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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
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Interest and fees on loans 48% 49% 45%
Interest and dividends on investment securities 25 25 31
Other 27 26 24
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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
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Interest and fees on loans 18% 26% 23%
Dividends, interest and service fees 80 69 70
Other 2 5 7
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100% 100% 100%
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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 142,536 134,150
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,777,720 $ 1,587,623
=========== ===========
Net interest income/spread 79,042 4.53% 74,965 4.82%
===== ======
Net yield on interest-earning assets 5.02% 5.33%
===== ======
Less: Tax-equivalent adjustment 826 973
------- -------
Net interest income $78,216 $73,992
======= =======
Years Ended December 31, 2002
-----------------------------------------------------------------------------
Average Average
Balance Interest Rate
--------------------------------
(dollars in thousands)
ASSETS
Interest-bearing deposits with other banks $ 3,494 $ 33 1.20%
Investment securities
Available for sale 238,947 14,748 6.17
Held to maturity 316,864 19,759 6.24
Tax-exempt[2] 33,579 2,489 7.41
Federal funds sold 16,704 277 1.66
Loans, net of unearned discounts[3]
Domestic 746,115 57,914 8.52
----------------------
TOTAL INTEREST-EARNING ASSETS 1,355,703 95,220 7.39%
------- =====
Cash and due from banks 49,994
Allowance for loan losses (13,986)
Goodwill 21,158
Other 54,053
-----------
TOTAL ASSETS $ 1,466,922
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Domestic
Savings $ 25,882 154 0.60%
NOW 112,301 880 0.78
Money market 164,578 1,321 0.80
Time 370,536 10,053 2.71
Foreign
Time 2,999 58 1.94
----------------------
Total interest-bearing deposits 676,296 12,466 1.84
----------------------
Borrowings
Securities sold under agreements to
repurchase--customers 63,540 1,163 1.83
Securities sold under agreements to
repurchase--dealers 6,960 129 1.85
Federal funds purchased 2,613 45 1.72
Commercial paper 31,885 655 2.06
Other short-term debt 23,885 573 2.40
Long-term borrowings 140,153 6,178 4.41
----------------------
Total borrowings 269,036 8,743 3.25
----------------------
Total Interest-Bearing Liabilities 945,332 21,209 2.24%
=====
Noninterest-bearing demand deposits 315,757 --
----------------------
Total including noninterest-bearing
demand deposits 1,261,089 21,209 1.68%
------- =====
Other liabilities 79,559
-----------
Total Liabilities 1,340,648
Shareholders' equity 126,274
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,466,922
===========
Net interest income/spread 74,011 5.15%
=====
Net yield on interest-earning assets 5.74%
=====
Less: Tax-equivalent adjustment 1,023
-------
Net interest income $72,988
=======
[1] The average balances of assets, liabilities and shareholders' equity are
computed on the basis of daily averages. Average rates are presented on a
tax-equivalent basis. Certain reclassifications have been made to prior
period amounts to conform to current presentation.
[2] Interest on tax-exempt securities included herein is presented on a
tax-equivalent basis.
[3] Includes loans held for sale and loans held in portfolio. Nonaccrual loans
are included in amounts outstanding and income has been included to the
extent earned.
PAGE 21
Sterling Bancorp
CONSOLIDATED RATE/VOLUME ANALYSIS[1]
December 31, 2003 to December 31, 2002 to
Increase (Decrease) from Years Ended, December 31, 2004 December 31, 2003
-----------------------------------------------------------------------------------------------------------------------
Volume Rate Total[2] Volume Rate Total[2]
--------------------------------------------------------------------------
(in thousands)
INTEREST INCOME
Interest-bearing deposits with other banks $ (3) $ (1) $ (4) $ -- $ (8) $ (8)
--------------------------------------------------------------------------
Investment securities
Available for sale 3,540 (1,017) 2,523 (2,753) (2,789) (5,542)
Held to maturity 1,078 (1,518) (440) 3,157 (3,647) (490)
Tax-exempt (150) (85) (235) (119) -- (119)
--------------------------------------------------------------------------
Total 4,468 (2,620) 1,848 285 (6,436) (6,151)
--------------------------------------------------------------------------
Federal funds sold 63 5 68 (143) (70) (213)
--------------------------------------------------------------------------
Loans, net of unearned discounts[3]
Domestic 5,350 (1,193) 4,157 9,777 (6,069) 3,708
--------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 9,878 $ (3,809) $ 6,069 $ 9,919 $ (12,583) $ (2,664)
==========================================================================
INTEREST EXPENSE
Interest-bearing deposits
Domestic
Savings $ 14 $ 8 $ 22 $ 10 $ (66) $ (56)
NOW 72 (36) 36 54 (348) (294)
Money market 262 226 488 9 (538) (529)
Time 1,638 110 1,748 (73) (2,610) (2,683)
Foreign
Time -- (8) (8) -- (17) (17)
--------------------------------------------------------------------------
Total interest-bearing deposits 1,986 300 2,286 -- (3,579) (3,579)
--------------------------------------------------------------------------
Borrowings
Securities sold under agreements to
repurchase--customers 150 (7) 143 135 (421) (286)
Securities sold under agreements to
repurchase--dealers (222) 54 (168) 495 (58) 437
Federal funds purchased 63 18 81 37 (17) 20
Commercial paper 75 25 100 (138) (253) (391)
Other short-term debt (364) 62 (302) 162 (190) (28)
Long-term borrowings (206) 58 (148) (12) 221 209
--------------------------------------------------------------------------
Total borrowings (504) 210 (294) 679 (718) (39)
--------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 1,482 $ 510 $ 1,992 $ 679 $ (4,297) $ (3,618)
==========================================================================
NET INTEREST INCOME $ 8,396 $ (4,319) $ 4,077 $ 9,240 $ (8,286) $ 954
==========================================================================
[1] Amounts are presented on a tax-equivalent basis.
[2] The change in interest income and interest expense due to both rate and
volume has been allocated to change due to rate and the change due to
volume in proportion to the relationship of the absolute dollar amounts of
the changes in each. The effect of the extra day in 2004 has been included
in the change in volume.
[3] Nonaccrual loans have been included in the amounts outstanding and income
has been included to the extent earned.
PAGE 22
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is its net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of interest rate risk and asset quality. The Company's net interest
income is affected by changes in market interest rates, and by the level and
composition of interest-earning assets and interest-bearing liabilities. The
Company's objectives in its asset/liability management are to utilize its
capital effectively, to provide adequate liquidity and to enhance net interest
income, without taking undue risks or subjecting the Company unduly to interest
rate fluctuations.
The Company takes a coordinated approach to the management of its liquidity,
capital and interest rate risk. This risk management process is governed by
policies and limits established by senior management which are reviewed and
approved by the Asset/Liability Committee. This committee, which is comprised of
members of senior management, meets to review, among other things, economic
conditions, interest rates, yield curve, cash flow projections, expected
customer actions, liquidity levels, capital ratios and repricing characteristics
of assets, liabilities and financial instruments.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market indices such as interest rates, foreign exchange rates and
equity prices. The Company's principal market risk exposure is interest rate
risk, with no material impact on earnings from changes in foreign exchange rates
or equity prices.
Interest rate risk is the exposure to changes in market interest rates. Interest
rate sensitivity is the relationship between market interest rates and net
interest income due to the repricing characteristics of assets and liabilities.
The Company monitors the interest rate sensitivity of its balance sheet
positions by examining its near-term sensitivity and its longer-term gap
position. In its management of interest rate risk, the Company utilizes several
financial and statistical tools including traditional gap analysis and
sophisticated income simulation models.
A traditional gap analysis is prepared based on the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities for
selected time bands. The mismatch between repricings or maturities within a time
band is commonly referred to as the "gap" for that period. A positive gap (asset
sensitive) where interest rate sensitive assets exceed interest rate sensitive
liabilities generally will result in the net interest margin increasing in a
rising rate environment and decreasing in a falling rate environment. A negative
gap (liability sensitive) will generally have the opposite result on the net
interest margin. However, the traditional gap analysis does not assess the
relative sensitivity of assets and liabilities to changes in interest rates and
other factors that could have an impact on interest rate sensitivity or net
interest income. The Company utilizes the gap analysis to complement its income
simulations modeling, primarily focusing on the longer-term structure of the
balance sheet.
The Company's balance sheet structure is primarily short-term in nature with a
substantial portion of assets and liabilities repricing or maturing within one
year. The Company's gap analysis at December 31, 2004, presented on page 26,
indicates that net interest income would increase during periods of rising
interest rates and decrease during periods of falling interest rates, but, as
mentioned above, gap analysis may not be an accurate predictor of net interest
income.
As part of its interest rate risk strategy, the Company may use financial
instrument derivatives to hedge the interest rate sensitivity of assets. The
Company has written policy guidelines, approved by the Board of Directors,
governing the use of financial instruments, including approved counterparties,
risk limits and appropriate internal control procedures. The credit risk of
derivatives arises principally from the potential for a counterparty to fail to
meet its obligation to settle a contract on a timely basis. During 2004, the
Company did not enter into any derivative contracts to hedge its interest rate
risk. At December 31, 2004 and 2003, the Company was not a party to any
derivative contracts to hedge its interest rate risk.
The Company utilizes income simulation models to complement its traditional gap
analysis. While the Asset/Liability Committee routinely monitors simulated net
interest income sensitivity over a rolling two-year horizon, it also utilizes
additional tools to monitor potential longer-term interest rate risk. The income
simulation models measure the Company's net interest income volatility or
sensitivity to interest rate changes utilizing statistical techniques that allow
the Company to consider various factors which impact net interest income. These
factors include actual maturities, estimated cash flows, repricing
PAGE 23
characteristics, deposits growth/retention and, most importantly, the relative
sensitivity of the Company's assets and liabilities to changes in market
interest rates. This relative sensitivity is important to consider as the
Company's core deposit base has not been subject to the same degree of interest
rate sensitivity as its assets. The core deposit costs are internally managed
and tend to exhibit less sensitivity to changes in interest rates than the
Company's adjustable rate assets whose yields are based on external indices and
generally change in concert with market interest rates.
The Company's interest rate sensitivity is determined by identifying the
probable impact of changes in market interest rates on the yields on the
Company's assets and the rates that would be paid on its liabilities. This
modeling technique involves a degree of estimation based on certain assumptions
that management believes to be reasonable. Utilizing this process, management
projects the impact of changes in interest rates on net interest margin. The
Company has established certain policy limits for the potential volatility of
its net interest margin assuming certain levels of changes in market interest
rates with the objective of maintaining a stable net interest margin under
various probable rate scenarios. Management generally has maintained a risk
position well within the policy limits. As of December 31, 2004, the model
indicated the impact of a 200 basis point parallel and pro rata rise in rates
over 12 months would approximate a 3.17% ($2.6 million) increase in net interest
income, while the impact of a 200 basis point decline in rates over the same
period would approximate a 3.79% ($3.1 million) decline from an unchanged rate
environment.
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot provide any assurances as to the
predictive nature of these assumptions, including how customer preferences or
competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals and
product preference changes, and other variables. Furthermore, the sensitivity
analysis does not reflect actions that the Asset/Liability Committee might take
in responding to or anticipating changes in interest rates.
The shape of the yield curve can cause downward pressure on net interest income.
In general, if and to the extent that the yield curve is flatter (i.e., the
differences between interest rates for different maturities are relatively
smaller) than previously anticipated, then the yield on the Company's
interest-earning assets and its cash flows will tend to be lower. Management
believes that a relatively flat yield curve shape could adversely affect the
Company's results in 2005.
Liquidity Risk
Liquidity is the ability to meet cash needs arising from changes in various
categories of assets and liabilities. Liquidity is constantly monitored and
managed at both the parent company and the bank levels. Liquid assets consist of
cash and due from banks, interest-bearing deposits in banks and Federal funds
sold and securities available for sale. Primary funding sources include core
deposits, capital markets funds and other money market sources. Core deposits
include domestic noninterest-bearing and interest-bearing retail deposits, which
historically have been relatively stable. The parent company and the bank
believe that they have significant unused borrowing capacity. Contingency plans
exist which we believe could be implemented on a timely basis to mitigate the
impact of any dramatic change in market conditions.
While the parent company generates income from its own operations, it also
depends for its cash requirements on funds maintained or generated by its
subsidiaries, principally the bank. Such sources have been adequate to meet the
parent company's cash requirements throughout its history.
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends without the approval of the Comptroller of
the Currency to an amount not to exceed the net profits as defined, for the year
to date combined with its retained net profits for the preceding two calendar
years.
At December 31, 2004, the parent company's short-term debt, consisting
principally of commercial paper used to finance ongoing current business
activities, was approximately $26.0 million. The parent company had cash,
interest-bearing deposits with banks and other current assets aggregating $34.9
million. The parent company also has back-up credit lines with banks of $24.0
million. Since 1979, the parent company has had no need to use available back-up
lines of credit.
PAGE 24
The following table sets forth information regarding the Company's obligations
and commitments to make future payments under contracts as of December 31, 2004:
Payments Due by Period
---------------------------------------------------------
Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
----------------------------------------------------------------------------------------------
(in thousands)
Long-Term Debt $ 135,774 $ -- $ 25,774 $ 10,000 $ 100,000
Operating Leases 29,718 3,536 6,744 6,446 12,992
---------------------------------------------------------
Total Contractual Cash Obligations $ 165,492 $ 3,536 $ 32,518 $ 16,446 $ 112,992
=========================================================
The following table sets forth information regarding the Company's obligations
under other commercial commitments as of December 31, 2004:
Amount of Commitment Expiration Per Period
----------------------------------------------------------------
Other Commercial Total Amounts Less than 1-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
---------------------------------------------------------------------------------------------------
(in thousands)
Residential loans $ 45,195 $ 45,195 $ -- $ -- $ --
Commercial loans 32,301 19,692 7,014 3,095 2,500
--------------------------------------------------------------
Total loans 77,496 64,887 7,014 3,095 2,500
Standby Letters of Credit 26,564 23,574 2,990 -- --
Other Commercial Commitments 11,519 11,512 -- -- 7
--------------------------------------------------------------
Total Commercial Commitments $ 115,579 $ 99,973 $ 10,004 $ 3,095 $ 2,507
==============================================================
While the past performance is no guarantee of the future, management believes
that the Company's funding sources (including dividends from all its
subsidiaries) and the bank's funding sources will be adequate to meet their
liquidity requirements in the future.
CAPITAL
The Company and the bank are subject to risk-based capital regulations which
quantitatively measure capital against risk-weighted assets, including certain
off-balance sheet items. These regulations define the elements 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).
Information regarding the Company's and the bank's risk-based capital at
December 31, 2004 and December 31, 2003, is presented in Note 21 beginning on
page 57. In addition, the bank is subject to the provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") which imposes a
number of mandatory supervisory measures. Among other matters, FDICIA
established five capital categories ranging from "well capitalized" to
"critically under capitalized." Such classifications are used by regulatory
agencies to determine a bank's deposit insurance premium, approval of
applications authorizing institutions to increase their asset size or otherwise
expand business activities or acquire other institutions. Under FDICIA, a "well
capitalized" bank must maintain minimum leverage, Tier 1 and Total Capital
ratios of 5%, 6% and 10%, respectively. The Federal Reserve Board applies
comparable tests for holding companies such as the Company. At December 31,
2004, the Company and the bank exceeded the requirements for "well capitalized"
institutions.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The parent company's common stock is traded on the New York Stock Exchange under
the symbol STL. Information regarding the quarterly prices of the common stock
is presented in Note 25 on page 63. Information regarding the average common
shares outstanding and dividends per common share is presented in the
Consolidated Statements of Income on page 29. Information regarding legal
restrictions on the ability of the bank to pay dividends is presented in Note 14
on page 48. Although such restrictions do not apply to the payment of dividends
by the parent company to its shareholders, such dividends may be limited by
other factors, such as the requirement to maintain adequate capital under the
risk-based capital regulations described in Note 21 beginning on page 57.
Information related to the parent company's preferred stock is presented in Note
11 on page 47.
PAGE 25
Sterling Bancorp
CONSOLIDATED INTEREST RATE SENSITIVITY
To mitigate the vulnerability of earnings to changes in interest rates, the
Company manages the repricing characteristics of assets and liabilities in an
attempt to control net interest rate sensitivity. Management attempts to confine
significant rate sensitivity gaps predominantly to repricing intervals of a year
or less, so that adjustments can be made quickly. Assets and liabilities with
predetermined repricing dates are classified based on the earliest repricing
period. Based on the interest rate sensitivity analysis shown below, the
Company's net interest income would increase during periods of rising interest
rates and decrease during periods of falling interest rates. Amounts are
presented in thousands.
Repricing Date
-----------------------------------------------------------------------------
More than
3 Months 3 Months 1 Year to Over Nonrate
or Less to 1 Year 5 Years 5 Years Sensitive Total
----------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits with other banks $ 1,329 $ -- $ -- $ -- $ -- $ 1,329
Investment securities 3,053 48,769 90,094 530,661 7,643 680,220
Loans, net of unearned discounts
Commercial and industrial 585,927 535 9,220 7 (460) 595,229
Loans to depository institutions 20,000 -- -- -- -- 20,000
Lease financing 3,122 14,833 158,856 9,050 (22,900) 162,961
Real estate 97,618 9,548 122,513 35,962 (1) 265,640
Installment 13,172 82 2,253 10 (2) 15,515
Noninterest-earning assets and
allowance for loan losses -- -- -- -- 130,218 130,218
-----------------------------------------------------------------------------
Total Assets 724,221 73,767 382,936 575,690 114,498 1,871,112
-----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Savings[1] -- -- 28,168 -- -- 28,168
NOW[1] -- -- 136,616 -- -- 136,616
Money market[1] 157,741 -- 34,742 -- -- 192,483
Time--domestic 163,408 162,198 146,614 50 -- 472,270
--foreign 1,645 1,362 -- -- -- 3,007
Securities sold under agreements
to repurchase--customers 55,934 -- -- -- -- 55,934
Securities sold under agreements
to repurchase--dealers 33,882 -- -- -- -- 33,882
Federal funds purchased 32,500 -- -- -- -- 32,500
Commercial paper 25,991 -- -- -- -- 25,991
Other short-term borrowings 2,517 -- -- -- -- 2,517
Long-term borrowings -- -- 10,000 100,000 25,774 135,774
Noninterest-bearing liabilities and
shareholders' equity -- -- -- -- 751,970 751,970
-----------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity 473,618 163,560 356,140 100,050 777,744 1,871,112
-----------------------------------------------------------------------------
Net Interest Rate Sensitivity Gap $ 250,603 $ (89,793) $ 26,796 $ 475,640 $ (663,246) $ --
=============================================================================
Cumulative Gap at December 31, 2004 $ 250,603 $ 160,810 $ 187,606 $ 663,246 $ -- $ --
=============================================================================
Cumulative Gap at December 31, 2003 $ 230,662 $ 77,756 $ 46,397 $ 595,450 $ -- $ --
=============================================================================
Cumulative Gap at December 31, 2002 $ 260,814 $ 167,170 $ 98,271 $ 522,344 $ -- $ --
=============================================================================
[1] Historically, balances on non-maturity deposit accounts have remained
relatively stable despite changes in levels of interest rates. Balances
are shown in repricing periods based on management's historical repricing
practices and runoff experience.
PAGE 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 2004 and 2003
and for each of the years in the three-year period ended December 31, 2004, and
the statements of condition of Sterling National Bank as of December 31, 2004
and 2003, notes thereto and Report of Independent Registered Public Accounting
Firm thereon appear on pages 28-64.
PAGE 27
Sterling Bancorp
CONSOLIDATED BALANCE SHEETS
Restated
December 31, 2004 2003
---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 48,842,418 $ 63,947,722
Interest-bearing deposits with other banks 1,329,103 1,656,338
Securities available for sale (at estimated fair value;
pledged: $64,933,098 in 2004 and $117,250,082 in 2003) 233,762,171 312,727,555
Securities held to maturity (pledged: $122,309,904 in 2004 and
$166,910,347 in 2003) (estimated fair value: $448,173,450
in 2004 and $374,977,771 in 2003) 446,457,563 370,390,519
----------------------------------
Total investment securities 680,219,734 683,118,074
----------------------------------
Loans held for sale 37,058,673 40,556,380
Loans held in portfolio, net of unearned discounts 1,022,286,479 900,556,215
Less allowance for loan losses 16,328,528 14,458,951
----------------------------------
Loans, net 1,005,957,951 886,097,264
----------------------------------
Customers' liability under acceptances 628,965 953,571
Goodwill 21,158,440 21,158,440
Premises and equipment, net 10,674,708 9,226,183
Other real estate 766,620 829,856
Accrued interest receivable 5,604,781 5,069,423
Bank owned life insurance 26,553,145 21,872,266
Other assets 32,317,224 25,338,740
----------------------------------
$ 1,871,111,762 $ 1,759,824,257
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 511,307,018 474,091,890
Interest-bearing deposits 832,544,097 737,648,930
----------------------------------
Total deposits 1,343,851,115 1,211,740,820
Securities sold under agreements to repurchase--customers 55,934,170 42,490,862
Securities sold under agreements to repurchase--dealers 33,882,000 51,327,944
Federal funds purchased 32,500,000 10,000,000
Commercial paper 25,991,038 28,799,055
Other short-term borrowings 2,517,375 56,871,359
Acceptances outstanding 628,965 953,571
Accrued expenses and other liabilities 91,329,506 78,604,639
Long-term borrowings 135,774,000 135,774,000
----------------------------------
Total liabilities 1,722,408,169 1,616,562,250
----------------------------------
Shareholders' Equity
Preferred stock, $5 par value -- 2,244,320
Common stock, $1 par value. Authorized 50,000,000 and 20,000,000
shares, respectively; issued 19,880,521 and 19,275,964 shares, respectively 19,880,521 19,275,964
Capital surplus 145,310,745 141,179,832
Retained earnings 28,664,568 16,166,517
Accumulated other comprehensive loss (1,921,060) (1,131,803)
----------------------------------
191,934,774 177,734,830
Common stock in treasury at cost, 1,642,996 and 1,306,587 shares, respectively (42,939,969) (33,577,847)
Unearned compensation (291,212) (894,976)
----------------------------------
Total shareholders' equity 148,703,593 143,262,007
----------------------------------
$ 1,871,111,762 $ 1,759,824,257
==================================
See Notes to Consolidated Financial Statements.
PAGE 28
Sterling Bancorp
CONSOLIDATED STATEMENTS OF INCOME
Restated Restated
Years Ended December 31, 2004 2003 2002
-----------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $65,778,789 $61,621,929 $57,913,946
Investment securities
Available for sale 13,038,461 10,601,611 16,213,837
Held to maturity 18,828,800 19,269,037 19,758,646
Federal funds sold 132,405 64,435 276,974
Deposits with other banks 20,969 25,464 33,564
---------------------------------------
Total interest income 97,799,424 91,582,476 94,196,967
---------------------------------------
INTEREST EXPENSE
Deposits 11,173,017 8,887,090 12,466,276
Securities sold under agreements to repurchase--customers 1,020,157 876,790 1,162,822
Securities sold under agreements to repurchase--dealers 398,415 565,552 129,063
Federal funds purchased 146,109 65,407 45,059
Commercial paper 363,918 264,254 655,355
Other short-term borrowings 243,492 544,722 572,717
Long-term borrowings 6,238,750 6,387,024 6,178,360
---------------------------------------
Total interest expense 19,583,858 17,590,839 21,209,652
---------------------------------------
Net interest income 78,215,566 73,991,637 72,987,315
Provision for loan losses 9,965,000 8,740,400 10,770,900
---------------------------------------
Net interest income after provision for loan losses 68,250,566 65,251,237 62,216,415
---------------------------------------
NONINTEREST INCOME
Factoring income 6,840,856 5,947,029 6,155,897
Mortgage banking income 15,300,971 14,606,494 10,254,430
Service charges on deposit accounts 4,722,011 4,905,900 4,961,897
Trade finance income 2,267,970 2,337,480 2,574,949
Trust fees 697,560 646,979 664,346
Other service charges and fees 1,843,603 1,922,590 1,846,103
Bank owned life insurance income 1,225,628 1,041,577 1,290,316
Securities gains 1,256,370 550,505 996,041
Other income 562,726 719,397 541,110
---------------------------------------
Total noninterest income 34,717,695 32,677,951 29,285,089
---------------------------------------
NONINTEREST EXPENSES
Salaries 30,103,160 27,022,023 25,993,675
Employee benefits 9,032,770 8,462,987 6,166,793
---------------------------------------
Total personnel expense 39,135,930 35,485,010 32,160,468
Occupancy expense, net 4,916,240 4,720,731 4,869,923
Equipment expense 3,063,136 2,854,169 2,657,571
Advertising and marketing 3,350,565 3,160,122 3,308,915
Professional fees 5,567,847 3,121,771 3,738,163
Data processing fees 1,124,441 1,012,309 1,270,974
Stationery and printing 801,625 903,915 1,052,394
Communications 1,530,476 1,580,678 1,626,467
Other expenses 6,122,393 6,435,872 6,664,798
---------------------------------------
Total noninterest expenses 65,612,653 59,274,577 57,349,673
---------------------------------------
Income before income taxes 37,355,608 38,654,611 34,151,831
Provision for income taxes 12,751,535 14,751,366 12,310,377
---------------------------------------
Net income $24,604,073 $23,903,245 $21,841,454
=======================================
Average number of common shares outstanding
Basic 18,241,567 17,914,855 17,978,728
Diluted 19,113,625 18,915,660 18,951,522
Earnings per average common share
Basic $ 1.35 $ 1.33 $ 1.21
Diluted 1.29 1.26 1.15
Dividends per common share .67 .57 .46
See Notes to Consolidated Financial Statements.
PAGE 29
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Restated Restated
Years Ended December 31, 2004 2003 2002
---------------------------------------------------------------------------------------------------------------
Net income $ 24,604,073 $ 23,903,245 $ 21,841,454
--------------------------------------------
Other comprehensive (loss) income, net of tax:
Unrealized gains on securities:
Unrealized holding (losses) gains arising during the year (886,698) (995,551) 3,034,768
Reclassification adjustment for gains included in net income (679,696) (297,823) (538,858)
Minimum pension liability adjustment 777,137 (501,359) (781,944)
--------------------------------------------
Other comprehensive (loss) income (789,257) (1,794,733) 1,713,966
--------------------------------------------
Comprehensive income $ 23,814,816 $ 22,108,512 $ 23,555,420
============================================
See Notes to Consolidated Financial Statements.
PAGE 30
Sterling Bancorp
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Restated Restated
Years Ended December 31, 2004 2003 2002
-----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at beginning of year $ 2,244,320 $ 2,322,060 $ 2,346,060
Conversions of Series B and Series D shares (2,244,320) (77,740) (24,000)
-----------------------------------------------
Balance at end of year $ -- $ 2,244,320 $ 2,322,060
===============================================
COMMON STOCK
Balance at beginning of year $ 19,275,964 $ 19,138,420 $ 16,849,271
Conversions of preferred shares into common shares 428,304 12,799 3,070
Common shares issued under stock incentive plan 176,253 124,745 312,740
Common shares issued in connection with stock dividend -- -- 1,973,339
-----------------------------------------------
Balance at end of year $ 19,880,521 $ 19,275,964 $ 19,138,420
===============================================
CAPITAL SURPLUS
Balance at beginning of year restated $ 141,179,832 $ 138,872,374 $ 93,219,956
Conversions of preferred shares into common shares 1,816,016 64,941 20,930
Common shares issued under stock incentive plan and
related tax benefits 2,340,933 2,274,875 4,530,940
Common shares issued in connection with stock dividend -- -- 40,724,200
Issuance of shares under incentive compensation plan -- -- 386,400
Common stock issued in connection with acquisition -- -- (10,052)
Stock split--cash paid in lieu (26,036) (32,358) --
-----------------------------------------------
Balance at end of year $ 145,310,745 $ 141,179,832 $ 138,872,374
===============================================
RETAINED EARNINGS
Balance at beginning of year restated $ 16,166,517 $ 2,498,606 $ 31,071,106
Net income 24,604,073 23,903,245 21,841,454
Cash dividends paid--common shares (12,106,022) (10,110,315) (7,571,667)
--preferred shares -- (125,019) (112,700)
Stock dividend paid--common shares -- -- (42,697,539)
--cash in lieu -- -- (32,048)
-----------------------------------------------
Balance at end of year $ 28,664,568 $ 16,166,517 $ 2,498,606
===============================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of year restated $ (1,131,803) $ 662,930 $ (1,051,036)
-----------------------------------------------
Unrealized holding (losses) gains arising during the period:
Before tax (1,638,997) (1,840,208) 5,609,554
Tax effect 752,299 844,657 (2,574,786)
-----------------------------------------------
Net of tax (886,698) (995,551) 3,034,768
-----------------------------------------------
Reclassification adjustment for gains included in net income:
Before tax (1,256,370) (550,505) (996,041)
Tax effect 576,674 252,682 457,183
-----------------------------------------------
Net of tax (679,696) (297,823) (538,858)
-----------------------------------------------
Minimum pension liability adjustment:
Before tax 1,436,482 (926,726) (1,445,369)
Tax effect (659,345) 425,367 663,425
-----------------------------------------------
Net of tax 777,137 (501,359) (781,944)
-----------------------------------------------
Balance at end of year $ (1,921,060) $ (1,131,803) $ 662,930
===============================================
TREASURY STOCK
Balance at beginning of year $ (33,577,847) $ (32,400,952) $ (15,542,454)
Purchase of common shares (8,310,004) (256,007) (15,501,195)
Issuance of shares under incentive compensation plan -- -- 1,267,200
Surrender of shares issued under incentive compensation plan (1,052,118) (920,888) (3,034,547)
Common shares issued in connection with acquisition -- -- 410,044
-----------------------------------------------
Balance at end of year $ (42,939,969) $ (33,577,847) $ (32,400,952)
===============================================
UNEARNED COMPENSATION
Balance at beginning of year $ (894,976) $ (1,873,926) $ (1,187,798)
Issuance of shares under incentive compensation plan -- -- (1,653,600)
Amortization of unearned compensation 603,764 978,950 967,472
-----------------------------------------------
Balance at end of year $ (291,212) $ (894,976) $ (1,873,926)
===============================================
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of year $ 143,262,007 $ 129,219,512 $ 125,705,105
Net changes during the year 5,441,586 14,042,495 3,514,407
-----------------------------------------------
Balance at end of year $ 148,703,593 $ 143,262,007 $ 129,219,512
===============================================
See Notes to Consolidated Financial Statements.
PAGE 31
Sterling Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Restated Restated
Years Ended December 31, 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,604,073 $ 23,903,245 $ 21,841,454
Adjustments to reconcile net income to net
cash provided by (used in)operating activities:
Provision for loan losses 9,965,000 8,740,400 10,770,900
Depreciation and amortization of premises and equipment 1,839,782 1,750,153 1,735,633
Securities gains (1,256,370) (550,505) (996,041)
Income from bank owned life insurance (1,225,628) (1,041,577) (1,290,316)
Deferred income tax benefit (729,908) (386,875) (510,540)
Net change in loans held for sale 3,497,707 14,128,607 (6,082,146)
Amortization of unearned compensation 603,764 978,950 967,472
Amortization of premiums on investment securities 1,456,202 2,341,462 1,516,143
Accretion of discounts on investment securities (568,608) (1,112,329) (1,152,553)
(Increase) Decrease in accrued interest receivable (535,358) (187,486) 985,184
Increase in accrued expenses and other liabilities 12,724,867 1,361,655 (3,394,519)
Increase in other assets (5,257,201) (5,812,233) (1,095,716)
Other, net (490,871) (1,219,208) (4,898,601)
-----------------------------------------------
Net cash provided by operating activities 44,627,451 42,894,259 18,396,354
-----------------------------------------------
INVESTING ACTIVITIES
Purchase of premises and equipment (3,288,307) (1,713,164) (3,146,443)
Net decrease (increase) in interest-bearing deposits with other banks 327,235 1,216,372 (385,532)
Decrease in Federal funds sold -- 5,000,000 5,000,000
Net increase in loans held in portfolio (129,825,687) (117,071,914) (42,490,939)
Decrease (Increase) in other real estate 63,236 (7,036) (13,636)
Purchase of bank owned life insurance (4,000,000) -- (20,000,000)
Proceeds from sales of securities 94,314,559 24,208,035 44,653,909
Proceeds from prepayments, redemptions or
maturities of securities--held to maturity 131,720,726 253,379,199 111,703,134
Purchases of securities--held to maturity (208,471,931) (255,512,023) (175,033,767)
Proceeds from prepayments, redemptions or
maturities--available for sale 123,946,777 367,057,916 193,790,227
Purchases of securities--available for sale (141,857,433) (486,974,411) (182,639,726)
-----------------------------------------------
Net cash used in investing activities (137,070,825) (210,417,026) (68,562,773)
-----------------------------------------------
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 37,215,128 72,523,411 45,265,171
Net increase in interest-bearing deposits 94,895,167 92,109,185 16,919,099
Increase in Federal funds purchased 22,500,000 10,000,000 --
Net decrease in securities sold under agreements to repurchase (4,002,636) (7,106,829) (46,170,000)
Net (decrease) increase in commercial paper and other
short-term borrowings (57,162,001) 19,321,090 15,558,453
(Decrease) Increase in long-term borrowings -- (5,000,000) 45,424,000
Purchase of treasury shares (8,310,004) (256,007) (15,501,195)
Proceeds from exercise of stock options 4,334,474 1,973,762 4,198,859
Cash dividends paid on preferred and common shares (12,106,022) (10,235,334) (7,684,367)
Cash paid in lieu of fractional shares in connection with
stock dividend/split (26,036) (32,358) (32,048)
-----------------------------------------------
Net cash provided by financing activities 77,338,070 173,296,920 57,977,972
-----------------------------------------------
Net (decrease) increase in cash and due from banks (15,105,304) 5,774,153 7,811,553
Cash and due from banks--beginning of year 63,947,722 58,173,569 50,362,016
-----------------------------------------------
Cash and due from banks--end of year $ 48,842,418 $ 63,947,722 $ 58,173,569
===============================================
Supplemental disclosure of cash flow information:
Interest paid $ 19,199,800 $ 17,613,850 $ 20,291,854
Income taxes paid 11,554,100 12,366,194 13,078,303
See Notes to Consolidated Financial Statements.
PAGE 32
Sterling National Bank
CONSOLIDATED STATEMENTS OF CONDITION
Restated
December 31, 2004 2003
--------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 47,910,092 $ 63,593,547
Interest-bearing deposits with other banks 1,329,103 921,338
Securities available for sale (at estimated fair value;
pledged: $64,933,098 in 2004 and $117,250,082 in 2003) 233,697,551 312,662,701
Securities held to maturity (pledged: $122,309,904 in 2004 and
$166,910,347 in 2003) (estimated fair value: $448,173,450 in 2004
and $374,977,771 in 2003) 446,457,563 370,390,519
-------------------------------
Total investment securities 680,155,114 683,053,220
-------------------------------
Loans held for sale 37,058,673 40,556,380
Loans held in portfolio, net of unearned discounts 968,681,575 860,539,887
Less allowance for loan losses 16,063,068 14,355,380
-------------------------------
Loans, net 952,618,507 846,184,507
-------------------------------
Receivables from affiliates -- 20,996
Customers' liability under acceptances 628,965 953,571
Premises and equipment, net 10,645,195 9,196,442
Other real estate 766,620 829,856
Accrued interest receivable 5,603,374 5,056,786
Bank owned life insurance 26,553,145 21,872,266
Other assets 25,825,748 18,513,116
-------------------------------
$1,789,094,536 $1,690,752,025
===============================
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest-bearing deposits $ 526,366,101 $ 498,036,577
Interest-bearing deposits 833,069,913 745,285,616
-------------------------------
Total deposits 1,359,436,014 1,243,322,193
Securities sold under agreements to repurchase--customers 55,934,170 42,490,862
Securities sold under agreements to repurchase--dealer 33,882,000 51,327,944
Federal funds purchased 32,500,000 10,000,000
Other short-term borrowings 2,517,375 56,871,359
Acceptances outstanding 628,965 953,571
Accrued expenses and other liabilities 78,088,892 64,948,817
Long-term borrowings--FHLB 110,000,000 110,000,000
-------------------------------
Total liabilities 1,672,987,416 1,579,914,746
-------------------------------
Commitments and contingent liabilities
Shareholder's Equity
Common stock, $50 par value
Authorized and issued, 358,526 shares 17,926,300 17,926,300
Surplus 19,762,560 19,762,560
Undivided profits 77,573,022 70,736,915
Accumulated other comprehensive income:
Net unrealized appreciation on securities available for sale, net of tax 845,238 2,411,504
-------------------------------
Total shareholder's equity 116,107,120 110,837,279
-------------------------------
$1,789,094,536 $1,690,752,025
===============================
See Notes to Consolidated Financial Statements.
PAGE 33
Sterling Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sterling Bancorp ("the parent company") is a financial holding company, pursuant
to an election made under the Gramm-Leach-Bliley Act of 1999. Throughout the
notes, the term "the Company" refers to Sterling Bancorp and its subsidiaries.
The Sterling companies provide 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, leasing, deposit services, trust and
estate administration and investment management services. Sterling has
operations principally in New York and conducts business throughout the United
States. As discussed in Note 2, the Company has restated prior period financial
statements.
The following summarizes the significant accounting policies of Sterling Bancorp
and its subsidiaries.
Basis of Presentation
The consolidated financial statements include the accounts of the parent company
and its subsidiaries, principally Sterling National Bank ("the bank"), after
elimination of intercompany transactions.
The Company effected a six-for-five stock split on December 8, 2004. All capital
and share amounts as well as basic and diluted average number of shares
outstanding and earnings per share information for all prior reporting periods
have been restated.
General Accounting Policies
The Company follows accounting principles generally accepted in the United
States of America ("U.S. GAAP") and prevailing practices within the banking
industry. The preparation of financial statements in accordance with U.S. GAAP
requires management to make assumptions and estimates that impact the amounts
reported in those statements and are, by their nature, subject to change in the
future as additional information becomes available or as circumstances vary.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current presentation.
New Accounting Standards and Interpretations
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities
Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 is effective for loans acquired
in fiscal years beginning after December 15, 2004. The statement requires that
acquired loans within its scope be recorded at fair value and prohibits the
carrying over or the creation of valuation allowances in the initial accounting
for any loans acquired in a transfer that have evidence of deterioration in
credit quality since inception, when it is probable that the purchaser will be
unable to collect all contractual cash flows. In addition, SOP 03-3 prohibits
the recognition of the excess of contractual cash flows over the cash receipts
expected to be collected as an adjustment of yield, loss accrual or valuation
allowance at the time of purchase; requires that subsequent increases in
expected cash flows be recognized prospectively through an adjustment of yield;
and requires that subsequent decreases in expected cash flows be recognized as
an impairment. The adoption of SOP 03-3 is not expected to have a material
impact on the Company's consolidated financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) is effective as of
the first interim or annual reporting period beginning after June 15, 2005 with
early adoption encouraged. SFAS No. 123(R) replaces SFAS No. 123, "Accounting
for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123(R) requires public entities to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is requested to provide service in exchange for the award--the
requisite service period (usually the vesting period). No compensation cost is
recognized for equity instruments for which employees do not render the
requisite service. SFAS No. 123(R) applies to all awards granted after the
required effective date and to awards modified, repurchased or cancelled after
that date. The cumulative effect of initially applying SFAS No. 123(R), if any,
is recognized as of the required effective date. As of the required effective
date, all public entities and those nonpublic entities that used the
fair-value-based method for either recognition or disclosure under SFAS No. 123
will apply this Statement using a modified version of prospective application.
Under that transition method, compensation cost is recognized on or after the
required effective date for the portion of outstanding awards for which the
requisite service has not yet been rendered, based on the grant-date fair value
of those awards calculated under SFAS No. 123 for either recognition or pro
forma disclosures. For periods before the required effective date, those
entities may elect to apply a modified version of retrospective application
under which financial statements for prior periods are adjusted on a basis
consistent with the pro forma disclosures required for those periods by SFAS No.
123. The Company has not yet determined which transition method it will apply
upon adoption of SFAS No. 123(R). The impact on the Company's consolidated
financial statements will depend on the transition method selected.
PAGE 34
In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets an
amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 eliminates the
exception contained in APB Opinion No. 29 to fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchange transactions that do not have commercial
substance. Under SFAS No. 153, a nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for transactions occurring in
reporting periods beginning after June 15, 2005. The adoption of SFAS No. 153 is
not expected to have a material impact on the Company's consolidated financial
statements.
In December 2003, FASB issued Interpretation No. 46 (revised), "Consolidation of
Variable Interests Entities" ("FIN 46R"), which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and, accordingly, should
consolidate the variable interest entity ("VIE"). FIN 46R replaces FASB
Interpretation No. 46 that was issued in January 2003. The Company is required
to apply FIN 46R to variable interests generally as of March 31, 2004 and to
special-purpose entities as of December 31, 2003. For any VIEs that must be
consolidated under FIN 46R that were created before January 1, 2004, the assets,
liabilities and non-controlling interest of the VIE initially would be measured
at their carrying amounts, and any difference between the net amount added to
the balance sheet and any previously recognized interest would be recorded as a
cumulative effect of an accounting change. If determining the carrying amounts
is not practicable, fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and non-controlling interest of the VIE. The
Company had an interest in a special-purpose entity as of December 31, 2003.
Upon adoption of FIN 46R as of December 31, 2003, the Company's interest in
Sterling Bancorp Trust I (see Note 10) required the deconsolidation of this
entity in the Company's consolidated financial statements.
Investment Securities
Securities are designated as available for sale or held to maturity at the time
of acquisition. Securities that the Company will hold for indefinite periods of
time and that might be sold in the future as part of efforts to manage interest
rate risk or in response to changes in interest rates, changes in prepayment
risk, changes in market conditions or changes in economic factors, are
classified as available for sale and carried at estimated market values. Net
aggregate unrealized gains or losses are included in a valuation allowance
account and are reported, net of taxes, as a component of shareholders' equity.
Securities that the Company has the positive intent and ability to hold to
maturity are designated as held to maturity and are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity. Gains and losses realized on sales of securities are determined on
the specific identification method and are reported in noninterest income as net
securities gains.
Securities pledged as collateral are reported separately in the consolidated
balance sheets if the secured party has the right by contract or custom to sell
or repledge the collateral. Securities are pledged by the Company to secure
trust and public deposits, securities sold under agreements to repurchase,
advances from the Federal Home Loan Bank of New York and for other purposes
required or permitted by law.
A periodic review is conducted by management to determine if the decline in the
fair value of any security appears to be other than temporary. Factors
considered in determining whether the decline is other-than-temporary include,
but are not limited to: the length of time and the extent to which fair value
has been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a period
of time sufficient to allow for any anticipated recovery. If the decline is
deemed to be other than temporary, the security is written down to a new cost
basis and the resulting loss is reported in non-interest income.
Loans
Loans, other than those held for sale, are reported at their principal amount
outstanding, net of unearned discounts and unamortized nonrefundable fees and
direct costs associated with their origination or acquisition. Interest earned
on loans without discounts is credited to income based on loan principal amounts
outstanding at appropriate interest rates. Material origination fees net of
direct costs and discounts on loans are credited to income over the terms of the
loans using a method that results in an approximate level rate of return.
Mortgage loans held for sale, including deferred fees and costs, are reported at
the lower of cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
loan basis and are included under the caption "Loans held for sale" in the
Consolidated Balance Sheets. Net unrealized losses, if any, are recognized in a
valuation allowance by a charge to income. Mortgage loans are sold, including
servicing rights, without recourse. Gains or losses resulting from sales of
mortgage loans, net of unamortized deferred fees and costs, are recognized when
the proceeds are received from investors and are included under the caption
"Mortgage banking income" in the Consolidated Statements of Income. In
connection with its mortgage banking activities, the Company had commitments to
fund loans held-for-sale and commitments to sell loans which are considered
derivative instruments under SFAS No. 133, "Accounting for
PAGE 35
Derivative Instruments and Hedging Activities." The fair values of these
free-standing derivative instruments were immaterial at December 31, 2004 and
2003, respectively.
Nonaccrual loans are those on which the accrual of interest has ceased. Loans,
including loans that are individually identified as being impaired under SFAS
No. 114, are generally placed on nonaccrual status immediately if, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more and collateral, if any, is insufficient to cover
principal and interest. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income. Interest income
is recognized on nonaccrual loans only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses, which is available for losses incurred in the
loan portfolio, is increased by a provision charged to expense and decreased by
charge-offs, net of recoveries.
Under the provisions of SFAS No. 114 and SFAS No. 118, individually identified
impaired loans are measured based on the present value of payments expected to
be received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices; or,
for loans that are solely dependent on the collateral for repayment, measurement
may be based on the fair value of the collateral. Loans that are to be
foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds fair value, a valuation
allowance is required as a component of the allowance for loan losses. Changes
to the valuation allowance are recorded as a component of the provision for loan
losses.
The adequacy of the allowance for loan losses is reviewed regularly by
management. The allowance for loan losses is maintained through the provision
for loan losses, which is a charge to operating earnings. The adequacy of the
provision and the resulting allowance for loan losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect the borrower's
ability to repay, review of overall portfolio quality through an analysis of
current charge-offs, delinquency and nonperforming loan data, estimates of the
value of any underlying collateral, review of regulatory examinations, an
assessment of current and expected economic conditions and changes in the size
and character of the loan portfolio. The allowance reflects management's
evaluation both of loans presenting identified loss potential and of the risk
inherent in various components of the portfolio, including loans identified as
impaired as required by SFAS No. 114. Thus, an increase in the size of the
portfolio or in any of its components could necessitate an increase in the
allowance even though there may not be a decline in credit quality or an
increase in potential problem loans. A significant change in any of the
evaluation factors described above could result in future additions to the
allowance.
Goodwill
Goodwill reflected in the consolidated balance sheets arose from the Company's
acquisition of the bank, under the purchase method of accounting in 1968.
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). Under the provisions of SFAS No. 142,
goodwill is deemed to have an indefinite useful life and the Company is required
to complete an annual assessment by segment for any impairment of goodwill,
which would be treated as an expense in the income statement. There was no
impairment expense recorded in 2004, 2003 or 2002. Prior to the adoption of SFAS
No. 142, the Company was not amortizing goodwill.
Goodwill is tested for impairment using a two-step approach that involves the
identification of "reporting units" and the estimation of their respective fair
values. An impairment loss is recognized as a charge to expense for any excess
of the goodwill carrying amount over implied fair value.
Premises and Equipment
Premises and equipment, excluding land, are stated at cost less accumulated
depreciation or amortization as applicable. Land is reported at cost.
Depreciation is computed on a straight-line basis and is charged to noninterest
expense over the estimated useful lives of the related assets. Amortization of
leasehold improvements is charged to noninterest expense over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Maintenance, repairs and minor improvements are charged to
noninterest expenses as incurred.
Bank Owned Life Insurance
The bank invested in Bank Owned Life Insurance ("BOLI") policies to fund certain
future employee benefit costs. The cash surrender value of the BOLI policies is
recorded in the Consolidated Balance Sheets under the caption "Bank owned life
insurance." Changes in the cash surrender value are recorded in the Consolidated
Statements of Income under the caption "Bank owned life insurance income."
PAGE 36
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Deferred income tax expense (benefit) is determined by recognizing
deferred tax assets and liabilities for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The realization of
deferred tax assets is assessed and a valuation allowance provided for that
portion of the assets for which it is more likely than not that it will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates and will be adjusted for the effects of future changes in tax laws or
rates, if any.
For income tax purposes, the Company files: a consolidated Federal income tax
return; combined New York City and New York State income tax returns; and
separate state income tax returns for its out-of-state subsidiaries. The parent
company, under tax sharing agreements, either pays or collects on account of
current income taxes to or from its subsidiaries.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
Stock Incentive Plan
At December 31, 2004, the Company had a stock-based employee compensation plan,
which is described more fully in Note 15. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. All
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant and, therefore, no option
related stock-based employee compensation cost is reflected in net income.
Stock-based employee compensation cost related to restricted stock is included
in compensation expense as discussed more fully in Note 15. In accordance with
SFAS No. 123, the following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to the
stock-based employee compensation plans.
Years Ended December 31, 2004 2003[1] 2002[1]
----------------------------------------------------------------------------------------------------------------
Net income available for common shareholders $24,604,073 $23,778,226 $21,728,754
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax effects (236,349) (422,709) (1,355,678)
-----------------------------------------
Pro forma net income $24,367,724 $23,355,517 $20,373,076
=========================================
Earnings per share:
Basic--as reported $ 1.35 $ 1.33 $ 1.21
Basic--pro forma 1.34 1.30 1.13
Diluted--as reported 1.29 1.26 1.15
Diluted--pro forma 1.27 1.23 1.08
[1] Restated; see "Basis of Presentation" above and Note 2.
Employee stock options generally expire ten years from the date of grant and
become non-forfeitable one year from date of grant, although if necessary to
qualify to the maximum extent possible as incentive stock options, these options
become exercisable in annual installments. Director nonqualified stock options
generally expire five years from the date of grant and become non-forfeitable
and become exercisable in four annual installments starting one year from date
of grant. In prior years, the stock-based compensation expense was calculated
based on when the options become exercisable. The Company has determined that it
is proper to calculate the stock-based compensation expense over the period from
date of grant to the date on which the options become non-forfeitable. The
stock-based compensation expense presented in the table above reflects this
change; prior periods have been recalculated.
Earnings Per Average Common Share
Basic earnings per share are computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
PAGE 37
NOTE 2.
RESTATEMENT OF FINANCIAL STATEMENTS
The consolidated financial statements for the years ended December 31, 2002 and
2003 have been restated to correct the accounting for employee benefits expense
so as to comply with Accounting Principles Board Opinion No. 12, as amended by
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, and FASB Technical Bulletin 85-4, Accounting for Purchases
of Life Insurance, and, accordingly, these consolidated financial statements
supersede the Company's previously issued audited consolidated financial
statements for the years ended December 31, 2002 and 2003. The adjustment to
the accounting for employee benefits expense involved (a) the expensing of
premiums paid for split-dollar life insurance policies on the lives of certain
executive officers of the Company, (b) the expensing of the Company's
obligations to pay future premiums on split-dollar life insurance policies
issued as part of a transaction in which an executive officer relinquishes his
right to receive pension payments in exchange for the insurance policy, (c) the
expensing of the Company's obligation to pay future post-retirement premiums on
certain split-dollar life insurance policies and (d) the crediting of increases
in the cash surrender values of these various policies. These changes comprise
the restatement adjustments for employee benefits expense set forth below.
The Company also restated for certain other less significant items. Accordingly,
the restated consolidated financial statements for the years ended December 31,
2002 and 2003 also correct the accounting for (i) other income and unrealized
holding (losses) gains (and thus other comprehensive (loss) income) so as to
comply with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities (changes to other income relate to the recognition of earnings on
assets held in a trust established by the Company and changes to unrealized
holding (losses) gains relate to the inclusion of unrealized holding (losses)
gains on assets held in the trust), (ii) occupancy expense so as to comply with
SFAS No. 13, Accounting for Leases (changes required to properly straight-line
rent incentives), (iii) income tax benefit arising from the exercise of
nonqualified stock options and the vesting of restricted stock so as to comply
with SFAS No. 109, Accounting for Income Taxes (changes relate to the amounts
credited directly to capital surplus), and (iv) minimum pension liability
adjustment (and thus other comprehensive (loss) income) so as to comply with
SFAS No. 87, Employers' Accounting for Pensions (changes relate to the timing of
adjustments).
The table below shows the impact of these restatements on the bank and the
parent company for other income, employee benefits expense, occupancy expense,
net income and basic and diluted earnings per share and on other comprehensive
(loss) income:
Years ended December 31, 2003 2002
---------------------------------------------------------------------------------------------------
Other income:
Other income as previously reported $ 597,410 $ 511,783
Restatement adjustment (bank) 121,987 29,327
----------------------------
Other income as restated $ 719,397 $ 541,110
============================
Employee benefits expense:
Employee benefits expense as previously reported $ 8,031,099 $ 6,161,254
----------------------------
Restatement adjustment:
Impact on bank 383,768 151,673
Impact on parent company 48,120 (146,134)
----------------------------
Total 431,888 5,539
----------------------------
Employee benefits expense as restated $ 8,462,987 $ 6,166,793
============================
Occupancy expense, net:
Occupancy expense, net as previously reported $ 4,788,150 $ 4,920,392
Restatement adjustment (bank) (67,419) (50,469)
----------------------------
Occupancy expense, net as restated $ 4,720,731 $ 4,869,923
============================
Net income:
Net income as previously reported $ 24,203,654 $ 21,777,726
----------------------------
Restatement adjustment:
Impact on bank (252,289) (82,406)
Impact on parent company (48,120) 146,134
----------------------------
Total (300,409) 63,728
----------------------------
Net income as restated $ 23,903,245 $ 21,841,454
============================
PAGE 38
Years ended December 31, 2003 2002
---------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income attributable to commons stock as previously reported[1] $ 1.34 $ 1.21
Restatement adjustment (.01) --
----------------------------
Net income attributable to common stock as restated $ 1.33 $ 1.21
============================
Diluted earnings per share:
Net income attributable to common stock as previously reported[1] $ 1.27 $ 1.14
Restatement adjustment (.01) .01
----------------------------
Net income attributable to common stock as restated $ 1.26 $ 1.15
============================
Other comprehensive (loss) income, net of tax:
Other comprehensive (loss) income as previously reported $ (2,307,021) $ 211,016
Restatement adjustment:
Unrealized holding (losses) gains arising during the
year, net of tax effect of $196,584 and $11,746,
respectively (bank) 231,703 13,845
Minimum pension liability adjustment, net of tax effect
of $238,058 and $1,263,398, respectively (parent company) 280,585 1,489,105
----------------------------
Total 512,288 1,502,950
----------------------------
Other comprehensive (loss) income as restated $ (1,794,733) $ 1,713,966
============================
[1] Restated to reflect the effect of the six-for-five stock split in the form
of a stock dividend effected on December 8, 2004; see Note 1.
As part of the restatement of the consolidated financial statements for the year
ended December 31, 2002, the cumulative effect on prior periods of the changes
has been reflected by adjustments to the opening balances of other assets,
accrued expenses and other liabilities, capital surplus, retained earnings and
accumulated other comprehensive (loss) income as of January 1, 2002, which
resulted in a $2,241,000 increase in other assets, a $5,013,000 increase in
accrued expenses and other liabilities and a $747,000 increase in capital
surplus, reduced retained earnings by $1,349,000 (net of tax benefit of
$222,000), and reduced accumulated other comprehensive (loss) income by
$2,170,000 (net of tax benefit of $1,841,000) to $(1,051,000). In addition, at
December 31, 2002, other assets increased $1,215,000, accrued expenses and other
liabilities increased $1,776,000, capital surplus increased $1,391,000, retained
earnings decreased $1,285,000, and accumulated other comprehensive income
decreased $667,000. At December 31, 2003, other assets increased $1,079,000,
accrued expenses and other liabilities increased $1,002,000, capital surplus
increased $1,817,000, retained earnings decreased $1,585,000, and accumulated
other comprehensive (loss) increased $(155,000).
NOTE 3.
CASH AND DUE FROM BANKS
The bank is required to maintain average reserves, net of vault cash, on deposit
with the Federal Reserve Bank of New York against outstanding domestic deposits
and certain other liabilities. The required reserves, which are reported in cash
and due from banks, were $21,580,000 and $22,830,000 at December 31, 2004 and
2003, respectively. Average required reserves during 2004 and 2003 were
$23,855,000 and $20,247,000, respectively.
PAGE 39
NOTE 4.
MONEY MARKET INVESTMENTS
The Company's money market investments include interest-bearing deposits with
other banks and Federal funds sold. The following table presents information
regarding money market investments.
Years Ended December 31, 2004 2003 2002
----------------------------------------------------------------------------------------------
Interest-bearing deposits with other banks
At December 31 --Balance $ 1,329,103 $ 1,656,338 $ 2,872,710
--Average interest rate 1.34% 1.00% 0.85%
--Average original maturity 74 Days 72 Days 66 Days
During the year --Maximum month-end balance 6,516,030 3,311,594 4,472,980
--Daily average balance 3,120,000 3,473,000 3,494,000
--Average interest rate earned 0.70% 0.73% 1.20%
--Range of interest rates earned 0.35-2.15% 0.29-1.50% 0.55-2.10%
==========================================
Federal funds sold
At December 31 --Balance $ -- $ -- $ 5,000,000
--Average interest rate -- -- 1.1875%
--Average original maturity -- -- 1 Day
During the year --Maximum month-end balance 75,000,000 10,000,000 50,000,000
--Daily average balance 10,943,000 5,759,000 16,704,000
--Average interest rate earned 1.21% 1.12% 1.66%
--Range of interest rates earned 0.875-1.8125% 0.875-1.375% 1.125-1.91%
==========================================
NOTE 5.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities available for sale are
as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 2,491,701 $ 190 $ 329 $ 2,491,562
Obligations of U.S. government corporations and agencies
--mortgage-backed securities 125,010,951 1,136,167 696,423 125,450,695
--collateralized mortgage obligations 44,093,452 24,621 1,171,470 42,946,603
--other securities 24,995,051 -- 259,113 24,735,938
Obligations of state and political institutions 26,588,493 882,414 -- 27,470,907
Trust preferred securities 2,735,973 287,073 -- 3,023,046
Federal Reserve Bank and other equity securities 7,623,242 20,178 -- 7,643,420
---------------------------------------------------------
Total $233,538,863 $ 2,350,643 $ 2,127,335 $233,762,171
=========================================================
December 31, 2003
--------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 2,496,316 $ 25 $ 91 $ 2,496,250
Obligations of U.S. government corporations and agencies
--mortgage-backed securities 219,875,124 2,807,751 521,976 222,160,899
--collateralized mortgage obligations 38,725,153 51 831,651 37,893,553
Obligations of state and political institutions 30,885,649 1,930,582 -- 32,816,231
Trust preferred securities 3,221,443 432,625 -- 3,654,068
Other debt securities 4,001,000 -- -- 4,001,000
Federal Reserve Bank and other equity securities 9,685,142 21,011 599 9,705,554
---------------------------------------------------------
Total $308,889,827 $ 5,192,045 $ 1,354,317 $312,727,555
=========================================================
PAGE 40
The carrying value and estimated fair value of securities held to maturity are
as follows:
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
December 31, 2004 Value Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
--mortgage-backed securities $344,005,204 $ 4,209,706 $ 1,450,677 $346,764,233
--collateralized mortgage obligations 61,190,692 138,988 968,901 60,360,779
--other securities 40,011,667 -- 213,229 39,798,438
Debt securities issued by foreign governments 1,250,000 -- -- 1,250,000
---------------------------------------------------------
Total $446,457,563 $ 4,348,694 $ 2,632,807 $448,173,450
=========================================================
December 31, 2003
--------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
--mortgage-backed securities $291,159,791 $ 6,054,814 $ 499,343 $296,715,262
--collateralized mortgage obligations 77,980,728 66,885 1,035,104 77,012,509
Debt securities issued by foreign governments 1,250,000 -- -- 1,250,000
---------------------------------------------------------
Total $370,390,519 $ 6,121,699 $ 1,534,447 $374,977,771
=========================================================
The following table presents information regarding securities available for sale
with temporary unrealized losses for the periods indicated at December 31, 2004:
Less Than 12 Months 12 Months or Longer Total
---------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 995,312 $ 329 $ -- $ -- $ 995,312 $ 329
Obligations of U.S. government corporations
and agencies
--mortgage-backed securities 60,972,736 546,124 8,917,870 150,299 69,890,606 696,423
--collateralized mortgage obligations 21,665,399 593,866 17,182,012 577,604 38,847,411 1,171,470
--other securities 24,735,938 259,113 -- -- 24,735,938 259,113
-----------------------------------------------------------------------------------
Total $108,369,385 $ 1,399,432 $26,099,882 $ 727,903 $134,469,267 $ 2,127,335
===================================================================================
The following table presents information regarding securities held to maturity
with temporary unrealized losses for the periods indicated at December 31, 2004:
Less Than 12 Months 12 Months or Longer Total
---------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations
and agencies
--mortgage-backed securities $126,342,655 $ 1,449,983 $ 19,433 $ 694 $126,362,088 $ 1,450,677
--collateralized mortgage obligations 23,923,422 344,707 26,237,313 624,194 50,160,735 968,901
--other securities 39,798,438 213,229 -- -- 39,798,438 213,229
-----------------------------------------------------------------------------------
Total $190,064,515 $ 2,007,919 $26,256,746 $ 624,888 $216,321,261 $ 2,632,807
===================================================================================
The Company invests principally in U.S. Treasury, U.S. government corporation
and agency obligations and A-rated or better investments. The fair value of
these investments fluctuates based on several factors, including credit quality
and general interest rate changes. The Company has made an evaluation that it
has the ability to hold its investments until maturity and therefore, realize
the full carrying value of its investment.
PAGE 41
The following tables present information regarding securities available for sale
and securities held to maturity at December 31, 2004, based on contractual
maturity. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. The average yield is based on the ratio of actual income
divided by the average outstanding balances during the year. The average yield
on obligations of state and political subdivisions and Federal Reserve Bank
securities is stated on a tax-equivalent basis.
Amortized Estimated Average
Securities available for sale Cost Fair Value Yield
------------------------------------------------------------------------------------------------
U.S. Treasury securities
Due within 1 year $ 2,491,701 $ 2,491,562 1.31%
---------------------------
Obligations of U.S. government corporations and agencies
--mortgage-backed securities 125,010,951 125,450,695 4.80
---------------------------
Obligations of U.S. government corporations and agencies
--collateralized mortgage obligations 44,093,452 42,946,603 4.17
---------------------------
Obligations of U.S. government corporations and agencies
--other securities
Due after 1 year but within 5 years 24,995,051 24,735,938 2.73
---------------------------
Obligations of state and political subdivisions
Due within 1 year 6,332,123 6,405,564 7.34
Due after 1 year but within 5 years 18,810,915 19,522,389 7.07
Due after 5 years 1,445,455 1,542,954 7.34
---------------------------
Total 26,588,493 27,470,907 7.14
---------------------------
Trust preferred securities
Due after 5 years 2,735,973 3,023,046 8.39
---------------------------
Federal Reserve Bank and other securities 7,623,242 7,643,420 2.55
---------------------------
Total $233,538,863 $233,762,171 4.69%
===========================
Carrying Estimated Average
Securities held to maturity Value Fair Value Yield
------------------------------------------------------------------------------------------------
Obligations of U.S. government corporations and agencies
--mortgage-backed securities $344,005,204 $346,764,233 4.90%
---------------------------
Obligations of U.S. government corporations and agencies
--collateralized mortgage obligations 61,190,692 60,360,779 4.31
---------------------------
Obligations of U.S. government corporations and agencies
--other securities
Due within 1 year 5,000,000 4,975,000 2.25
Due after 1 year but within 5 years 35,011,667 34,823,438 2.93
---------------------------
Total 40,011,667 39,798,438 2.85
---------------------------
Debt securities issued by foreign governments
Due after 1 year but within 5 years 1,250,000 1,250,000 6.86
---------------------------
Total $446,457,563 $448,173,450 4.79%
===========================
Information regarding securities sales from the available for sale portfolio is
as follows:
Years Ended December 31, 2004 2003 2002
--------------------------------------------------------------------------------
Proceeds $94,314,558 $24,208,035 $44,653,909
Gross gains 1,256,370 550,505 996,041
Investment securities are pledged to secure trust and public deposits,
securities sold under agreements to repurchase, advances from the Federal Home
Loan Bank of New York and for other purposes required or permitted by law.
PAGE 42
NOTE 6.
LOANS
The major components of domestic loans held for sale and loans held in portfolio
are as follows:
December 31, 2004 2003
--------------------------------------------------------------------------------
Loans held for sale
Real estate--mortgage $ 37,058,673 $ 40,556,380
===============================
Loans held in portfolio
Commercial and industrial $ 595,689,717 $564,378,943
Lease financing 185,861,868 168,555,202
Real estate--mortgage 226,262,013 161,357,698
Real estate--construction 2,319,808 2,367,574
Installment 15,516,290 14,304,822
Loans to depository institutions 20,000,000 10,000,000
-------------------------------
Loans, gross 1,045,649,696 920,964,239
Less unearned discounts 23,363,217 20,408,024
-------------------------------
Loans, net of unearned discounts $1,022,286,479 $900,556,215
===============================
There are no industry concentrations (exceeding 10% of loans, gross) in the
commercial and industrial loan portfolio. Approximately 64% of loans are to
borrowers located in the metropolitan New York area.
Nonaccrual loans at December 31, 2004 and 2003 totaled $3,115,000 and
$3,343,000, respectively. There were no reduced rate loans at December 31, 2004
or 2003. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 2004, 2003 and 2002 in accordance with their
original terms is estimated to be $233,000, $196,000 and $136,000, respectively,
for the years then ended. Applicable interest income actually realized was
$133,000, $141,000 and $83,000, respectively, for the aforementioned years, and
there were no commitments to lend additional funds on nonaccrual loans.
Loans are made at normal lending limits and credit terms to officers or
directors (including their immediate families) of the Company or for the benefit
of corporations in which they have a beneficial interest. There were no
outstanding balances on such loans in excess of $60,000 to any individual or
entity at December 31, 2004 or 2003.
NOTE 7.
ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, 2004 2003 2002
------------------------------------------------------------------------------------------------
Balance at beginning of year $ 14,458,951 $ 13,549,297 $ 14,038,322
Provision for loan losses 9,965,000 8,740,400 10,770,900
--------------------------------------------
24,423,951 22,289,697 24,809,222
--------------------------------------------
Less charge-offs, net of recoveries:
Charge-offs 8,579,538 8,310,703 12,048,352
Recoveries (1,003,883) (637,556) (1,024,809)
--------------------------------------------
Net charge-offs 7,575,655 7,673,147 11,023,543
--------------------------------------------
Less losses on loans transferred to held for sale 519,768 157,599 236,382
--------------------------------------------
Balance at end of year $ 16,328,528 $ 14,458,951 $ 13,549,297
============================================
The Company follows SFAS No. 114 which establishes rules for calculating certain
components of the allowance for loan losses. As of December 31, 2004, 2003 and
2002, $1,319,000, $2,022,000 and $500,000, respectively, of loans were judged to
be impaired within the scope of SFAS No. 114 and carried on a cash-basis. The
average recorded investment in impaired loans during the years ended December
31, 2004, 2003 and 2002, was approximately $1,295,000, $970,000 and $332,000,
respectively. The application of SFAS No. 114 indicated that these loans
required valuation allowances totaling $340,000, $890,000 and $230,000 at
December 31, 2004, 2003 and 2002, respectively, which are included within the
overall allowance for loan losses. The interest income that would have been
earned on impaired loans outstanding at December 31, 2004, 2003 and 2002 in
accordance with their original
PAGE 43
terms is estimated to be $65,000, $108,000 and $71,000, respectively, for the
years then ended. Applicable interest income actually realized was $59,000,
$91,000 and $60,000, respectively, for the aforementioned years, and there were
no commitments to lend additional funds on impaired loans.
NOTE 8.
INTEREST-BEARING DEPOSITS
The following table presents certain information for interest expense on
deposits:
Years Ended December 31, 2004 2003 2002
-------------------------------------------------------------------------------------------------------
Interest expense
Interest-bearing deposits in domestic offices
Savings $ 119,601 $ 97,501 $ 154,625
NOW 622,279 585,954 879,952
Money Market 1,280,313 791,810 1,320,735
Time
Three months or less 3,637,361 3,697,126 5,982,183
More than three months through twelve months 3,232,313 2,232,482 2,024,765
More than twelve months through twenty-three months 1,808,934 921,720 1,049,269
More than twenty-four months through thirty-five months 120,936 192,537 170,599
More than thirty-six months through forty-seven months 37,368 47,505 13,171
More than forty-eight months through sixty months 274,683 277,596 809,972
More than sixty months 6,580 1,559 2,809
---------------------------------------
11,140,368 8,845,790 12,408,080
Interest-bearing deposits in foreign offices
Time
Three months or less 16,315 20,048 29,098
More than three months through twelve months 16,334 21,252 29,098
---------------------------------------
Total $11,173,017 $ 8,887,090 $12,466,276
=======================================
Foreign deposits totaled $3,007,000 and $3,000,000 at December 31, 2004 and
2003, respectively.
The aggregate of time certificates of deposit and other time deposits in
denominations of $100,000 or more was $298,331,288 at December 31, 2004.
The aggregate of time certificates of deposit and other time deposits by
remaining maturity range is presented below:
December 31, 2004 2003 2002
------------------------------------------------------------------------------------------------------
Domestic
Three months or less $163,407,607 $168,686,490 $201,103,529
More than three months through six months 81,769,015 55,924,655 33,203,650
More than six months through twelve months 80,428,856 92,641,396 53,956,927
More than twelve months through twenty-three months 137,074,627 70,478,871 48,707,638
More than twenty-four months through thirty-five months 7,755,291 2,726,759 12,004,923
More than thirty-six months through forty-seven months 1,448,990 2,020,961 806,203
More than forty-eight months through sixty months 335,723 748,329 5,338,468
More than sixty months 50,000 7,649 85,998
------------------------------------------
472,270,109 393,235,110 355,207,336
------------------------------------------
Foreign
Three months or less 1,645,000 1,645,000 1,820,000
More than three months through six months 1,362,063 1,355,000 1,180,000
------------------------------------------
3,007,063 3,000,000 3,000,000
------------------------------------------
Total $475,277,172 $396,235,110 $358,207,336
==========================================
PAGE 44
Interest expense related to the aggregate of time certificates of deposit and
other time deposits is presented below:
Years Ended December 31, 2004 2003 2002
--------------------------------------------------------------------------------
Interest expense
Domestic $9,118,175 $7,370,525 $10,052,768
Foreign 32,649 41,300 58,196
-------------------------------------------
Total $9,150,824 $7,411,825 $10,110,964
===========================================
NOTE 9.
SHORT-TERM BORROWINGS
The following table presents information regarding Federal funds purchased,
securities sold under agreements to repurchase--customers and dealers, and
commercial paper:
Years Ended December 31, 2004 2003 2002
--------------------------------------------------------------------------------------------------------
Federal funds purchased
At December 31 --Balance $ 32,500,000 $ 10,000,000 $ --
--Average interest rate 2.31% 1.00% --
--Average original maturity 1 Day 1 Day --
During the year --Maximum month-end balance 35,000,000 25,000,000 30,000,000
--Daily average balance 9,946,000 5,463,000 2,613,000
--Average interest rate paid 1.47% 1.20% 1.72%
--Range of interest rates paid 0.9375-2.50% 1.00-1.50% 1.25-2.3125%
============================================
Securities sold under agreements to repurchase--customers
At December 31 --Balance $ 55,934,170 $ 42,490,862 $ 60,925,635
--Average interest rate 1.29% 1.06% 1.28%
--Average original maturity 22 Days 43 Days 27 Days
During the year --Maximum month-end balance 103,595,822 82,006,437 64,328,739
--Daily average balance 84,559,000 71,648,000 63,540,000
--Average interest rate paid 1.21% 1.22% 1.83%
--Range of interest rates paid 1.00-2.40% 0.95-1.25% 1.00-3.95%
============================================
Securities sold under agreements to repurchase--dealers
At December 31 --Balance $ 33,882,000 $ 51,327,944 $ 40,000,000
--Average interest rate 2.45% 1.16% 1.36%
--Average original maturity 23 Days 26 Days 22 Days
During the year --Maximum month-end balance 68,252,000 78,274,000 40,000,000
--Daily average balance 29,601,000 46,219,000 6,960,000
--Average interest rate paid 1.35% 1.22% 1.85%
--Range of interest rates paid 1.08-2.45% 1.00-1.36% 1.36-1.88%
============================================
Commercial paper
At December 31 --Balance $ 25,991,038 $ 28,799,055 $ 29,318,920
--Average interest rate 1.37% 1.00% 1.26%
--Average original maturity 63 Days 49 Days 67 Days
During the year --Maximum month-end balance 36,200,700 28,799,055 40,286,500
--Daily average balance 30,069,000 23,819,000 31,885,000
--Average interest rate paid 1.21% 1.11% 2.06%
--Range of interest rates paid 0.95-1.60% 0.65-2.25% 0.95-2.35%
============================================
PAGE 45
The parent company has agreements with its line banks for back-up lines of
credit for which it pays a fee at the annual rate of 1/4 of 1% times the line of
credit extended. At December 31, 2004, these back-up bank lines of credit
totaled $24,000,000; no lines were used at any time during 2004, 2003 or 2002.
Other short-term borrowings include advances from the Federal Home Loan Bank of
New York due within one year and treasury tax and loan funds.
At December 31, 2004, there were no borrowings from the Federal Home Loan Bank.
At December 31, 2003, Federal Home Loan Bank borrowings included an advance of
$20,000,000 payable on January 2, 2004 at a rate of 1.04%, an advance of
$20,000,000 payable on January 30, 2004 at a rate of 1.47%, an advance of
$10,000,000 payable on May 3, 2004 at a rate of 1.33% and an advance of
$5,000,000 payable on August 13, 2004 at a rate of 3.62%.
NOTE 10.
LONG-TERM BORROWINGS
These borrowings represent advances from the Federal Home Loan Bank of New York
("FHLB") and junior subordinated debt securities issued by the parent company.
The following table presents information regarding fixed rate FHLB advances:
Advance Interest Maturity Initial December 31,
------------------------------
Type Rate Date Call Date 2004 2003
-------------------------------------------------------------------------------
Callable 5.13% 2/20/08 2/20/01 $ 10,000,000 $ 10,000,000
Callable 4.26 2/14/11 8/13/01 10,000,000 10,000,000
Callable 4.36 2/14/11 2/13/02 10,000,000 10,000,000
Callable 4.70 2/22/11 2/20/03 10,000,000 10,000,000
Callable 3.17 10/24/11 10/22/03 10,000,000 10,000,000
Callable 2.52 11/14/11 11/14/03 10,000,000 10,000,000
Callable 3.66 10/24/11 10/22/04 10,000,000 10,000,000
Callable 3.62 10/17/11 10/15/04 10,000,000 10,000,000
Callable 4.28 10/17/11 10/15/06 10,000,000 10,000,000
Callable 3.33 1/17/12 1/16/04 10,000,000 10,000,000
Callable 2.42 1/17/12 1/16/03 10,000,000 10,000,000
------------------------------
Total $110,000,000 $110,000,000
==============================
Weighted-average interest rate 3.77% 3.77%
Under the terms of a collateral agreement with the FHLB, advances are secured by
stock in the FHLB and by certain qualifying assets (primarily mortgage-backed
securities) having market values at least equal to 110% of the advances
outstanding. After the initial call date, each callable advance is callable by
the FHLB quarterly from the initial call date, at par.
In February 2002, the Company completed its issuance of trust capital securities
("capital securities") that raised $25,000,000 ($24,062,500 net proceeds after
issuance costs). The 8.375 percent capital securities, due March 31, 2032, were
issued by Sterling Bancorp Trust I ("Trust"), a wholly-owned non-consolidated
statutory business trust. The Trust was formed with initial capitalization of
common stock and for the exclusive purpose of issuing the capital securities.
The Trust used the proceeds from the issuance of the capital securities to
acquire $25,774,000 junior subordinated debt securities that pay interest at
8.375 percent ("debt securities") issued by the parent company. The debt
securities are due concurrently with the capital securities which may not be
redeemed, except under limited circumstances until March 31, 2007, and
thereafter at a price equal to their principal amount plus interest accrued to
the date of redemption. The Company may also reduce outstanding capital
securities through open market purchases. Dividends and interest are paid
quarterly.
PAGE 46
The Company has the right to defer payments of interest on the debt securities
at any time or from time to time for a period of up to 20 consecutive quarterly
periods with respect to each deferral period. Under the terms of the debt
securities, in the event that under certain circumstances there is an event of
default under the debt securities or the Company has elected to defer interest
on the debt securities, the Company may not, with certain exceptions, declare or
pay any dividends or distributions on its capital stock or purchase or acquire
any of its capital stock.
Payments of distribution on the capital securities and payments on redemption of
the capital securities are guaranteed by the Company on a limited basis. The
Company also entered into an agreement as to expenses and liabilities pursuant
to which it agreed, on a subordinated basis, to pay any costs, expenses or
liabilities of the Trust other than those arising under the capital securities.
The obligations of the Company under the debt securities, the related indenture,
the trust agreement establishing the Trust, the guarantee and the agreement as
to expenses and liabilities, in the aggregate, constitute a full and
unconditional guarantee by the Company of the Trust's obligations under the
capital securities.
Despite the fact that the accounts of the Trust are not included in the
Company's consolidated financial statements, the $25 million in capital
securities issued by the Trust are included in the Tier 1 capital of Sterling
for regulatory capital purposes as allowed by the Federal Reserve Board. In
March 2005, the Federal Reserve Board adopted a rule that would continue to
allow the inclusion of capital securities issued by unconsolidated subsidiary
trusts in Tier 1 capital, but with stricter quantitative limits. Under the final
rule, after a five-year transition period, the aggregate amount of capital
securities and certain other capital elements would be limited to 25% of Tier 1
capital, net of goodwill less any associated deferred tax liability. Based on
the final rule, the Company expects to include all of its $25 million in capital
securities in Tier 1 capital.
NOTE 11.
PREFERRED STOCK
The parent company is authorized to issue up to 644,389 shares of convertible
preferred stock, $5 par value, in one or more series. The following table
presents information regarding the parent company's preferred stock:
December 31, 2004 2003
-----------------------------------------------------------------------------------------
Series D shares. Authorized 300,000 shares; issued and outstanding--
224,432 shares at liquidation value $ -- $2,244,320
Series D shares may only be issued to the trustee acting on behalf of an
Employee Stock Ownership Plan ("ESOP") or other employee benefit plan of the
Company. Each Series D share was convertible as of December 31, 2003 into 1.9084
common shares of the parent company. During 1993, the parent company issued
250,000 shares to the trustee of the Company's ESOP. These shares are entitled
to receive cash dividends in the amount of $.6125 per annum (subject to
adjustment), payable quarterly. Participants in the Company's ESOP are entitled
to vote in accordance with the terms of the ESOP and vote together as one class
with the holders of the common shares. The holders of these shares are entitled
to receive $10 per share and certain other preferences on liquidation,
dissolution or winding up. During 2004, 224,432 shares were converted into
common shares. See Note 16 on page 51 for a discussion of the Company's ESOP.
NOTE 12.
COMMON STOCK
December 31, 2004 2003
-------------------------------------------------------------------------------------------------------------
Number of shares reserved for issuance upon conversion of Series D preferred shares -- 428,306
=======================
Number of shares outstanding 18,237,525 17,969,377
=======================
Number of shareholders 1,664 1,742
=======================
PAGE 47
NOTE 13.
OTHER COMPREHENSIVE INCOME
The following table presents the components of accumulated other comprehensive
(loss) income as of December 31, 2004 and 2003 included in shareholders' equity:
Pre-tax Tax After-tax
Amount Effect Amount
--------------------------------------------------------------------------------
December 31, 2004
Net unrealized gain on securities $ 1,497,029 $ (640,874) $ 856,155
Minimum pension liability (5,133,485) 2,356,270 (2,777,215)
-----------------------------------------
Total $(3,636,456) $ 1,715,396 $(1,921,060)
=========================================
December 31, 2003[1]
Net unrealized gain on securities $ 4,392,396 $(1,969,847) $ 2,422,549
Minimum pension liability (6,569,967) 3,015,615 (3,554,352)
-----------------------------------------
Total $(2,177,571) $ 1,045,768 $(1,131,803)
=========================================
[1] Restated; see Note 2.
NOTE 14.
RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the bank can supply funds
to the parent company and its nonbank subsidiaries. All national banks are
limited in the payment of dividends in any year without the approval of the
Comptroller of the Currency to an amount not to exceed the net profits (as
defined) for that year to date combined with its retained net profits for the
preceding two calendar years. In addition, from time to time dividends are paid
to the parent company by the finance subsidiaries from their retained earnings
without regulatory restrictions.
NOTE 15.
STOCK INCENTIVE PLAN
In April 1992, shareholders approved a Stock Incentive Plan ("the plan")
covering up to 100,000 common shares of the parent company. Under the plan, key
employees of the parent company and its subsidiaries could be granted awards in
the form of incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights ("SARs"), restricted stock or a combination
of these. The plan is administered by a committee of the Board of Directors.
Since the inception of the plan, shareholders have approved amendments
increasing the number of shares covered under the plan; the total number of
shares authorized by shareholders through December 31, 2004 was 2,650,000. The
plan provides for proportional adjustment to the number of shares covered by the
plan and by outstanding awards, and in the exercise price of outstanding stock
options, to reflect, among other things, stock splits and stock dividends. After
giving effect to stock option and restricted stock awards granted and the effect
of the six-for-five stock split in the form of a stock dividend effected
December 8, 2004, the five-for-four stock split in the form of a stock dividend
effected September 10, 2003, the 20% stock dividend paid in December 2002, the
10% stock dividends paid in December 2001 and December 2000, and the 5% stock
dividend paid in December 1999, shares available for grant were 610,931, 669,971
and 711,299 at December 31, 2004, 2003 and 2002, respectively.
PAGE 48
Stock Options
The following tables present information on the qualified and non-qualified
stock options outstanding (after the effect of the six-for-five stock split
effected December 8, 2004, the five-for-four stock split effected September 10,
2003, the 20% stock dividend paid in December 2002, the 10% stock dividends paid
in December 2001 and December 2000 and the 5% stock dividend paid in December
1999) as of December 31, 2004, 2003 and 2002 and changes during the years then
ended:
2004 2003 2002
----------------------------------------------------------------------------------------
Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Qualified Stock Options Options Exercise Price Options Exercise Price Options Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 816,972 $ 10.38 951,718 $ 10.38 1,131,641 $ 8.11
Granted -- -- -- -- 266,927 15.31
Exercised (101,917) 9.12 (134,746) 10.38 (436,350) 7.37
Forfeited -- -- -- -- (10,500) 15.31
---------- ---------- ----------
Outstanding at end of year 715,055 10.56 816,972 10.38 951,718 10.38
=========================================================================================
Options exercisable at end of year 348,901 344,882 241,790
========== ========== ==========
Weighted-average fair value of
options granted during the year $ -- $ -- $ 3.05
========== ========== ==========
2004 2003 2002
----------------------------------------------------------------------------------------
Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Non-Qualified Stock Options Options Exercise Price Options Exercise Price Options Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,326,463 $ 10.99 1,316,174 $ 10.62 1,299,741 $ 9.51
Granted 70,848 22.75 61,991 19.13 173,513 16.93
Exercised (98,957) 8.18 (51,702) 11.23 (126,585) 7.74
Forfeited -- -- -- -- (30,495) 11.28
---------- ---------- ---------
Outstanding at end of year 1,298,354 11.85 1,326,463 10.99 1,316,174 10.62
=========================================================================================
Options exercisable at end of year 1,111,649 1,096,993 937,346
========== ========== ==========
Weighted-average fair value of
options granted during the year $ 4.36 $ 3.13 $ 3.95
========== ========== ==========
The following table presents information regarding qualified and non-qualified
stock options outstanding at December 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------------------------------------- -------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/04 Contractual Life Price 12/31/04 Price
---------------------------------------------------------------------------------------------------------------------------------
Qualified $6.78-15.31 715,055 5.04 years $ 10.56 348,901 $ 11.36
Non-Qualified 6.78-23.02 1,298,354 3.70 years 11.85 1,111,649 10.58
Director NQSOs expire five years from the date of the grant and become
exercisable in four annual installments, starting one year from the date of the
grant, or upon the earlier death or disability of the grantee. Employee stock
options generally expire ten years from the date of the grant and vest one year
from the date of grant, although, if necessary to qualify to the maximum extent
possible as ISOs, these options become exercisable in annual installments.
Employee stock options which become exercisable over a period of more than one
year are generally subject to earlier exercisability upon the termination of the
grantee's employment for any reason more than one year following grant. Amounts
received upon exercise of options are recorded as common stock and capital
surplus. The tax benefit received by the Company upon exercise of a NQSO is
credited to capital surplus.
PAGE 49
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement encourages, but does not require, companies to use
a fair value-based method of accounting for stock-based employee compensation
plans, including stock options and stock appreciation rights. Under this method,
compensation expense is measured as of the date the awards are granted based on
the estimated fair value of the awards, and the expense is generally recognized
over the vesting period. If a company elects to continue using the intrinsic
value-based method under APB Opinion No. 25, pro forma disclosures of net income
and net income per share are required as if the fair value-based method had been
applied. Under the intrinsic method, compensation expense is the excess, if any,
of the market price of the stock as of the grant date over the amount employees
must pay to acquire the stock or over the price established for determining
appreciation. Under the Company's current compensation policies, there is no
such excess on the date of grant and therefore, no compensation expense is
recorded.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes option-pricing model with the following assumptions:
Years Ended December 31, 2004 2003 2002
--------------------------------------------------------------------------------
Dividend yield 2.86% 2.53% 2.95%
Volatility 25% 25% 25%
Expected term
Qualified N/A N/A 4 years
Non-Qualified (Directors) 4 years 4 years 4 years
Non-Qualified (Officers) N/A N/A 8 years
Risk-free interest rate 3.92% 2.79% 4.66%
The Company has elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock incentive plan. Accordingly, no
compensation expense related to options granted pursuant to the plan has been
recognized in the consolidated statements of income. Had compensation expense
been determined based on the estimated fair value of the awards at the grant
dates, the Company's net income and earnings per share would have been reduced
to the pro forma amounts as shown in Note 1 beginning on page 34.
The provisions of SFAS No. 123(R), which are effective for the first interim
period beginning after June 15, 2005, are discussed in Note 1 beginning on page
34.
Restricted Stock
On February 11, 2000, 92,500 shares of restricted stock were awarded from
Treasury shares. The fair value was $15.8125 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year; the initial
awards vested on February 11, 2000.
On February 6, 2002, 60,000 shares of restricted stock were awarded from
Treasury shares. The fair value was $27.56 per share. These awards vest to
recipients over a four-year period at the rate of 25% per year.
The plan calls for the forfeiture of non-vested shares which are restored to the
Treasury and become available for future awards. During 2004, 2003 and 2002,
there were no shares forfeited. Unearned compensation resulting from these
awards is amortized as a charge to compensation expense over a four-year period;
such charges were $603,764, $742,680 and $714,032 in 2004, 2003 and 2002,
respectively. The balance of unearned compensation is shown as a reduction of
shareholders' equity. For income tax purposes, the Company is entitled to a
deduction in an amount equal to the average market value of the shares on
vesting date and dividends paid on shares for which restrictions have not
lapsed.
PAGE 50
NOTE 16.
EMPLOYEE STOCK OWNERSHIP PLAN
On March 5, 1993, the Company established an Employee Stock Ownership Plan
("ESOP"). This plan covers substantially all employees with one or more years of
service of at least 1,000 hours who are at least 21 years of age. During 1993,
the parent company issued 250,000 shares of Series D preferred stock at a price
of $10.00 per share to the Company's ESOP trust. The trust borrowed $2,500,000
from the bank to pay for the shares. The ESOP loan is at a fixed interest rate
for a term of ten years with quarterly payments of interest. Quarterly principal
payments at an annual rate of $250,000 and $350,000 commenced on March 31, 1996
and March 31, 1999, respectively. The bank match-funded the ESOP loan with
collateralized advances from the Federal Home Loan Bank of New York. The ESOP
shares, pledged as collateral for the ESOP loan, are held in a suspense account
and released for allocation among the participants as principal and interest on
the ESOP loan is repaid. Under the terms of the ESOP, participants may vote both
allocated and unallocated shares.
The Company makes quarterly contributions to the ESOP equal to the debt service
on the ESOP loan less dividends paid on the ESOP shares. All dividends paid are
used for debt service. ESOP shares released from the suspense account are
allocated among the participants on the basis of salary in the year of
allocation. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
Accordingly, the Company initially recorded a deduction from shareholders'
equity equal to the purchase price of the shares reflecting such amount as
unearned compensation. The consolidated balance sheets report as unearned
compensation the remaining shares pledged as collateral. The unearned
compensation is reduced as payments are made on the loan and, as shares are
released from the suspense account, the Company recognizes compensation expense
equal to the current market price of the common shares into which the preferred
shares are convertible, and the shares become outstanding for earnings per share
computations. Dividends on unallocated ESOP shares are recorded as a reduction
of accrued interest payable; dividends on allocated ESOP shares are recorded as
a reduction of retained earnings.
Compensation expense was $0, $236,270 and $253,440 for 2004, 2003 and 2002,
respectively, with a corresponding reduction in unearned compensation. As of
December 31, 2004, 250,000 shares had been allocated; there were no unreleased
shares ("unallocated"). The ESOP was terminated effective February 19, 2004. The
following table presents interest paid on the ESOP loan and dividends paid on
the Series D preferred shares:
Years Ended December 31, 2004 2003 2002
--------------------------------------------------------------------------------
Interest paid $ -- $ 16,224 $ 42,984
Dividends paid -- 139,491 142,695
Contributions -- 366,224 392,984
NOTE 17.
EMPLOYEE BENEFIT PLAN
The Company has a noncontributory defined benefit pension plan that covers the
majority of employees with one or more years of service of at least 1,000 hours
who are at least 21 years of age. The benefits are based upon years of credited
service, primary social security benefits and a participant's highest average
compensation as defined. The funding requirements for the plan are determined
annually based upon the amount needed to satisfy the Employee Retirement Income
Security Act of 1974 funding standards. The Company also has a supplemental
non-qualified, non-funded retirement plan which is designed to supplement the
pension plan for key officers.
PAGE 51
The following tables set forth the disclosures required for pension benefits:
At or For the Years Ended December 31, 2004 2003
--------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year (PBO) $ 33,745,854 $ 27,593,693
Service cost 1,562,914 1,304,504
Interest cost 1,986,363 2,038,372
Amendments -- 191,925
Actuarial loss 2,261,865 4,100,731
Settlement (3,000,000) --
Benefits paid (793,539) (1,483,371)
------------------------------
Benefit obligation at end of year $ 35,763,457 $ 33,745,854
==============================
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year $ 19,641,142 $ 16,837,701
Actual return on plan assets 943,287 1,986,812
Employer contributions 1,322,088 2,300,000
Benefits paid (793,539) (1,483,371)
------------------------------
Fair value of assets at end of year $ 21,112,978 $ 19,641,142
==============================
Funded status $(14,650,479) $(14,104,712)
Unrecognized prior service cost 570,434 647,756
Unrecognized net actuarial loss 12,657,923 12,203,248
------------------------------
Net amount recognized $ (1,422,122) $ (1,253,708)
==============================
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ 4,579,413 $ 4,541,420
Accrued benefit liability (11,135,020) (12,365,095)[1]
Accumulated other comprehensive loss (pre-tax) 5,133,485 6,569,967[1]
------------------------------
Net amount recognized $ (1,422,122) $ (1,253,708)
==============================
[1] Restated; see Note 2.
Rate of Compen-
Discount Rate sation Increase
------------- ---------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE THE BENEFIT OBLIGATION:
Defined benefit pension plan 6.00% 6.25% 3.00% 3.00%
Supplemental retirement plan 6.00 6.25 3.00 3.00
Years Ended December 31, 2004 2003 2002
---------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC COST
Service cost $ 1,562,914 $ 1,304,504 $ 1,189,407
Interest cost 1,986,363 2,038,372 1,883,524
Expected return on plan assets (1,678,674) (1,577,285) (1,720,188)
Amortization of prior service cost 77,322 77,323 38,045
Recognized actuarial loss 873,768 910,874 470,095
---------------------------------------------
Net periodic benefit cost 2,821,693 2,753,788 1,860,883
Additional settlement gain recognized pursuant to SFAS No. 88 (1,331,190) -- --
---------------------------------------------
Total $ 1,490,503 $ 2,753,788 $ 1,860,883
=============================================
PAGE 52
Expected Return Rate of Compen-
Discount Rate on Plan Assets sation Increase
-------------- -------------- ---------------
2004 2003 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC COST:
Defined benefit pension plan 6.25% 6.75% 8.50% 9.25% 3.00% 3.00%
Supplemental retirement plan 6.25 6.75 N/A N/A 3.00 3.00
To determine the expected return on plan assets, we consider historical return
information on plan assets, the mix of investments that comprise plan assets and
the actual income derived from plan assets.
The accumulated benefit obligation for the defined benefit pension plan at
December 31, 2004 and 2003 was $20,932,819 and $18,099,716, respectively.
The tables presented on the previous page and above include the supplemental
retirement plan which is an unfunded plan. The following information is
presented regarding the supplemental retirement plan:
December 31, 2004 2003
--------------------------------------------------------------------------------
Projected benefit obligation $11,891,590 $12,924,800
Accumulated benefit obligation 11,353,404 12,365,096
The following table sets forth information regarding the assets of the defined
benefit pension plan:
December 31, 2004 2003
--------------------------------------------------------------------------------
U.S. government corporation and agency debt obligation 25% 30%
Corporate debt obligation 19 23
Common equity securities 53 40
Other 3 7
--------------
Total 100% 100%
==============
The defined benefit pension plan owns common stock of Sterling Bancorp which is
included in common equity securities above. At December 31, 2004, the value of
Sterling Bancorp common stock was $1,858,669 and represented approximately 9% of
plan assets. At December 31, 2003, the value of Sterling Bancorp common stock
was $1,562,598 and represented 8% of plan assets.
The overall strategy of the Pension Plan Investment Policy is to have a diverse
portfolio that reasonably spans established risk/return levels and preserves
liquidity. The strategy allows for a moderate risk approach in order to achieve
greater long-term asset growth. The asset mix can vary but is targeted at 50%
equity securities, inclusive of up to 10% in Sterling Bancorp common stock, 25%
in corporate obligations and 25% in federal and agency obligations. The money
market position will vary but will generally be held under 5%. The Plan's
allocation to common stock, excluding shares of Sterling Bancorp, will represent
investment in those companies from time to time comprising the growth and value
Model Portfolio as advised by the trustee's investment advisor.
The Company expects to contribute approximately $3,000,000 to the defined
benefit pension plan in 2005.
The following table presents benefit payments expected to be paid, which include
the effect of expected future service for the years indicated.
Defined Supplemental Total
Year(s) Benefit Plan Retirement Plan Benefit Payments
-------------------------------------------------------------------------------
2005 $ 776,988 $8,878,017 $ 9,655,005
2006 882,317 334,937 1,217,254
2007 1,011,123 234,419 1,245,542
2008 1,105,654 1,057,680 2,163,334
2009 1,231,151 1,089,547 2,320,698
Years 2010-2014 8,645,238 1,577,399 10,222,637
The cash flows shown above are based on the assumptions used in the annual
actuarial valuations of the Defined Benefit Plan. The Supplemental Retirement
Plan column is computed assuming that any executive who has reached the age upon
which full retirement is assumed for actuarial purposes, actually retires in the
current year. However, if such an executive does not actually retire in the
current year, the obligation will be deferred until a later year. We are not
aware of any senior executives who have near-term plans to retire.
PAGE 53
The Company currently provides life insurance benefits to certain officers. The
coverage provided depends upon years of service with the Company and the
employee's date of retirement. The Company's plan for its postretirement benefit
obligation is unfunded. The Company's postretirement obligations are not
material. Net postretirement benefit cost was $90,000, $80,000 and $64,000 for
2004, 2003 and 2002, respectively.
NOTE 18.
INCOME TAXES
The current and deferred tax provisions (benefits) for each of the last three
fiscal years are as follows:
Years Ended December 31, 2004 2003[1] 2002[1]
--------------------------------------------------------------------------------
FEDERAL
Current $ 13,469,896 $ 12,302,412 $ 10,838,138
Deferred (509,086) (361,058) (248,462)
------------------------------------------------
Total $ 12,960,810 $ 11,941,354 $ 10,589,676
================================================
STATE AND LOCAL
Current $ 11,547 $ 2,835,829 $ 1,982,779
Deferred (220,822) (25,817) (262,078)
------------------------------------------------
Total $ (209,275) $ 2,810,012 $ 1,720,701
================================================
TOTAL
Current $ 13,481,443 $ 15,138,241 $ 12,820,917
Deferred (729,908) (386,875) (510,540)
------------------------------------------------
Total $ 12,751,535 $ 14,751,366 $ 12,310,377
================================================
[1] Restated; see Note 2.
Reconciliations of income tax provisions with taxes computed at Federal
statutory rates are as follows:
Years Ended December 31, 2004 2003[1] 2002[1]
-----------------------------------------------------------------------------------------------------------------
Federal statutory rate 35% 35% 35%
--------------------------------------------------
Computed tax $ 13,074,462 $ 13,529,115 $ 11,953,141
(Decrease) Increase in tax resulting from:
State and local taxes, net of Federal income tax benefit (136,029) 1,826,508 1,118,455
Tax-exempt income (862,029) (828,518) (930,296)
Other permanent items 675,131 224,261 169,077
--------------------------------------------------
Total $ 12,751,535 $ 14,751,366 $ 12,310,377
==================================================
[1] Restated; see Note 2.
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31, 2004 2003[1]
------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Difference between financial statement provision for loan losses and tax bad debt deduction $ 7,542,350 $ 6,721,521
Deferred compensation 3,399,963 2,743,207
Other 975,857 903,761
----------------------------
Total deferred tax assets 11,918,170 10,368,489
----------------------------
Deferred tax liabilities
Pension and benefit plans 2,115,279 2,111,306
Other 1,784,177 1,298,422
----------------------------
Total deferred tax liabilities 3,899,456 3,409,728
----------------------------
Net deferred tax asset 8,018,714 6,958,761
SFAS No. 115 deferred tax liability (726,388) (2,055,361)
Minimum pension liability adjustment 2,356,270 3,015,615
----------------------------
$ 9,648,596 $ 7,919,015
============================
[1] Restated; see Note 2.
PAGE 54
Management believes, based upon current facts, that, more likely than not, there
will be sufficient taxable income in future years to realize the deferred tax
assets. However, there can be no assurance about the level of future earnings.
NOTE 19.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income less dividends on allocated Series
D convertible preferred shares held on behalf of the Employee Stock Ownership
Plan ("basic net income"), by the weighted-average common shares outstanding
during the year.
Diluted EPS is computed by dividing basic net income by the weighted-average
common shares and common equivalent shares outstanding during the year. The
common equivalent shares outstanding include the weighted-average number of
Series D convertible preferred shares (held on behalf of the Employee Stock
Ownership Plan) and the dilutive effect of unexercised stock options using the
treasury stock method. When applying the treasury stock method, the average
price of the Company's common stock is utilized.
The following table provides a reconciliation of basic and diluted EPS as
required by SFAS No. 128:
For the Year Ended 12/31/04 For the Year Ended 12/31/03[1]
----------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
BASIC EPS
Net income $ 24,604,073 $ 23,903,245
Less preferred dividends -- 125,019
------------ ------------
Net income available for
common shareholders 24,604,073 18,241,567 $ 1.35 23,778,226 17,914,855 $ 1.33
============ ============
DILUTED EPS
Options[2] 837,530 772,434
Convertible preferred stock 34,528 228,371
------------ ---------- ------------ ----------
Net income available for
common shareholders plus
assumed conversions $ 24,604,073 19,113,625 $ 1.29 $ 23,778,226 18,915,660 $ 1.26
==================================================================================
For the Year Ended 12/31/02[1]
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------------
BASIC EPS
Net income $ 21,841,454
Less preferred dividends 112,700
------------
Net income available for
common shareholders 21,728,754 17,978,728 $ 1.21
============
DILUTED EPS
Options[2] 739,592
Convertible preferred stock 233,202
------------ ----------
Net income available for
common shareholders plus
assumed conversions $ 21,728,754 18,951,522 $ 1.15
========================================
[1] Restated; see Notes 1 and 2.
[2] Options issued with exercise prices greater than the average market price
of the common shares for each of the years ended December 31, 2004, 2003
and 2002 have not been included in computation of diluted EPS for those
respective years. As of December 31, 2004 and 2003, there were no options
excluded; as of December 31, 2002, 45,732 options to purchase shares at a
price of $23.81 were not included.
NOTE 20.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose the "fair value" of certain financial instruments for
which it is practical to estimate "fair value."
Much of the information used to arrive at "fair value" is highly subjective and
judgmental in nature and therefore the results may not be precise. The
subjective factors include, among other things, estimated cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. With the exception of investment securities and long-term debt, the
Company's financial instruments are not readily marketable and market prices do
not exist. Since negotiated prices for the instruments that are not readily
marketable depend greatly on the motivation of the buyer and seller, the amounts
that will actually be realized or paid per settlement or maturity of these
instruments could be significantly different.
PAGE 55
The following disclosures represent the Company's best estimate of the "fair
value" of financial instruments.
Financial Instruments with Carrying Amount Equal
to Fair Value
The carrying amount of cash and due from banks, interest-bearing deposits with
other banks, Federal funds sold, customers' liabilities under acceptances,
accrued interest receivable, Federal funds purchased and securities sold under
agreements to repurchase, commercial paper, other short-term borrowings,
acceptances outstanding, and other liabilities and accrued expenses, as a result
of their short-term nature, is considered to be equal to fair value.
Investment Securities
For investment securities, fair value has been based upon current market
quotations, where available. If quoted market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
Loans Held in Portfolio
The fair value of loans held in portfolio which reprice within 90 days
reflecting changes in the base rate approximate their carrying amount. For other
loans held in portfolio, the estimated fair value is calculated based on
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality and for similar
maturities. These calculations have been adjusted for credit risk based on the
Company's historical credit loss experience.
The estimated fair value for secured nonaccrual loans is the value of the
underlying collateral which is sufficient to repay each loan. For other
nonaccrual loans, the estimated fair value represents book value less a credit
risk adjustment based on the Company's historical credit loss experience.
Deposits
SFAS No. 107 requires that the fair value of demand, savings, NOW (negotiable
order of withdrawal) and certain money market deposits be equal to their
carrying amount. The Company believes that the fair value of these deposits is
clearly greater than that prescribed by SFAS No. 107.
For other types of deposits with fixed maturities, fair value has been estimated
based upon interest rates currently being offered on deposits with similar
characteristics and maturities.
Long-Term Debt
For long-term borrowings, the estimated fair value is calculated based on
discounted cash flow analyses, using interest rates currently being quoted for
similar characteristics and maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees
The notional amount of commitments to extend credit, standby letters of credit,
and financial guarantees, is considered equal to fair value. Due to the
uncertainty involved in attempting to assess the likelihood and timing of a
commitment being drawn upon, coupled with lack of an established market and the
wide diversity of fee structures, the Company does not believe it is meaningful
to provide an estimate of fair value that differs from the notional value of the
commitment.
PAGE 56
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
December 31, 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ 48,842,418 $ 48,842,418 $ 63,947,722 $ 63,947,722
Interest-bearing deposits with other banks 1,329,103 1,329,103 1,656,338 1,656,338
Investment securities 680,219,734 681,935,621 683,118,074 687,705,326
Loans held for sale 37,058,673 37,058,673 40,556,380 40,567,380
Loans held in portfolio, net 1,005,957,951 1,007,217,410 886,097,264 886,875,247
Customers' liability under acceptances 628,965 628,965 953,571 953,571
Accrued interest receivable 5,604,781 5,604,781 5,069,423 5,069,423
FINANCIAL LIABILITIES
Demand, NOW, savings and money market deposits 868,573,943 868,573,943 815,505,710 815,505,710
Time deposits 475,277,172 474,670,243 396,235,110 397,980,110
Securities sold under agreements to repurchase 89,816,170 89,816,170 93,818,806 93,818,806
Federal funds purchased 32,500,000 32,500,000 10,000,000 10,000,000
Commercial paper 25,991,038 25,991,038 28,799,055 28,799,055
Other short-term borrowings 2,517,375 2,517,375 56,871,359 56,871,359
Acceptances outstanding 628,965 628,965 953,571 953,571
Accrued expenses and other liabilities 91,329,506[1] 91,329,506[1] 78,604,639[1] 78,604,639[1]
Long-term borrowings 135,774,000 138,848,059 135,774,000 142,494,000
[1] Restated; see Note 2.
NOTE 21.
CAPITAL MATTERS
The Company and the bank are subject to risk-based capital regulations which
quantitatively measure capital against risk-weighted assets, including certain
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 bank is subject to the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") which imposes a number of
mandatory supervisory measures. Among other matters, FDICIA established five
capital categories ranging from "well capitalized" to "critically under
capitalized." Such classifications are used by regulatory agencies to determine
a bank's deposit insurance premium, approval of applications authorizing
institutions to increase their asset size or otherwise expand business
activities or acquire other institutions. Under FDICIA a "well capitalized" bank
must maintain minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and
10%, respectively. The Federal Reserve Board applies comparable tests for
holding companies such as the Company. At December 31, 2004, the Company and the
bank exceeded the requirements for "well capitalized" institutions.
PAGE 57
The following tables present information regarding the Company's and the bank's
regulatory capital ratios:
For Capital
Actual Adequacy Minimum To Be Well Capitalized
------------------------------------------------------------------
As of December 31, 2004 Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Total Capital (to Risk-Weighted Assets):
The Company $169,226 14.35% $ 94,334 8.00% $117,917 10.00%
The bank 129,267 11.56 89,466 8.00 111,832 10.00
Tier 1 Capital (to Risk-Weighted Assets):
The Company 154,467 13.10 47,167 4.00 70,750 6.00
The bank 115,262 10.31 44,733 4.00 67,099 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 154,467 8.49 72,792 4.00 90,990 5.00
The bank 115,262 6.56 70,270 4.00 87,837 5.00
As of December 31, 2003[1]
-------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk-Weighted Assets):
The Company $161,837 14.88% $ 86,986 8.00% $108,732 10.00%
The bank 121,439 11.68 83,177 8.00 103,971 10.00
Tier 1 Capital (to Risk-Weighted Assets):
The Company 148,235 13.63 43,493 4.00 65,239 6.00
The bank 108,426 10.43 41,588 4.00 62,383 6.00
Tier 1 Leverage Capital (to Average Assets):
The Company 148,235 8.88 66,741 4.00 83,426 5.00
The bank 108,426 6.67 65,010 4.00 81,262 5.00
[1] Restated; see Note 2.
NOTE 22.
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way information about operating
segments is reported in annual financial statements and establishes standards
for related disclosures about an enterprise's products and services, geographic
areas, and major customers.
The Company provides a broad range of financial products and services, including
commercial loans, commercial and residential mortgage lending and brokerage,
asset-based financing, factoring/accounts receivable management services, trade
financing, equipment leasing, corporate and consumer deposit services, trust and
estate administration and investment management services. The Company's primary
source of earnings is net interest income, which represents the difference
between interest earned on interest-earning assets and the interest incurred on
interest-bearing liabilities. The Company's 2004 average interest-earning assets
were 57.1% loans (corporate lending was 71.7% and real estate lending was 25.4%
of total loans, respectively) and 42.0% investment securities and money market
investments. There were no industry concentrations (exceeding 10% of loans,
gross) in the corporate loan portfolio. Approximately 64% of loans are to
borrowers located in the metropolitan New York area. In order to comply with the
provisions of SFAS No. 131, the Company has determined that it has three
reportable operating segments: corporate lending, real estate lending and
company-wide treasury.
PAGE 58
The following table provides certain information regarding the Company's
operating segments:
Corporate Real Estate Company-wide
Lending Lending Treasury Totals
------------------------------------------------------------------------------------------------------
Year Ended December 31, 2004
Net interest income $ 35,561,406 $ 16,736,564 $ 23,925,710 $ 76,223,680
Noninterest income 13,213,656 15,640,862 2,594,207 31,448,725
Depreciation and amortization 324,938 404,384 1,229 730,551
Segment profit 15,506,658 16,342,475 30,255,641 62,104,774
Segment assets 698,575,228 313,730,365 812,113,123 1,824,418,716
Year Ended December 31, 2003
Net interest income 34,506,033 16,365,324 21,408,591 72,279,948
Noninterest income 12,468,121 14,944,227 1,684,023 29,096,371
Depreciation and amortization 232,527 317,086 -- 549,613
Segment profit 17,733,173[1] 15,718,397 25,371,959 58,823,529[1]
Segment assets 723,570,456 209,425,056 790,327,841[1] 1,723,323,353[1]
Year Ended December 31, 2002
Net interest income 30,021,774 13,621,274 27,761,630 71,404,678
Noninterest income 12,787,107 10,298,873 2,382,211 25,468,191
Depreciation and amortization 196,049 205,109 -- 401,158
Segment profit 16,121,709[1] 10,951,445 31,974,728 59,047,882[1]
Segment assets 639,918,714 193,458,081 701,590,089[1] 1,534,966,884[1]
[1] Restated; see Note 2
The following table sets forth reconciliations of net interest income,
noninterest income, profits and assets for reportable operating segments to the
Company's consolidated totals:
Years Ended December 31, 2004 2003 2002
---------------------------------------------------------------------------------------------------------
Net interest income:
Total for reportable operating segments $ 76,223,680 $ 72,279,948 $ 71,404,678
Other[1] 1,991,886 1,711,689 1,582,637
-----------------------------------------------------------
Consolidated net interest income $ 78,215,566 $ 73,991,637 $ 72,987,315
===========================================================
Noninterest income:
Total for reportable operating segments $ 31,448,725 $ 29,096,371 $ 25,468,191
Other[1] 3,268,970 3,581,580[2] 3,816,898[2]
-----------------------------------------------------------
Consolidated noninterest income $ 34,717,695 $ 32,677,951[2] $ 29,285,089[2]
===========================================================
Profit:
Total for reportable operating segments $ 62,104,774 $ 58,823,529[2] $ 59,047,882[2]
Other[1] (24,749,166) (20,168,918)[2] (24,896,051)[2]
------------------------------------------------------------
Consolidated income before income taxes $ 37,355,608 $ 38,654,611[2] $ 34,151,831[2]
============================================================
Assets:
Total for reportable operating segments $ 1,824,418,716 $1,723,323,353[2] $1,534,966,884[2]
Other[1] 46,693,046 36,500,904[2] 28,198,130[2]
------------------------------------------------------------
Consolidated assets $ 1,871,111,762 $1,759,824,257[2] $1,563,165,014[2]
============================================================
[1] Represents operations not considered to be a reportable segment and/or
general operating expenses of the Company.
[2] Restated; see Note 2.
PAGE 59
NOTE 23.
PARENT COMPANY
CONDENSED BALANCE SHEETS
December 31, 2004 2003[1]
------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks
Banking subsidiary $ 10,463,497 $ 21,417,062
Other banks 25,000 25,000
Interest-bearing deposits--banking subsidiary 390,309 7,531,623
Investment in subsidiaries
Banking subsidiary (including goodwill of $21,158,440) 137,265,560 131,995,719
Other subsidiaries 6,180,911 6,105,046
Due from subsidiaries
Other subsidiaries 54,002,677 38,348,178
Other assets 5,632,504 5,981,426
-----------------------------
$213,960,458 $211,404,054
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper $ 25,991,038 $ 28,799,055
Due to subsidiaries
Other subsidiaries 993,228 992,254
Accrued expenses and other liabilities 12,498,599 12,576,738
Junior subordinated debt (see Note 9) 25,774,000 25,774,000
Shareholders' equity 148,703,593 143,262,007
-----------------------------
$213,960,458 $211,404,054
=============================
[1] Restated; see Note 2.
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 2004 2003[1] 2002[1]
------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends and interest from
Banking subsidiary $ 20,086,143 $ 10,063,062 $ 15,114,920
Other subsidiaries 434,499 630,686 1,363,501
Other income 2,422 71,879 54,810
------------------------------------------------
Total income 20,523,064 10,765,627 16,533,231
------------------------------------------------
EXPENSE
Interest expense 2,511,309 2,409,339 2,415,805
Other expenses 2,413,799 2,361,701 2,530,967
------------------------------------------------
Total expense 4,925,108 4,771,040 4,946,772
------------------------------------------------
Income before income taxes and equity in undistributed net
income of subsidiaries 15,597,956 5,994,587 11,586,459
Benefit for income taxes (2,039,767) (1,790,670) (1,639,592)
------------------------------------------------
17,637,723 7,785,257 13,226,051
Equity in undistributed net income of
Banking subsidiary 6,836,107 15,775,343 7,883,021
Other subsidiaries 130,243 342,645 732,382
------------------------------------------------
Net income $ 24,604,073 $ 23,903,245 $ 21,841,454
================================================
[1] Restated; see Note 2.
PAGE 60
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 2003[1] 2002[1]
-------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,604,073 $ 23,903,245 $ 21,841,454
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Amortization of unearned compensation 603,764 978,950 967,472
(Decrease) Increase in accrued expenses and other liabilities (78,139) 3,037,735 (1,529,992)
Increase (Decrease) in due to subsidiaries, net 974 (676,989) 16,206
(Increase) Decrease in due from subsidiaries, net (15,654,499) 3,608,472 8,093,314
Equity in undistributed net income of subsidiaries (6,966,350) (16,117,988) (8,615,403)
Decrease (Increase) in other assets 348,922 (3,564,111) 139,174
Other, net (2,038,019) (285,122) (4,373,968)
------------------------------------------------
Net cash provided by operating activities 820,726 10,884,192 16,538,257
------------------------------------------------
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits--banking subsidiary 7,141,314 17,135,104 (23,230,889)
Capital contributed to subsidiaries -- (50,000) --
------------------------------------------------
Net cash provided by (used in) investing activities 7,141,314 17,085,104 (23,230,889)
------------------------------------------------
FINANCING ACTIVITIES
Net decrease in commercial paper (2,808,017) (519,865) (12,784,280)
Cash dividends paid on preferred and common shares (12,106,022) (10,235,334) (7,684,367)
Proceeds from exercise of stock options 4,334,474 1,973,762 4,198,859
Purchase of treasury shares (8,310,004) (256,007) (15,501,195)
Increase in junior subordinated debt -- -- 25,774,000
Decrease in other short-term borrowings -- (350,000) (350,000)
Cash paid in lieu of fractional shares in connection with stock dividend (26,036) (32,358) (32,048)
------------------------------------------------
Net cash used in financing activities (18,915,605) (9,419,802) (6,379,031)
------------------------------------------------
Net (decrease) increase in cash and due from banks (10,953,565) 18,549,494 (13,071,663)
Cash and due from banks--beginning of year 21,442,062 2,892,568 15,964,231
------------------------------------------------
Cash and due from banks--end of year $ 10,488,497 $ 21,442,062 $ 2,892,568
================================================
Supplemental disclosure of cash flow information:
Interest paid $ 2,508,928 $ 2,415,336 $ 2,505,255
Income taxes paid 11,435,000 12,006,594 12,805,357
[1] Restated; see Note 2.
The parent company was required to maintain a deposit with the bank in an amount
equal to the unpaid principal balance on the bank's loan to the trustee of the
Employee Stock Ownership Plan. There was no required deposit at December 31,
2004.
PAGE 61
NOTE 24.
COMMITMENTS AND CONTINGENT LIABILITIES
Total rental expenses under cancelable and noncancelable leases for premises and
equipment were $3,325,473, $3,642,155 and $3,647,916 for the years ended
December 31, 2004, 2003 and 2002, respectively, which are net of rental income
for a sublease of $172,930, $149,600 and $0 for the years ended December 31,
2004, 2003 and 2002, respectively.
The future minimum rental commitments as of December 31, 2004 under
noncancelable leases follow:
Rental
Year(s) Commitments
------------------------------------------------------------------------------
2005 $ 3,535,569
2006 3,365,428
2007 3,379,101
2008 3,393,094
2009 and thereafter 16,044,763
-----------
Total $29,717,955
===========
Certain leases included above have escalation clauses and/or provide that the
Company pay maintenance, electric, taxes and other operating expenses applicable
to the leased property.
In the normal course of business, there are various commitments and contingent
liabilities outstanding which are properly not recorded on the balance sheet.
Management does not anticipate that losses, if any, as a result of these
transactions would materially affect the financial position of the Company.
Loan commitments, substantially all of which have an original maturity of one
year or less, were approximately $77,496,000 as of December 31, 2004. These
commitments are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements because
some of the commitments are expected to expire without being drawn upon. The
bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, by the bank upon extension
of credit is based on management's credit evaluation of the borrower. Collateral
held varies but may include cash, U.S. Treasury and other marketable securities,
accounts receivable, inventory and property, plant and equipment.
Standby letters of credit and financial guarantees, substantially all of which
are within the scope of FIN No. 45, are written conditional commitments issued
by the bank to guarantee the performance of a customer to a third party. At
December 31, 2004 these commitments totaled $26,563,953 of which $23,574,027
expire within one year and $2,989,926 within two years. Approximately 70% of the
commitments are automatically renewable for a period of one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The bank holds cash or cash
equivalents and marketable securities as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 2004 ranged from 0% to 100%; the average
amount collateralized was approximately 97%.
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 has been made in the accompanying consolidated
financial statements.
PAGE 62
NOTE 25.
QUARTERLY DATA (UNAUDITED)
Restated
-------------------------------------------------------
2004 Quarter Mar 31 Jun 30 Sept 30 Dec 31
----------------------------------------------------------------------------------------------------------
Total interest income $23,534,674 $23,552,184 $24,812,419 $25,900,147
Total interest expense 4,539,315 4,518,928 5,049,666 5,475,949
Net interest income 18,995,359 19,033,256 19,762,753 20,424,198
Provision for loan losses 2,426,500 2,470,500 2,338,500 2,729,500
Net securities gains 536,304 148,500 285,918 285,648
Noninterest income, excluding 7,687,805 8,398,106 8,888,910 8,486,504
securities gains
Noninterest expenses 15,949,230[2] 16,191,237[2] 16,493,583[2] 16,978,603
Income before income taxes 8,843,738[2] 8,918,125[2] 10,105,498[2] 9,488,247
Net income 5,206,934{2} 6,564,601[2] 6,550,174[2] 6,282,364
Earnings per average common
share:
Basic .29[1][2] .35[1][2] .36[1][2] .35
Diluted .27[1][2] .34[1][2] .35[1][2] .33
Common stock closing price:
High 26.1667 25.0917 24.4583 28.25
Low 22.575 22.1917 20.9667 22.525
Quarter--end 24.292 23.017 22.542 28.25
Restated
------------------------------------------------------------
2003 Quarter Mar 31 Jun 30 Sept 30 Dec 31
----------------------------------------------------------------------------------------------
Total interest income $22,633,218 $23,095,455 $22,352,544 $23,501,259
Total interest expense 4,376,789 4,518,557 4,285,572 4,409,921
Net interest income 18,256,429 18,576,898 18,066,972 19,091,338
Provision for loan losses 1,791,300 2,172,500 2,172,500 2,604,100
Net securities gains 95,992 100,366 101,225 252,922
Noninterest income, excluding 7,374,810 8,043,316 8,660,774 8,048,546
securities gains[2]
Noninterest expenses[2] 14,505,952 15,070,253 14,885,234 14,813,138
Income before income taxes[2] 9,429,979 9,477,827 9,771,237 9,975,568
Net income[2] 5,733,785 5,817,947 6,056,541 6,294,972
Earnings per average common
share:[1][2]
Basic .32 .32 .34 .35
Diluted .30 .31 .32 .33
Common stock closing price:
High 18.26 19.8667 22.75 26.1333
Low 16.1467 16.2733 18.4267 22.9417
Quarter--end 16.427 18.593 22.425 23.75
[1] Restated see Note 1.
[2] Restated for reasons described in Notes 1 and 2. The following previously
reported information is provided:
Net Basic Diluted
Income EPS EPS
-------------------------------------------
1st quarter 2003 $5,846,423 $.32 $.31
2nd quarter 2003 5,860,002 .33 .31
3rd quarter 2003 6,114,713 .34 .32
4th quarter 2003 6,382,516 .35 .33
1st quarter 2004 6,460,509 .35 .34
2nd quarter 2004 6,719,599 .37 .35
3rd quarter 2004 6,737,934 .37 .35
PAGE 63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[LOGO KPMG]
The Shareholders and Board of Directors
Sterling Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling Bancorp
and subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2004, and the consolidated statements of condition of Sterling National Bank and
subsidiaries as of December 31, 2004 and 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the
accompanying 2003 and 2002 consolidated financial statements have been restated.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling Bancorp and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, and the financial position of Sterling National Bank
and subsidiaries as of December 31, 2004 and 2003, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG
New York, New York
March 29, 2005
PAGE 64
PART II (continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
As required under the Securities Exchange Act of 1934, the Company's management,
with the participation of the Company's principal executive and principal
financial officers, evaluated the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this annual report on Form 10-K. Based on this
evaluation and the identification of a material weakness in our internal control
over financial reporting described below, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that, as of
December 31, 2004, the Company's disclosure controls and procedures were not
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. For a discussion of the reasons and matters on which this conclusion was
based, see "Assessment of internal control over financial reporting" below.
Assessment of internal control over financial reporting
As permitted by the SEC's exemptive order for certain "accelerated filers"
(Release No. 50754, November 30, 2004), we have not filed in this Form 10-K a
report on management's assessment of our internal control over financial
reporting or a registered public accounting firm's attestation report on
management's assessment of our internal control over financial reporting. The
SEC's exemptive order permits us to file this information by amendment to this
Form 10-K not later than April 29, 2005.
As previously disclosed in the Company's Form 8-K dated March 15, 2005, a
material weakness (as defined in Auditing Standard No. 2 of the Public Company
Accounting Oversight Board) was identified in our internal control over
financial reporting as of December 31, 2004. The material weakness relates to
inadequate resources for controls over the accounting for employee benefits,
including (a) the expensing of premiums paid for split-dollar life insurance
policies on the lives of certain executive officers of the Company, (b) the
expensing of the Company's obligations to pay future premiums on split-dollar
life insurance policies issued as part of a transaction in which an executive
officer relinquishes his right to receive pension payments in exchange for the
insurance policy, (c) the expensing of the Company's obligation to pay future
post-retirement premiums on certain split-dollar life insurance policies and (d)
the crediting of increases in the cash surrender values of these various
policies. The Company has corrected the accounting by recording non-cash charges
to employee benefits expense. The Company has restated its audited financial
statements for the years ended December 31, 2002 and 2003, and will restate its
unaudited condensed financial statements for the quarters ended March 31, June
30 and September 30, 2003 and 2004. The Company believes that the method of
accounting for employee benefits expense in the audited consolidated financial
statements included in this Form 10-K complies 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. Notwithstanding the
existence of this material weakness, we believe that the financial statements in
this Form 10-K fairly present, in all material respects, our financial condition
as of December 31, 2003 and 2004, and our results of operations and cash flows
for each of the years ended December 31, 2002, 2003 and 2004, in conformity with
accounting principles generally accepted in the United States of America. We are
currently working to remediate this material weakness.
Management has also identified, and the Company is currently working to
remediate, certain significant deficiencies (as defined in Auditing Standard No.
2 of the Public Company Accounting Oversight Board) in the Company's internal
control over financial reporting of December 31, 2004, which management believes
do not currently constitute material weaknesses. At this time we have not
identified, and KPMG LLP ("KPMG") has not communicated to us, any other material
weaknesses in our internal control over financial reporting. The Company has not
yet completed its assessment and KPMG has not yet completed its audit of our
internal control over financial reporting, however, and we cannot provide
assurance that KPMG will not identify additional material weaknesses in
connection with its audit of our internal control over financial reporting.
Changes in internal control over financial reporting
No significant change in the Company's internal control over financial reporting
occurred during the fiscal quarter ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PAGE 65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers required by Item 401 of Regulation S-K
is furnished in a separate disclosure on page 10 at the end of Part I of this
report. The other information required by Item 10 is incorporated herein by
reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days after
December 31, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 within 120 days after December 31,
2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information appearing in Notes 15 and 16 on pages 48-51 under the
captions "Stock Incentive Plan" and "Employee Stock Ownership Plan,"
respectively, of the Company's consolidated financial statements filed in Item 8
hereof.
The following table provides information as of December 31, 2004, regarding
securities issued to all of our employees under our equity compensation plans
that were in effect during the fiscal year ended December 31, 2004, and other
equity compensation plan information.
EQUITY COMPENSATION PLAN INFORMATION
Number of Securities
remaining available
Number of Securities for future issuance under
to be issued Weighted Average Equity Compensation
upon Exercise of Exercise Price of Plans (excluding
Outstanding Options, Outstanding Options, securities reflected
Warrants and Rights Warrants and Rights in columns (a))
Plan Category (a) (b) (c)
-----------------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans approved by security holders 2,013,409 $11.39 610,931
Equity Compensation Plans not approved by security holders -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,013,409 $11.39 610,931
===================================================================================================================================
The other information required by Item 12 is incorporated herein by reference to
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 within 120 days after December 31,
2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 within 120 days after December 31,
2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 within 120 days after December 31,
2004.
PAGE 66
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The documents filed as a part of this report are listed below:
1. Financial Statements
Sterling Bancorp
Consolidated Balance sheets as of December 31, 2004 and 2003*
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003* and 2002*
Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 2004, 2003* and 2002*
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2004, 2003* and 2002*
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003* and 2002*
Sterling National Bank
Consolidated Statements of Condition as of December 31, 2004
and 2003*
* Consolidated financial statements for 2003 and 2002 are
restated.
2. Financial Statement Schedules
None
3. Exhibits
3. (i) Restated Certificate of Incorporation filed with the
State of New York Department of State, October 28, 2004
(Filed as Exhibit 3(i) to the Registrant's Form 10-Q for
the quarter ended September 30, 2004 and incorporated
herein by reference).
(ii) By-Laws as in effect on August 5, 2004 (Filed as Exhibit
3(ii) (A) to the Registrant's Form 10-Q for the quarter
ended June 30, 2004 and incorporated herein by
reference).
4. (a) Pursuant to Regulation S-K, Item 601(b)(4) (iii)(A), no
instrument which defines the rights of holders of
long-term debt of the Registrant or any of its
consolidated subsidiaries is filed herewith. Pursuant to
this regulation, the Registrant hereby agrees to furnish
a copy of any such instrument to the SEC upon request.
10.(i)(A) Sterling Bancorp Stock Incentive Plan (Amended and
Restated as of May 20, 2004) (Filed as Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended September
30, 2004 and incorporated herein by reference).
(i)(B) Form of Award Letter for Non-Employee Directors (Filed
as Exhibit 10 to the Registrant's Form 10-Q for the
quarter ended September 30, 2004 and incorporated herein
by reference).
(i)(C) Form of Award Letter for Officers (Filed as Exhibit 10
to the Registrant's Form 10-Q for the quarter ended
September 30, 2004 and incorporated herein by
reference).
(i)(D) Form of Nonqualified Stock Option Award (Filed as
Exhibit 10(A) to the Registrant's Form 8-K dated March
18, 2005 and filed on March 24, 2005 and incorporated
herein by reference).
(ii)(A) Sterling Bancorp Key Executive Incentive Bonus Plan
(Filed as Exhibit C to the Registrant's definitive Proxy
Statement, dated March 13, 2001, filed on March 16, 2001
and incorporated herein by reference).
(iii)(A) Amended and Restated Employment Agreements dated March
22, 2002 for Louis J. Cappelli and John C. Millman
(Filed as Exhibits 10(i)(a) and 10(i)(b), respectively,
to the Registrant's Form 10-Q for the quarter ended
March 31, 2002 and incorporated by reference herein).
(iii)(B) Amendments to Employment Agreements dated February 26,
2003 for Louis J. Cappelli and John C. Millman (Filed as
Exhibits 3.10(xiv)(a) and 3.10(xiv)(b), respectively, to
the Registrant's Form 10-K for the fiscal year ended
December 31, 2002 and incorporated herein by reference).
(iii)(C) Amendments to Employment Agreements dated February 24,
2004 for Louis J. Cappelli and John C. Millman (Filed as
Exhibits 10(xv)(a) and 10(xv)(b), respectively, to the
Registrant's Form 10-K dated December 31, 2003 and filed
on March 12, 2004 and incorporated herein by reference).
(iii)(D) Amendments to Employment Agreements dated March 18,
2005 for Louis J. Cappelli and John C. Millman (Filed as
Exhibits 10(B) and 10(C), respectively, to the
Registrant's Form 8-K dated March 18, 2005 and filed on
March 24, 2005 and incorporated herein by reference).
(iv)(A) Form of Change of Control Severance Agreement entered
into May 21, 1999 between the Registrant and each of six
executives (Filed as Exhibit 10(ii) to the Registrant's
Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference).
(iv)(B) Amendment to Form of Change of Control Severance
Agreement dated February 6, 2002 entered into between
the Registrant and each of four executives (Filed as
Exhibit 10(ii) to the Registrant's Form 10-Q for the
quarter ended March 31, 2002 and incorporated herein by
reference).
(iv)(C) Form of Change of Control Severance Agreement dated
April 3, 2002 entered into between the Registrant and
one executive (Filed as Exhibit 10(i) to the
Registrant's Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference).
PAGE 67
(iv)(D) Form of Change of Control Severance Agreement dated
June 8, 2004 entered into between the Registrant and one
executive (Filed as Exhibit 10(i) to the Registrant's
Form 10-Q for the quarter ended June 30, 2004 and
incorporated herein by reference).
11. Statement re: Computation of Per Share Earnings.
12. Statement re: Computation of Ratios.
14. Code of Business Conduct and Ethics.
21. Subsidiaries of the Registrant.
23. Consent of KPMG LLP Independent Registered Public
Accounting Firm.
31. Rule 13a-14(a) Certifications.
32. Section 1350 Certifications.
(b) Reports on Form 8-K:
In a report on Form 8-K dated September 20, 2004 and filed on September
21, 2004, the Company reported, under Item 7 "Financial Statements, Pro
Forma Financial Information and Exhibits" the press release announcing a
presentation on September 23, 2004 by John C. Millman--President of
Sterling Bancorp and, Michael Bizenov--President Sterling National
Mortgage Company, Inc., as part of the LI Invest First Annual Investor
Conference.
In a report on Form 8-K/A dated September 20, 2004 and filed on September
21, 2004, the Company reported, under Item 7.01 "Regulation FD Disclosure"
and under Item 9.01 "Financial Statements, Pro Forma Financial Information
and Exhibits," the press release announcing a presentation on September
23, 2004 by John C. Millman--President of Sterling Bancorp and Michael
Bizenov--President of Sterling National Mortgage Company Inc., as part of
the LI Invest First Annual Investor Conference.
In a report on Form 8-K dated October 18, 2004 and filed on October 19,
2004, the Company reported under Items 7.01 and 2.02 "Results of
Operations and Financial Condition and Regulation FD Disclosure," the
press release announcing a conference call to discuss its financial
results for the third quarter ended September 30, 2004.
In a report on Form 8-K dated October 21, 2004 and filed on October 22,
2004, the Company reported, under Items 2.02 and 7.01 "Results of
Operations and Financial Condition and Regulation FD Disclosure" and Under
Item 9.01 "Financial Statements and Exhibits," the press release
announcing results for the third quarter ended September 30, 2004.
In a report on Form 8-K dated October 22, 2004 and filed on October 25,
2004, the Company reported, under Item 7.01 "Regulation FD Disclosure" and
under Item 9.01 "Financial Statements, Pro Forma Financial Information and
Exhibits," the press release announcing a presentation on October 27, 2004
by John C. Millman-President of Sterling Bancorp and Howard M.
Applebaum-Executive Vice President and Senior Lending Officer of Sterling
National Bank, as part of the Ryan Beck & Co. Financial Institutions'
Investor Conference.
In a report on Form 8-K dated November 18, 2004 and filed November 19,
2004, the Company reported, under Items 7.01 and 8.01 "Regulation FD
Disclosure and Other Events," the press release announcing a six-for-five
stock split to be distributed on December 8, 2004 to shareholders of
record on November 29, 2004 and the declaration of a quarterly cash
dividend of $0.19 per common share payable on December 31, 2004 to
shareholders of record on December 17, 2004.
In a report on Form 8-K dated February 4, 2005 and filed on February 10,
2005, the Company reported under Items 2.02 and 7.01 "Results of
Operations and Financial Condition and Regulation FD Disclosure" and,
under Item 9.01 "Financial Statements and Exhibits," the press release
announcing fiscal year 2004 financial results.
PAGE 68
In a report on Form 8-K dated February 15, 2005 and filed on February 17,
2005, the Company reported under Item 5.02 "Departure of Directors or
Principal Officers; Election of Directors; Appointment of Principal
Officers," announced that Director Anthony E. Burke formally notified the
Company that he will not be standing for re-election at the upcoming
shareholders meeting.
In a report on Form 8-K dated February 17, 2005 and filed on February 18,
2005, the Company reported under Items 7.01 and 8.01 "Regulation FD
Disclosure and Other Events," the press release announcing the declaration
of a quarterly cash dividend of $0.19 per common share payable on March
31, 2005 to shareholders of record as of March 15, 2005.
In a report on Form 8-K dated March 15, 2005 and filed on March 16, 2005,
the Company reported under Item 2.02 "Results of Operations and Financial
Condition" and Item 4.02 "Non-Reliance on Previously Issued Financial
Statements or a Related Audit Report or Completed Interim Review" that it
would restate its financial statements for the years 2002 and 2003 and the
first three quarters of 2003 and 2004 and that its audited financial
statements for the year 2004 would reflect revisions to previously issued
unaudited financial information, under Item 8.01 "Other Events" that it
would file for an extension of the deadline for filing this report on Form
10-K, and under Item 9.01 "Financial Statements and Exhibits" the press
release announcing that the Company would restate financial statements.
In a report on Form 8-K dated March 18, 2005 and filed on March 24, 2005,
the Company reported under Item 1.01 "Entry into a Material Definitive
Agreement" and Item 9.01 "Financial Statements and Exhibits" that the
Company granted nonqualified stock options to purchase an aggregate of
99,000 common shares and amended its employment agreements with Messrs.
Louis J. Capelli and John C. Millman.
PAGE 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STERLING BANCORP
/s/ Louis J. Cappelli
----------------------------------------------
Louis J. Cappelli, Chairman
(Principal Executive Officer)
March 31, 2005
Date
/s/ John W. Tietjen
----------------------------------------------
John W. Tietjen, Treasurer
(Principal Financial and Accounting Officer)
March 31, 2005
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
March 31, 2005 /s/ Louis J. Cappelli Director
(Date) -------------------------- ---------------
(Signature) (Title)
March 31, 2005 /s/ John C. Millman Director
(Date) -------------------------- ---------------
(Signature) (Title)
March 31, 2005 /s/ Walter Feldesman Director
(Date) -------------------------- ---------------
(Signature) (Title)
March 31, 2005 /s/ Henry J. Humphreys Director
(Date) -------------------------- ---------------
(Signature) (Title)
March 31, 2005 /s/ Eugene T. Rossides Director
(Date) -------------------------- ---------------
(Signature) (Title)
PAGE 70
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DOCUMENTS FILED
AS A PART
OF THIS ANNUAL REPORT
ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
STERLING BANCORP
PAGE 71
EXHIBIT INDEX
Exhibit
Number
3. (i) Restated Certificate of Incorporation filed with the State of
New York Department of State, October 28, 2004 (Filed as Exhibit
3(i) to the Registrant's Form 10-Q for the quarter ended September
30, 2004 and incorporated herein by reference).
(ii) By-Laws as in effect on August 5, 2004 (Filed as Exhibit 3(ii)(A) to
the Registrant's Form 10-Q for the quarter ended June 30, 2004 and
incorporated herein by reference).
4. (a) Pursuant to Regulation S-K, Item 601(b)(4) (iii)(A), no
instrument which defines the rights of holders of long-term debt of
the Registrant or any of its consolidated subsidiaries is filed
herewith. Pursuant to this regulation, the Registrant hereby agrees
to furnish a copy of any such instrument to the SEC upon request.
10. (i)(A) Sterling Bancorp Stock Incentive Plan (Amended and Restated
as of May 20, 2004) (Filed as Exhibit 10 to the Registrant's Form
10-Q for the quarter ended September 30, 2004 and incorporated
herein by reference).
(i)(B) Form of Award Letter for Non-Employee Directors (Filed as Exhibit 10
to the Registrant's Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference).
(i)(C) Form of Award Letter for Officers (Filed as Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended September 30, 2004 and
incorporated herein by reference).
(i)(D) Form of Nonqualified Stock Option Award (Filed as Exhibit 10(A) to
the Registrant's Form 8-K dated March 18, 2005 and filed on March
24, 2005 and incorporated herein by reference).
(ii)(A) Sterling Bancorp Key Executive Incentive Bonus Plan (Filed as
Exhibit C to the Registrant's definitive Proxy Statement, dated
March 13, 2001, filed on March 16, 2001 and incorporated herein by
reference).
(iii)(A) Amended and Restated Employment Agreements dated March 22, 2002
for Louis J. Cappelli and John C. Millman (Filed as Exhibits
10(i)(a) and 10(i)(b), respectively, to the Registrant's Form 10-Q
for the quarter ended March 31, 2002 and incorporated herein by
reference).
(iii)(B) Amendments to Employment Agreements dated February 26, 2003 for
Louis J. Cappelli and John C. Millman (Filed as Exhibits
3.10(xiv)(a) and 3.10(xiv)(b), respectively, to the Registrant's
Form 10-K for the fiscal year ended December 31, 2002 and
incorporated herein by reference).
(iii)(C) Amendments to Employment Agreements dated February 24, 2004 for
Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(xv)(a)
and 10(xv)(b), respectively, to the Registrant's Form 10-K dated
December 31, 2003 and filed on March 31, 2004 and incorporated
herein by reference).
(iii)(D) Amendments to Employment Agreements dated March 18, 2005 for Louis
J. Cappelli and John C. Millman (Filed as Exhibits 10(B) and
10(C), respectively, to the Registrant's Form 8-K dated
March 18, 2005 and filed on March 24, 2005 and incorporated herein
by reference).
(iv)(A) Form of Change of Control Severance Agreement entered into May 21,
1999 between the Registrant and each of six executives (Filed as
Exhibit 10(ii) to the Registrant's Form 10-Q for the quarter ended
June 30, 1999 and incorporated herein by reference).
PAGE 72
(iv)(B) Amendment to Form of Change of Control Severance Agreement dated
February 6, 2002 entered into between the Registrant and each of
four executives (Filed as Exhibit 10(i) to the Registrant's Form
10-Q for the quarter ended March 31, 2002 and incorporated herein by
reference).
(iv)(C) Form of Change of Control Severance Agreement dated April 3, 2002
entered into between the Registrant and one executive (Filed as
Exhibit 10(ii) to the Registrant's Form 10-Q for the quarter ended
June 30, 2002 and incorporated herein by reference).
(iv)(D) Form of Change of Control Severance Agreement dated June 8, 2004
entered into between the Registrant and one executive (Filed as
Exhibit 10(i) to the Registrant's Form 10-Q for the quarter ended
June 30, 2004 and incorporated herein by reference).
11. Statement re: Computation of Per Share Earnings.
12. Statement re: Computation of Ratios.
14. Code of Business Conduct and Ethics.
21. Subsidiaries of the Registrant.
23. Consent of KPMG LLP Independent Registered Public Accounting Firm.
31. Rule 13a-14(a) Certifications.
32. Section 1350 Certifications.
PAGE 73