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UNITED STATES
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, 2004 Commission File No. 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 identification No.)
incorporation or organization)
650 Fifth Avenue, New York, N.Y. 10019-6108
(Address of principal executive offices) (Zip Code)
(212) 757-3300
(Registrant's telephone number, including area code)
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 per share,
and attached Preferred Stock Purchase Rights New York Stock Exchange
Cumulative Trust Preferred
Securities 8.375% (Liquidation Amount
$10 per Preferred Security) of Sterling
Bancorp Trust I and Guarantee of Sterling
Bancorp with respect thereto 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 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.|X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 under the Act). Yes |X| No |_|
On March 23, 2005, the aggregate market value of the common equity held by
non-affiliates of the Registrant was $393,267,497.
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 18,290,641 shares were outstanding at March 23, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Sterling Bancorp's definitive Proxy Statement to be filed
pursuant to Regulation 14A are incorporated by reference in Part III.
TABLE OF CONTENTS
Page
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 1
Item 1. BUSINESS 1
Item 2. PROPERTIES 10
Item 3. LEGAL PROCEEDINGS 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
Item 6. SELECTED FINANCIAL DATA 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 65
Item 9A. CONTROLS AND PROCEDURES 65
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 66
Item 11. EXECUTIVE COMPENSATION 66
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 66
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 66
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 66
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 67
SIGNATURES
Exhibits Submitted in a Separate Volume.
PART I
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this annual report
on Form 10-K, including but not limited to, statements concerning future results
of operations or financial position, borrowing capacity and future liquidity,
future investment results, future credit exposure, future loan losses and plans
and objectives for future operations, and other statements contained herein
regarding matters that are not historical facts, are "forward-looking
statements" as defined in the Securities Exchange Act of 1934. These statements
are not historical facts but instead are subject to numerous assumptions, risks
and uncertainties, and represent only our belief regarding future events, many
of which, by their nature, are inherently uncertain and outside our control. Any
forward-looking statements we may make speak only as of the date on which such
statements are made. Our actual results and financial position may differ
materially from the anticipated results and financial condition indicated in or
implied by these forward-looking statements.
Factors that could cause our actual results to differ materially from those in
the forward-looking statements include, but are not limited to, the following:
inflation, interest rates, market and monetary fluctuations; geopolitical
developments including acts of war and terrorism and their impact on economic
conditions; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
changes, particularly declines, in general economic conditions and in the local
economies in which the Company operates; the financial condition of the
Company's borrowers; competitive pressures on loan and deposit pricing and
demand; changes in technology and their impact on the marketing of new products
and services and the acceptance of these products and services by new and
existing customers; the willingness of customers to substitute competitors'
products and services for the Company's products and services; the impact of
changes in financial services laws and regulations (including laws concerning
taxes, banking, securities and insurance); changes in accounting principles,
policies and guidelines; the success of the Company at managing the risks
involved in the foregoing as well as other risks and uncertainties detailed from
time to time in press releases and other public filings. The foregoing list of
important factors is not exclusive, and we will not update any forward-looking
statement, whether written or oral, that may be made from time to time.
ITEM 1. BUSINESS
Sterling Bancorp ("the parent company" or "the Registrant") is a bank holding
company and a financial holding company as defined by the Bank Holding Company
Act of 1956, as amended (the "BHCA"), which was organized in 1966. Throughout
the report, the terms "the Company" or "Sterling" refer to Sterling Bancorp and
its subsidiaries. Sterling provides a full range of financial products and
services, including business and consumer loans, commercial and residential
mortgage lending and brokerage, asset-based financing, factoring/ accounts
receivable management services, trade financing, equipment leasing, deposit
services, trust and estate administration and investment management services.
The Company has operations in New York, Virginia and North Carolina and conducts
business throughout the United States.
The parent company owns, directly or indirectly, all of the outstanding shares
of Sterling National Bank ("the bank"), its principal subsidiary, and all of the
outstanding shares of Sterling Banking Corporation, Sterling Financial Services
Company, Inc.("Sterling Financial") and Sterling Real Estate Abstract Holding
Company, Inc. ("the finance subsidiaries") and Sterling Bancorp Trust I
("trust"). Sterling National Mortgage Company, Inc. ("SNMC"), Sterling National
Servicing, Inc. ("SNS-Virginia"), Sterling Factors Corporation ("Factors"),
Sterling Trade Services, Inc. ("Trade Services") and Sterling Holding Company of
Virginia, Inc. are wholly-owned subsidiaries of the bank. Trade Services owns
all of the outstanding common shares of Sterling National Asia Limited, Hong
Kong; both companies commenced operations as of July 2, 2001. Sterling Holding
Company of Virginia, Inc. owns all of the outstanding common shares of Sterling
Real Estate Holding Company, Inc.. Sterling Bancorp Trust I was formed as of
February 4, 2002. Sterling Real Estate Abstract Holding Company, Inc., which
commenced operations as of January 16, 2003, owns 51% of the outstanding common
shares of SBC Abstract Company, LLC, which commenced operations as of January
17, 2004.
Segment information appears in Note 22 of the Company's consolidated financial
statements filed in Item 8 hereof.
INFORMATION AVAILABLE ON OUR WEB SITE
Our Internet address is www.sterlingbancorp.com and the investor relations
section of our web site is located at www.sterlingbancorp.com/ir/investor.cfm.
We make available free of charge, on or through the investor relations section
of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section
PAGE 1
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.
Also posted on our web site, and available in print upon request of any
shareholder to our Investor Relations Department, are the Charters for our Board
of Directors' Audit Committee, Compensation Committee and Corporate Governance
and Nominating Committee, our Corporate Governance Guidelines, our Method for
Interested Persons to Communicate with Non-Management Directors and a Code of
Business Conduct and Ethics governing our directors, officers and employees.
Within the time period required by the Securities and Exchange Commission and
the New York Stock Exchange, we will post on our web site any amendment to the
Code of Business Conduct and Ethics and any waiver applicable to our senior
financial officers, as defined in the Code, or our executive officers or
directors. In addition, information concerning purchases and sales of our equity
securities by our executive officers and directors is posted on our web site.
GOVERNMENT MONETARY POLICY
The Company is affected by the credit policies of monetary authorities,
including the Board of Governors of the Federal Reserve System. An important
element of the Federal Reserve System is to regulate the national supply of bank
credit. Among the instruments of monetary policy used by the Federal Reserve are
open market operations in U.S. Government securities, changes in the discount
rate, reserve requirements on member bank deposits, and funds availability
regulations. The monetary policies of the Federal Reserve have in the past had a
significant effect on operations of financial institutions, including the bank,
and will continue to do so in the future. Changing conditions in the national
economy and in the money markets make it difficult to predict future changes in
interest rates, deposit levels, loan demand or their effects on the business and
earnings of the Company. Foreign activities of the Company are not considered to
be material.
BUSINESS OPERATIONS
The Bank
Sterling National Bank was organized in 1929 under the National Bank Act and
commenced operations in New York City. The bank maintains ten offices in New
York, eight offices in New York City (four branches and an international banking
facility in Manhattan and three branches in Queens), one branch in Nassau County
in Great Neck, New York and one branch in Yonkers, New York. The executive
office is located at 650 Fifth Avenue, New York, New York.
The bank provides a broad range of banking and financial products and services,
including business and consumer lending, asset-based financing,
factoring/accounts receivable management services, equipment leasing, commercial
and residential mortgage lending and brokerage, international trade financing,
deposit services, trust and estate administration, investment management and
investment services. Business lending, depository and related financial services
are furnished to a wide range of customers in diverse industries, including
commercial, industrial and financial companies, and government and non-profit
entities.
For the year ended December 31, 2004, the bank's average earning assets
represented approximately 97% of the Company's average earning assets. Loans
represented 56% and investment securities represented 43% of the bank's average
earning assets in 2004.
Commercial Lending, Asset-Based Financing and Factoring/ Accounts Receivable
Management. The bank provides loans to small and medium-sized businesses. The
businesses are diversified across industries, and the loans generally range in
size from $250,000 to $10 million. Business loans can be tailored to meet
customers' specific long- and short-term needs, and include secured and
unsecured lines of credit, business installment loans, business lines of credit,
and debtor-in-possession financing. Our loans are often collateralized by
assets, such as accounts receivable, inventory, marketable securities, other
liquid collateral, equipment and other assets. Through its factoring subsidiary,
the bank provides accounts receivable management services. Factors purchases
clients' accounts receivable, assumes credit risk on approved orders and handles
credit, collection and bookkeeping. Income for these services is derived from
commission charges for receivables serviced and interest charged on advances to
the client. The accounts receivable factored are for clients primarily engaged
in the apparel and textile industries. As of December 31, 2004, the outstanding
loan balance for commercial and industrial lending was $595.2 million,
representing approximately 56% of the bank's total loan portfolio.
Equipment Leasing. The bank offers equipment leasing services in the New York
metropolitan area and across the United States through direct leasing programs,
third party sources and vendor programs. The bank finances small and
medium-sized equipment leases with an average term of 24 to 30 months. At
December 31, 2004, the outstanding loan balance for equipment leases was $163.0
million, and equipment leases comprised approximately 15% of the bank's total
loan portfolio.
PAGE 2
Residential and Commercial Mortgages. The bank's real estate loan portfolio
consists of real estate loans on one-to-four family residential properties and
commercial properties. The residential mortgage banking and brokerage business
is conducted through SNMC offices located principally in New York, North
Carolina and other mid-Atlantic states. The mortgage company originates
conforming residential mortgage loans throughout the tri-state metropolitan
area, as well as in Virginia and other mid-Atlantic states, for resale, and
non-conforming residential mortgage loans, for its own portfolio and for resale.
Commercial real estate financing is offered on income-producing investor
properties and owner-occupied properties, professional co-ops and condos through
our real estate lending department. At December 31, 2004, the outstanding loan
balance for real estate mortgage loans was $263.3 million, representing
approximately 25% of the bank's total loans outstanding.
International Trade Finance. Through its international division, international
banking facility and Hong Kong trade services subsidiary, 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 banker's
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.
Trust Services. The bank's trust department provides a variety of fiduciary,
investment management, custody and advisory and corporate agency services to
individuals, corporations and foundations. The bank acts as trustee for pension,
profit-sharing, 401(k) 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.
There are no industry concentrations exceeding 10% of gross loans, in the
commercial and industrial loan portfolio. Approximately 64% of the bank's loans
are to borrowers located in the metropolitan New York area. The bank has no
foreign loans.
The composition of income from the operations of the bank and its subsidiaries
for the three most recent fiscal years was as follows:
Years Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------------
Interest and fees on loans 48% 49% 45%
Interest and dividends on investment securities 25 25 31
Other 27 26 24
----------------------
100% 100% 100%
======================
At December 31, 2004, the bank and its subsidiaries had 481 employees,
consisting of 175 officers and 306 supervisory and clerical employees. The bank
considers its relations with its employees to be satisfactory.
Parent Company and Sterling Financial
The parent company, through Sterling Financial, makes loans that are secured by
personal property, accounts receivable or other collateral; occasionally,
unsecured advances are provided to its customers.
Dealer Receivable Financing. Through Sterling Financial, we provide loans to
independent dealers who market products, such as housewares, appliances,
automobiles and educational material to consumers on an installment basis with
repayment terms between 12 and 48 months. We administer these installment
contracts for the dealer by providing billing, payment processing and other
bookkeeping services. We generally lend up to 80% of the value of the borrower's
collateral. More than 65% of the payments are received electronically.
The composition of income (excluding equity in undistributed net income of the
bank) of the parent company and its finance subsidiaries for the three most
recent fiscal years was as follows:
Years Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Interest and fees on loans 18% 26% 23%
Dividends, interest and service fees 80 69 70
Other 2 5 7
------------------------
100% 100% 100%
========================
At December 31, 2004, the parent company and Sterling Financial employed 34
persons, consisting of 2 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.
PAGE 3
COMPETITION
There is intense competition in all areas in which the Company conducts its
business. As a result of the deregulation of the financial services industry
under the Gramm-Leach-Bliley Act of 1999 ("GLB Act"), the Company competes with
banks and other financial institutions, including savings and loans
associations, savings banks, finance companies, and credit unions. Many of these
competitors have substantially greater resources and lending limits and provide
a wider array of banking services. To a limited extent, the company also
competes with other providers of financial services, such as money market mutual
funds, brokerage firms, consumer finance companies and insurance companies.
Competition is based on a number of factors, including prices, interest rates,
service, availability of products, and geographic location.
SUPERVISION AND REGULATION
General
The banking industry is highly regulated. Statutory and regulatory controls are
designed primarily for the protection of depositors and the banking system, and
not for the purpose of protecting the shareholders of the parent company. The
following discussion is not intended to be a complete list of all the activities
regulated by the banking laws or of the impact of such laws and regulations on
the bank. It is intended only to briefly summarize some material provisions.
Sterling Bancorp is a bank holding company and a financial holding company under
the BHCA and is subject to supervision, examination and reporting requirements
of the Board of Governors of the Federal Reserve System ("Federal Reserve
Board").
As a national bank, the bank is principally subject to the supervision,
examination and reporting requirements of the Office of the Comptroller of the
Currency ("OCC"), as well as the Federal Deposit Insurance Corporation ("FDIC").
Insured banks, including the bank, are subject to extensive regulation of many
aspects of their business. These regulations, among other things, relate to: (a)
the nature and amount of loans that may be made by the bank and the rates of
interest that may be charged; (b) types and amounts of other investments; (c)
branching; (d) permissible activities; (e) reserve requirements; and (f)
dealings with officers, directors and affiliates.
Sterling Banking Corporation is subject to supervision and regulation by the
Banking Department of the State of New York.
Bank Holding Company Regulation
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 (1) banking or managing or controlling banks,
(2) furnishing services to or performing services for their subsidiaries, or (3)
activities that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
As discussed below under "Financial Holding Company Regulation," the
Gramm-Leach-Bliley Act of 1999 amended the BHCA to permit a broader range of
activities for bank holding companies that qualify as "financial holding
companies."
Financial Holding Company Regulation
Effective as of March 11, 2000, the Gramm-Leach-Bliley Act:
o allows bank holding companies, the depository institution subsidiaries of
which meet management, capital and CRA standards, to engage in a
substantially broader range of nonbanking financial activities than was
previously permissible, including (a) insurance underwriting and agency,
(b) making merchant banking investments in commercial companies, (c)
securities underwriting, dealing and market making, and (d) sponsoring
mutual funds and investment companies;
o allows insurers and other financial services companies to acquire banks;
and
o establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
In order for a bank holding company to engage in the broader range of activities
that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository
subsidiaries must be and remain well-capitalized and well-managed and have
received at least a satisfactory CRA rating, and (2) it must file a declaration
with the Federal Reserve Board that it elects to be a "financial holding
company."
Requirements and standards to remain "well-capitalized" are discussed below. To
maintain financial holding company status, the bank must have at least a
"satisfactory" rating under the Community Reinvestment Act (the "CRA"). Under
the CRA, during examinations of the bank, the OCC is required to assess the
bank's record of meeting the credit needs of the communities serviced by the
bank, including low- and moderate-income communities. Banks are given one of
four ratings
PAGE 4
under the CRA: "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The bank received a rating of outstanding on the most recent
exam completed by the OCC.
Pursuant to an election made under the Gramm-Leach-Bliley Act, the parent
company has been designated as a financial holding company. As a financial
holding company, Sterling Bancorp may conduct, or acquire a company (other than
a U.S. depository institution or foreign bank) engaged in, activities that are
"financial in nature," as well as additional activities that the Federal Reserve
determines (in the case of incidental activities, in conjunction with the
Department of the Treasury) are incidental or complementary to financial
activities, without the prior approval of the Federal Reserve. Under the
Gramm-Leach-Bliley Act, activities that are financial in nature include
insurance, securities underwriting and dealing, merchant banking, and sponsoring
mutual funds and investment companies. Under the merchant banking authority
added by the Gramm-Leach-Bliley Act, financial holding companies may invest in
companies that engage in activities that are not otherwise permissible
"financial" companies, subject to certain limitations, including that the
financial holding company makes the investment with the intention of limiting
the investment duration and does not manage the company on a day-to-day basis.
Generally, financial holding companies must continue to meet all the
requirements for financial holding company status in order to maintain the
ability to undertake new activities or acquisitions that are financial in nature
and the ability to continue those activities that are not generally permissible
for bank holding companies. If the parent company ceases to so qualify it would
be required to obtain the prior approval of the Federal Reserve to engage in
non-banking activities or to acquire more than 5% of the voting stock of any
company that is engaged in non-banking activities. With certain exceptions, the
Federal Reserve can only provide prior approval to applications involving
activities that it had previously determined, by regulation or order, are so
closely related to banking as to be properly incident thereto. Such activities
are more limited than the range of activities that are deemed "financial in
nature."
Payment of Dividends and Transactions with Affiliates
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.
Various legal restrictions limit the extent to which the bank can fund the
parent company and its nonbank subsidiaries. All national banks are limited in
the payment of dividends without the approval of the OCC 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, less any required
transfers to surplus. Federal law also prohibits national banks from paying
dividends that would be greater than the bank's undivided profits after
deducting statutory bad debt in excess of the bank's allowance for loan losses.
Under the foregoing restrictions, and without adversely affecting its "well
capitalized" status, the bank could pay aggregate dividends of approximately $43
million to the parent company, without obtaining affirmative governmental
approvals, at December 31, 2004. This is not necessarily indicative of amounts
that may be paid or are available to be paid in future periods.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a depository institution, such as the bank, may not pay dividends if
payment would cause it to become undercapitalized or if it is already
undercapitalized. The payment of dividends by the parent company and the bank
may also be affected or limited by other factors, such as the requirement to
maintain adequate capital.
Federal laws strictly limit the ability of banks to engage in transactions with
their affiliates, including their bank holding companies. Such transactions
between a subsidiary bank and its parent company or the nonbank subsidiaries of
the bank holding company are limited to 10% of a bank subsidiary's capital and
surplus and, with respect to such parent company and all such nonbank
subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and
surplus. Further, loans and extensions of credit generally are required to be
secured by eligible collateral in specified amounts. Federal law also requires
that all transactions between a bank and its affiliates be on terms only as
favorable to the bank as transactions with non-affiliates.
Federal law also limits a bank's authority to extend credit to its directors,
executive officers and 10% shareholders, as well as to entities controlled by
such persons. Among other things, extensions of credit to insiders are required
to be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons. Also, the terms of such
extensions of credit may not involve more than the normal risk of repayment or
present
PAGE 5
other unfavorable features and may not exceed certain limitations on the amount
of credit extended to such persons, individually and in the aggregate, which
limits are based, in part, on the amount of the bank's capital.
Banks are subject to prohibitions on certain tying arrangements. A depository
institution is prohibited, subject to some exceptions, from extending credit to
or offering any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or its affiliates or not obtain services
of a competitor of the institution.
Capital Adequacy
The Company and the bank are subject to risk-based capital regulations which
quantitatively measure capital against risk-weighted assets, including
off-balance sheet items. These regulations define the elements of the Tier 1 and
Tier 2 components of Total Capital 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).
In addition, the Company and the bank are subject to the provisions of FDICIA
that impose a number of mandatory supervisory measures and establish a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Among other matters, FDICIA establishes five capital categories of
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Such classifications are
used by regulatory agencies to determine, in part, 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. Banks that are not adequately capitalized are subject to
significant restrictions and requirements that increase as capital levels
deteriorate, and may not accept brokered deposits.
Under FDICIA, a "well capitalized" institution must maintain minimum leverage,
Tier 1 and Total Capital ratios of 5%, 6% and 10%, respectively. At December 31,
2004, the capital ratios for the Company and the bank exceeded the requirements
for "well capitalized" institutions.
The table presenting capital and ratios for the Company and the bank as of
December 31, 2004 and 2003 appears in Note 21 of the Company's consolidated
financial statements filed in Item 8 hereof.
BIS Guidelines
The U.S. federal bank regulatory agencies' risk-capital guidelines are based
upon the 1988 capital accord of the Basel Committee on Banking Supervision (the
"BIS"). The BIS is a committee of central banks and bank supervisors/regulators
from the major industrialized countries that develops broad policy guidelines
that each country's supervisors can use to determine the supervisory policies
they apply. In January 2001 the BIS released a proposal to replace the 1988
capital accord with a new capital accord that would set capital requirements for
operational risk and refine the existing capital requirements for credit risk
and market risk exposures. Operational risk is defined to mean the risk of
direct or indirect loss resulting from inadequate or failed internal processes,
people and systems or from external events. The 1988 capital accord does not
include separate capital requirements for operational risk. The U.S. federal
regulatory agencies are currently expected to release proposed rules to
implement the BIS's new capital accord in mid-year 2005. It is currently
anticipated that these agencies will release final rules in mid-year 2006, and
that the final rules will become effective in January 2008. The parent Company
cannot predict the timing or final form of the United States rules implementing
the new capital accord and their impact on the Company. The new capital
requirements that may arise from the final rules could increase the minimum
capital requirements applicable to the Company.
Support of the bank
The Federal Reserve Board has stated that a bank holding company should serve as
a source of financial and managerial strength to its subsidiary banks. As a
result, the Federal Reserve Board 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 by the Federal Reserve Board even though not expressly
required by regulation. In addition, any capital loans by a bank holding company
to any of its subsidiary banks are subordinate in right of payment to deposits
to certain other indebtedness of such subsidiary banks. The BHCA provides that,
in the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to
priority of payment. Furthermore, under the National Bank Act, if the capital
stock of the bank is impaired by losses or otherwise, the OCC is authorized to
require payment of the deficiency by assessment upon the parent company. If the
assessment is not paid within three months, the OCC could order a sale of the
capital stock of the bank held by the parent company to make good the
deficiency.
PAGE 6
FDIC Insurance
Under the FDIC's risk-related insurance assessment system, insured depository
institutions may be required to pay annual assessments to the FDIC based on the
institution's risk classification. An institution's risk classification is based
on the FDIC's assignment of the institution to one of three capital groups and
to one of three supervisory groups. The three supervisory groups are Group "A"
financially solid institutions with only a few minor weaknesses, Group "B"
institutions with weaknesses which, if uncorrected, could cause substantial
deterioration of the institution and increased risk to the insurance fund, and
Group "C" institutions with a substantial probability of loss to the fund absent
effective corrective action.
The three capital categories are well capitalized, adequately capitalized, and
undercapitalized. These three categories are substantially the same as the
prompt corrective action categories previously described, with the
undercapitalized category including institutions that are undercapitalized,
significantly undercapitalized, and critically undercapitalized for prompt
corrective action purposes. A bank's capital and supervisory subgroup is
confidential and may not be disclosed. Assessment rates for deposit insurance
currently range from zero basis points to 27 basis points per $100 of deposits.
Any increase in insurance assessments could have an adverse impact on the
earnings of insured institutions, including the bank. Because of favorable loss
experience and a healthy reserve ratio in the Bank Insurance Fund maintained by
the FDIC, well capitalized and well managed banks, including the bank, have in
recent years paid no premiums for FDIC insurance. In the future, even well
capitalized and well managed banks may be required to pay premiums on deposit
insurance. The amount of any such premiums will depend on the outcome of
legislative and regulatory initiatives as well as Bank Insurance Fund loss
experience and other factors.
In addition, the bank is required to make payments for the servicing of
obligations of the Financing Corporation ("FICO") issued in connection with the
resolution of savings and loan associations, so long as such obligations remain
outstanding. The current FICO annual assessment rate is 1.54 cents per $100 of
deposits.
Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC.
In addition, the Federal Deposit Insurance Act provides that a depository
institution insured by the FDIC can be held liable by the FDIC for any loss
incurred or reasonably expected to be incurred in connection with the default of
a commonly controlled FDIC-insured depository institution or in connection with
any assistance provided by the FDIC to a commonly controlled institution "in
danger of default" (as defined).
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is generally required to satisfy its
obligations to insured depositors at the least possible cost to the deposit
insurance fund. In addition, the FDIC may not take any action that would have
the effect of increasing the losses to the deposit insurance fund by protecting
depositors for more than the insured portion of deposits (generally $100,000) or
creditors other than depositors. The Omnibus Budget Reconciliation Act of 1993
provided for a domestic depositor preference upon liquidation or dissolution of
an insured bank.
Depositor Preference
The FDIA provides that, in the event of the "liquidation or other resolution" of
an insured depository institution, the claims of depositors of the institution,
including the claims of the FDIC as subrogee of insured depositors, and certain
claims for administrative expenses of the FDIC as a receiver, will have priority
over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the
FDIC, will have priority in payment ahead of unsecured, non-deposit creditors,
including the parent bank holding company, with respect to any extensions of
credit they have made to such insured depository institution.
Liability of Commonly Controlled Institutions
FDIC-insured depository institutions can be held liable for any loss incurred,
or reasonably expected to be incurred, by the FDIC due to the default of an
FDIC-insured depository institution controlled by the same holding company.
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") requires depository institutions
to assist in meeting the credit needs of their market areas consistent with safe
and sound banking practice. Under the CRA, each depository institution is
required to help meet the credit needs of its market areas by, among other
things, providing credit to low- and moderate-income individuals and
communities. Depository institutions are periodically examined for compliance
with the CRA and are assigned ratings. In order for a financial holding company
to commence any new activity permitted by the BHCA, or to acquire any company
engaged in any new activity permitted by the BHCA,
PAGE 7
each insured depository institution subsidiary of the financial holding company
must have received a rating of at least "satisfactory" in its most recent
examination under the CRA. Furthermore, banking regulators take into account CRA
ratings when considering approval of a proposed transaction.
Financial Privacy
In accordance with the GLB Act, federal banking regulators adopted rules that
limit the ability of banks and other financial institutions to disclose
non-public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. The privacy provisions of the GLB
Act affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years
has been aimed at combating money laundering and terrorist financing. The USA
Patriot Act of 2001 (the "USA Patriot Act") substantially broadened the scope of
United States anti-money laundering laws and regulations by imposing significant
new compliance and due diligence obligations, creating new crimes and penalties
and expanding the extra-territorial jurisdiction of the United States. The
United States Treasury Department has issued a number of implementing
regulations which apply to various requirements of the USA Patriot Act to
financial institutions such as the Company. These regulations impose obligations
on financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and terrorist financing
and to verify the identity of their customers. Failure of a financial
institution to maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with all of the relevant laws
or regulations, could have serious legal and reputational consequences for the
institution.
Legislative Initiatives
From time to time, various legislative and regulatory initiatives are introduced
in Congress and state legislatures, as well as by regulatory agencies. Such
initiatives may include proposals to expand or contract the powers of bank
holding companies and depository institutions or proposals to substantially
change the financial institution regulatory system. Such legislation could
change banking statutes and the operating environment of the Company in
substantial and unpredictable ways. If enacted, such legislation could increase
or decrease the cost of doing business, limit or expand permissible activities
or affect the competitive balance among banks, savings associations, credit
unions and other financial institutions. The Company cannot predict whether any
such legislation will be enacted, and if enacted, the effect that it, or any
implementing regulations, would have on the financial condition or results of
operations of the Company. A change in statutes, regulations or regulatory
policies applicable to the Company could have a material effect on the business
of the Company.
Safety and Soundness Standards
Federal banking agencies promulgate safety and soundness standards relating to,
among other things, internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees, and benefits. With respect to internal controls,
information systems and internal audit systems, the standards describe the
functions that adequate internal controls and information systems must be able
to perform, including: (i) monitoring adherence to prescribed policies; (ii)
effective risk management; (iii) timely and accurate financial, operations, and
regulatory reporting; (iv) safeguarding and managing assets; and (v) compliance
with applicable laws and regulations. The standards also include requirements
that: (i) those performing internal audits be qualified and independent; (ii)
internal controls and information systems be tested and reviewed; (iii)
corrective actions be adequately documented; and (iv) results of an audit be
made available for review of management actions.
SELECTED CONSOLIDATED STATISTICAL INFORMATION
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential
The information appears on pages 21 and 22 of the Company's management
discussion and analysis of financial condition and results of operations filed
in Item 7 hereof on pages 23 and 24 of the Company's quantitative and
qualitative disclosures about market risk.
II. Investment Portfolio
A summary of the Company's investment securities by type with related carrying
values at the end of each of the three most recent fiscal years appears on page
17 of the Company's management discussion and analysis of financial condition
and results of operations filed in Item 7 hereof. Information regarding book
values and range of maturities by type of security and weighted average yields
for totals of each category is presented on pages 40, 41 and 42 of the Company's
consolidated financial statements filed in Item 8 hereof.
PAGE 8
III. Loan Portfolio
A table setting forth the composition of the Company's loan portfolio, net of
unearned discounts, at the end of each of the five most recent fiscal years
appears on page 17 of the Company's management discussion and analysis of
financial condition and results of operations filed in Item 7 hereof.
A table setting forth the maturities and sensitivity to changes in interest
rates of the Company's commercial and industrial loans at December 31, 2004
appears on page 18 of the 2004 Company's management discussion and analysis of
financial condition and results of operations filed in Item 7 hereof.
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 appears in the Company's management
and discussion and analysis of financial condition and results of operations
filed in Item 7 hereof beginning on page 17 under the caption "Loan Portfolio"
and in Note 6 and in Note 1 under the caption "Loans" of the Company's
consolidated financial statements filed in Item 8 hereof.
A table setting forth the aggregate amount of domestic non-accrual, past due and
restructured loans of the Company at the end of each of the five most recent
fiscal years appears on page 18 of the Company's management discussion and
analysis of financial condition and results of operations filed in Item 7
hereof; there were no foreign loans accounted for on a nonaccrual basis and
there were no troubled debt restructurings for any types of loans. 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.
IV. Summary of Loan Loss Experience
The information appears in Note 7 of the Company's consolidated financial
statements filed in Item 8 hereof and beginning on page 18 under the caption
"Asset Quality" of the Company's management discussion and analysis of financial
condition and results of operations filed in Item 7 hereof. A table setting
forth certain information with respect to the Company's loan loss experience for
each of the five most recent fiscal years appears on page 19 of the Company's
management discussion and analysis of financial condition and results of
operations filed in Item 7 hereof.
The Company considers its allowance for loan losses to be adequate based upon
the size and risk characteristics of the outstanding loan portfolio at December
31, 2004. Net losses within the loan portfolio are not, however, statistically
predictable and are subject to various external factors that are beyond the
control of the Company. Consequently, changes in conditions in the next twelve
months could result in future provisions for loan losses varying from the level
taken in 2004.
To comply with a regulatory requirement to provide an allocation of the
allowance for possible loan losses, a table presenting the Company's allocation
of the allowance appears on page 20 of the Company's management discussion and
analysis of financial condition and results of operations filed in Item 7
hereof. This allocation is based on estimates by management that may vary based
on management's evaluation of the risk characteristics of the loan portfolio.
The amount allocated to a particular loan category may not necessarily be
indicative of actual future charge-offs in that loan category.
V. Deposits
Average deposits and average rates paid for each of the three most recent years
are presented on page 21 of the Company's management discussion and analysis of
financial condition and results of operations filed in Item 7 hereof.
Outstanding time certificates of deposit issued from domestic and foreign
offices and interest expense on domestic and foreign deposits are presented in
Note 8 of the Company's consolidated financial statements for the fiscal year
ended December 31, 2004 filed in Item 8 hereof.
The table providing selected information with respect to the Company's deposits
for each of the three most recent fiscal years appears on page 20 of the
Company's management discussion and analysis of financial condition and results
of operations filed in Item 7 hereof.
Interest expense for the three most recent fiscal years is presented in Note 8
of the Company's consolidated financial statements filed in Item 8 hereof.
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 five most recent years is presented on page 12 under the caption
"Selected Financial Data" filed in Item 6 hereof.
VII. Short-Term Borrowings
Balance and rate data for significant categories of the Company's Short-Term
Borrowings for each of the three most recent years is presented in Note 9 of the
Company's consolidated financial statements filed in Item 8 hereof.
PAGE 9
ITEM 2. PROPERTIES
The principal offices of the Company occupy one floor at 650 Fifth Avenue, New
York, N.Y., consisting of approximately 14,400 square feet. The lease for these
premises expires April 30, 2016. Rental commitments to the expiration date
approximate $9,957,525.
The bank also maintains operating leases for nine branch offices, the
International Banking Facility, an Operations Center, and additional office
space in New York City, Nassau, Suffolk and Westchester counties (New York), in
Charlotte (North Carolina) and in Richmond (Virginia) with an aggregate of
approximately 135,300 square feet. The aggregate office rental commitments for
these premises approximates $19,760,430. The leases have expiration dates
ranging from 2005 through 2018 with varying renewal options. The bank owns free
and clear (not subject to a mortgage) a building in which it maintains a branch
located in Forest Hills, Queens.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of
the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
This information is included pursuant to Instruction 3 to Item 401 (b) of
Regulation S-K:
Held Executive
Name of Executive Title Age Office Since
- ----------------------------------------------------------------------------------------------------------------------
Louis J. Cappelli Chairman of the Board and Chief Executive Officer, Director 74 1967
John C. Millman President, Director 62 1986
John W. Tietjen Executive Vice President, Treasurer and Chief Financial Officer 60 1989
John A. Aloisio Senior Vice President 62 1992
Howard M. Applebaum Senior Vice President 46 2002
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.
PAGE 10
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
See the information appearing on page 25 under the caption "MARKET FOR THE
COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS." All such
information should be read in conjunction with the consolidated financial
statements and notes thereto, filed in Item 8 hereof. As of March 23, 2005,
there were 1,691 shareholders of record of our common shares.
During the fiscal years ended December 31, 2003 and 2004, the following
dividends were declared on our common shares on the dates indicated: February
20, 2003: $.12; May 15, 2003: $.13; August 21, 2003: $.16; November 20, 2003:
$.16; February 19, 2004: $.16; May 20, 2004: $.16; August 19, 2004: $.16; and
November 18, 2004: $.19. The foregoing amounts of dividends per share have been
adjusted to reflect the effect of the stock splits referred to in the next
paragraph.
The Company effected a five-for-four stock split in the form of a stock dividend
on September 10, 2003 and effected a six-for-five stock split in the form of a
stock dividend on December 8, 2004.
For information regarding securities authorized for issuance under the Company's
equity compensation plan, see Item 12 hereof.
ITEM 6. SELECTED FINANCIAL DATA
The information appears on page 12. All such information should be read in
conjunction with the consolidated financial statements and notes thereto, filed
in Item 8 hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appears on pages 13-26. Supplementary data appears in Note 25 of
the Company's consolidated financial statements for the fiscal year ended
December 31, 2004 filed in Item 8 hereof. All such information should be read in
conjunction with the consolidated financial statements and the notes thereto,
filed in Item 8 hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appears on pages 23-25 under the caption "ASSET/LIABILITY
MANAGEMENT." All such information should be read in conjunction with the
consolidated financial statements and notes thereto, filed in Item 8 hereof.
PAGE 11
Sterling Bancorp
SELECTED FINANCIAL DATA
Restated
----------------------------------------------------
(dollars in thousands except per share data) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Total interest income $ 97,799 $ 91,583 $ 94,197 $ 95,866 $ 97,125
Total interest expense 19,583 17,591 21,210 26,816 34,242
Net interest income 78,216 73,992 72,987 69,050 62,883
Provision for loan losses 9,965 8,740 10,771 7,401 6,563
Net securities gains 1,256 551 996 -- --
Noninterest income, excluding net securities gains[1] 33,461 32,127 28,289 24,144 22,380
Noninterest expenses[1] 65,613 59,275 57,350 54,997 50,297
Income before taxes[1] 37,355 38,655 34,151 30,795 28,403
Provision for income taxes[1] 12,751 14,752 12,310 12,207 12,286
Net income[1] 24,604 23,903 21,841 18,588 16,116
Per common share--basic[1][2] 1.35 1.33 1.21 1.02 0.89
--diluted[1][2] 1.29 1.26 1.15 0.97 0.87
Dividends per common share[2] 0.67 0.57 0.46 0.40 0.34
YEAR END BALANCE SHEETS
Investment securities 680,220 683,118 588,774 576,028 433,797
Loans held for sale 37,059 40,557 54,685 48,603 12,516
Loans held in portfolio, net of unearned discounts 1,022,286 900,556 791,315 760,084 738,372
Total assets[1] 1,871,112 1,759,824 1,563,165 1,485,112 1,272,129
Noninterest-bearing deposits 511,307 474,092 401,568 356,303 341,039
Interest-bearing deposits 832,544 737,649 645,540 628,621 525,243
Long-term debt 135,774 135,774 140,774 95,350 10,700
Shareholders' equity[1] 148,704 143,262 129,220 125,705 115,376
AVERAGE BALANCE SHEETS
Investment securities 689,569 593,005 589,390 468,861 453,237
Loans held for sale 46,395 71,779 37,459 30,906 19,830
Loans held in portfolio, net of unearned discounts 891,107 785,575 708,656 674,310 615,150
Total assets 1,777,720 1,587,623 1,466,922 1,267,856 1,165,707
Noninterest-bearing deposits 415,664 370,554 315,757 292,918 258,347
Interest-bearing deposits 830,950 683,748 676,296 594,303 536,523
Long-term debt 135,774 139,870 140,153 47,055 12,046
Shareholders' equity 142,536 134,150 126,274 123,935 107,584
RATIOS
Return on average total assets[1] 1.38% 1.51% 1.49% 1.47% 1.38%
Return on average tangible shareholders' equity[1][3] 20.27 21.15 20.78 18.09 18.65
Return on average shareholders' equity[1] 17.26 17.82 17.30 15.00 14.98
Dividend payout ratio 44.92 41.77 34.77 32.03 29.57
Average shareholders' equity to average total assets 8.02 8.45 8.61 9.78 9.23
Net interest margin (tax-equivalent basis) 5.02 5.33 5.74 6.23 6.13
Loans/assets, year end[1][4] 56.62 53.48 54.12 54.45 59.03
Net charge-offs/loans, year end[5] 0.79 0.85 1.39 0.79 0.68
Nonperforming loans/loans, year end[4] 0.29 0.36 0.21 0.22 0.27
Allowance/loans, year end[5] 1.60 1.61 1.71 1.85 1.72
[1] Prior periods have been restated for reasons described in Note 2 on page
38. The following previously reported information is provided:
(dollars in thousands except 2001 2000
per share data)
- ----------------------------------------------------------------
Net income $19,388 $16,559
Per common share-basic[2] 1.06 0.91
-diluted[2] 1.02 0.89
Shareholders' equity, year end 128,477 117,016
[2] Prior period amounts have been restated to reflect the six-for-five stock
split in the form of a stock dividend effected on December 8, 2004.
[3] Average tangible shareholders' equity is average shareholders' equity less
average goodwill.
[4] The term "loans" includes loans held for sale and loans held in portfolio.
[5] The term "loans" includes loans held in portfolio.
PAGE 12
Sterling Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
financial condition and results of operations of Sterling Bancorp ("the parent
company"), a financial holding company under the Gramm-Leach-Bliley Act of 1999,
and its subsidiaries, principally Sterling National Bank ("the bank").
Throughout this discussion and analysis, the term "the Company" refers to
Sterling Bancorp and its subsidiaries. This discussion and analysis should be
read in conjunction with the consolidated financial statements and selected
financial data contained elsewhere in this annual report. As described in Note 2
to the consolidated financial statements, the financial statements for each of
the years 2002 and 2003 (a) have been restated to correct the accounting for
employee benefits expense so as to comply with APB Opinion No. 12, as amended
by Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, and FASB Technical Bulletin
85-4, Accounting for Purchases of Life Insurance, and (b) also reflect other
accounting revisions and adjustments, which were made after March 16, 2005, the
date of filing of the Company's Form 8-K dated March 15, 2005. In addition,
certain reclassifications have been made to prior years' financial data to
conform to current financial statement presentations as well as to reflect the
effect of the six-for-five stock split in the form of a stock dividend effected
on December 8, 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by the Company conform, in all
material respects, to accounting principles generally accepted in the United
States of America. In preparing the consolidated financial statements,
management has made estimates, judgments and assumptions that affect the
reported amount of assets and liabilities as of the date of the consolidated
statements of condition and results of operations for the periods indicated.
Actual results could differ significantly from those estimates.
The Company's accounting policies are fundamental to understanding management's
discussion and analysis of financial condition and results of operations. The
most significant accounting policies followed by the Company are presented in
Note 1 beginning on page 34. The Company has identified its policies on the
allowance for loan losses and income tax liabilities to be critical because
management has to make subjective and/or complex judgments about matters that
are inherently uncertain and could be most subject to revision as new
information becomes available. Additional information on these policies can be
found in Note 1.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The methodology used to determine the
allowance for loan losses is outlined in Note 1 and a discussion of the factors
driving changes in the amount of the allowance for loan losses is included under
"Asset Quality" beginning on page 18.
The objectives of accounting for income taxes are to recognize the amount of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in an entity's financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact
the Company's consolidated financial condition or results of operations.
Additional discussion on the accounting for income taxes is presented in Note 1
beginning on page 34 and in Note 18 on page 54.
OVERVIEW
The Company provides a broad range of financial products and services, including
business and consumer loans, commercial and residential mortgage lending and
brokerage, asset-based financing, factoring/accounts receivable management
services, deposit services, trade financing, equipment leasing, deposit
services, trust and estate administration, and investment management services.
The Company has operations in the metropolitan New York area, Virginia and North
Carolina, and conducts business throughout the United States. The general state
of the U.S. economy and, in particular, economic and market conditions in the
metropolitan New York area have a significant impact on loan demand, the ability
of borrowers to repay these loans and the value of any collateral securing these
loans and may also affect deposit levels. Accordingly, future general economic
conditions are a key uncertainty that management expects will materially affect
the Company's results of operations.
In 2004, the bank's average earning assets represented approximately 97% of the
Company's average earning assets. Loans represented 56% and investment
securities represented 43% of the bank's average earning assets in 2004.
PAGE 13
The Company's primary source of earnings is net interest income, and its
principal market risk exposure is interest rate risk. The Company is not able to
predict market interest rate fluctuations, and its asset-liability management
strategy may not prevent interest rate changes from having a material adverse
effect on the Company's results of operations and financial condition.
Although management endeavors to minimize the credit risk inherent in the
Company's loan portfolio, it must necessarily make various assumptions and
judgments about the collectibility of the loan portfolio based on its experience
and evaluation of economic conditions. If such assumptions or judgments prove to
be incorrect, the current allowance for loan losses may not be sufficient to
cover loan losses and additions to the allowance may be necessary, which would
have a negative impact on net income.
There is intense competition in all areas in which the Company conducts its
business. The Company competes with banks and other financial institutions,
including savings and loan associations, savings banks, finance companies, and
credit unions. Many of these competitors have substantially greater resources
and lending limits and provide a wider array of banking services. To a limited
extent, the Company also competes with other providers of financial services,
such as money market mutual funds, brokerage firms, consumer finance companies
and insurance companies. Competition is based on a number of factors, including
prices, interest rates, service, availability of products, and geographic
location.
The Company regularly evaluates acquisition opportunities and conducts due
diligence activities in connection with possible acquisitions. As a result,
acquisition discussions, and in some cases negotiations, regularly take place
and future acquisitions could occur.
INCOME STATEMENT ANALYSIS
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. Net interest spread is the
difference between the average rate earned, on a tax-equivalent basis, on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The net yield on interest-earning assets ("net interest margin") is
calculated by dividing tax equivalent net interest income by average
interest-earning assets. Generally, the net interest margin will exceed the net
interest spread because a portion of interest-earning assets are funded by
various noninterest-bearing sources, principally noninterest-bearing deposits
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 provided in the Rate/Volume Analysis shown on page
22. Information as to the components of interest income and interest expense and
average rates is provided in the Average Balance Sheets shown on page 21.
COMPARISON OF YEARS 2004 AND 2003
The Company reported net income for the year ended December 31, 2004 of $24.6
million, representing $1.29 per share, calculated on a diluted basis, compared
to $23.9 million, or $1.26 per share calculated on a diluted basis, for 2003.
This increase reflects continued growth in both net interest income and
noninterest income and a lower provision for income taxes, which more than
offset increases in the provision for loan losses and noninterest expenses.
Net interest income, on a tax-equivalent basis, increased $4.0 million to $79.0
million for 2004 from $75.0 million for 2003, due to higher average earning
assets outstanding coupled with lower average cost of funding partially offset
by a lower yield on earning assets and higher average interest-bearing deposit
balances. The net interest margin, on a tax-equivalent basis, was 5.02% for 2004
compared to 5.33% for 2003. The decrease in the net interest margin was
primarily the result of changes in the mix of earning assets and of deposits,
partially offset by the higher rate environment in 2004.
Total interest income, on a tax-equivalent basis, aggregated $98.6 million for
2004, from $92.5 million for 2003. The tax-equivalent yield on interest-earning
assets was 6.26% in 2004 compared to 6.58% for 2003.
Interest earned on the loan portfolio amounted to $65.8 million for 2004, up
$4.2 million from a year ago. Average loan balances amounted to $937.5 million,
up $80.2 million from an average of $857.3 million in the prior year. The
increase in the average loans (across virtually all segments of the Company's
loan portfolio), primarily due to the Company's business development activities
and the ongoing consolidation of banks in the Company's marketing area,
accounted for the increase in interest earned on loans. The decrease in the
yield on the domestic loan portfolio to 7.56% for 2004 from 7.68% for 2003 was
primarily attributable to changes in the mix of outstanding balances on average
among the components of the loan portfolio.
PAGE 14
Interest earned on the securities portfolio, on a tax-equivalent basis,
increased to $32.7 million for 2004 from $30.8 million in the prior year.
Average outstandings increased to $689.6 million from $593.0 in the prior year
period. The average life of the securities portfolio was approximately 4.0 years
at December 31, 2004 compared to 3.8 years at December 31, 2003, reflecting the
impact of purchases made primarily in the first and second quarters of 2004. The
decrease in yields on the securities portfolio reflects the impact of purchases
made during the lower rate environment on average in the first and second
quarters of the 2004 period and of the principal prepayments primarily in the
second quarter of 2004.
Total interest expense increased to $19.6 million for 2004 from $17.6 million
for 2003 primarily due to higher average balances for interest-bearing deposits.
Interest expense on deposits increased to $11.2 million for 2004 from $8.9
million for 2003 primarily due to an increase in average balances. Average
interest-bearing deposit balances increased to $831.0 million for 2004 from
$683.7 in 2003 primarily as a result of branching initiatives and other business
development activities. Average rate paid on interest-bearing deposits was 1.34%
which was 4 basis points higher than the prior year period.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for loan losses for 2004 increased
to $10.0 million from $8.7 million for the prior year period. Factors affecting
the level of provision for loan losses included the growth in the loan
portfolios, changes in general economic conditions and the amount of nonaccrual
loans.
Noninterest Income
Noninterest income increased to $34.7 million for 2004 from $32.7 million in
2003, primarily due to increased income from mortgage banking, principally the
result of a change in the mix of loans sold due to a broader array of loan
products and an increased focus on higher margin mortgage loans, and from
factoring activities, from bank owned life insurance and from gains on sales of
available for sale securities. Partially offsetting these increases were lower
revenues from fees for deposit, trade finance and various other services.
Noninterest Expenses
Noninterest expenses increased $6.3 million for 2004 when compared to 2003. The
increase was primarily due to investments in the Sterling franchise, including
the new branches, and regulatory compliance costs, with higher expenses related
to salaries and employee benefits, advertising and marketing, and professional
fees.
Provision for Income Taxes
The provision for income taxes decreased $2.0 million for 2004 when compared to
2003. The lower provision for taxes in the 2004 period was primarily due to the
resolution, during the second quarter of 2004, of certain state tax issues for
tax years 1999-2001.
COMPARISON OF YEARS 2003 AND 2002
The Company reported net income for the year ended December 31, 2003 of $23.9
million, representing $1.26 per share, calculated on a diluted basis, compared
to $21.8 million, or $1.15 per share, calculated on a diluted basis, for 2002.
This increase reflected continued growth in both net interest income and
noninterest income, which together with a lower provision for loan losses, more
than offset increases in noninterest expenses and the provision for income
taxes.
Net Interest Income
Net interest income, on a tax-equivalent basis, increased $1.0 million to $75.0
million for 2003 from $74.0 million for 2002, due to higher average earning
assets outstanding coupled with lower average cost of funding partially offset
by a lower yield on earning assets. The net interest margin, on a tax-equivalent
basis, was 5.33% for 2003 compared to 5.74% for 2002. The decrease in the net
interest margin was primarily the result of the impact of the lower interest
rate environment in 2003, partially offset by the impact of an increase in
average loan outstandings.
Total interest income, on a tax-equivalent basis, aggregated $92.5 million for
2003, down $2.7 million from $95.2 million for 2002. The tax-equivalent yield on
interest-earning assets was 6.58% in 2003 compared to 7.39% for 2002.
Interest earned on the loan portfolio amounted to $61.6 million for 2003, up
$3.7 million from a year ago. Average loan balances amounted to $857.3 million,
up $111.2 million from an average of $746.1 million in the prior year. The
increase in the average loans (across virtually all segments of the Company's
loan portfolio), primarily due to the Company's business development activities
and the ongoing consolidation of banks in the Company's marketing area,
accounted for the increase in interest earned on loans. The decrease in the
yield on the domestic loan portfolio to 7.68% for 2003 from 8.52% for 2002 was
primarily attributable to the mix of outstanding balances on average among the
components of the loan portfolio and lower interest rate environment in 2003.
PAGE 15
Interest earned on the securities portfolio, on a tax-equivalent basis,
decreased to $30.8 million for 2003 from $37.0 million in the prior year.
Average outstandings increased to $593.0 million from $589.4 million in the
prior year. The average life of the securities portfolio was approximately 3.8
years at December 31, 2003 compared to 2.75 years at December 31, 2002,
reflecting the impact of purchases made in 2003 and of greater principal
prepayments, which increased to $383.1 million for 2003 from $232.9 million in
2002. The decrease in yields on most of the securities portfolio reflected the
impact of purchases made during the lower rate environment on average in 2003
and of greater principal prepayments during 2003.
Total interest expense decreased $3.6 million to $17.6 million for 2003 from
$21.2 million for 2002, primarily due to lower average rates paid partially
offset by higher average balances principally for customer and dealer repurchase
agreements and other short-term debt.
Interest expense on deposits decreased $3.6 million for 2003 to $8.8 million
from $12.4 million for 2002 due to the decrease in the cost of funds. Average
rate paid on interest-bearing deposits was 1.30% which was 54 basis points lower
than the prior year. The decrease in average cost of deposits reflected the
lower interest rate environment during 2003 compared to 2002.
Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed
under "Asset Quality" below), the provision for loan losses for 2003 decreased
to $8.7 million from $10.8 million for the prior year. The provision for 2002
was impacted by the charge-off of a $5.4 million loan to a corporate borrower
which had become the subject of an involuntary bankruptcy. Other factors
affecting the level of provision included the growth in the loan portfolios,
changes in general economic conditions and the amount of nonaccrual loans.
Noninterest Income
Noninterest income increased $3.4 million for 2003 when compared to 2002,
primarily due to increased income from mortgage banking, as a result of an
increase in residential loans sold to $709.6 million for 2003 from $490.6
million for 2002. Partially offsetting that increase were lower revenues from
factoring activities, from fees for various other services, from gains on sales
of available for sale securities, and from a bank owned life insurance program.
Noninterest Expenses
Noninterest expenses increased $1.9 million for 2003 when compared to 2002,
primarily due to increased salary expenses, pension and other employee benefit
costs, equipment, mortgage tax, and various other expenses incurred to support
growing levels of business activity and continued investment in the business
franchise. Partially offsetting these increases were reductions in fees for
professional services, occupancy, advertising and marketing, stationery and
printing and various other expenses.
Provision for Income Taxes
The provision for income taxes increased $2.4 million for 2003 when compared to
2002, principally as the result of higher pre-tax income in 2003. In addition,
during the second quarter of 2002, New York State completed an examination of
Sterling's tax returns through 1998 and issued a no change finding. As a result,
based on management's review of required tax reserves with outside
professionals, approximately $1.0 million in excess reserves was adjusted
through the provision that quarter.
BALANCE SHEET ANALYSIS
Securities
The Company's securities portfolios are composed principally of U.S. government
and U.S. government corporation and agency guaranteed mortgage-backed securities
along with other debt and equity securities. At December 31, 2004, the Company's
portfolio of securities totaled $680.2 million, of which U.S. government
corporation and agency guaranteed mortgage-backed securities and collateralized
mortgage obligations having an average life of approximately 4.4 years amounted
to $573.6 million. 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 $4.3
million and $2.6 million, 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 $2.4 million and gross unrealized losses of $2.1
million. 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.
Information regarding book values and range of maturities by type of security
and weighted average yields for totals of each category is presented in Note 5
beginning on page 40.
PAGE 16
The following table sets forth the composition of the Company's investment
securities by type, with related carrying values at the end of each of the three
most recent fiscal years:
December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
% of % of % of
Balances Total Balances Total Balances Total
-----------------------------------------------------------------
(dollars in thousands)
U.S. Treasury securities $ 2,492 0.37% $ 2,496 0.37% $ 2,495 0.42%
Obligations of U.S. government corporations and agencies
--mortgage-backed securities 469,456 69.02 513,321 75.14 387,173 65.76
--collateralized mortgage obligations 104,137 15.31 115,874 16.97 133,494 22.67
--other securities 64,748 9.52 -- -- -- --
Obligations of states and political subdivisions 27,471 4.04 32,816 4.80 34,948 5.94
Trust preferred securities 3,023 0.44 3,654 0.53 3,445 0.59
Debt securities issued by foreign governments 1,250 0.18 1,250 0.18 1,500 0.25
Other debt securities -- -- 4,001 0.59 15,000 2.55
Federal Reserve Bank and other equity securities 7,643 1.12 9,706 1.42 10,719 1.82
-----------------------------------------------------------------
Total $680,220 100.00% $683,118 100.00% $588,774 100.00%
=================================================================
Loan Portfolio
A management objective is to maintain the quality of the loan portfolio. The
Company seeks to achieve this objective by maintaining rigorous underwriting
standards coupled with regular evaluation of the creditworthiness of and the
designation of lending limits for each borrower. The portfolio strategies
include seeking industry and loan size diversification in order to minimize
credit exposure and the origination of loans in markets with which the Company
is familiar.
The Company's commercial and industrial loan portfolio represents approximately
56% of all loans. Loans in this category are typically made to individuals,
small and medium-sized businesses and range between $250,000 and $10 million.
The Company's leasing portfolio, which consists of finance leases for various
types of business equipment, represents approximately 15% of all loans. The
leasing and commercial and industrial loan portfolios are included in corporate
lending for segment reporting purposes as presented in Note 22 beginning on page
58. The Company's real estate loan portfolio, which represents approximately 25%
of all loans, is secured by mortgages on real property located principally in
the states of New York, New Jersey, Virginia and North Carolina. Sources of
repayment are from the borrower's operating profits, cash flows and liquidation
of pledged collateral. Based on underwriting standards, loans and leases may be
secured whole or in part by collateral such as liquid assets, accounts
receivable, equipment, inventory, and real property. The collateral securing any
loan or lease may depend on the type of loan and may vary in value based on
market conditions.
The following table sets forth the composition of the Company's loans held for
sale and loans held in portfolio, net of unearned discounts, at the end of each
of the five most recent fiscal years:
December 31, 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of
Balances Total Balances Total Balances Total Balances Total
------------------------------------------------------------------------------------------
(dollars in thousands)
Domestic
Commercial and industrial $ 595,229 56.19% $563,799 59.91% $500,311 59.14% $519,557 64.25%
Lease financing 162,961 15.38 148,737 15.80 128,749 15.22 90,614 11.20
Real estate--mortgage 263,320 24.86 201,911 21.46 185,412 21.92 161,012 19.91
Real estate--construction 2,320 0.22 2,368 0.25 2,400 0.28 -- --
Installment--individuals 15,515 1.46 14,298 1.52 9,128 1.08 8,504 1.05
Loans to depository institutions 20,000 1.89 10,000 1.06 20,000 2.36 29,000 3.59
Foreign government and official
institutions -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Total $1,059,345 100.00% $941,113 100.00% $846,000 100.00% $808,687 100.00%
==========================================================================================
December 31, 2000
- --------------------------------------------------------
% of
Balances Total
-------------------
(dollars in thousands)
Domestic
Commercial and industrial $499,984 66.59%
Lease financing 98,349 13.10
Real estate--mortgage 122,272 16.28
Real estate--construction -- --
Installment--individuals 9,506 1.27
Loans to depository institutions 20,000 2.66
Foreign government and official
institutions 777 0.10
-------------------
Total $750,888 100.00%
===================
PAGE 17
The following table sets forth the maturities of the Company's commercial and
industrial loans, as of December 31, 2004:
Due One Due One Due After Total
Year to Five Five Gross
or Less Years Years Loans
- -----------------------------------------------------------------------------
(in thousands)
Commercial and industrial $ 586,462 $ 9,220 $ 7 $ 595,689
=================================================
All loans due after one year have predetermined interest rates.
Asset Quality
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk of loss inherent in the Company's portfolio of loans
may be increased. While management endeavors to minimize this risk, it
recognizes that loan losses will occur and that the amount of these losses will
fluctuate depending on the risk characteristics of the loan portfolio which in
turn depend on current and expected economic conditions, the financial condition
of borrowers, the realization of collateral, and the credit management process.
The following table sets forth the amount of domestic nonaccrual and past due
loans of the Company at the end of each of the five most recent fiscal years;
there were no foreign loans accounted for on a nonaccrual basis and there were
no troubled debt restructurings for any types of loans. Loans contractually past
due 90 days or more as to principal or interest and still accruing are loans
that are both well-secured or guaranteed by financially responsible third
parties and are in the process of collection.
December 31, 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans
Commercial and industrial $1,035 $2,022 $ 405 $ -- $ 470
Lease financing 1,304 783 275 311 495
Real estate--mortgage 704 489 949 1,392 938
Installment--individuals 72 49 155 45 92
----------------------------------------------
Total nonaccrual loans 3,115 3,343 1,784 1,748 1,995
Past due 90 days or more (other than the above) 1,672 127 286 200 162
----------------------------------------------
Total $4,787 $3,470 $2,070 $1,948 $2,157
==============================================
Interest income that would have been earned on
nonaccrual loans outstanding $ 233 $ 196 $ 136 $ 153 $ 168
==============================================
Applicable interest income actually realized on
nonaccrual loans outstanding $ 133 $ 141 $ 83 $ 92 $ 110
==============================================
Nonaccrual and past due loans as a
percentage of total gross loans 0.45% 0.37% 0.25% 0.24% 0.28%
==============================================
Management views the allowance for loan losses as a critical accounting policy
due to its subjectivity. The allowance for loan losses is maintained through the
provision for loan losses, which is a charge to operating earnings. The adequacy
of the provision and the resulting allowance for loan losses is determined by a
management evaluation process 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, an assessment of current and expected
economic conditions and changes in the size and character of the loan portfolio.
Other data utilized by management in determining the adequacy of the allowance
for loan losses includes, but is not limited to, the results of regulatory
reviews, the amount of, trend of and/or borrower characteristics on loans that
are identified as requiring special attention as part of the credit review
process, and peer group comparisons. The impact of this other data might result
in an allowance which will be greater than that indicated by the evaluation
process previously described. The allowance reflects management's evaluation
both of loans presenting identified loss potential and of the risk inherent in
various components of the portfolio, including loans identified as impaired as
required by SFAS No. 114.
PAGE 18
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, 2004, the ratio of the allowance to
loans held in portfolio, net of unearned discounts, was 1.60% and the allowance
was $16.3 million. At such date, the Company's nonaccrual loans amounted to $3.1
million; $1.3 million of such loans was judged to be impaired within the scope
of SFAS No. 114. Nonaccrual loans and loans 90 days past due and still accruing
include leases, in the amount of $0.7 million and $1.6 million, respectively, of
telecommunications equipment from a company that went into bankruptcy in July
2004. The service provider to the lessees discontinued service, resulting in the
failure of certain lessees to make payments. While pursuing collection of the
lease payments, past due amounts accrue. Legal action is typically commenced
against lessees whose accounts are not paid within 180 days and are placed in
nonaccrual status. Lessees remain unconditionally obligated to make payments.
All are creditworthy and personally guaranteed; the reported delinquencies are
not due to credit issues. Based on the foregoing, as well as management's
judgment as to the current risks inherent in loans held in portfolio, the
Company's allowance for 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, 2004. Net losses within loans
held in 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 2004. 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 causes management to
have serious doubts as to the ability of the borrowers to continue to comply
with the present repayment terms, aggregated $1.2 million and $1.3 million at
December 31, 2004 and 2003, respectively.
The following table sets forth certain information with respect to the Company's
loan loss experience for each of the five most recent fiscal years:
December 31, 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
Average loans held in portfolio, net of
unearned discounts, during year $891,107 $785,575 $708,656 $674,310 $615,150
========================================================
Allowance for loan losses:
Balance at beginning of year $ 14,459 $ 13,549 $ 14,038 $ 12,675 $ 11,117
--------------------------------------------------------
Charge-offs:
Commercial and industrial 6,116 6,571 10,205 4,899 4,010
Lease financing 2,447 1,155 930 1,528 1,075
Real estate 8 547 856 269 313
Installment 9 38 58 103 92
--------------------------------------------------------
Total charge-offs 8,580 8,311 12,049 6,799 5,490
--------------------------------------------------------
Recoveries:
Commercial and industrial 917 552 871 589 220
Lease financing 44 25 69 84 228
Real estate -- -- 16 -- --
Installment 43 61 69 88 37
--------------------------------------------------------
Total recoveries 1,004 638 1,025 761 485
--------------------------------------------------------
Subtract:
Net charge-offs 7,576 7,673 11,024 6,038 5,005
--------------------------------------------------------
Provision for loan losses 9,965 8,741 10,771 7,401 6,563
--------------------------------------------------------
Loss on loans transferred to held for sale 520 158 236 -- --
--------------------------------------------------------
Balance at end of year $ 16,328 $ 14,459 $ 13,549 $ 14,038 $ 12,675
========================================================
Ratio of net charge-offs to average
loans held in portfolio, net of
unearned discounts, during year 0.85% 0.98% 1.56% 0.90% 0.81%
========================================================
PAGE 19
To comply with a regulatory requirement to provide an allocation of the
allowance for loan losses, the following table presents the Company's allocation
of the allowance. This allocation is based on estimates by management and may
vary from year to year based on management's evaluation of the risk
characteristics of the loan portfolio. The amount allocated to a particular loan
category of the Company's loans held in portfolio may not necessarily be
indicative of actual future charge-offs in a loan category.
December 31, 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------------------------------
(dollars in thousands)
Domestic
Commercial and industrial $ 9,636 1.62% $ 8,637 1.53% $ 7,977 1.59% $ 9,438 1.82% $ 8,968 1.79%
Loans to depository
institutions 120 0.60 80 0.80 150 0.75 230 0.79 160 0.80
Lease financing 4,073 2.50 2,686 1.80 1,961 1.52 1,736 1.92 1,637 1.66
Real estate--mortgage 2,184 0.97 2,310 1.43 2,000 1.37 1,613 1.28 1,423 1.22
Real estate--construction 15 0.65 24 1.01 23 0.96 -- -- -- --
Installment--individuals 100 0.64 14 0.10 10 0.11 10 0.12 10 0.11
Unallocated 200 -- 708 -- 1,428 -- 1,011 -- 477 --
------- ------- ------- ------- -------
Total $16,328 1.60% $14,459 1.61% $13,549 1.71% $14,038 1.85% $12,675 1.72%
==================================================================================================
Deposits
A significant source of funds are customer 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 at the end of each of the three most recent fiscal years:
December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------------------
% of % of % of
Balances Total Balances Total Balances Total
--------------------------------------------------------------
(dollars in thousands)
Domestic
Demand $ 511,307 38.0% $ 474,092 39.1% $ 401,568 38.4%
NOW 136,616 10.2 134,122 11.1 111,869 10.7
Savings 28,168 2.1 30,105 2.5 27,307 2.6
Money Market 192,483 14.3 177,187 14.6 148,157 14.2
Time deposits by remaining maturity
Within 3 months 163,408 12.2 168,687 13.9 201,103 19.2
After 3 months but within 1 year 162,198 12.1 148,565 12.3 87,160 8.3
After 1 year but within 2 years 137,074 10.2 70,479 5.8 48,708 4.6
After 2 years but within 3 years 7,755 0.6 2,727 0.2 12,005 1.1
After 3 years but within 4 years 1,449 0.1 2,021 0.2 806 0.1
After 4 years but within 5 years 336 -- 748 0.1 5,339 0.5
After 5 years 50 -- 8 -- 86 --
--------------------------------------------------------------
Total domestic deposits 1,340,844 99.8 1,208,741 99.8 1,044,108 99.7
--------------------------------------------------------------
Foreign
Time deposits by remaining maturity
Within 3 months 1,645 0.1 1,645 0.1 1,820 0.2
After 3 months but within 1 year 1,362 0.1 1,355 0.1 1,180 0.1
--------------------------------------------------------------
Total foreign deposits 3,007 0.2 3,000 0.2 3,000 0.3
--------------------------------------------------------------
Total deposits $1,343,851 100.0% $1,211,741 100.0% $1,047,108 100.0%
==============================================================
Fluctuations of balances in total or among categories at any date can occur
based on the Company's mix of assets and liabilities as well as on customers'
balance sheet strategies. Historically, however, average balances for deposits
have been relatively stable. Information regarding these average balances for
the three most recent fiscal years is presented on page 21.
PAGE 20
Sterling Bancorp
CONSOLIDATED AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST EARNINGS[1]
Years Ended December 31, 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------
(dollars in thousands)
ASSETS
Interest-bearing deposits with other banks $ 3,120 $ 21 0.70% $ 3,473 $ 25 0.73%
Investment securities
Available for sale 266,823 11,729 4.36 188,876 9,206 4.86
Held to maturity 392,869 18,829 4.79 372,213 19,269 5.18
Tax-exempt[2] 29,877 2,135 7.14 31,916 2,370 7.43
Federal funds sold 10,943 132 1.21 5,759 64 1.12
Loans, net of unearned discounts[3]
Domestic 937,502 65,779 7.56 857,354 61,622 7.68
---------------------- --------------------
TOTAL INTEREST-EARNING ASSETS 1,641,134 98,625 6.26% 1,459,591 92,556 6.58%
------- ===== ------- =====
Cash and due from banks 60,281 58,350
Allowance for loan losses (15,906) (14,720)
Goodwill 21,158 21,158
Other 71,053 63,244
----------- -----------
TOTAL ASSETS $ 1,777,720 $ 1,587,623
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $ 31,203 120 0.38% $ 27,554 98 0.35%
NOW 134,096 622 0.46 119,730 586 0.49
Money market 213,331 1,280 0.60 165,666 792 0.48
Time 449,319 9,118 2.03 367,798 7,370 2.00
Foreign
Time 3,001 33 1.09 3,000 41 1.38
---------------------- ----------------------
Total interest-bearing deposits 830,950 11,173 1.34 683,748 8,887 1.30
---------------------- ----------------------
Borrowings
Securities sold under agreements to
repurchase--customers 84,559 1,020 1.21 71,648 877 1.22
Securities sold under agreements to
repurchase--dealers 29,601 398 1.35 46,219 566 1.22
Federal funds purchased 9,946 146 1.47 5,463 65 1.20
Commercial paper 30,069 364 1.21 23,819 264 1.11
Other short-term debt 12,629 243 1.93 31,853 545 1.71
Long-term borrowings 135,774 6,239 4.62 139,870 6,387 4.57
---------------------- ----------------------
Total borrowings 302,578 8,410 2.79 318,872 8,704 2.73
---------------------- ----------------------
Total Interest-Bearing Liabilities 1,133,528 19,583 1.73% 1,002,620 17,591 1.76%
===== =====
Noninterest-bearing demand deposits 415,664 -- 370,554 --
---------------------- ----------------------
Total including noninterest-bearing
demand deposits 1,549,192 19,583 1.26% 1,373,174 17,591 1.28%
------- ===== ------- =====
Other liabilities 85,992 80,299
----------- -----------
Total Liabilities 1,635,184 1,453,473
Shareholders' equity