> 15
NOTE 10. LONG-TERM CONVERTIBLE SUBORDINATED DEBENTURES
The parent company's floating interest rate convertible subordinated debentures
are traded on the New York Stock Exchange. A summary of changes in these
debentures follows (amounts in thousands):
<TABLE>
<CAPTION>
Maturity Dates
------------------------------------
July 1, Nov. 1, July 1,
------------------------------------
1996 1998 2001 Total
-----------------------------------------------------
Series Third 4th Fifth
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 4,964 $14,462 $ 7,020 $ 26,446
Repayments, conversions and retirements (4,964) (136) -- (5,100)
-----------------------------------------------------
Balance at December 31, 1995 $-- 14,326 7,020 21,346
=======
Repayments, conversions and retirements (7,937) (7,020) (14,957)
--------------------------------------
Balance at December 31, 1996 $ 6,389 $-- $ 6,389
======================================
Estimated market value at December 31, 1996 $ 6,852 $ 6,852
======= =========
</TABLE>
The debentures bear interest at a floating interest rate equal to one half
of one percent (1/2%) above the daily average reference rate of interest of a
designated major New York City bank, payable semi-annually. The daily average
interest rates paid on the Third and 4th series for the six-month interest
periods ended December 31, 1996, June 30, 1996, December 31, 1995, June 30,
1995, December 31, 1994, and June 30, 1994 were 8.80% and 8.75%, 9.30% and
9.30%, and 8.10% and 6.80%, respectively. The daily average interest rates paid
on the Fifth series for the six-month interest periods ended December 31, 1996,
June 30, 1996, December 31, 1995, June 30, 1995, and for the initial period
August 1 to December 31, 1994 were 8.80% and 8.75%, 9.30% and 9.30%, and 8.20%,
respectively. The debentures are convertible into common shares of the parent
company. The conversion rate is subject to anti-dilution provisions of the
indenture. The 4th series was issued on October 17, 1988 in the amount of $15
million with a conversion price of $12.50 and a maturity date of November 1,
1998.
NOTE 11. OTHER LONG-TERM BORROWINGS
These borrowings represent advances from the Federal Home Loan Bank of New York
("FHLB"), as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rates and maturity dates
4.84% to 5.20%, due 1997 $ -- $ 3,500,000
5.05% to 5.44%, due 1998 12,750,000 12,750,000
5.68%, due 1999 350,000 350,000
5.92%, due 2000 350,000 350,000
6.07%, due 2001 350,000 350,000
6.22%, due 2002 350,000 350,000
6.37%, due 2003 350,000 350,000
------------------------------
Total $14,500,000 $18,000,000
==============================
Weighted average interest rate 5.22% 5.15%
==============================
</TABLE>
Under the terms of a collateral agreement with the FHLB, advances are
secured by stock in the FHLB and by certain qualifying assets (primarily
mortgage-backed securities) having market values at least equal to 110% of the
advances outstanding.
25
<PAGE> 16
NOTE 12. PREFERRED STOCK
The parent company is authorized to issue up to 644,389 shares of convertible
preferred stock, $5 par value, in one or more series. At December 31, 1996 and
1995, two series of preferred stock had been issued--Series B and Series D.
The following table presents information regarding the parent company's
preferred stock:
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Series B shares.
Authorized 4,389
shares; issued
and outstanding--
1,230 and 1,288
shares, respectively,
at liquidation value $ 24,600 $ 25,760
Series D shares.
Authorized 300,000
shares; issued
and outstanding--
248,200 and
250,000 shares,
respectively, at
liquidation value 2,482,000 2,500,000
-------------------------
Total $2,506,600 $2,525,760
=========================
</TABLE>
SERIES B
Series B shares may be redeemed, in whole or in part, at the election of the
parent company at a price of $28 per share, plus accrued and unpaid dividends to
the date of redemption. In the event of involuntary liquidation of the parent
company, the holders of these shares are entitled to receive, before any
distribution to the holders of common shares, $20 per share ("liquidation
value"). At the option of holders of these shares, such shares are convertible
into common shares of the parent company at a conversion rate of two common
shares for each Series B share surrendered. During 1996, 58 shares were
converted; there were no conversions during 1995. Dividends on the Series B
shares are paid at the rate of $.10 per annum, payable semi-annually and are
cumulative. Holders of these shares are entitled to one vote for each share held
and vote together as one class with the holders of the common shares of the
parent company.
SERIES D
Series D shares may only be issued to the trustee acting on behalf of an
employee stock ownership plan ("ESOP") or other employee benefit plan of the
Company. The Series D shares are convertible into common shares of the parent
company on a share for share basis. During 1993, the parent company issued
250,000 shares to the trustee of the Company's ESOP. These shares are entitled
to receive cash dividends in the amount of $.6125 per annum (subject to
adjustment), payable quarterly. Participants in the Company's ESOP are entitled
to vote in accordance with the terms of the ESOP and vote together as one class
with the holders of the common shares of the parent company. The holders of
these shares are entitled to receive $10 per share and certain other preferences
on liquidation, dissolution or winding up. See Footnote 16 for a discussion of
the Company's ESOP.
NOTE 13. COMMON STOCK
<TABLE>
<CAPTION>
Number of shares reserved for issuance:
1996 1995
- --------------------------------------------------------
<S> <C> <C>
Conversion of
subordinated
debentures:
Floating rate
due 11/1/98 511,120 1,146,080
Floating rate
due 7/1/01 -- 802,286
Conversion of Series B
preferred shares 2,460 2,576
Conversion of Series D
preferred shares 298,200 300,000
-----------------------
811,780 2,250,942
=======================
Number of shares
outstanding at
December 31, 7,683,190 6,346,511
=======================
Number of shareholders
at December 31, 2,366 2,430
=======================
</TABLE>
NOTE 14. RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits (as defined) for that
year to date combined with its retained net profits for the preceding two
calendar years. In addition, from time to time dividends are paid to the parent
company by the finance subsidiaries from their retained earnings without
regulatory restrictions.
26
<PAGE> 17
NOTE 15. STOCK INCENTIVE PLANS
In April 1992, shareholders approved a Stock Incentive Plan ("the plan")
covering up to 100,000 common shares of the parent company. Under the plan, key
employees of the parent company and its subsidiaries could be granted awards in
the form of incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights ("SARs"), restricted stock or a combination
of these. The plan is administered by committees of the Board of Directors. In
April 1995, shareholders approved amendments to the plan which increased the
number of shares covered under the plan by 300,000 and which provided for the
annual automatic grant of NQSOs to each director who is not an employee or
officer ("outside director") of the Company. Under this provision annual NQSO
awards covering 2,000 common shares of the parent company are granted to each
outside director beginning April 1995 and continuing through April 1999. In
April 1996, shareholders approved amendments to the plan which increased the
number of shares covered under the plan by 300,000. After giving effect to stock
option and restricted stock awards granted, shares available for grant were
361,000, 287,000 and -0- at December 31, 1996, 1995 and 1994, respectively.
Stock Options
The following table presents information on stock option awards granted:
<TABLE>
<CAPTION>
Number of Options
-----------------------------------------------------------
Option 1996 1995 1994
Grant Exercise -----------------------------------------------------------
Date Price ISO NQSO ISO NQSO ISO NQSO
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 97,000 16,000 100,000 -- 100,000 --
Granted 4/95 $ 7.25 -- -- -- 16,000 -- --
Granted 1/96 12.50 109,500 -- -- -- -- --
Granted 4/96 11.375 -- 16,000 -- -- -- --
Exercised ($7.25 per share) -- (1,500) -- -- -- --
Terminated (7,500) -- (3,000) -- -- --
------------------------------------------------------------
Outstanding at end of year 199,000 30,500 97,000 16,000 100,000 --
============================================================
Exercisable at end of year 97,000 14,500 97,000 -- 100,000 --
============================================================
</TABLE>
Other than director NQSOs which expire five years from the date of grant
and become exercisable in four annual installments, starting one year from the
date of grant, or upon the death or disability of the grantee, stock options
generally expire ten years from the date of grant or, to the extent appropriate
to qualify to the maximum extent possible as ISOs in installments, subject to
earlier exercisability upon the death or disability of the grantee or other
specified events. Amounts received upon exercise of options are recorded as
common stock and capital surplus.
On January 1, 1996 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". The
statement encourages, but does not require companies to use a fair value-based
method of accounting for stock-based employee compensation plans, including
stock options and stock appreciation rights. Under this method, compensation
expense is measured as of the date the awards are granted based on the estimated
fair value of the awards, and the expense is generally recognized over the
vesting period. If a company elects to continue using the intrinsic value-based
method under APB Opinion No. 25, pro forma disclosures of net income and net
income per share are required as if the fair value-based method had been
applied. Under the intrinsic method, compensation expense is the excess, if any,
of the market price of the stock as of the grant date over the amount employees
must pay to acquire the stock or over the price established for determining
appreciation. Under the Company's current compensation policies, there is no
such excess on the date of grant and therefore, no compensation expense is
recorded.
Using the Black-Scholes option-pricing model with the following
assumptions, the table below presents information regarding stock options
granted pursuant to the provisions of SFAS No. 123:
<TABLE>
<CAPTION>
Grant Estimated Annual Expected Expected Risk-free Expected
Date Fair Value Dividend Yield Volatility Interest Rate Life
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NQSOs 11/95 $1.40 2% 20% 5.89% 3 Years
ISOs 1/96 3.22 2% 20% 5.46% 7 Years
NQSOs 4/96 2.04 2% 20% 5.90% 3 Years
</TABLE>
27
<PAGE> 18
The Company has elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock incentive plan. Accordingly, no
compensation expense has been recognized in the consolidated statements of
income related to the stock incentive plan. Had compensation expense been
determined based on the estimated fair value of the awards at the grant dates,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table that follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------
<S> <C> <C>
Net income
As reported $8,252,000 $5,638,000
Pro forma 8,200,000 5,636,000
Primary earnings
per share
As reported 1.16 .88
Pro forma 1.15 .88
Fully diluted
earnings per share
As reported 1.05 .80
Pro forma 1.04 .80
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Additionally, the full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net income above,
since such expense is apportioned over the vesting period of those options which
are expected to vest. Compensation expense for options granted prior to 1995 is
also not considered.
Restricted Stock
On January 3, 1996, 110,500 shares of restricted stock were awarded from
Treasury shares. The fair value was $12.50 per share. These awards vest to
recipients over a four year period at the rate of 25% per year. The plan calls
for the forfeiture of nonvested shares which are restored to the Treasury and
become available for future awards. During 1996, 2,500 shares were forfeited.
Unearned compensation resulting from these awards is amortized as a charge to
noninterest expenses over a four year period; such charge was $230,210 in 1996.
The balance of unearned compensation is shown as a reduction of shareholders'
equity. For income tax purposes, the Company is entitled to a deduction in an
amount equal to the average market value of the shares on vesting date and
dividends paid on shares for which restrictions have not lapsed.
NOTE 16. EMPLOYEE STOCK OWNERSHIP PLAN
On March 5, 1993, the Company established an Employee Stock Ownership Plan
("ESOP"). This plan covers substantially all employees with one or more years of
service of at least 1,000 hours who are at least 21 years of age. During 1993,
the parent company issued 250,000 shares of Series D preferred stock at a price
of $10.00 per share to the Company's ESOP trust. The trust borrowed $2,500,000
from the bank, to pay for the shares. The ESOP loan is at a fixed interest rate
for a term of ten years with quarterly payments of interest only through
December 31, 1995. Quarterly principal payments at an annual rate of $250,000
and $350,000 commence on March 31, 1996 and March 31, 1999, respectively, plus
interest. The bank match-funded the ESOP loan with collateralized advances from
the Federal Home Loan Bank of New York. The ESOP shares, pledged as collateral
for the ESOP loan, are held in a suspense account and released for allocation
among the participants as principal and interest on the ESOP loan is repaid.
Under the terms of the ESOP, participants may vote both allocated and
unallocated shares.
The Company makes quarterly contributions to the ESOP equal to the debt
service on the ESOP loan less dividends paid on the ESOP shares. All dividends
paid are used for debt service. ESOP shares released from the suspense account
are allocated among the participants on the basis of salary in the year of
allocation. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans".
Accordingly, the Company initially recorded a deduction from shareholders'
equity equal to the purchase price of the shares reflecting such amount as
unearned compensation. The consolidated balance sheets report as unearned
compensation the remaining shares pledged as collateral. The unearned
compensation is reduced as payments are made on the loan and, as shares are
released from the suspense account, the Company recognizes compensation expense
equal to the current market price of the common shares into which the preferred
shares are convertible, and the shares become outstanding for earnings per share
computations. Dividends on unallocated ESOP shares are recorded as a reduction
of accrued interest payable; dividends on allocated ESOP shares are recorded as
a reduction of retained earnings. In addition, because the parent company
guaranteed a liquidation and redemption price of $10.00 per share, the amount,
if any, by which $10.00 exceeds the year-end market
28
<PAGE> 19
price of the parent company common stock into which the outstanding Series D
shares are convertible is reflected outside shareholders' equity less its
related shares of unearned compensation for the unallocated shares.
Compensation expense was $279,100, $122,150 and $122,150 for 1996, 1995 and
1994, respectively, with a corresponding reduction in unearned compensation. As
of December 31, 1996, 34,642 shares had been allocated and 27,910 shares had
been released for allocation; 185,648 shares were not released ("unallocated").
The fair value of unallocated shares at December 31, 1996 was $1,856,480. The
following table presents interest paid on the ESOP loan, dividends paid on the
Series D preferred shares and contributions made by the Company:
<TABLE>
<CAPTION>
Years Ended
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 183,451 $ 190,104 $ 190,104
Dividends paid 152,915 153,125 153,125
Company contributions 30,536 36,979 36,979
</TABLE>
NOTE 17. EMPLOYEE BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan that covers
substantially all employees with one or more years of service of at least 1,000
hours who are at least 21 years of age. The quarterly payments to the plan are
determined annually based upon the amount needed to satisfy the Employee
Retirement Income Security Act funding standards.
The following table sets forth the pension plan funded status:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
($7,784,876) and ($7,444,199), respectively $ (8,436,781) $ (8,111,748)
==================================
Projected benefit obligation for service rendered to date $(11,532,656) $(11,016,949)
Plan assets at fair value (U.S. Treasury securities, insurance contract and
listed stock) 11,761,815 10,299,659
-----------------------------------
Funded status 229,159 (717,290)
Unrecognized prior service cost (2,706) (5,326)
Unrecognized net loss 1,392,975 2,142,345
-----------------------------------
Prepaid pension cost $ 1,619,428 $ 1,419,729
===================================
Net pension expense included the following components:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 631,846 $ 509,817 $ 514,083
Interest cost 755,538 723,038 609,807
Actual return on assets (1,142,243) (2,075,850) 250,311
Deferral of asset gain/(loss) 374,335 1,570,743 (761,159)
-------------------------------------------------
Total included in employee benefits $ 619,476 $ 727,748 $ 613,042
=================================================
</TABLE>
Pension cost is determined using assumptions at the beginning of the year.
The projected benefit obligation (PBO) is determined using assumptions at the
end of the year. Assumptions used to determined pension cost and the PBO were:
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.0% 8.25%
Rate of increase in future compensation levels 4.5% 4.0% 5.0 %
Long-term rate of return on plan assets 8.0% 8.0% 8.0 %
</TABLE>
29
<PAGE> 20
NOTE 18. INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
FEDERAL
<S> <C> <C> <C>
Current $ 4,882,913 $ 3,896,674 $ 3,429,163
Deferred (377,704) (666,228) (1,365,534)
--------------------------------------------------
Total $ 4,505,209 $ 3,230,446 $ 2,063,629
==================================================
STATE AND LOCAL
Current $ 2,659,665 $ 2,959,732 $ 4,741,927
Deferred 410,624 (211,326) (780,780)
--------------------------------------------------
Total $ 3,070,289 $ 2,748,406 $ 3,961,147
==================================================
TOTAL
Current $ 7,542,578 $ 6,856,406 $ 8,171,090
Deferred 32,920 (877,554) (2,146,314)
--------------------------------------------------
Total $ 7,575,498 $ 5,978,852 $ 6,024,776
==================================================
</TABLE>
Reconciliations of income tax provisions with taxes or tax benefits
computed at Federal statutory rates are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35% 34% 34%
-----------------------------------------------
Computed tax $5,539,573 $3,949,616 $3,410,419
Increase in tax resulting from:
Principally state and local taxes,
net of Federal income tax benefit 2,035,925 2,029,236 2,614,357
-----------------------------------------------
Total $7,575,498 $5,978,852 $6,024,776
===============================================
</TABLE>
The components of the net deferred tax asset, included in other assets, are
as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Difference between financial statement provision for
possible loan losses and tax bad debt deduction $2,721,154 $1,785,000
Nonaccrual and other interest 1,778,110 2,723,207
Deferred compensation 204,599 186,901
Other 628,595 958,586
----------------------------
Total deferred tax assets 5,332,458 5,653,694
Deferred tax liabilities ----------------------------
Pension and benefit plans 558,687 558,687
Other 48,993 336,476
----------------------------
Total deferred tax liabilities 607,680 895,163
----------------------------
Net deferred tax asset 4,724,778 4,758,531
SFAS No. 115 deferred tax liability (77,058) (461,126)
----------------------------
Total net deferred tax asset $4,647,720 $4,297,405
============================
</TABLE>
Management believes, based upon current facts, that more likely than not
there will be sufficient taxable income in future years to realize the deferred
tax assets. However, there can be no assurance about the level of future
earnings.
30
<PAGE> 21
Federal income tax returns of the Company for all years through December
31, 1987 have been settled with the Internal Revenue Service.
Taxes, other than taxes on income, are charged against noninterest expenses
and amounted to $1,367,107, $1,346,664 and $1,170,721 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures about
Fair Value of Financial Instruments" requires the Company to disclose the "fair
values" of certain financial instruments for which it is practical to estimate
"fair value".
Much of the information used to arrive at fair value is highly subjective
and judgmental in nature and therefore the results may not be precise. The
subjective factors include, among other things, estimated cash flows, risk
characteristics, credit quality and interest rates all of which are subject to
change. With the exception of investment securities and long-term debt, the
Company's financial instruments are not readily marketable and market prices do
not exist. Since negotiated prices for the instruments which are not readily
marketable depend greatly on the motivation of the buyer and seller, the amounts
which will actually be realized or paid per settlement or maturity of these
instruments could be significantly different.
The following disclosures represent the Company's best estimate of the
"fair value" of both on- and off-balance sheet financial instruments.
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks, interest-bearing deposits with
other banks, Federal funds sold, customers' liabilities under acceptances,
accrued interest receivable, Federal funds purchased and securities sold under
agreements to repurchase, commercial paper, other short-term borrowings,
acceptances outstanding, due to factoring clients, and accrued interest payable,
as a result of their short-term nature, is considered to be equal to fair value.
Investment Securities
For investment securities, fair value has been based upon current market
quotations, where available. If quoted market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
Loans
The fair value of loans which reprice within 90 days reflecting changes in the
base rate is equal to their carrying amount. For other loans, the estimated fair
value is calculated based on discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality and for similar maturities. These calculations have been adjusted
for credit risk based on the Company's historical credit loss experience.
The estimated fair value for secured nonaccrual loans is the value of the
underlying collateral which is sufficient to repay each loan. For other
nonaccrual loans, the estimated fair value represents book value less a credit
risk adjustment based on the Company's historical credit loss experience.
Deposits
SFAS No. 107 requires that the fair value of demand, savings, NOW and certain
money market deposits be equal to their carrying amount. The Company believes
that the fair value of these deposits is clearly greater than that prescribed by
SFAS No. 107.
For other types of deposits with fixed maturities, fair value has been
estimated based upon interest rates currently being offered on deposits with
similar characteristics and maturities.
Long-Term Debt
The fair value of the Company's convertible subordinated debentures is based on
current market quotations. For other long-term borrowings, the estimated fair
value is calculated based on discounted cash flow analyses, using interest rates
currently being quoted for similar characteristics and maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees
The notional amount of off-balance sheet commitments to extend credit, standby
letters of credit, and financial guarantees, is considered equal to fair value.
Resulting from the uncertainty involved in attempting to assess the likelihood
and timing of a commitment being drawn upon, coupled with lack of an established
market and the wide diversity of fee structures, the Company does not believe it
is meaningful to provide an estimate of fair value that differs from the
notional value of the commitment.
31
<PAGE> 22
Off-Balance Sheet Financial Instruments
The Company enters into interest rate floor contracts to manage interest rate
exposure. These instruments are entered into as hedges against interest rate
risk associated with certain identified assets. At December 31, 1996 the
notional amount of these instruments was $100,000,000. The Company paid up front
premiums of $807,500 which are amortized over the term of the related assets. At
December 31, 1996, the unamortized premiums on these contracts totaled $500,793
and the amount receivable was $31,453. The estimated fair value of these
contracts generally reflects the amount the Company would receive to terminate
the contracts, thereby taking into account the current unrealized gain on these
contracts. Dealer quotes are available on all of these contracts. At December
31, 1996 the estimated fair value of these contracts was $942,500.
The following is a summary of the book values and estimated fair values of
the Company's financial assets and liabilities:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
DECEMBER 31, AMOUNT FAIR VALUE Amount Fair Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 54,512,462 $ 54,512,462 $ 40,720,401 $ 40,720,401
Interest-bearing deposits with
other banks 3,010,000 3,010,000 3,000,000 3,000,000
Federal funds sold 3,000,000 3,000,000 5,000,000 5,000,000
Investment securities 304,331,005 301,265,767 299,237,872 298,243,808
Loans, net 457,513,164 459,437,000 392,036,583 389,880,382
Customers' liability under
acceptances 613,430 613,430 2,395,089 2,395,089
Accrued interest receivable 4,257,142 4,257,142 4,151,950 4,151,950
FINANCIAL LIABILITIES
Demand, NOW, savings and
money market deposits 430,959,831 430,959,831 401,852,750 401,852,750
Time deposits 143,462,530 143,626,000 149,175,053 150,115,000
Federal funds purchased and
securities sold under agreements
to repurchase 88,144,400 88,144,400 51,265,620 51,265,620
Commercial paper 32,569,900 32,569,900 26,607,200 26,607,200
Other short-term borrowings 30,419,791 30,419,791 5,331,640 5,331,640
Acceptances outstanding 613,430 613,430 2,395,089 2,395,089
Due to factoring clients 23,140,504 23,140,504 22,596,179 22,596,179
Accrued interest payable 4,893,549 4,893,549 6,784,851 6,784,851
Long-term convertible
subordinated debentures 6,389,000 6,852,000 21,346,000 22,775,000
Other long-term borrowings--FHLB 14,500,000 14,816,000 18,000,000 17,824,000
</TABLE>
32
<PAGE> 23
NOTE 20. PARENT COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,291,441 $ 284,259
Interest-bearing deposits--banking subsidiary 12,112,500 10,525,000
Loans, net of unearned discounts 40,462,949 30,311,913
Less allowance for possible loan losses 1,719,947 957,447
---------------------------------
Loans, net 38,743,002 29,354,466
---------------------------------
Investment in subsidiaries
Banking subsidiary 67,661,550 69,090,657
Other subsidiaries 2,853,608 2,736,174
Due from subsidiaries
Banking subsidiary 661,460 1,946,971
Other subsidiaries 113,266 4,987,270
Other assets 821,125 1,731,726
--------------------------------
$124,257,952 $120,656,523
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper $ 32,569,900 $ 26,607,200
Other short-term borrowings 250,000 250,000
Due to subsidiaries
Banking subsidiary 660,570 1,809,831
Other subsidiaries 1,035,752 1,033,325
Accrued expenses and other liabilities 4,175,295 7,702,943
Long-term convertible subordinated debt 6,389,000 21,346,000
Other long-term borrowings 2,000,000 2,250,000
Shareholders' equity 77,177,435 59,657,224
--------------------------------
$124,257,952 $120,656,523
================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends and interest from
Banking subsidiary $ 8,929,861 $ 5,257,669 $ 3,880,700
Other subsidiaries 1,170,336 491,981 414,219
Management and service fees from
Banking subsidiary 1,046,527 1,088,290 877,260
Other subsidiaries 111,600 111,600 111,600
Interest and fees on loans 6,067,638 5,074,121 2,914,933
Other income 211,133 33,025 60,220
-------------------------------------------------
Total income 17,537,095 12,056,686 8,258,932
-------------------------------------------------
EXPENSES
Interest expense 3,080,443 3,503,035 2,680,746
Provision for possible loan losses 762,500 534,000 350,000
Salaries and employee benefits 2,053,707 1,223,985 1,140,687
Computer service fees and rent paid to banking subsidiary 76,006 73,677 77,663
Other expenses 1,725,400 1,438,763 902,908
-------------------------------------------------
Total expenses 7,698,056 6,773,460 5,152,004
-------------------------------------------------
Income before income taxes and equity in undistributed
net income of subsidiaries 9,839,039 5,283,226 3,106,928
Provision/(Benefit) for income taxes 456,571 134,524 (294,452)
-------------------------------------------------
9,382,468 5,148,702 3,401,380
Equity in (excess dividends)/undistributed net income
of subsidiaries[1] (1,130,614) 488,964 604,489
-------------------------------------------------
Net income $ 8,251,854 $ 5,637,666 $ 4,005,869
=================================================
[1] Reflects the excess of the dividends allowable under applicable bank
regulations over GAAP net income of the banking subsidiary for the year
ended December 31, 1996.
</TABLE>
33
<PAGE> 24
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,251,854 $ 5,637,666 $ 4,005,869
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 762,500 534,000 350,000
Amortization of unearned compensation 509,600 122,150 122,150
Decrease (Increase) in accrued interest receivable 2,013 242,548 (123,895)
(Decrease) Increase in accrued expenses and
other liabilities (3,527,648) 3,999,315 1,981,567
(Decrease) Increase in due to subsidiaries, net (1,146,834) 586,252 (561,538)
Decrease (Increase) in due from subsidiaries, net 6,159,515 (5,067,312) (695,945)
Equity in excess dividends/(undistributed net income)
of subsidiaries 1,130,614 (488,964) (604,489)
Other, net 907,314 175,979 79,273
------------------------------------------------------
Net cash provided by operating activities 13,048,928 5,741,634 4,552,992
------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits--
banking subsidiary (1,587,500) 240,000 1,186,815
Net increase in loans (10,151,036) (11,028,350) (4,143,542)
------------------------------------------------------
Net cash used in investing activities (11,738,536) (10,788,350) (2,956,727)
------------------------------------------------------
FINANCING ACTIVITIES
Net increase in commercial paper 5,962,700 11,934,400 352,400
Cash dividends paid on preferred and common shares (2,244,852) (1,588,106) (1,334,208)
Issuance of debentures -- -- 7,020,000
Prepayments and maturities of debentures (3,773,515) (5,097,010) (7,466,000)
Proceeds from exercise of stock options 10,875 -- --
Purchase of minority interest (8,418) -- --
Decrease in other long-term borrowings (250,000) (250,000) --
------------------------------------------------------
Net cash (used in) provided by financing activities (303,210) 4,999,284 (1,427,808)
------------------------------------------------------
Net increase (decrease) in cash and due from banks 1,007,182 (47,432) 168,457
Cash and due from banks--beginning of year 284,259 331,691 163,234
------------------------------------------------------
Cash and due from banks--end of year $ 1,291,441 $ 284,259 $ 331,691
======================================================
Supplemental disclosure of non-cash financing activities:
Debenture and preferred stock conversions $ 11,202,645 $ 2,990 $ --
Issuance of Treasury shares 1,381,250 -- 350
Issuance of common shares 262,995 -- --
Supplemental disclosure of cash flow information:
Interest paid 2,432,185 3,473,980 2,438,821
Income taxes paid 10,790,311 7,105,020 4,928,459
The parent company, is required to maintain a deposit with the bank in an
amount equal to the unpaid principal balance on the bank's loan to the trustee
of the Employee Stock Ownership Plan. The required deposit which is reported in
interest-bearing deposits on the parent company's condensed balance sheet was
$2,250,000 at December 31, 1996.
</TABLE>
34
<PAGE> 25
NOTE 21. CAPITAL MATTERS
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations is a leverage
requirement. This requirement establishes a minimum leverage ratio, (at least
4%) which is calculated by dividing Tier 1 capital by adjusted quarterly average
assets (after deducting goodwill). In addition, the Company and the bank are
subject to the provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1981 ("FDICIA") which imposes a number of mandatory
supervisory measures. Among other matters, FDICIA established five capital
categories ranging from "well capitalized" to "critically under capitalized".
Such classifications are used by regulatory agencies to determine a bank's
deposit insurance premium, approval of applications authorizing institutions to
increase their asset size or otherwise expand business activities or acquire
other institutions. Under the provisions of FDICIA, a "well capitalized"
institution must maintain minimum leverage, Tier 1 and Total Capital ratios of
5%, 6% and 10%, respectively. At December 31, 1996, the Company and the bank
exceeded the requirements for "well capitalized" institutions.
The following tables present information regarding the Company's and the
bank's risk-based capital and related ratios:
<TABLE>
<CAPTION>
The Company The bank
--------------------------------------------------------
12/31/96 12/31/95 12/31/96 12/31/95
- ------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
COMPONENTS
Shareholders' equity $ 77,177 $ 59,657 $ 46,503 $ 47,940
Add/(Subtract):
Minority interest -- 8 -- --
Goodwill (21,158) (21,158) -- --
Net unrealized appreciation on securities
available for sale, net of taxes[1] (90) (544) (89) (541)
---------------------------------------------------------
Tier 1 Capital 55,929 37,963 46,414 47,399
--------------------------------------------------------
Allowance for possible loan losses
(limited to 1.25% of total risk-weighted assets) 6,580 5,192 5,014 3,649
Subordinated debt (limited to 50% of
Tier 1 Capital) 1,278 12,751 -- --
--------------------------------------------------------
Tier 2 Capital 7,858 17,943 5,014 3,649
--------------------------------------------------------
Total Risk-based Capital $ 63,787 $ 55,906 $ 51,428 $ 51,048
========================================================
</TABLE>
<TABLE>
<CAPTION>
As of Capital Well Capital Well
December 31, Adequacy Capitalized Adequacy Capitalized
--------------- Minimum Minimum Minimum Minimum
1996 1995 Requirement Requirement Capital Capital
- -------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
RATIOS AND MINIMUMS
Tier 1 Leverage
The Company 6.89% 5.37% 4.00% 5.00% $32,449 $40,562
The bank 6.13 7.19 30,295 37,868
Tier 1 Risk-Based Capital
The Company 10.65% 8.54% 4.00% 6.00% $20,998 $31,497
The bank 9.63 11.98 19,283 28,925
Total Risk-Based Capital
The Company 12.15% 12.58% 8.00% 10.00% $41,997 $52,496
The bank 10.67 12.90 38,566 48,208
[1] As directed by regulatory agencies, this amount must be excluded from the
computation of Tier 1 capital.
</TABLE>
35
<PAGE> 26
NOTE 22. COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $1,793,433, $1,659,638 and $1,521,151, respectively, for the
years ended December 31, 1996, 1995 and 1994.
The future minimum rental commitments as of December 31, 1996 under
noncancelable leases follow:
<TABLE>
<CAPTION>
Rental
Year(s) Commitments
-------------------------------------------------------
<S> <C>
1997 $ 1,539,499
1998 1,552,847
1999 1,387,918
2000 1,601,590
2001 1,376,313
2002 and thereafter 7,958,465
-------------------------------------------------------
Total $15,416,632
=======================================================
</TABLE>
Certain of the leases included above have escalation clauses and/or provide
that the Company pay maintenance, electric, taxes and other operating expenses
applicable to the leased property.
In the normal course of business, there are various commitments and
contingent liabilities outstanding which are properly not recorded on the
balance sheet. Management does not anticipate that losses, if any, as a result
of these transactions would materially affect the financial position of the
Company.
Loan commitments, substantially all of which have an original maturity of
one year or less, were approximately $13,983,000 as of December 31, 1996. These
commitments are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements because
some of the commitments are expected to expire without being drawn upon. The
bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, by the bank upon extension
of credit is based on management's credit evaluation of the borrower. Collateral
held varies but may include cash, U.S. Treasury and other marketable securities,
accounts receivable, inventory and property, plant and equipment.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the bank to guarantee the performance of a customer to a
third party. At December 31, 1996, these commitments totalled $33,432,702 of
which $29,312,268 expire within one year, $3,870,434 within two years and
$250,000 within three years. Approximately 33% of the commitments were
automatically renewable for periods of one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The bank holds cash or cash equivalents and
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 1996 ranged from 0 percent to 100 percent; the
average amount collateralized is approximately 24%.
The Company uses interest rate floor contracts to manage fluctuating
interest rates. In exchange for the payment of a premium, an interest rate floor
gives the Company the right to receive at specified future dates the amount, if
any, by which the market interest rate specified in the floor falls below the
fixed floor rate, multiplied by the notional amount of the floor. The credit
exposure on a floor is limited to this interest derived amount. Potential credit
losses are minimized through careful evaluation of counter party credit
standing. The floors currently held by the Company have an average remaining
term of approximately 23/4 years and total notional amount of $100 million.
In the normal course of business there are various legal proceedings
pending against the Company. Management, after consulting with counsel, is of
the opinion that there should be no material liability with respect to such
proceedings, and accordingly no provision has been made in the accompanying
consolidated financial statements.
36
<PAGE> 27
<TABLE>
<CAPTION>
NOTE 23. QUARTERLY DATA (UNAUDITED)
1996 QUARTER Mar 31 Jun 30 Sept 30 Dec 31
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $14,036,419 $14,686,277 $15,542,917 $16,731,415
Total interest expense 5,010,506 4,959,782 5,598,989 5,764,480
Net interest income 9,025,913 9,726,495 9,943,928 10,966,935
Provision for possible loan losses 577,000 562,500 401,250 506,255
Net securities gains/(losses) 22,161 -- -- (93,415)
Noninterest income 1,639,373 1,982,110 3,103,179 3,255,057
Noninterest expenses 6,743,078 7,346,476 8,510,059 9,097,766
Income before income taxes 3,367,369 3,799,629 4,135,798 4,524,556
Net income 1,759,745 1,985,086 2,161,360 2,345,663
Earnings per average common share
Primary .27 .28 .30 .31
Fully diluted .23 .25 .27 .28
Common stock price
High 13 5/8 12 7/8 13 15
Low 11 1/4 10 3/8 10 1/4 12 1/2
Quarter--end 12 7/8 11 12 3/4 14 3/4
1995 Quarter Mar 31 Jun 30 Sept 30 Dec 31
- -------------------------------------------------------------------------------------------------------------------------
Total interest income $12,611,695 $13,403,743 $13,553,104 $13,915,039
Total interest expense 4,632,482 4,907,565 4,815,870 4,963,101
Net interest income 7,979,213 8,496,178 8,737,234 8,951,938
Provision for possible loan losses 315,000 345,000 574,000 632,000
Net securities gains -- 4,801 -- --
Noninterest income 1,286,450 1,272,497 1,649,889 1,764,574
Noninterest expenses 6,272,133 6,750,210 6,680,334 6,957,579
Income before income taxes 2,678,530 2,678,266 3,132,789 3,126,933
Net income 1,257,074 1,296,564 1,492,369 1,591,659
Earnings per average common share
Primary .20 .20 .23 .25
Fully diluted .18 .18 .21 .23
Common stock price
High 7 1/4 8 3/4 9 5/8 12 1/2
Low 6 1/2 7 8 3/4 9
Quarter--end 7 8 3/4 9 1/8 12 1/2
</TABLE>
37
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
[LOGO]
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling
Bancorp and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1996 and
the consolidated statements of condition of Sterling National Bank as of
December 31, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sterling
Bancorp and Subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1996 and the financial position of Sterling National
Bank as of December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
New York, New York
February 7, 1997
38
<PAGE> 29
STERLING BANCORP and Subsidiaries
SELECTED FINANCIAL DATA
(in thousands except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 60,997 $ 53,484 $ 43,493 $ 32,482 $ 30,572
Total interest expense 21,334 19,319 14,882 10,168 11,510
Net interest income 39,663 34,165 28,611 22,314 19,062
Provision for possible loan losses 2,047 1,866 1,053 690 1,290
Net securities (losses)/gains (71) 5 42 -- 1,568
Noninterest income 9,979 5,973 4,429 3,929 3,682
Noninterest expenses 31,697 26,660 21,998 19,770 18,659
Income before taxes 15,827 11,617 10,031 5,783 4,363
Provision for income taxes 7,575 5,979 6,025 2,628 1,786
Net income 8,252 5,638 4,006 3,155 2,577
Per average common share--primary 1.16 .88 .63 .50 .41
Dividends per common share .31 .25 .21 .20 .20
AT YEAR END
Interest-bearing deposits with other
banks and Federal funds sold 6,010 8,000 10,970 2,970 3,630
Investment securities 304,331 299,238 311,782 286,816 219,571
Term Federal funds sold -- -- -- 40,000 99,000
Other loans, net of unearned discounts 465,517 397,229 312,769 258,751 189,791
Total assets 861,605 775,608 706,636 653,039 578,248
Noninterest-bearing deposits 229,977 224,081 174,897 174,089 159,234
Interest-bearing deposits 344,446 326,947 342,405 298,897 296,925
Federal funds purchased
and securities sold under
agreements to repurchase 88,144 51,266 44,051 37,225 6,642
Long-term convertible subordinated
debentures 6,389 21,346 26,446 26,892 35,166
Other long-term borrowings--FHLB 14,500 18,000 22,500 25,500 --
Shareholders' equity 77,177 59,657 53,719 52,857 50,150
</TABLE>
39
<PAGE> 30
STERLING BANCORP and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
Sterling Bancorp ("the parent company") is a bank holding company, as defined by
the Bank Holding Company Act of 1956, as amended. Throughout the notes, the term
"the Company" refers to Sterling Bancorp and its subsidiaries. The Sterling
companies provide a full range of products and services, including business and
consumer loans, commercial and residential mortgage lending and brokerage,
asset-based financing, factoring, trade financing, leasing, trust and estate
administration and investment management services. Sterling has operations in
New York and Virginia and conducts business throughout the United States. The
parent company owns all of the outstanding shares of Sterling National Bank (the
bank), its principal subsidiary, and all of the outstanding shares of Sterling
Factors Corporation, Universal Finance Corporation, Sterling Banking Corporation
and Sterling Industrial Loan Association (finance subsidiaries). Sterling
National Mortgage Company, Inc. is a wholly-owned subsidiary of the bank.
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 December 31,
1996, the bank's year to date average earning assets (of which loans were 50%
and securities were 49%) represented approximately 93% of the Company's year to
date average earning assets. See page 47 for the composition of the Company's
average balance sheets for the three most recent years.
FINANCIAL CONDITION
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the bank levels. Liquid assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital market funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits, which
historically have been relatively stable. The parent company and the bank have
significant unused borrowing capacity. Contingency plans exist and could be
implemented on a timely basis to minimize the impact of any dramatic change in
market conditions.
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements throughout its history. At December 31, 1996,
the parent company had on hand approximately $13,404,000 in cash.
Various legal restrictions limit the extent to which the bank can supply
funds to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for that
year to date combined with its retained net profits for the preceding two
calendar years. In addition, from time to time dividends are paid to the parent
company by the finance subsidiaries from their retained earnings without
regulatory restrictions.
At December 31, 1996, the parent company's outstanding long-term debt,
consisting principally of convertible subordinated debentures (originally issued
pursuant to rights offerings to shareholders of the Company), aggregated
$8,389,000. To the extent convertible subordinated debentures are converted to
common stock of the parent company (as has been the case with $22,000,000
principal amount since 1982), the subordinated debt related thereto is retired
and becomes part of shareholders' equity. The parent company's long-term
indebtedness is also met through funds generated from profits and new financing.
Since becoming a public company in 1946, the parent company and its predecessors
have been able to obtain the financing required and have paid at maturity all
outstanding long-term indebtedness. The parent company expects to continue to
meet its obligations in accordance with their terms.
At December 31, 1996, the parent company's short-term debt, consisting
principally of commercial paper, was approximately $32,820,000. The
40
<PAGE> 31
parent company had cash, interest-bearing deposits with banks and other current
assets aggregating $54,642,000 and back-up credit lines with banks of
$14,000,000. The parent company and its predecessor have issued and repaid at
maturity approximately $12 billion of commercial paper since 1955. Since 1979,
the parent company has had no need to use available back-up lines of credit.
Information regarding the Company's and the bank's risk-based capital, at
December 31, 1996 and December 31, 1995, is presented in Footnote 21 on page 35.
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.
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company unduly to interest
rate fluctuations.
The Company takes a coordinated approach to the management of its
liquidity, capital and interest rate risk. This risk management process is
governed by policies and limits established by senior management which are
reviewed and approved by the Asset/Liability Committee ("ALCO"). ALCO, which is
comprised of members of senior management and the Board, meets to review among
other things, economic conditions, interest rates, yield curve, cash flow
projections, expected customer actions, liquidity levels, capital ratios and
repricing characteristics of assets, liabilities and off-balance sheet financial
instruments.
The Company's balance sheet structure is primarily short-term in nature
with most assets and liabilities repricing or maturing in less than five years.
The Company monitors the interest rate sensitivity of its on- and off-balance
sheet positions by examining its near-term sensitivity and its longer term gap
(as defined below) position. The Company utilizes several tools in its
management of interest rate risk, primarily utilizing a sophisticated income
simulations model and complementing this with a traditional gap analysis.
The income simulation model measures the Company's net interest income
sensitivity or volatility to interest rate changes utilizing statistical
techniques that allow the Company to consider various factors which impact net
interest income. These factors include actual maturities, estimated cash flows,
repricing characteristics, deposits growth/ retention and, most importantly, the
relative sensitivity of the Company's assets and liabilities to changes in
market interest rates. This relative sensitivity is important to consider as the
Company's core deposit base is not subject to the same degree of interest rate
sensitivity as its assets. The core 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
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 likely
rate scenarios. The Company can also utilize this technique to stress test its
portfolio to determine the impact of various interest rate scenarios on the
Company's net interest income.
41
<PAGE> 32
The traditional gap analysis is prepared based on the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities for selected time bands. The mismatch between repricings or
maturities within a time band is commonly referred to as the "gap" for that
period. A positive gap (asset sensitive) where interest-rate sensitive assets
exceed interest-rate sensitive liabilities generally will result in an
institution's net interest margin increasing in a rising rate environment and
decreasing in a falling rate environment. A negative gap (liability sensitive)
will generally have the opposite 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.
As part of its interest rate risk strategy, the Company uses off-balance
sheet financial instruments (derivatives) to hedge the interest rate sensitivity
of assets with the corresponding amortization reflected in the yield of the
related on-balance sheet assets being hedged. The Company has written policy
guidelines, which have been approved by the Board of Directors and the
Asset/Liability Committee, governing the use of off-balance sheet financial
instruments, including approved counterparties, risk limits and appropriate
internal control procedures. The credit risk of derivatives arises principally
from the potential for a counterparty to fail to meet its obligation to settle a
contract on a timely basis. At December 31, 1996, all counterparties have
investment grade credit ratings from the major rating agencies. Each
counterparty is specifically approved for applicable credit exposure.
At December 31, 1996, the Company's off-balance sheet financial instruments
consisted of three interest rate floor contracts having a notional amount
totaling $100 million; a contract with a notional amount of $50 million has a
final maturity of February 27, 2000, another contract with a notional amount of
$25 million has a final maturity of October 10, 1999 and another contract with a
notional amount of $25 million has a final maturity of March 17, 1998. These
financial instruments are being used as part of the Company's interest rate risk
management and not for trading purposes.
Interest rate floor contracts require the counterparty to pay the Company
at specified future dates the amount, if any, by which the specified interest
rate (3 month LIBOR) falls below the fixed floor rates, applied to the notional
amounts. The Company utilizes these financial instruments to adjust its interest
rate risk position without exposing itself to principal risk and funding
requirements. The interest rate floor contracts require the Company to pay a fee
for the right to receive a fixed interest payment.
The Company purchased interest rate floor contracts to reduce the impact of
falling rates on its floating rate commercial loans. The Company paid up front
premiums of $807,000 which are amortized monthly against interest income from
the designated assets. At December 31, 1996, the unamortized premiums on these
contracts totaled $501,000 and are included in other assets. At December 31,
1996, $31,000 was receivable under these contracts.
SECURITIES
The Company's securities portfolios are comprised of principally U.S. Government
and U.S. Government corporation and agency mortgage-backed securities along with
other debt and equity securities. At December 31, 1996, the Company's portfolio
of securities totalled $304,331,000 of which U.S. Government and U.S. Government
corporation and agency guaranteed mortgage-backed securities having an average
life of approximately 21/2 years amounted to $295,489,000. The Company has the
intent and ability to hold to maturity securities classified "held to maturity".
These securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts. The gross unrealized gains and losses on "held to
maturity" securities were $693,000 and $3,758,000, 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
42
<PAGE> 33
component of shareholders' equity. "Available for sale" securities included
gross unrealized gains of $400,000 and gross unrealized losses of $233,000.
Given the relatively short-term nature of the portfolio and its generally high
credit quality, management expects to realize all of its investment upon the
maturity of such instruments, and thus believes that any market value impairment
is temporary in nature.
Based on a decision by the Financial Accounting Standards Board to allow
companies a one-time opportunity to reassess their investment securities
classifications, in December 1995, the Company transferred certain U.S. Treasury
securities and certain mortgage-backed securities with an amortized cost of
$35,436,000 and an estimated fair value of $35,791,000 from held to maturity to
available for sale. This action was taken by management in connection with its
Asset/Liability Management process and was designed to provide flexibility in
the management of interest rate risk, yield and collateral requirements. The net
unrealized gain after tax effect on the transferred securities was $183,000
($354,000 before tax effect) and is included in shareholders' equity.
CREDIT RISK
A key management objective is to maintain the quality of the loan portfolio.
This objective is achieved by maintaining high underwriting standards coupled
with regular evaluation of the creditworthiness of and the designation of
lending limits for each borrower. The portfolio strategies seek to avoid
concentrations by industry or loan size in order to minimize credit exposure and
to originate loans in markets with which it is familiar. See Footnote 6 shown on
page 22 for the composition of the loan portfolio.
The Company's commercial and industrial loan portfolio represents
approximately 74% 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 approximately 14% of gross loans, is secured by mortgages on real
property located principally in the City of New York and the State of Virginia.
The collateral securing any loan may vary in value based on the success of the
business and economic conditions.
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Company's portfolio of loans is
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
The allowance for possible loan losses is maintained through the provision
for possible loan losses, which is a charge to operating earnings. The adequacy
of the provision and the resulting allowance for possible loan losses is
determined by management's continuing review of the loan portfolio, including
identification and review of individual problem situations that may affect the
borrower's ability to repay, review of overall portfolio quality through an
analysis of current charge-offs, delinquency and nonperforming loan data,
estimates of the value of any underlying collateral, review of regulatory
examinations, an assessment of current and expected economic conditions and
changes in the size and character of the loan portfolio. The allowance reflects
management's evaluation of both loans presenting identified loss potential and
of the risk inherent in various components of the portfolio, including loans
identified as impaired as required by SFAS No. 114. Thus an increase in the size
of the portfolio or in any of its components could necessitate an increase in
the allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance. At December 31, 1996, the ratio of the allowance to loans, net of
unearned discounts, was 1.7% and the allowance was $8,003,000. At such date, the
43
<PAGE> 34
Company's non-accrual loans amounted to $442,000; $121,000 of such loans were
judged to be impaired within the scope of SFAS No. 114 and required valuation
allowances of $69,000. Based on the foregoing, as well as management's judgement
as to the current risks inherent in the loan portfolio, the Company's allowance
for possible loan losses was deemed adequate to absorb all reasonably
anticipated losses on specifically known and other possible credit risks
associated with the portfolio as of December 31, 1996. 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 $263,000 at December 31,
1996.
RESULTS OF OPERATIONS
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
interest-earning assets and interest-bearing liabilities. An analysis of the
Company's interest rate sensitivity is presented on page 49. The increases
(decreases) for the components of interest income and interest expense,
expressed in terms of fluctuation in average volume and rate are shown on page
48. Information as to the components of interest income and interest expense and
average rates is provided in the Average Balance Sheets shown on page 47.
Comparison of Years Ended December 31, 1996 and December 31, 1995
Net interest income for 1996 increased $5,498,000 to $39,663,000 from
$34,165,000 for the comparable period in 1995.
Total interest income aggregated $60,997,000 up $7,513,000 for 1996 as
compared to $53,484,000 for the same period of 1995. The yield on interest
earning assets was 9.05% for 1996 compared with 8.65% for the comparable period
in 1995. The increase in interest income was principally due to an increase in
income earned on the Company's loan portfolio as a result of asset growth.
Interest earned on the loan portfolio amounted to $39,221,000 up $6,495,000
when compared to a year ago. Average loan balances amounted to $376,879,000 up
$65,760,000 from an average loan of $311,119,000 the prior year period. The
increase in the average loans, primarily in the Company's commercial and
industrial loan portfolio, accounted for $6,038,000 or 93% of the increase in
interest earned on loans.
Interest expense increased $2,015,000 to $21,334,000 for 1996 from
$19,319,000 for the comparable period in 1995. The increase in interest expense
was substantially due to the higher average outstandings.
Interest expense on savings and time deposits increased $567,000 for 1996
to $12,108,000 from $11,541,000 for the comparable 1995 period primarily due to
an increase in the cost of funds. The average rate paid on interest-bearing
deposits rose to 3.66% in 1996 compared to 3.53% in the comparable year ago
period.
Interest expense associated with borrowed funds was $1,448,000 higher when
comparing 1996 to the same period in 1995. The impact of the higher average
outstandings increased interest expense associated with borrowed funds by
$1,887,000. This increase was partially offset by a reduction in the cost of
funds of $440,000 as a result of lower rates paid.
Reference is made to "CREDIT RISK" above for information as to management's
continuing evaluation of the loan portfolio and the allowance for possible loan
losses appropriate thereto. Based on such evaluation, and principally as the
result of the growth in the portfolio, $2,047,000 was provided for possible loan
losses for the year ended December 31, 1996.
Noninterest income increased $3,930,000 for 1996 when compared with 1995 as
a result of increased fees from factoring and mortgage banking services and
higher income from other fee based services.
Noninterest expenses increased $5,037,000 for 1996 versus the same period
last year reflecting higher
44
<PAGE> 35
salary and employee benefit costs as well as higher general business costs and
professional fees associated with increased business development efforts in
accordance with a policy of continuing investment in the Company's business
franchise.
The higher level of pretax profitability resulted in an increase in the
provision for income taxes of $1,596,000 in 1996 when compared to the prior
year.
As a result of the above factors, net income increased $2,614,000 for the
year ended December 31, 1996 when compared to 1995.
Comparison of Years Ended December 31, 1995 and December 31, 1994
Net interest income for 1995 increased $5,554,000 to $34,165,000 from
$28,611,000 for the comparable period in 1994.
Total interest income aggregated $53,484,000 up $9,991,000 for 1995 as
compared to $43,493,000 for the same period of 1994. The yield on interest
earning assets was 8.65% for 1995 compared with 7.44% for the comparable period
in 1994. The increase in interest income was principally due to an increase in
income earned on the Company's loan portfolio as a result of asset growth and
higher market interest rates.
Interest earned on the loan portfolio amounted to $32,726,000 up $8,993,000
when compared to a year ago. Average loan balances amounted to $311,119,000 up
$55,896,000 from an average loan of $255,223,000 the prior year period. The
increase in the average loans, primarily in the Company's commercial and
industrial loan portfolio, accounted for $5,201,000 or 58% of the increase in
interest earned on loans, with the balance attributable to higher rates.
Interest expense increased $4,437,000 to $19,319,000 for 1995 from
$14,882,000 for the comparable period in 1994. The cost of funds increased to
4.26% for 1995 up from 3.35% for 1994. The increase in interest expense was
substantially due to the higher rate environment.
Interest expense on savings and time deposits increased $3,068,000 for 1995
to $11,541,000 from $8,473,000 for the comparable 1994 period primarily due to
an increase in the cost of funds. The average rate paid on interest-bearing
deposits rose to 3.53% in 1996 compared to 2.75% in the comparable year earlier
period. Average balances for interest-bearing deposits increased approximately
$19 million in 1995 when compared to the like period a year ago.
Interest expense associated with borrowed funds was $1,369,000 higher when
comparing 1995 to the same period in 1994. The impact of the higher interest
rate environment increased interest expense associated with borrowed funds by
$1,932,000. This increase was partially offset by a reduction in the cost of
funds of $563,000 as a result of lower average borrowings.
Reference is made to "CREDIT RISK" above for information as to management's
continuing evaluation of the loan portfolio and the allowance for possible loan
losses appropriate thereto. Based on such evaluation, and principally as the
result of the growth in the portfolio, $1,866,000 was provided for possible loan
losses for the year ended December 31, 1995.
Noninterest income increased $1,507,000 for 1995 when compared with 1994 as
a result of increased fees from factoring services and higher income from other
fee based services.
Noninterest expenses increased $4,662,000 for 1995 versus the same period
last year reflecting higher salary and employee benefit costs as well as higher
general business costs and professional fees associated with increased business
development efforts. Offsetting these increases was a decrease in Federal
deposit insurance premiums as a result of a reduction in premiums charged.
The higher level of pretax profitability was offset by lower additional
provisions for unresolved state tax issues, so that the provision for income
taxes declined by $46,000 in 1995 when compared to the prior year.
As a result of the above factors, net income increased $1,632,000 for the
year ended December 31, 1995 when compared to 1994.
45
<PAGE> 36
Market for the Company's Common Stock and Related Security Holder Matters
The parent company's common stock is traded on The New York Stock Exchange under
the symbol STL. Information regarding the quarterly prices of the common stock
is presented in Footnote 23 on page 37. Information regarding the average common
shares outstanding and dividends per common share is presented in the
Consolidated Statements of Income on page 13. Information regarding legal
restrictions on the ability of the bank to pay dividends is presented in
Footnote 14 on page 26. There are no such restrictions on the ability of the
parent company to pay dividends to its shareholders. Information related to the
parent company's preferred stock is presented in Footnote 12 on page 26.
Recent Accounting Developments
In 1996, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities". This statement is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively; earlier or retroactive application of this statement is not
permitted.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of financial-components approach that focuses on control.
It distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No. 125
will have a material impact on the Company's financial condition, results of
operations or liquidity.
46
<PAGE> 37
STERLING BANCORP and Subsidiaries
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS[1]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 Year Ended December 31, 1995 Year Ended December 31, 1994
--------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
------- ------- ------- -------- -------- ------ ------- -------- ----------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits with
other banks $ 2,999 $ 157 5.23% $ 3,037 $ 183 5.93% $ 2,963 $ 123 4.17%
Investment securities
Available for sale 93,188 6,289 6.75 69,675 4,683 6.72 80,498 4,480 5.55
Held to maturity 228,656 15,034 6.58 234,933 15,349 6.53 240,364 14,825 6.17
Tax-exempt[2] 113 7 5.97 133 8 6.12 143 9 6.29
Federal funds sold 5,153 289 5.60 9,153 535 5.92 7,033 323 4.59
Loans, net of unearned discounts
Domestic[3] 376,090 39,168 11.41 310,330 32,669 10.87 254,434 23,690 9.37
Foreign 789 53 6.69 789 57 7.18 789 43 5.44
------- ------ ------- ------ ------ ------
TOTAL INTEREST-EARNING ASSETS 706,988 60,997 9.05% 628,050 53,484 8.65% 586,224 43,493 7.44%
------ ===== ------ ===== ------ =====
Cash and due from banks 40,402 37,178 40,564
Allowance for possible loan losses (6,422) (4,765) (3,768)
Excess cost over equity in net
assets of the bank 21,158 21,158 21,158
Other 15,569 13,901 14,706
-------- -------- --------
TOTAL ASSETS $777,695 $695,522 $658,884
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $174,578 4,229 2.42% $175,473 4,032 2.30% $178,149 3,257 1.83%
Other time 153,231 7,740 5.05 148,849 7,354 4.94 126,935 5,112 4.03
Foreign
Other time 2,711 139 5.14 2,780 155 5.56 2,663 104 3.89
Borrowings
Federal funds purchased
and securities sold under
agreements to repurchase 87,092 4,611 5.29 53,295 2,967 5.56 55,824 2,076 3.72
Commercial paper 29,652 1,547 5.22 21,850 1,176 5.38 14,491 524 3.62
Other short-term debt 14,812 1,042 5.27 6,156 316 5.14 14,464 553 3.83
Long-term debt 33,920 2,026 6.76 45,606 3,319 7.28 51,581 3,256 6.31
------- ----- ------ ----- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES 495,996 21,334 4.24% 454,009 19,319 4.26% 444,107 14,882 3.35%
===== ===== =====
Noninterest-bearing demand
deposits 175,232 -- 153,244 -- 144,974 --
------- ------ ------- ------ ------- ------
Total including noninterest-bearing
demand deposits 671,228 21,334 3.13% 607,253 19,319 3.18% 589,081 14,882 2.53%
------ ===== ------ ===== ------ =====
Other liabilities 40,699 31,868 16,554
-------- ------- -------
TOTAL LIABILITIES 711,927 639,121 605,635
SHAREHOLDERS' EQUITY 65,768 56,401 53,249
-------- ------- -------
Total Liabilities and
Shareholders' Equity $777,695 $695,522 $658,884
======== ======== =======
Net interest income/spread $39,663 4.81% $34,165 4.39% $28,611 4.09%
======= ===== ======= ===== ======= =====
Net yield on interest earning assets 5.93% 5.52% 4.91%
===== ===== =====
</TABLE>
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages for the bank and monthly averages
for the parent company and its finance subsidiaries.
[2] Interest on these securities is not presented on a tax equivalent basis.
[3] Non-accrual loans are included in the average balance which reduces the
average yields.
47
<PAGE> 38
STERLING BANCORP and Subsidiaries
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 TO December 31, 1994 to
Increase (Decrease) from Years Ended, DECEMBER 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
VOLUME RATE TOTAL[1] Volume Rate Total[1]
--------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest-bearing deposits
with other banks
$ (3) $ (23) $ (26) $ 5 $ 55 $ 60
--------------------------------------------------------------------------
Investment securities
Available for sale 1,591 15 1,606 (670) 873 203
Held to maturity (401) 86 (315) (342) 866 524
Tax-exempt[2] (1) -- (1) (1) -- (1)
--------------------------------------------------------------------------
Total 1,189 101 1,290 (1,013) 1,739 726
--------------------------------------------------------------------------
Federal funds sold (226) (20) (246) 108 104 212
Loans, net of unearned discount
Domestic[3] 6,038 461 6,499 5,201 3,778 8,979
Foreign -- (4) (4) -- 14 14
--------------------------------------------------------------------------
Total 6,038 457 6,495 5,201 3,792 8,993
Total Interest Income $6,998 $ 515 $ 7,513 $ 4,301 $5,690 $9,991
==========================================================================
INTEREST EXPENSE
Savings and time deposits
Domestic
Savings $ (12) $ 209 $ 197 $ (54) $ 829 $ 775
Other time 229 157 386 986 1,256 2,242
Foreign
Other time (4) (12) (16) 5 46 51
--------------------------------------------------------------------------
Total 213 354 567 937 2,131 3,068
--------------------------------------------------------------------------
Borrowings
Federal funds purchased and
securities sold under agreements
to repurchase 1,840 (196) 1,644 (116) 1,007 891
Commercial paper 415 (44) 371 331 321 652
Other short-term debt 582 144 726 (372) 135 (237)
Long-term debt (949) (344) (1,293) (406) 469 63
--------------------------------------------------------------------------
Total 1,888 (440) 1,448 (563) 1,932 1,369
--------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $2,101 $ (86) $ 2,015 $ 374 $4,063 $4,437
==========================================================================
NET INTEREST INCOME $4,897 $ 601 $ 5,498 $ 3,927 $1,627 $5,554
==========================================================================
</TABLE>
[1] The rate/volume variance is allocated equally between changes in volume and
rate. The effect of the extra day in 1996 has been included in the change
in volume.
[2] Interest on the securities is not calculated on a tax equivalent basis.
[3] Non-accrual loans have been included in the amounts outstanding and income
has been included to the extent earned.
48
<PAGE> 39
STERLING BANCORP and Subsidiaries
INTEREST RATE SENSITIVITY
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are classified based on the earliest repricing
period. Based on the interest rate sensitivity analysis shown below, the
Company's net interest income would increase during periods of rising interest
rates and decrease during periods of falling interest rates. Amounts are
presented in thousands.
<TABLE>
<CAPTION>
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
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits
with other banks $ 1,910 $ 1,100 $ -- $ -- $ -- $ 3,010
Investment securities 5,450 28,474 35,606 228,710 6,091 304,331
Federal funds sold 3,000 -- -- -- -- 3,000
Loans, net of unearned discounts 372,711 7,050 49,223 44,615 (8,082) 465,517
Noninterest-earning assets and
allowance for possible loan losses -- -- -- -- 85,747 85,747
--------------------------------------------------------------------------
Total Assets 383,071 36,624 84,829 273,325 83,756 861,605
--------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits 169,659 72,038 102,749 -- -- 344,446
Securities sold under agreements
to repurchase 73,017 8,127 -- -- -- 81,144
Commercial paper 32,570 -- -- -- -- 32,570
Other short-term borrowings 34,170 3,250 -- -- -- 37,420
Long-term convertible
subordinated debentures 6,389 -- -- -- -- 6,389
Other long-term borrowings--FHLB -- -- 13,800 700 -- 14,500
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 345,136 345,136
--------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity 315,805 83,415 116,549 700 345,136 861,605
---------------------------------------------------------------------------
Net Interest Rate Sensitivity Gap $ 67,266 $(46,791) $(31,720) $272,625 $(261,380) $ --
===========================================================================
Cumulative Gap at December 31, 1996 $ 67,266 $ 20,475 $(11,245) $261,380 $ -- $ --
===========================================================================
Cumulative Gap at December 31, 1995 $ 76,612 $ 53,606 $ 23,820 $256,359 $ -- $ --
===========================================================================
Cumulative Gap at December 31, 1994 $ 38,812 $ 10,115 $(87,710) $179,179 $ -- $ --
===========================================================================
</TABLE>
49
<PAGE> 1
Exhibit 21
STERLING BANCORP
Subsidiaries of the Registrant
a) Sterling National Bank
b) Sterling Factors Corporation
c) Sterling Industrial Loan Association
d) Universal Finance Corporation
e) Sterling Banking Corporation
f) Sterling National Mortgage Company, Inc. (New York)
g) Sterling National Mortgage Corporation (Virginia)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
STERLING BANCORP AND SUBSIDIARIES
Article 9 of Regulation S-X
Financial Data Schedule
December 31, 1996
($ in 000's, except per share)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 54,512
<INT-BEARING-DEPOSITS> 3,010
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,597
<INVESTMENTS-CARRYING> 226,734
<INVESTMENTS-MARKET> 223,669
<LOANS> 465,517
<ALLOWANCE> 8,003
<TOTAL-ASSETS> 861,605
<DEPOSITS> 574,422
<SHORT-TERM> 151,134
<LIABILITIES-OTHER> 37,982
<LONG-TERM> 20,889
0
2,507
<COMMON> 7,725
<OTHER-SE> 66,945
<TOTAL-LIABILITIES-AND-EQUITY> 861,605
<INTEREST-LOAN> 39,221
<INTEREST-INVEST> 21,331
<INTEREST-OTHER> 445
<INTEREST-TOTAL> 60,997
<INTEREST-DEPOSIT> 12,108
<INTEREST-EXPENSE> 21,334
<INTEREST-INCOME-NET> 39,663
<LOAN-LOSSES> 2,047
<SECURITIES-GAINS> (71)
<EXPENSE-OTHER> 31,697
<INCOME-PRETAX> 15,827
<INCOME-PRE-EXTRAORDINARY> 15,827
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,252
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 5.93
<LOANS-NON> 442
<LOANS-PAST> 390
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 263
<ALLOWANCE-OPEN> 5,192
<CHARGE-OFFS> 738
<RECOVERIES> 1,502
<ALLOWANCE-CLOSE> 8,003
<ALLOWANCE-DOMESTIC> 4,730
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,273
</TABLE>
