<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER: 1-5273-1
STERLING BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-2565216
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION)
430 PARK AVENUE, NEW YORK, N.Y. 10022-3505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
212-826-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
[X] YES [ ] NO
AS OF MARCH 31, 1999 THERE WERE 8,154,891 SHARES OF COMMON STOCK,
$1.00 PAR VALUE, OUTSTANDING.
<PAGE> 2
STERLING BANCORP
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business 11
Overview 11
Income Statement Analysis 12
Balance Sheet Analysis 13
Capital 15
Average Balance Sheets 17
Rate/Volume Analysis 18
Regulatory Capital and Ratios 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Asset/Liability Management 20
Interest Rate Sensitivity 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 24
EXHIBIT INDEX 25
Exhibit 11 Computation of Per Share Earnings 26
Exhibit 27 Financial Data Schedule 27
2
<PAGE> 3
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
-------------- --------------
<S> <C> <C>
Cash and due from banks $ 40,567,607 $ 43,311,268
Interest-bearing deposits with other banks 515,000 515,000
Investment securities
Available for sale (at estimated market value) 134,955,232 145,060,902
Held to maturity (estimated market value
$190,729,429 and $185,425,123, respectively) 190,304,229 184,745,325
-------------- --------------
Total investment securities 325,259,461 329,806,227
-------------- --------------
Loans, net of unearned discounts 587,839,161 640,206,308
Less allowance for credit losses 10,393,811 10,156,077
-------------- --------------
Loans, net 577,445,350 630,050,231
-------------- --------------
Customers' liability under acceptances 169,529 609,431
Excess cost over equity in net assets of the
banking subsidiary 21,158,440 21,158,440
Premises and equipment, net 6,268,690 6,294,654
Accrued interest receivable 4,078,611 3,991,914
Other real estate owned 902,952 1,044,509
Other assets 8,888,792 7,663,541
-------------- --------------
$ 985,254,432 $1,044,445,215
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 259,886,746 $ 329,020,287
Interest-bearing deposits 399,366,547 373,782,181
-------------- --------------
Total deposits 659,253,293 702,802,468
Federal funds purchased and securities
sold under agreements to repurchase 85,159,496 99,429,027
Commercial paper 40,513,300 41,529,300
Other short-term borrowings 10,312,105 12,771,325
Acceptances outstanding 169,529 609,431
Due to factoring clients 30,783,615 32,074,004
Accrued expenses and other liabilities 14,942,779 11,678,336
-------------- --------------
841,134,117 900,893,891
Long-term debt - FHLB 41,050,000 41,400,000
-------------- --------------
Total liabilities 882,184,117 942,293,891
-------------- --------------
Commitments and contingent liabilities
Shareholders' equity
Preferred stock, $5 par value. Authorized 644,389 shares
Series B ($20 liquidation value), issued 1,230 shares 24,600 24,600
Series D ($10 liquidation value), issued 243,929 shares 2,439,290 2,439,290
-------------- --------------
2,463,890 2,463,890
Common stock, $1 par value. Authorized 20,000,000 shares;
issued 8,318,284 and 8,310,284 shares, respectively 8,318,284 8,310,284
Capital surplus 45,379,315 45,287,315
Retained earnings 51,287,902 48,817,648
Accumulated other comprehensive income 76,954 538,840
-------------- --------------
107,526,345 105,417,977
Less
Common shares in treasury at cost, 163,393 and
101,693 shares, respectively 2,862,275 1,592,690
Unearned compensation 1,593,755 1,673,963
-------------- --------------
Total shareholders' equity 103,070,315 102,151,324
-------------- --------------
$ 985,254,432 $1,044,445,215
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans $13,138,475 $12,259,919
Investment securities:
Available for sale 1,964,764 1,878,135
Held to maturity 2,621,355 3,837,126
Federal funds sold 188,277 138,639
Deposits with other banks 24,186 74,671
----------- -----------
Total interest income 17,937,057 18,188,490
----------- -----------
INTEREST EXPENSE
Deposits 3,308,600 4,404,727
Federal funds purchased
and securities sold under agreements
to repurchase 972,342 1,217,449
Commercial paper 488,272 361,031
Other short-term borrowings 102,780 244,432
Long-term debt 525,283 204,264
----------- -----------
Total interest expense 5,397,277 6,431,903
----------- -----------
Net interest income 12,539,780 11,756,587
Provision for credit losses 1,383,000 844,000
----------- -----------
Net interest income after provision
for credit losses 11,156,780 10,912,587
----------- -----------
NONINTEREST INCOME
Factoring income 1,156,263 1,033,652
Mortgage banking income 1,207,642 859,045
Service charges on deposit accounts 792,595 674,588
Trade finance income 523,606 403,668
Trust income 196,185 189,495
Other service charges and fees 327,526 252,563
Other income 24,071 62,314
----------- -----------
Total noninterest income 4,227,888 3,475,325
----------- -----------
NONINTEREST EXPENSES
Salaries 4,639,643 4,407,664
Employee benefits 1,011,152 1,006,345
----------- -----------
Total personnel expenses 5,650,795 5,414,009
Occupancy expense, net 759,645 792,798
Equipment expense 549,942 590,631
Other expenses 2,681,900 2,322,229
----------- -----------
Total noninterest expenses 9,642,282 9,119,667
----------- -----------
Income before income taxes 5,742,386 5,268,245
Provision for income taxes 2,277,764 2,265,280
----------- -----------
Net income $ 3,464,622 $ 3,002,965
=========== ===========
Average number of common shares outstanding
Basic 8,184,916 8,218,288
Diluted 8,567,736 8,663,144
Per average common share
Basic $ .42 $ .36
Diluted .40 .35
Dividends per common share .12 .10
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Net income $ 3,464,622 $ 3,002,965
Other comprehensive income, net of tax:
Unrealized holding losses arising during the period (461,886) (75,927)
----------- -----------
Comprehensive income $ 3,002,736 $ 2,927,038
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- -------------
<S> <C> <C>
PREFERRED STOCK
Balance at January 1 $ 2,463,890 $ 2,486,730
Conversions of Series D shares -- (15,220)
------------- -------------
Balance at March 31 $ 2,463,890 $ 2,471,510
============= =============
COMMON STOCK
Balance at January 1 $ 8,310,284 $ 8,262,500
Conversions of preferred shares
into common shares -- 1,522
Options exercised 8,000 500
------------- -------------
Balance at March 31 $ 8,318,284 $ 8,264,522
============= =============
CAPITAL SURPLUS
Balance at January 1 $ 45,287,315 $ 44,775,759
Conversions of preferred shares
into common shares -- 13,698
Options exercised 92,000 3,125
------------- -------------
Balance at March 31, $ 45,379,315 $ 44,792,582
============= =============
RETAINED EARNINGS
Balance at January 1 $ 48,817,648 $ 39,590,806
Net income 3,464,622 3,002,965
Cash dividends paid - common shares (977,736) (816,616)
- preferred shares (16,632) (13,573)
------------- -------------
Balance at March 31 $ 51,287,902 $ 41,763,582
============= =============
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at January 1 $ 538,840 $ 197,374
------------- -------------
Unrealized holding losses arising during
the period:
Before tax (853,770) (140,346)
Tax benefit 391,884 64,419
------------- -------------
Net of tax (461,886) (75,927)
------------- -------------
Balance at March 31 $ 76,954 $ 121,447
============= =============
TREASURY STOCK
Balance at January 1 $ (1,592,690) $ (441,257)
Purchase of common shares (1,269,585) --
------------- -------------
Balance at March 31 $ (2,862,275) $ (441,257)
============= =============
UNEARNED COMPENSATION
Balance at January 1 $ (1,673,963) $ (2,249,346)
Amortization of unearned compensation 80,208 80,208
------------- -------------
Balance at March 31 $ (1,593,755) $ (2,169,138)
============= =============
TOTAL SHAREHOLDERS' EQUITY
Balance at January 1 $ 102,151,324 $ 92,622,566
Net changes during the period 918,991 2,180,682
------------- -------------
Balance at March 31 $ 103,070,315 $ 94,803,248
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,464,622 $ 3,002,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 1,383,000 844,000
Depreciation and amortization of premises and equipment 447,797 269,577
Deferred income tax provision (75,287) (36,754)
Net change in loans held for sale (37,309,657) (3,109,823)
Amortization of unearned compensation 80,208 80,208
Amortization of premiums of securities 674,013 441,950
Accretion of discounts on securities (202,610) (221,864)
Increase in accrued interest receivable (86,697) (40,382)
(Decrease)Increase in due to factored clients (1,290,389) 1,868,654
Increase in other liabilities 3,264,443 454,776
Other, net (1,903,341) (570,632)
------------- -------------
Net cash (used in) provided by operating activities (31,553,898) 2,982,675
------------- -------------
INVESTING ACTIVITIES
Purchase of premises and equipment (421,833) (39,341)
Net decrease in interest-bearing deposits
with other banks -- 1,710,000
Decrease(Increase) in other real estate owned 141,557 (337,141)
Net decrease in loans 89,676,804 29,921,734
Proceeds from prepayments, redemptions or maturities
of securities - held to maturity 20,767,320 13,848,623
Purchases of securities - held to maturity (26,868,288) (9,794,813)
Purchases of securities - available for sale (65,559,880) (192,995,719)
Proceeds from prepayments, redemptions or maturities
of securities - available for sale 74,882,436 219,843,131
------------- -------------
Net cash provided by investing activities 92,618,116 62,156,474
------------- -------------
FINANCING ACTIVITIES
Net decrease in noninterest-bearing deposits (69,133,541) (78,612,265)
Net increase in interest-bearing deposits 25,584,366 13,038,030
Net decrease in Federal funds purchased and
securities sold under agreements to repurchase (14,269,531) (33,391,371)
Net decrease in commercial paper
and other short-term borrowings (3,475,220) (808,288)
Purchase of Treasury stock (1,269,585) --
(Decrease)Increase in other long-term debt (350,000) 40,000,000
Proceeds from exercise of stock options 100,000 3,625
Cash dividends paid on common and preferred stock (994,368) (830,189)
------------- -------------
Net cash used in financing activities (63,807,879) (60,600,458)
------------- -------------
Net (decrease)increase in cash and due from banks (2,743,661) 4,538,691
Cash and due from banks - beginning of period 43,311,268 40,065,863
------------- -------------
Cash and due from banks - end of period $ 40,567,607 $ 44,604,554
============= =============
Supplemental schedule of non-cash financing activities:
Debenture and preferred stock conversions $ -- $ 15,220
Supplemental disclosure of cash flow information:
Interest paid $ 2,378,563 $ 6,146,435
Income taxes paid 265,000 309,052
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE> 8
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The consolidated financial statements include the accounts of Sterling
Bancorp ("the parent company") and its subsidiaries, principally Sterling
National Bank and its subsidiaries ("the bank"), after elimination of
material intercompany transactions. The term "the Company" refers to
Sterling Bancorp and its subsidiaries. The consolidated financial
statements as of and for the interim periods ended March 31, 1999 and 1998
are unaudited; however, in the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation
of such periods have been made. Certain reclassifications have been made
to the 1998 financial statements to conform to the current presentation.
The interim financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended December 31, 1998.
2. For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks.
3. The Company's outstanding Preferred Shares comprise 1,230 Series B shares
(of 4,389 Series B shares authorized) and 243,929 Series D shares (of
300,000 Series D shares authorized). Each Series B share is entitled to
cumulative dividends at the rate of $0.10 per year, to one vote per share
and upon liquidation or redemption to an amount equal to accrued and
unpaid dividends to the date of redemption or liquidation plus an amount
which is $20 in the case of involuntary liquidation and $28 otherwise;
each Series D share (all of such shares are owned by the Company's
Employee Stock Ownership Trust) is entitled to dividends at the rate of
$0.6125 per year, is convertible into one Common Share, and is entitled to
a liquidation preference of $10 (together with accrued dividends). All
preferred shares are entitled to one vote per share (voting with the
Common Shares except as otherwise required by law).
4. In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132"). SFAS 132 standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable. SFAS 132 provides
information that assists users in (a) evaluating the employer's
obligations under pension and other postretirement plans and the effects
on the employer's prospects for future cash flows, (b) analyzing the
quality of currently reported net income, and (c) estimating future
reputed net income. SFAS 132 addresses disclosure only. SFAS 132 is
effective for fiscal years beginning after December 15, 1997, and, as
appropriated was adopted in the financial statement of the Company for the
year ended December 31, 1998.
8
<PAGE> 9
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements, requires that selected information about operating
segments be reported in interim financial statements issued to
stockholders and establishes standards for related disclosures about an
enterprises' products and services, geographic areas, and major customers.
The Company provides a full range of financial products and
services, including business and consumer loans, commercial and
residential mortgage lending and brokerage, asset-based financing,
accounts receivable management services, trade financing, equipment
leasing, corporate and consumer deposit services, trust and estate
administration and investment management services. The Company's primary
source of earnings is net interest income, which represents the difference
between interest earned on interest-earning assets and the interest
incurred on interest-bearing liabilities. The Company's 1999 year-to-date
average interest-earning assets were 61.3% loans (corporate lending was
80.0% and real estate lending was 20.0% of total loans, respectively) and
38.7% investment securities and money market investments. There are no
industry concentrations exceeding 10% of loans, gross, in the corporate
loan portfolio. Approximately 70% of loans are to borrowers located in the
metropolitan New York area. In order to comply with the provisions of SFAS
No. 131, the Company has determined that it has three reportable operating
segments: corporate lending, real estate lending and company-wide
treasury.
The following table provides certain information regarding the
Company's operating segments:
<TABLE>
<CAPTION>
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
Net interest income $ 6,599,165 $ 2,301,216 $ 2,721,939 $ 11,622,320
Noninterest income 1,934,843 1,190,889 41,603 3,167,335
Depreciation and amortization 37,443 43,149 171 80,763
Segment profit 2,755,833 2,025,100 4,723,100 9,504,033
Segments assets 471,668,226 104,471,768 371,042,756 947,182,750
Three months ended March 31, 1998
Net interest income $ 5,278,358 $ 1,988,140 $ 3,714,764 $ 11,181,262
Noninterest income 1,837,924 826,912 16,068 2,680,904
Depreciation and amortization 19,374 39,178 86 58,638
Segment profit 1,986,386 1,597,300 5,099,400 8,683,086
Segments assets 433,459,504 88,111,011 404,130,917 925,701,432
</TABLE>
9
<PAGE> 10
The following table sets forth reconciliations of reportable operating
segments net interest income, noninterest income, profits and assets to the
Company's consolidated totals:
<TABLE>
<CAPTION>
Three months Ended March 31, 1999 1998
------------- -------------
<S> <C> <C>
Net interest income:
Total for reportable operating segments $ 11,622,320 $ 11,181,262
Other [1] 917,460 575,325
------------- -------------
Consolidated net interest income $ 12,539,780 $ 11,756,587
============= =============
Noninterest income:
Total for reportable operating segments $ 3,167,335 $ 2,680,904
Other [1] 1,060,553 794,421
------------- -------------
Consolidated noninterest income $ 4,227,888 $ 3,475,325
============= =============
Profit:
Total for reportable operating segments $ 9,504,033 $ 8,683,086
Other [1] (3,761,647) (3,414,841)
------------- -------------
Consolidated income before income taxes $ 5,742,386 $ 5,268,245
============= =============
Assets:
Total for reportable operating segments $ 947,182,750 $ 925,701,432
Other [1] 38,071,682 40,100,696
------------- -------------
Consolidated assets $ 985,254,432 $ 965,802,128
============= =============
</TABLE>
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
6. SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" requires that after the securitization of a mortgage loan held
for sale, an entity engaged in mortgage banking is no longer required to
classify all retained mortgage-backed securities as trading securities.
However, a mortgage banking enterprise must classify as trading any
retained mortgage-backed securities that it commits to sell before or
during the securitization process. As required, the Company adopted the
provisions of SFAS 134 on January 1, 1999. The effect of adopting this
standard did not have a material impact on the Company's financial
condition or results of operations.
10
<PAGE> 11
STERLING BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analyses of the
consolidated results of operations and financial condition of Sterling Bancorp
(the "parent company"), a bank holding company as defined by the Bank Holding
Company Act of 1956, as amended, and its wholly-owned subsidiaries Sterling
Banking Corporation, Sterling Industrial Loan Association, and Sterling National
Bank (the "Bank"). The Bank, which is the principal subsidiary, owns all of the
outstanding shares of Sterling Factors Corporation ("Factors"), Sterling
National Mortgage Company, Inc.("SNMC-New York"), Sterling National Mortgage
Corp. ("SNMC-Virginia") and Sterling Holding Company of Virginia, Inc. Sterling
Holding Company of Virginia, Inc. owns all of the outstanding shares of Sterling
Real Estate Holding Company Inc. ("SREHC"). Throughout this discussion and
analysis, the term "the Company" refers to Sterling Bancorp and its
subsidiaries. This discussion and analysis should be read in conjunction with
the company's annual report on form 10-K for the year ended December 31, 1998.
This report contains statements that constitute forward-looking statements and
are subject to certain risks and uncertainties that could cause actual facts to
differ materially from those presented in this report. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date of this report.
COMPANY BUSINESS
The Company provides a full range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposits services, trust
and estate administration, and investment management services. The Company has
operations in New York and Virginia and conducts business throughout the United
States.
There is intense competition in all areas in which the Company conducts
its business. In addition to competing with other banks, the Company competes in
certain areas of its business with other financial institutions. At March 31,
1999, the Bank's year-to-date average earning assets (of which loans were 60%
and investment securities were 39%) represented approximately 93% of the
Company's year-to-date average earning assets.
The Company regularly evaluates acquisition opportunities and conducts due
diligence activities in connection with possible acquisition. As a result,
acquisition discussions and, in some cases negotiations, regularly take place
and future acquisitions could occur.
OVERVIEW
The Company reported net income for the three months ended March 31, 1999 of
$3.5 million, representing $0.40 per share, calculated on a diluted basis,
compared to $3.0 million, or $0.35 per share calculated on a diluted basis, for
the like period in 1998. This increase reflects the improvement in net interest
income and continued growth in noninterest income.
Net interest income increased to $12.5 million for first quarter of 1999
compared with $11.8 million for same period in 1999, principally due to higher
average earning assets outstanding. The net interest margin, on a tax equivalent
11
<PAGE> 12
basis, was 6.14% for the first three months of 1999 compared to 5.79% for the
like 1998 period. This increase was due to a decrease in average cost of funds
of 54 basis points partially offset by a 21 basis point decrease in the average
yield on earning assets.
Noninterest income rose to $4.2 million for the three months ended March
31, 1999 compared to $3.5 million for the like 1998 period principally due to
continued growth in fees from mortgage banking, factoring, trade finance and
deposit services.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, which represents the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities,
is the Company's primary source of earnings. Net interest income can be affected
by changes in market interest rates as well as the level and composition of
assets, liabilities and shareholders' equity. The increases (decreases) in the
components of interest income and interest expense, expressed in terms of
fluctuation in average volume and rate are shown on page 18. Information as to
the components of interest income and interest expense and average rates is
provided in the Average Balance Sheets shown on page 17.
Net interest income for the three months ended March 31, 1999 increased
$783,000 to $12,540,000 from $11,757,000 for the comparable period in 1998.
Total interest income aggregated $17,937,000 down $251,000 for the first
quarter of 1999 as compared to $18,188,000 for the same period of 1998. The tax
equivalent yield on interest earning assets was 8.78% for the first three months
of 1999 compared with 8.99% for the comparable period in 1998. The increase in
interest income was principally due to an increase in income earned on the
Company's loan portfolio as a result of management's strategy of increasing loan
outstandings as a percentage of total assets. The decrease in yield on earning
assets was due to lower yields on loans and investment securities.
Interest earned on the loan portfolio amounted to $13,138,000 down
$879,000 when compared to a year ago. Average loan balances amounted to
$528,546,000 up $43,543,000 from an average of $485,003,000 in the prior year
period. The increase in the average loans, primarily in the Company's leasing,
mortgage and in the short-term money market component of commercial and
industrial loan portfolio, accounted for the increase in interest earned on
loans. The decrease in the yield on the loan portfolio to 10.72% for the three
months ended March 31, 1999 from 11.10% for the comparable 1998 period was
primarily attributable to a lower rate environment.
Tax equivalent interest earned on investment securities increased
$1,015,000 to $4,737,000 in 1999 due to lower average outstandings and lower
yields due to a flattening of the U.S. Treasury yield curve.
Interest expense decreased $1,035,000 to $5,397,000 for the first three
months of 1999 from $6,432,000 for the comparable period in 1998. The decrease
in interest expense was due to the lower average funds employed and average
rates paid.
Interest expense on savings and time deposits decreased $1,096,000 for the
three months ended March 31, 1999 to $3,309,000 from $4,405,000 for the
comparable 1998 period due to decreases in average outstandings and the cost of
funds. Average outstandings decreased $44,960,000 to $384,512,000 in 1999 from
$429,472,000 in 1998. The average rate paid on interest-bearing deposits was
reduced to 3.49% in 1999 compared to 4.16% in the comparable year ago period.
12
<PAGE> 13
Provision for Credit Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for credit losses increased to
$1,383,000 up $539,000 when compared to the same period last year.
Noninterest Income
Noninterest income increased $753,000 for the first quarter of 1999 when
compared with the like 1998 period primarily as a result of increased fees from
mortgage banking, factoring, trade finance and deposit services.
Noninterest Expense
Noninterest expenses increased $523,000 for the first three months of 1999 when
compared with the like 1998 period primarily due to increased personnel expenses
incurred to support growing levels of business activity and continued
investments in the business franchise.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are comprised of principally U.S. Government
and U.S. Government corporation and agency guaranteed mortgage backed securities
along with other debt and equity securities. At March 31, 1999, the Company's
portfolio of securities totalled $325,259,000 of which U.S. Government and U.S.
Government corporation and agency guaranteed mortgage-backed securities having
an average life of approximately 3.8 years amounted to $279,332,000. The Company
has the intent and ability to hold to maturity securities classified as "held to
maturity". These securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts. The gross unrealized gains and losses on
"held to maturity" securities were $1,300,000 and $875,000, respectively.
Securities classified as "available for sale" may be sold in the future, prior
to maturity. These securities are carried at market value. Net aggregate
unrealized gains or losses on these securities are included in a valuation
allowance account and are shown net of taxes, as a component of shareholders'
equity. "Available for sale" securities included gross unrealized gains of
$642,000 and gross unrealized losses of $500,000. Given the generally high
credit quality of the portfolio, management expects to realize all of its
investment upon the maturity of such instruments, and thus believes that any
market value impairment is temporary in nature.
Loan Portfolio
A key management objective is to maintain the quality of the loan portfolio.
This objective is achieved by maintaining high underwriting standards coupled
with regular evaluation of the creditworthiness of and the designation of
lending limits for each borrower. The portfolio strategies seek to avoid
concentrations by industry or loan size in order to minimize credit exposure and
to originate loans in markets with which it is familiar.
The Company's commercial and industrial loan portfolio represents
approximately 69% of gross loans. Loans in this category are typically made to
small and medium sized businesses and range between $250,000 and $10 million.
The primary source of repayment is from the borrower's operating profits and
cash flows. Based on underwriting standards, loans may be secured in whole or in
part by collateral such as liquid assets, accounts receivable, equipment,
inventory or real property. The Company's real estate loan portfolio, which
represents
13
<PAGE> 14
approximately 17% of gross loans, is secured by mortgages on real property
located principally in the State of New York and the State of Virginia. The
Company's leasing portfolio, which consists of finance leases for various types
of business equipment, represents approximately 11% of gross loans. The
collateral securing any loan may vary in value based on market conditions.
The following table sets forth the composition of the Company's loan
portfolio.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------
1999 1998
---------------------- ----------------------
($ in thousands)
% of % of
Balances Gross Balances Gross
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Domestic
Commercial and industrial $413,766 69.2% $383,150 70.9%
Equipment lease financing 67,199 11.3 52,142 9.7
Real estate 102,897 17.2 87,906 16.3
Installment - individuals 13,114 2.2 16,277 3.0
Foreign
Government and official institutions 787 0.1 788 0.1
-------- -------- -------- --------
Gross loan 597,763 100.0% 540,263 100.0%
======== ========
Unearned discounts 9,924 8,593
-------- --------
Loans, net of unearned discounts $587,839 $531,670
======== ========
</TABLE>
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Company's portfolio of loans is
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial condition of
borrowers and the credit management process.
The allowance for credit losses is maintained through the provision for
credit losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for credit losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
evaluation of both loans presenting identified loss potential and of the risk
inherent in various components of the portfolio, including loans identified as
impaired as required by SFAS No. 114. Thus an increase in the size of the
portfolio or in any of its components could necessitate an increase in the
allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance. At March 31, 1999, the ratio of the allowance to loans, net of
unearned discounts, was 1.8% and the allowance was $10,394,000. At such date,
the Company's non-accrual loans amounted to $1,450,000; no loans were judged to
be impaired within the scope of SFAS No. 114. Based on the foregoing, as well as
management's judgement as to the current risks inherent in the loan portfolio,
the Company's allowance for credit losses was deemed adequate to absorb all
reasonably anticipated losses on specifically known and other possible credit
risks associated with the portfolio as of March 31, 1999. Potential problem
loans, which are loans that are currently performing under present loan
repayment terms but where known information about possible credit problems of
borrowers cause management to have serious doubts as to the ability of the
borrowers to continue to comply with the present repayment terms, aggregated
$1,070,000 at March 31, 1999.
14
<PAGE> 15
Deposits
The Company's principal source of funds continues to be deposits, consisting of
demand (noninterest-bearing), NOW, Savings, money market and time deposits
(principally certificates of deposit).
The following table provides certain information with respect to the
Company's deposits:
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1999 1998
----------------- -----------------
($ in thousands)
% of % of
Balances Total Balances Total
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Domestic
Demand $259,887 39.4% $233,849 35.1%
NOW 59,118 9.0 63,798 9.6
Savings 23,881 3.6 22,710 3.4
Money Market 123,207 18.7 122,066 18.3
Time deposits 190,430 28.9 220,681 33.2
-------- ----- -------- -----
Total domestic deposits 656,523 99.6 663,104 99.6
Foreign
Time deposits 2,730 0.4 2,730 0.4
-------- ----- -------- -----
Total deposits $659,253 100.0% $665,834 100.0%
======== ===== ======== =====
</TABLE>
Fluctuations of balances in total or among categories at any date may occur
based on the Company's mix of assets and liabilities as well as on customer's
balance sheet strategies. Historically, however, average balances for deposits
have been relatively stable. Information regarding these average balances is
presented on page 17.
CAPITAL
The Company and the bank are subject to risk-based capital regulations. The
purpose of these regulations is to quantitatively measure capital against
risk-weighted assets, including off-balance sheet items. These regulations
define the elements of total capital into Tier 1 and Tier 2 components and
establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for
capital adequacy purposes. Supplementing these regulations, is a leverage
requirement. This requirement establishes a minimum leverage ratio, (at least 3%
to 5%) which is calculated by dividing Tier 1 capital by adjusted quarterly
average assets (after deducting goodwill). Information regarding the Company's
and the bank's risk-based capital is presented on page 19. In addition the
Company and the bank are subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1981 ("FDICIA") which imposes a number
of mandatory supervisory measures. Among other matters, FDICIA established five
capital categories ranging from "well capitalized" to "critically under
capitalized". Such classifications are used by regulatory agencies to determine
a bank's deposit insurance premium, approval of applications authorizing
institutions to increase their asset size or otherwise expand business
activities or acquire other institutions. Under the provisions of FDICIA a "well
capitalized" institution must maintain minimum leverage, Tier 1 and Total
Capital ratios of 5%, 6% and 10%, respectively. At March 31, 1999, the Company
and the bank exceeded the requirements for "well capitalized" institutions.
15
<PAGE> 16
YEAR 2000 PROJECT
Management has initiated a company-wide program to prepare the Company's
computer hardware and software for the year 2000. In this connection, the
Company has established a Year 2000 ("Y2K") Compliance Committee ("the
Committee") to address this important issue. The Committee has undertaken a
project with major emphasis on identifying all hardware and software supporting
the Company's mission critical applications. This project has been divided into
the following five phases: awareness, assessment, renovation, validation and
implementation.
The Committee has completed the awareness and the assessment phases in
which all of the Company's hardware and software have been identified, reviewed
and classified according to their ability to adequately function beyond December
31, 1999. The Committee has also completed the renovation phase for both
internal and external mission critical systems, meaning that all of the
programming for the Company's mission critical systems has been altered to
address Year 2000 dates. As of March 31, 1999, the Committee had completed the
testing on approximately 80% of the Company's mission critical systems. The
results of these tests were successful without any Year 2000 issues arising. In
accordance with the Company's Year 2000 Testing Plan, 100% of the mission
critical testing will be complete by June 30, 1999. The Committee has completed
the Company's Customer Awareness Program. The Company sent a questionnaire to
its significant commercial customer base and funding sources to assess their
level of awareness of and compliance with Y2K issues. The Committee will
continue monitoring the progress of its significant commercial customer base,
funding sources, and vendors, and will assess the potential impact of these
efforts on the Company.
The Committee has estimated that the cost to complete all phases of the
Y2K project to be approximately $350,000 and will be expensed as incurred. This
estimate does not include any costs to be charged to the Company by outside
vendors and service providers. Many of the expenditures will relate to
microcomputer hardware and software that would have been upgraded in the normal
course of the Company's operations through December 31, 1999.
Despite the best efforts of the Committee, there can be no complete
assurance that the Company will not be adversely affected by unforeseen problems
in its own computer systems or in systems provided by third parties and by other
entities not associated with the Company which are unsuccessful in properly
addressing this issue. While the dollar impact of any unforseen problems cannot
be accurately quantified at this time because of the uncertainties involved,
such problems could have a material adverse effect on the Company. The Company,
as part of its normal business practice, has business resumption and disaster
recovery plans to facilitate timely restoration of services and processes in the
event of a business disruption. The effort to update these plans to reflect the
potential of Year 2000-related failures is underway. In addition, the Company is
developing business resumption, remediation and event contingency plans to
prepare for potential systems failures at critical dates, failures of critical
third parties to effectively remedy and certify their technologies as well as
any other unanticipated events that could arise with the date change. The
development of these plans includes the identification of core business
processes, critical to the Company's business and operations, and assessment of
failure scenarios. The Company expects that its contingency planning for the
year 2000 issue will be complete by the end of June, 1999.
16
<PAGE> 17
STERLING BANCORP AND SUBSIDIARIES
Average Balance Sheets [1]
Three Months Ended March 31,
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
with other banks $ 515 $ 24 4.11% $ 2,658 $ 75 5.12%
Investment securities
Available for sale [2] 135,765 2,116 6.26 122,086 1,915 6.32
Held to maturity 180,961 2,621 5.79 234,149 3,837 6.56
Federal funds sold 16,167 188 4.66 10,171 139 5.45
Loans, net of unearned discounts
Domestic [3] 527,759 13,127 10.73 484,214 12,247 11.11
Foreign 787 12 6.20 789 13 6.87
--------- --------- --------- ---------
TOTAL INTEREST-EARNING
ASSETS 861,954 18,088 8.78% 854,067 18,226 8.99%
--------- ====== --------- ======
Cash and due from banks 44,000 41,304
Allowance for credit losses (10,474) (8,999)
Goodwill 21,158 21,158
Other assets 20,011 20,979
--------- ---------
TOTAL ASSETS $ 936,649 $ 928,509
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Domestic
Savings $ 24,986 145 2.35% $ 23,549 130 2.24%
NOW 62,218 378 2.46 53,563 374 2.83
Money Market 125,352 843 2.73 135,128 1,023 3.07
Time 169,226 1,910 4.58 214,506 2,842 5.37
Foreign
Time 2,730 33 4.93 2,726 36 5.36
--------- --------- --------- ---------
Total interest-bearing
deposits 384,512 3,309 3.49 429,472 4,405 4.16
--------- --------- --------- ---------
Borrowings
Federal funds purchased and
securities sold under
agreements to repurchase 80,706 972 4.89 91,196 1,217 5.41
Commercial paper 41,904 488 4.73 28,146 361 5.20
Other short-term debt 3,622 103 5.08 14,513 245 5.19
Long-term debt 41,295 525 5.09 16,306 204 5.08
--------- --------- --------- ---------
Total borrowings 167,527 2,088 4.90 150,161 2,027 5.32
--------- --------- --------- ---------
TOTAL INTEREST-BEARING
LIABILITIES 552,039 5,397 3.92% 579,633 6,432 4.46%
--------- ====== --------- ======
Noninterest-bearing deposits 241,093 213,851
Other liabilities 41,294 42,162
--------- ---------
Total liabilities 834,426 835,646
Shareholders' equity 102,223 92,863
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 936,649 $ 928,509
========= =========
Net interest income/spread 12,691 4.86% 11,794 4.53%
====== ======
Net yield on interest-earning
assets (margin) 6.14% 5.79%
====== ======
Less: Tax equivalent adjustment 151 34
--------- ---------
Net interest income $ 12,540 $ 11,757
========= =========
</TABLE>
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages. Average rates are presented on a
tax equivalent basis.
[2] Interest on tax-exempt securities included herein is presented on a tax
equivalent basis.
[3] Nonaccrual loans are included in amounts outstanding and income has been
included to the extent earned.
17
<PAGE> 18
STERLING BANCORP AND SUBSIDIARIES
Rate/Volume Analysis [1]
Three Months Ended March 31,
(dollars in thousands)
<TABLE>
<CAPTION>
Increase/(Decrease)
Three Months Ended
March 31, 1999 and 1998
-------------------------------
Volume Rate Net[2]
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Interest-bearing deposits with other banks $ (40) $ (11) $ (51)
------- ------- -------
Investment securities
Available for sale 219 (18) 201
Held to maturity (801) (415) (1,216)
------- ------- -------
Total (582) (433) (1,015)
------- ------- -------
Federal funds sold 71 (22) 49
------- ------- -------
Loans, net of unearned discounts [3]
Domestic 1,295 (415) 880
Foreign -- (1) (1)
------- ------- -------
Total 1,295 (1) (879)
------- ------- -------
TOTAL INTEREST INCOME $ 744 $ (882) $ (138)
======= ======= =======
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 9 $ 6 $ 15
NOW 61 (57) 4
Money Market (71) (109) (180)
Time (549) (383) (932)
Foreign
Time -- (3) (3)
------- ------- -------
Total (550) (546) (1,096)
------- ------- -------
Borrowings
Federal funds purchased and securities
sold under agreements to repurchase (133) (112) (245)
Commercial paper 163 (36) 127
Other short-term debt (138) (4) (142)
Long-term debt 321 -- 321
------- ------- -------
Total 213 (152) 61
------- ------- -------
TOTAL INTEREST EXPENSE $ (337) $ (698) $(1,035)
======= ======= =======
NET INTEREST INCOME $ 1,081 $ (184) $ 897
======= ======= =======
</TABLE>
[1] The above table is presented on tax equivalent basis.
[2] The change in interest income and interest expense due to both rate and
volume has been allocated to change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts of
the changes in each.
[3] Nonaccrual loans have been included in the amounts outstanding and income
has been included to the extent accrued.
18
<PAGE> 19
STERLING BANCORP AND SUBSIDIARIES
Regulatory Capital and Ratios
RATIOS AND MINIMUMS
(Dollars in thousands)
<TABLE>
<CAPTION>
For Capital To Be Well
Actual Adequacy Minimum Capitalized
AS OF MARCH 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- --------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
The Company $89,788 14.17% $50,703 8.00% $63,378 10.00%
The Bank 74,534 12.79 46,608 8.00 58,260 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 81,835 12.91 25,351 4.00 38,027 6.00
The Bank 67,241 11.54 23,304 4.00 34,956 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 81,835 8.94 36,620 4.00 45,775 5.00
The Bank 67,241 7.72 34,818 4.00 43,523 5.00
AS OF DECEMBER 31, 1998
- -----------------------
Total Capital (to Risk Weighted Assets):
The Company $89,307 12.63% $56,552 8.00% $70,690 10.00%
The Bank 71,998 10.93 52,675 8.00 65,844 10.00
Tier 1 Capital (to Risk Weighted Assets):
The Company 80,454 11.38 28,276 4.00 42,414 6.00
The Bank 64,117 9.74 26,337 4.00 39,506 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 80,454 8.67 37,109 4.00 46,387 5.00
The Bank 64,117 7.20 35,624 4.00 44,530 5.00
</TABLE>
19
<PAGE> 20
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of market risk, liquidity risk, capital and asset quality. The
Company's net interest income is affected by changes in market interest rates
and by the level and composition of interest-earning assets and interest-bearing
liabilities. The Company's objectives in its asset/liability management are to
utilize its capital effectively, to provide adequate liquidity and to enhance
net interest income, without taking undue risks or subjecting the Company unduly
to interest rate fluctuations.
The Company takes a coordinated approach to the management of market risk,
liquidity and capital. This risk management process is governed by policies and
limits established by senior management which are reviewed and approved by the
Asset/Liability Committee ("ALCO"). ALCO, which is comprised of members of
senior management and the Board, meets to review among other things, economic
conditions, interest rates, yield curve, cash flow projections, expected
customer actions, liquidity levels, capital ratios and repricing characteristics
of assets, liabilities and off-balance sheet financial instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. The Company monitors the interest rate sensitivity of its on - and
off - balance sheet positions by examining its near-term sensitivity and its
longer term gap position. In its management of interest rate risk, the Company
utilizes several tools including traditional gap analysis and sophisticated
income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest-rate sensitive assets exceed interest-rate sensitive
liabilities generally will result in an institution's net interest margin
increasing in a rising rate environment and decreasing in a falling rate
environment. A negative gap (liability sensitive) will generally have the
opposite result on an institution's net interest margin. However, the
traditional gap analysis does not assess the relative sensitivity of assets and
liabilities to changes in interest rates. The Company utilizes the gap analysis
to complement its income simulations modeling, primarily focusing on the longer
term structure of the balance sheet.
The Company's balance sheet structure is primarily short-term in nature
with a substantial portion of assets and liabilities repricing or maturing
within one year. The Company's gap analysis at March 31, 1999, presented on page
23, reveals that net interest income would increase during periods of rising
interest rates and decrease during periods of falling interest rates.
As part of its interest rate risk strategy, the Company uses off-balance
sheet financial instruments (derivatives) to hedge the interest rate sensitivity
of assets with the corresponding amortization reflected in the yield of the
related on-balance sheet assets being hedged. The Company has written policy
guidelines, which have been approved by the Board of Directors based on
recommendations of the Asset/Liability Committee, governing the use of
off-balance sheet financial instruments, including approved counterparties, risk
20
<PAGE> 21
limits and appropriate internal control procedures. The credit risk of
derivatives arises principally from the potential for a counterparty to fail to
meet its obligation to settle a contract on a timely basis.
The Company purchased interest rate floor contracts to reduce the impact
of falling rates on its floating rate commercial loans. Interest rate floor
contracts require the counterparty to pay the Company at specified future dates
the amount, if any, by which the specified interest rate (3 month LIBOR) falls
below the fixed floor rates, applied to the notional amounts. The Company
utilizes these financial instruments to adjust its interest rate risk position
without exposing itself to principal risk and funding requirements.
At March 31, 1999, the Company's off-balance sheet financial instruments
consisted of four interest rate floor contracts having a notional amount
totaling $125 million consisting of a contract with a notional amount of $25
million and a final maturity of October 10, 1999, another contract with a
notional amount of $50 million and a final maturity of February 27, 2000,
another contract with a notional amount of $25 million and a final maturity
February 9, 2001 and another contract with a notional amount of $25 million and
a final maturity of May 1, 2001. These financial instruments are being used as
part of the Company's interest rate risk management and not for trading
purposes. At March 31, 1999, all counterparties have investment grade credit
ratings from the major rating agencies. Each counterparty is specifically
approved for applicable credit exposure.
The interest rate floor contracts require the Company to pay a fee for the
right to receive a fixed interest payment. The Company paid up front premiums of
$879,000 which are amortized monthly against interest income from the designated
assets. At March 31, 1999, the unamortized premiums on these contracts totaled
$255,000 and are included in other assets. At March 31, 1999, $46,000 was
receivable under these contracts.
The Company utilizes income simulation models to complement its
traditional gap analysis. While ALCO routinely monitors simulated net interest
income sensitivity over a rolling two-year horizon, it also utilizes additional
tools to monitor potential longer-term interest rate risk. The income simulation
models measure the Company's net interest income sensitivity or volatility to
interest rate changes utilizing statistical techniques that allow the Company to
consider various factors which impact net interest income. These factors include
actual maturities, estimated cash flows, repricing characteristics, deposits
growth/retention and, most importantly, the relative sensitivity of the
Company's assets and liabilities to changes in market interest rates. This
relative sensitivity is important to consider as the Company's core deposit base
is not subject to the same degree of interest rate sensitivity as its assets.
The core deposits costs are internally managed and tend to exhibit less
sensitivity to changes in interest rates than the Company's adjustable rate
assets whose yields are based on external indices and change in concert with
market interest rates.
The Company's interest rate sensitivity is determined by identifying the
probable impact of changes in market interest rates on the yields on the
Company's assets and the rates which would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
can project the impact of changes in interest rates on net interest margin. The
estimated effects of the Company's interest rate floors are included in the
results of the sensitivity analysis. The Company has established certain limits
for the potential volatility of its net interest margin assuming certain levels
of changes in market interest rates with the objective of maintaining a stable
net interest margin under various probable rate scenarios. Management generally
has maintained a risk position well within the policy limits. As of March 31,
1999, the model indicated the impact of a 200 basis point parallel and pro rata
rise in rates over twelve months would approximate a 2.14% ($1,122,000) increase
in net interest income, while the impact of a 200 basis point decline in rates
over the same period would approximate a 1.15% ($606,000) decline from an
unchanged rate environment.
21
<PAGE> 22
The preceding sensitivity analysis does not represent a Company forecast
and should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due too: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
the Asset/Liability Committee might take in responding to or anticipating
changes in interest rates.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the bank levels. Liquid assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital markets funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits, which
historically have been relatively stable. The parent company and the bank have
significant unused borrowing capacity. Contingency plans exist and could be
implemented on a timely basis to minimize the impact of any dramatic change in
market conditions.
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash equivalents throughout its history.
Various legal restrictions limit the extent to which the bank can supply
funds to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for that
year to date combined with its retained net profits for the preceding two
calendar years.
At March 31, 1999, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $40,513,000. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating
$61,608,000 and back-up credit lines with banks of $19,000,000. Since 1979, the
parent company has had no need to use available back-up lines of credit.
While the past performance is no guarantee of the future, management
believes that the Company's funding sources (including dividends from all its
subsidiaries) and the bank's funding sources will be adequate to meet their
liquidity and capital requirements in the future.
22
<PAGE> 23
STERLING BANCORP AND SUBSIDIARIES
Interest Rate Sensitivity
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are placed in a time of the earliest repricing
period. Based on the analysis shown below, the Company's net interest income
would increase during periods of rising interest rates and decrease during
periods of falling interest rates. Amounts are presented in thousands.
<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 $ 515 $ -- $ -- $ -- $ -- $ 515
Investment securities 9,948 9,162 17,667 281,689 6,793 325,259
Loans, net of unearned
discounts
Commercial and Industrial 409,518 166 1,121 2,959 (670) 413,094
Lease financing 181 3,050 62,091 1,877 (8,829) 58,370
Real estate 19,685 2,332` 19,852 61,028 (225) 102,672
Installment 6,913 1,044 2,049 3,108 (198) 12,916
Foreign government and
official institutions -- 787 -- -- -- 787
Noninterest-earning assets
and allowance for
credit losses -- -- -- -- 71,641 71,641
--------- --------- --------- --------- --------- ---------
Total Assets 446,760 16,541 102,780 350,661 68,512 985,254
--------- --------- --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Savings [1] -- -- 23,881 -- -- 23,881
NOW [1] -- -- 59,118 -- -- 59,118
Money market [1] 100,153 -- 23,054 -- -- 123,207
Time - domestic 110,612 53,168 26,380 270 -- 190,430
- foreign 2,730 -- -- -- -- 2,730
Federal funds purchased &
securities sold u/a/r 81,735 3,425 -- -- -- 85,160
Commercial paper 40,513 -- -- -- -- 40,513
Other short-term borrowings 9,962 350 -- -- -- 10,312
Long-term borrowings - FHLB 20,000 10,000 11,050 -- -- 41,050
Noninterest-bearing
liabilities and share-
holders' equity -- -- -- -- 408,853 408,853
--------- --------- --------- --------- --------- ---------
Total Liabilities and
Shareholders' Equity 365,705 66,943 143,483 270 408,853 985,254
--------- --------- --------- --------- --------- ---------
Net Interest Rate
Sensitivity Gap $ 81,055 $ (50,402) $ (40,703) $ 350,391 $(340,341) $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
March 31, 1999 $ 81,055 $ 30,653 $ (10,050) $ 340,341 $ -- $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
March 31, 1998 $ 94,996 $ 19,177 $ (43,361) $ 298,206 $ -- $ --
========= ========= ========= ========= ========= =========
Cumulative Gap at
December 31, 1998 $ 149,850 $ 113,187 $ 65,434 $ 404,571 $ -- $ --
========= ========= ========= ========= ========= =========
</TABLE>
[1] Historically, balances in non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based in management's historical repricing
practices and runoff experience.
23
<PAGE> 24
STERLING BANCORP AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(11) Statement Re: Computation of Per Share Earnings
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING BANCORP
----------------------------------
(Registrant)
Date 5/12/99 /s/ Louis J. Cappelli
----------------------------------
Louis J. Cappelli
Chairman and
Chief Executive Officer
Date 5/12/99 /s/ John W. Tietjen
----------------------------------
John W. Tietjen
Executive Vice President, Treasurer
and Chief Financial Officer
24
<PAGE> 25
STERLING BANCORP AND SUBSIDIARIES
Exhibit Index
Incorporated Sequential
Exhibit Herein By Filed Page
Number Description Reference To Herewith No.
------ ----------- ------------ -------- ---
11 Computation of X 24
Per Share Earnings
27 Financial Data X 25
Schedule
25
<PAGE> 1
Exhibit (11)
STERLING BANCORP AND SUBSIDIARIES
Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Net income $3,464,622 $3,002,965
Less: preferred dividends 16,632 12,807
---------- ----------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS 3,447,990 2,990,158
Add: interest on convertible subordinated debt -- --
---------- ----------
NET INCOME ADJUSTED FOR DILUTED COMPUTATION $3,447,990 $2,990,158
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,184,916 8,218,288
Add dilutive effect of:
Stock options 138,891 200,165
Convertible preferred stock 243,929 244,691
---------- ----------
ADJUSTED FOR ASSUMED DILUTED COMPUTATION 8,567,736 8,663,144
========== ==========
BASIC EARNINGS PER SHARE $ 0.42 $ 0.36
========== ==========
DILUTED EARNINGS PER SHARE $ 0.40 $ 0.35
========== ==========
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
STERLING BANCORP AND SUBSIDIARIES
Article 9 of Regulation S-X
Financial Data Schedule
March 31, 1999
($ in 000's, except per share)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 40,568
<INT-BEARING-DEPOSITS> 515
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,955
<INVESTMENTS-CARRYING> 190,304
<INVESTMENTS-MARKET> 190,729
<LOANS> 587,839
<ALLOWANCE> 10,394
<TOTAL-ASSETS> 985,254
<DEPOSITS> 659,253
<SHORT-TERM> 135,985
<LIABILITIES-OTHER> 45,896
<LONG-TERM> 41,050
0
2,464
<COMMON> 8,318
<OTHER-SE> 92,288
<TOTAL-LIABILITIES-AND-EQUITY> 985,254
<INTEREST-LOAN> 13,138
<INTEREST-INVEST> 4,586
<INTEREST-OTHER> 213
<INTEREST-TOTAL> 17,937
<INTEREST-DEPOSIT> 3,309
<INTEREST-EXPENSE> 5,397
<INTEREST-INCOME-NET> 12,540
<LOAN-LOSSES> 1,383
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,642
<INCOME-PRETAX> 5,742
<INCOME-PRE-EXTRAORDINARY> 3,465
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,465
<EPS-PRIMARY> 0.42<F1>
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 6.14
<LOANS-NON> 1,450
<LOANS-PAST> 57
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,070
<ALLOWANCE-OPEN> 10,156
<CHARGE-OFFS> 1,218
<RECOVERIES> 73
<ALLOWANCE-CLOSE> 10,394
<ALLOWANCE-DOMESTIC> 9,628
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 766
<FN>
<F1>Basic
</FN>
</TABLE>
