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EX-32.0 - EXHIBIT 32.0 - STERLING BANCORPexhibit320certification331.htm
EX-31.2 - EXHIBIT 31.2 - STERLING BANCORPexhibit312certification331.htm
EX-31.1 - EXHIBIT 31.1 - STERLING BANCORPexhibit311certification331.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________ 
FORM 10-Q
______________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35385
______________________________ 
STERLING BANCORP
(Exact Name of Registrant as Specified in its Charter)
______________________________ 
Delaware
 
80-0091851
(State or Other Jurisdiction of
 
(IRS Employer ID No.)
Incorporation or Organization)
 
 
 
 
 
400 Rella Boulevard, Montebello, New York
 
10901
(Address of Principal Executive Office)
 
(Zip Code)
(845) 369-8040
(Registrant’s Telephone Number including area code)
______________________________
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 twelve 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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer             x    Accelerated filer             ¨
Non-accelerated filer             ¨    (Do not check if a smaller reporting company)
Smaller reporting company     ¨
Emerging growth company     ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Classes of Common Stock
  
Shares outstanding as of May 2, 2018
$0.01 per share
  
225,473,473



STERLING BANCORP AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
QUARTERLY PERIOD ENDED MARCH 31, 2018
 
 
PART I. FINANCIAL INFORMATION - UNAUDITED
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share and per share data)



 
March 31,
 
December 31,
 
2018
 
2017
ASSETS:
 
 
 
Cash and due from banks
$
364,331

 
$
479,906

Securities:
 
 
 
Available for sale, at fair value
3,760,338

 
3,612,072

Held to maturity, at amortized cost (fair value of $2,807,106 and $2,863,909 at March 31, 2018 and December 31, 2017, respectively)
2,874,948

 
2,862,489

Total securities
6,635,286

 
6,474,561

Loans held for sale
44,440

 
5,246

Portfolio loans
19,939,245

 
20,008,983

Allowance for loan losses
(82,092
)
 
(77,907
)
Portfolio loans, net
19,857,153

 
19,931,076

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost
354,832

 
284,112

Accrued interest receivable
102,129

 
94,098

Premises and equipment, net
318,267

 
321,722

Goodwill
1,579,891

 
1,579,891

Other intangible assets, net
147,139

 
153,191

Bank owned life insurance
655,278

 
651,638

Other real estate owned
24,493

 
27,095

Other assets
385,541

 
357,005

Total assets
$
30,468,780

 
$
30,359,541

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 

Deposits
$
20,623,233

 
$
20,538,204

FHLB borrowings
4,449,829

 
4,510,123

Repurchase agreements
26,850

 
30,162

Senior Notes
278,144

 
278,209

Subordinated Notes
172,771

 
172,716

Mortgage escrow funds
161,724

 
122,641

Other liabilities
482,474

 
467,308

Total liabilities
26,195,025

 
26,119,363

Commitments and Contingent liabilities (See Note 16. “Commitments and Contingencies”)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; 135,000 shares issued and outstanding at March 31, 2018 and December 31, 2017)
139,025

 
139,220

Common stock (par value $0.01 per share; 310,000,000 shares authorized at March 31, 2018 and December 31, 2017; 229,872,925 shares issued at March 31, 2018 and December 31, 2017; 225,466,266 and 224,782,694 shares outstanding at March 31, 2018 and December 31, 2017, respectively)
2,299

 
2,299

Additional paid-in capital
3,766,280

 
3,780,908

Treasury stock, at cost (4,406,659 shares at March 31, 2018 and 5,090,231 at December 31, 2017)
(51,102
)
 
(58,039
)
Retained earnings
496,297

 
401,956

Accumulated other comprehensive loss, net of tax benefit of $(30,194) at March 31, 2018 and $(17,083) at December 31, 2017
(79,044
)
 
(26,166
)
Total stockholders’ equity
4,273,755

 
4,240,178

Total liabilities and stockholders’ equity
$
30,468,780

 
$
30,359,541

See accompanying notes to consolidated financial statements.

3

STERLING BANCORP AND SUBSIDIARIES
Consolidated Income Statements (Unaudited)
(Dollars in thousands, except share and per share data)


 
Three months ended
 
March 31,
 
2018
 
2017
Interest and dividend income:
 
 
 
Loans and loan fees
$
234,615

 
$
104,570

Securities taxable
27,061

 
12,282

Securities non-taxable
15,312

 
7,618

Other earning assets
4,358

 
1,530

Total interest and dividend income
281,346

 
126,000

Interest expense:
 
 
 
Deposits
24,206

 
9,508

Borrowings
22,770

 
7,702

Total interest expense
46,976

 
17,210

Net interest income
234,370

 
108,790

Provision for loan losses
13,000

 
4,500

Net interest income after provision for loan losses
221,370

 
104,290

Non-interest income:
 
 
 
Deposit fees and service charges
7,003

 
3,335

Accounts receivable management / factoring commissions and other fees
5,360

 
3,769

Bank owned life insurance
3,614

 
1,370

Loan commissions and fees
3,406

 
2,987

Investment management fees
1,825

 
231

Net loss on sale of securities
(5,421
)
 
(23
)
Other
2,920

 
1,167

Total non-interest income
18,707

 
12,836

Non-interest expense:
 
 
 
Compensation and benefits
54,680

 
31,187

Stock-based compensation plans
2,854

 
1,736

Occupancy and office operations
17,460

 
8,134

Information technology
11,718

 
2,469

Amortization of intangible assets
6,052

 
2,229

FDIC insurance and regulatory assessments
5,347

 
1,888

Other real estate owned expense, net
364

 
1,676

Merger-related expense

 
3,127

Other
13,274

 
7,904

Total non-interest expense
111,749

 
60,350

Income before income tax expense
128,328

 
56,776

Income tax expense
29,456

 
17,709

Net income
$
98,872

 
$
39,067

Preferred stock dividend
1,999

 

Net income available to common stockholders
$
96,873

 
$
39,067

Weighted average common shares:
 
 
 
Basic
224,730,686

 
135,163,347

Diluted
225,264,147

 
135,811,721

Earnings per common share:
 
 
 
Basic
$
0.43

 
$
0.29

Diluted
0.43

 
0.29

See accompanying notes to consolidated financial statements.

4

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)

 
Three months ended
 
March 31,
 
2018
 
2017
Net income
$
98,872

 
$
39,067

Other comprehensive (loss) income, before tax:
 
 
 
Change in unrealized holding (losses) gains on securities available for sale
(72,321
)
 
4,495

Reclassification adjustment for net realized losses included in net income
5,421

 
23

Accretion of net unrealized loss on securities transferred to held to maturity
234

 
243

Change in the actuarial loss of defined benefit plan and post-retirement benefit plans
679

 
56

Total other comprehensive (loss) income, before tax
(65,987
)
 
4,817

Deferred tax benefit (expense) related to other comprehensive (loss) income
18,238

 
(1,903
)
Other comprehensive (loss) income, net of tax
(47,749
)
 
2,914

Comprehensive income
$
51,123

 
$
41,981

See accompanying notes to consolidated financial statements.

5

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(Dollars in thousands, except share and per share data)


 
Number of common
shares
 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
(loss) income
 
Total
stockholders’
equity
Balance at January 1, 2017
135,257,570

 
$

 
$
1,411

 
$
1,597,287

 
$
(66,188
)
 
$
349,308

 
$
(26,635
)
 
$
1,855,183

Net income

 

 

 

 

 
39,067

 

 
39,067

Other comprehensive income

 

 

 

 

 

 
2,914

 
2,914

Stock option & other stock transactions, net
40,253

 

 

 
49

 
553

 
(109
)
 

 
493

Restricted stock awards, net
306,612

 

 

 
(7,043
)
 
3,589

 
3,846

 

 
392

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(9,436
)
 

 
(9,436
)
Balance at March 31, 2017
135,604,435

 
$

 
$
1,411

 
$
1,590,293

 
$
(62,046
)
 
$
382,676

 
$
(23,721
)
 
$
1,888,613

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
224,782,694

 
$
139,220

 
$
2,299

 
$
3,780,908

 
$
(58,039
)
 
$
401,956

 
$
(26,166
)
 
$
4,240,178

Net income

 

 

 

 

 
98,872

 

 
98,872

Other comprehensive income

 

 

 

 

 

 
(47,749
)
 
(47,749
)
Stock option & other stock transactions, net
28,794

 

 

 
2

 
375

 
(46
)
 

 
331

Restricted stock awards, net
654,778

 

 

 
(14,630
)
 
6,562

 
8,078

 

 
10

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(15,693
)
 

 
(15,693
)
Cash dividends declared ($16.25 per preferred share)

 
(195
)
 

 

 

 
(1,999
)
 

 
(2,194
)
Reclassification of the stranded income tax effects from the enactment of the Tax Cuts and Jobs Act from accumulated other comprehensive (loss)

 

 

 

 

 
5,129

 
(5,129
)
 

Balance at March 31, 2018
225,466,266

 
$
139,025

 
$
2,299

 
$
3,766,280

 
$
(51,102
)
 
$
496,297

 
$
(79,044
)
 
$
4,273,755


See accompanying notes to consolidated financial statements.

6

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)


 
Three months ended
 
March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
98,872

 
$
39,067

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provisions for loan losses
13,000

 
4,500

Net (gain) loss from write-downs and sales of other real estate owned
(272
)
 
1,293

Depreciation of premises and equipment
5,082

 
2,014

Amortization of intangible assets
6,052

 
2,229

Amortization of low income housing tax credits
998

 
138

Net loss on sale of securities
5,421

 
23

Net gain on loans held for sale
(2
)
 
(701
)
Net amortization of premiums on securities
9,514

 
5,545

Amortization of premium on certificates of deposit
(1,687
)
 

Net accretion of purchase discount and amortization of net deferred loan costs
(30,090
)
 
(3,482
)
Net accretion of debt issuance costs and amortization of premium on borrowings
(595
)
 
134

Restricted stock compensation expense
2,852

 
1,686

Stock option compensation expense
2

 
50

Originations of loans held for sale
(44,077
)
 
(5,159
)
Proceeds from sales of loans held for sale
4,885

 
45,190

Increase in cash surrender value of bank owned life insurance
(3,614
)
 
(1,370
)
Deferred income tax expense (benefit)
15,327

 
(890
)
Other adjustments (principally net changes in other assets and other liabilities)
(19,063
)
 
(28,398
)
Net cash provided by operating activities
62,605

 
61,869

Cash flows from investing activities:
 
 
 
Purchases of securities:
 
 
 
Available for sale
(416,491
)
 
(282,437
)
Held to maturity
(54,279
)
 
(100,799
)
Proceeds from maturities, calls and other principal payments on securities:
 
 
 
Available for sale
76,694

 
70,273

Held to maturity
33,706

 
14,124

Proceeds from sales of securities available for sale
117,810

 
232

Portfolio loan originations, net
86,297

 
(169,183
)
Portfolio loans purchased

 
(94,912
)
Proceeds from sale of loans held for investment

 
28,990

Purchases of FHLB and FRB stock, net
(70,720
)
 
(12,932
)
Proceeds from sales of other real estate owned
7,590

 
3,361

Purchases of premises and equipment
(1,627
)
 
(2,263
)
Premiums paid for bank owned life insurance
(26
)
 

Purchases of low income housing tax credits
(2,063
)
 
(2,200
)
Net cash (used in) investing activities
(223,109
)
 
(547,746
)

7

STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)


 
Three months ended
 
March 31,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Net increase in transaction, savings and money market deposits
$
19,992

 
$
220,658

Net increase (decrease) in certificates of deposit
66,724

 
(37,192
)
Net (decrease) in short-term FHLB borrowings
(885,000
)
 
(256,000
)
Advances of term FHLB borrowings
1,125,000

 
625,000

Repayments of term FHLB borrowings
(300,000
)
 
(125,000
)
Net (decrease) increase in other borrowings
(3,312
)
 
27,830

Net increase (decrease) in mortgage escrow funds
39,083

 
(419
)
Proceeds from stock option exercises
329

 
493

Cash dividends paid - common stock
(15,693
)
 
(9,436
)
Cash dividends paid - preferred stock
(2,194
)
 

Net cash provided by financing activities
44,929

 
445,934

Net decrease in cash and cash equivalents
(115,575
)
 
(39,943
)
Cash and cash equivalents at beginning of period
479,906

 
293,646

Cash and cash equivalents at end of period
$
364,331

 
$
253,703

Supplemental cash flow information:
 
 
 
  Interest payments
$
41,870

 
$
13,369

  Income tax payments
9,647

 
2,785

Real estate acquired in settlement of loans
4,716

 
667

Loans transferred from held for investment to held for sale

 
28,990


See accompanying notes to consolidated financial statements.

8

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 


(1) Basis of Financial Statement Presentation

(a) Nature of Operations
Sterling Bancorp (the “Company”) is a Delaware corporation, a bank holding company and a financial holding company headquartered in Montebello, New York that owns all of the outstanding shares of common stock of Sterling National Bank (the “Bank”), its principal subsidiary. The Bank is a full-service regional bank specializing in the delivery of services and solutions to business owners, their families and consumers within the communities it serves through teams of dedicated and experienced relationship managers.

(b) Basis of Presentation
The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of the Company and all other entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies the Company follows conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the banking industry, which include regulatory reporting instructions.

The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2017, included in our Annual Report on Form 10-K, as filed with the SEC on March 1, 2018 (the “2017 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Certain items in prior financial statements have been reclassified to conform to the current presentation. These reclassifications had no impact on previously reported net income.

(c) Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, expense and contingencies at the date of the financial statements. Actual results could differ significantly from these estimates, particularly the allowance for loan losses and the status of contingencies, and are subject to change.

(d) Merger with Astoria Financial Corporation
On October 2, 2017, Astoria Financial Corporation (“Astoria”) merged with and into the Company (the “Astoria Merger”). In connection with the merger, Astoria Bank, the principal subsidiary of Astoria, also merged with and into the Bank.

(e) Adoption of New Accounting Standards
The Company adopted the following new accounting standards effective January 1, 2018:

Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (the “New Revenue Standard”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of non-financial assets, such as other real estate owned (“OREO”). The Company adopted the New Revenue Standard using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the New Revenue Standard while prior period amounts continue to be reported in accordance with legacy GAAP. The adoption of the New Revenue Standard did not result in a significant change to the accounting for any in-scope revenue streams. As such, no cumulative effect adjustment was recorded. The majority of the Company’s revenues come from interest income and other sources, including loans and securities, that are outside the scope of the New Revenue Standard. The Company’s services that fall within the scope of the New Revenue Standard are primarily included within non-interest income in the consolidated income statements and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of the New Revenue Standard include deposit fees and services charges, accounts receivable management / factoring commissions and other fees, investment management fees and the sale of OREO, which is included within OREO, net expense. See Note 13. “Non-Interest Income and Other Non-Interest Expense” for further discussion on the Company’s accounting policies for revenue sources with the scope of the New Revenue Standard.


9

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities (the “New Fair Value Standard”), which makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. The New Fair Value Standard requires equity investments to be measured at fair value with changes in fair value recognized in net income; however, the Company owned no assets subject to this portion of the New Fair Value Standard. The New Fair Value Standard also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. As a result of the adoption of the New Fair Value Standard, the Company modified its calculation used to estimate the fair value of portfolio loans. See Note 17. “Fair Value Measurements” for further discussion of the Company’s methodology. The New Fair Value Standard had no impact to the consolidated balance sheets or income statements.

ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the “New Retirement Standard”), which requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are presented as a component of other non-interest expense. The adoption of this standard resulted in the reclassification of $109 from compensation and benefits to other non-interest expense for the three months ended March 31, 2017.

ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (the “AOCI Standard”), which allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the stranded tax effects caused by the revaluation of estimated deferred taxes resulting from the enactment of Tax Cuts and Jobs Act of 2017. As a result of the adoption of the AOCI Standard the Company reduced AOCI and increased retained earnings by $5,129 in the three months ended March 31, 2018 related to unrealized losses on securities available for sale, securities transferred to held to maturity and a net actuarial loss on defined benefit retirement plans. As we finalize the accounting for the tax effects of the Tax Cuts and Jobs Act of 2017, additional reclassification adjustments may be recorded. As a result of the adoption of the AOCI standard, the Company will release such income tax effects only when the entire portfolio to which the underlying items are liquidated, sold or extinguished. The adoption of the AOCI Standard did not impact total stockholders’ equity or the consolidated income statements for any period.


10

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

(2) Acquisitions
Astoria Merger
On October 2, 2017, the Company completed the Astoria Merger. Under the terms of the Astoria Merger agreement, Astoria shareholders received 0.875 shares of the Company’s common stock for each share of Astoria common stock, which resulted in the issuance of 88,829,776 of the Company’s common shares. Based on the Company’s closing stock price per share of $24.65 on September 29, 2017, the aggregate consideration was $2,189,687, which included cash in lieu of fractional shares. Consistent with the Company’s strategy, the primary reason for the Astoria Merger was the expansion of the Company’s geographic footprint in the Greater New York metropolitan region, including Long Island.

The assets acquired and liabilities assumed were accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of October 2, 2017 based on management’s best estimate using the information available as of the Astoria Merger date. The Astoria Merger resulted in the recognition of loans of $9,209,398, deposits of
$9,044,061 and goodwill of $883,291.

Accounting guidance identifies the measurement period for the Astoria Merger as the period that is required to identify and measure the fair value of the identifiable assets acquired and the liabilities assumed. The measurement period ends when the Company has all of the information that the Company arranged to obtain and that is known to be obtainable. The measurement period runs through October 2, 2018. The Company is preparing final tax returns related to Astoria’s business and operations through October 1, 2017 and believes certain adjustments to income tax balances and goodwill may result upon completion of these returns. No adjustments were made during the three months ended March 31, 2018.

(3) Securities

A summary of amortized cost and estimated fair value of securities as of March 31, 2018 and December 31, 2017 is presented below. The term “MBS” refers to mortgage-backed securities and the term “CMOs” refers to collateralized mortgage obligations. Both of these terms are further defined in Note 17. “Fair Value Measurements”.    
 
March 31, 2018
 
Available for Sale
 
Held to Maturity
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
Amortized
cost
 
Gross
unrecognized
gains
 
Gross
unrecognized
losses
 
Fair
value
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
2,303,487

 
$
238

 
$
(62,943
)
 
$
2,240,782

 
$
346,167

 
$
143

 
$
(8,821
)
 
$
337,489

CMOs/Other MBS
625,985

 
10

 
(18,633
)
 
607,362

 
32,074

 

 
(1,010
)
 
31,064

Total residential MBS
2,929,472

 
248

 
(81,576
)
 
2,848,144

 
378,241

 
143

 
(9,831
)
 
368,553

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
339,549

 

 
(13,481
)
 
326,068

 
58,747

 
220

 
(29
)
 
58,938

Corporate
335,035

 
1,082

 
(5,622
)
 
330,495

 
56,629

 
1,029

 
(198
)
 
57,460

State and municipal
260,081

 
268

 
(4,718
)
 
255,631

 
2,363,081

 
2,389

 
(61,375
)
 
2,304,095

Other

 

 

 

 
18,250

 
21

 
(211
)
 
18,060

Total other securities
934,665

 
1,350

 
(23,821
)
 
912,194

 
2,496,707

 
3,659

 
(61,813
)
 
2,438,553

Total securities
$
3,864,137

 
$
1,598

 
$
(105,397
)
 
$
3,760,338

 
$
2,874,948

 
$
3,802

 
$
(71,644
)
 
$
2,807,106



11

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

 
December 31, 2017
 
Available for Sale
 
Held to Maturity
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
Amortized
cost
 
Gross
unrecognized
gains
 
Gross
unrecognized
losses
 
Fair
value
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
2,171,044

 
$
1,570

 
$
(21,965
)
 
$
2,150,649

 
$
355,013

 
$
978

 
$
(2,504
)
 
$
353,487

CMOs/Other MBS
656,514

 
31

 
(7,142
)
 
649,403

 
33,496

 
26

 
(760
)
 
32,762

Total residential MBS
2,827,558

 
1,601

 
(29,107
)
 
2,800,052

 
388,509

 
1,004

 
(3,264
)
 
386,249

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Federal agencies
409,322

 

 
(9,326
)
 
399,996

 
58,640

 
949

 

 
59,589

Corporate
147,781

 
1,421

 
(976
)
 
148,226

 
56,663

 
1,255

 
(103
)
 
57,815

State and municipal
264,310

 
1,380

 
(1,892
)
 
263,798

 
2,342,927

 
12,396

 
(10,900
)
 
2,344,423

Other

 

 

 

 
15,750

 
83

 

 
15,833

Total other securities
821,413

 
2,801

 
(12,194
)
 
812,020

 
2,473,980

 
14,683

 
(11,003
)
 
2,477,660

Total securities
$
3,648,971

 
$
4,402

 
$
(41,301
)
 
$
3,612,072

 
$
2,862,489

 
$
15,687

 
$
(14,267
)
 
$
2,863,909


The amortized cost and estimated fair value of securities at March 31, 2018 are presented below by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential MBS are shown separately since they are not due at a single maturity date.
 
March 31, 2018
 
Available for sale
 
Held to maturity
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Remaining period to contractual maturity:
 
 
 
 
 
 
 
One year or less
$
13,961

 
$
13,941

 
$
95,514

 
$
95,347

One to five years
114,882

 
113,962

 
88,862

 
89,005

Five to ten years
661,990

 
646,016

 
398,931

 
395,413

Greater than ten years
143,832

 
138,275

 
1,913,400

 
1,858,788

Total securities with a stated maturity date
934,665

 
912,194

 
2,496,707

 
2,438,553

Residential MBS
2,929,472

 
2,848,144

 
378,241

 
368,553

Total securities
$
3,864,137

 
$
3,760,338

 
$
2,874,948

 
$
2,807,106


Sales of securities for the periods indicated below were as follows:
 
For the three months ended
 
March 31,
 
2018
 
2017
Available for sale:
 
 
 
Proceeds from sales
$
117,810

 
$
232

Gross realized gains
1

 
6

Gross realized losses
(5,422
)
 
(29
)
Income tax benefit on realized net losses
(1,260
)
 
(7
)

At March 31, 2018 and December 31, 2017, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity, other than the U.S. federal government and its agencies.

12

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 


The following table summarizes securities available for sale with unrealized losses, segregated by the length of time in a continuous unrealized loss position for the periods presented below:
 
Continuous unrealized loss position
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
value
 
Unrealized losses
 
Fair
value
 
Unrealized losses
 
Fair
value
 
Unrealized losses
Available for sale
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,726,329

 
$
(41,888
)
 
$
463,042

 
$
(21,055
)
 
$
2,189,371

 
$
(62,943
)
CMOs/Other MBS
573,177

 
(17,249
)
 
33,661

 
(1,384
)
 
606,838

 
(18,633
)
Total residential MBS
2,299,506

 
(59,137
)
 
496,703

 
(22,439
)
 
2,796,209

 
(81,576
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
223,016

 
(6,569
)
 
103,052

 
(6,912
)
 
326,068

 
(13,481
)
Corporate
232,747

 
(4,595
)
 
14,803

 
(1,027
)
 
247,550

 
(5,622
)
State and municipal
177,197

 
(2,862
)
 
45,181

 
(1,856
)
 
222,378

 
(4,718
)
Total other securities
632,960

 
(14,026
)
 
163,036

 
(9,795
)
 
795,996

 
(23,821
)
Total
$
2,932,466

 
$
(73,163
)
 
$
659,739

 
$
(32,234
)
 
$
3,592,205

 
$
(105,397
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,349,217

 
$
(10,550
)
 
$
486,948

 
$
(11,415
)
 
$
1,836,165

 
$
(21,965
)
CMOs/Other MBS
605,200

 
(6,064
)
 
36,107

 
(1,078
)
 
641,307

 
(7,142
)
Total residential MBS
1,954,417

 
(16,614
)
 
523,055

 
(12,493
)
 
2,477,472

 
(29,107
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
243,476

 
(1,955
)
 
156,520

 
(7,371
)
 
399,996

 
(9,326
)
Corporate
65,056

 
(397
)
 
15,268

 
(579
)
 
80,324

 
(976
)
State and municipal
97,307

 
(757
)
 
56,324

 
(1,135
)
 
153,631

 
(1,892
)
Total other securities
405,839

 
(3,109
)
 
228,112

 
(9,085
)
 
633,951

 
(12,194
)
Total securities
$
2,360,256

 
$
(19,723
)
 
$
751,167

 
$
(21,578
)
 
$
3,111,423

 
$
(41,301
)


13

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following table summarizes securities held to maturity with unrecognized losses, segregated by the length of time in a continuous unrecognized loss position for the periods presented below:
 
Continuous unrecognized loss position
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
value
 
Unrecognized losses
 
Fair
value
 
Unrecognized losses
 
Fair
value
 
Unrecognized losses
Held to maturity
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
246,174

 
$
(5,259
)
 
$
70,957

 
$
(3,562
)
 
$
317,131

 
$
(8,821
)
CMOs/Other MBS
11,877

 
(248
)
 
19,186

 
(762
)
 
31,063

 
(1,010
)
Total residential MBS
258,051

 
(5,507
)
 
90,143

 
(4,324
)
 
348,194

 
(9,831
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
14,666

 
(29
)
 

 

 
14,666

 
(29
)
Corporate
16,431

 
(198
)
 

 

 
16,431

 
(198
)
State and municipal
1,742,960

 
(45,717
)
 
377,930

 
(15,658
)
 
2,120,890

 
(61,375
)
Other
10,039

 
(211
)
 

 
 
 
10,039

 
(211
)
Total other securities
1,784,096

 
(46,155
)
 
377,930

 
(15,658
)
 
2,162,026

 
(61,813
)
Total securities
$
2,042,147

 
$
(51,662
)
 
$
468,073

 
$
(19,982
)
 
$
2,510,220

 
$
(71,644
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
136,679

 
$
(572
)
 
$
74,303

 
$
(1,932
)
 
$
210,982

 
$
(2,504
)
CMOs/Other MBS
10,314

 
(129
)
 
20,160

 
(631
)
 
30,474

 
(760
)
Total residential MBS
146,993

 
(701
)
 
94,463

 
(2,563
)
 
241,456

 
(3,264
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate
16,560

 
(103
)
 

 

 
16,560

 
(103
)
State and municipal
860,536

 
(5,310
)
 
393,200

 
(5,590
)
 
1,253,736

 
(10,900
)
Total other securities
877,096

 
(5,413
)
 
393,200

 
(5,590
)
 
1,270,296

 
(11,003
)
Total securities
$
1,024,089

 
$
(6,114
)
 
$
487,663

 
$
(8,153
)
 
$
1,511,752

 
$
(14,267
)

At March 31, 2018, a total of 424 available for sale securities were in a continuous unrealized loss position for less than 12 months and 152 available for sale securities were in a continuous unrealized loss position for 12 months or longer. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other than temporary impairment (“OTTI”) losses, management considers, among other things: (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time the Company anticipates it will receive full value for the securities. Furthermore, as of March 31, 2018, management did not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons related to credit quality. As of March 31, 2018, management believes the impairments detailed in the table above are temporary.

14

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

Securities pledged for borrowings at the FHLB and other institutions, and securities pledged for municipal deposits and other purposes, were as follows for the periods presented below:
 
March 31,
 
December 31,
 
2018
 
2017
Available for sale securities pledged for borrowings, at fair value
$
10,228

 
$
10,225

Available for sale securities pledged for municipal deposits, at fair value
325,715

 
323,341

Held to maturity securities pledged for borrowings, at amortized cost
36,637

 
35,047

Held to maturity securities pledged for municipal deposits, at amortized cost
1,421,714

 
1,182,674

Total securities pledged
$
1,794,294

 
$
1,551,287


(4) Portfolio Loans

The composition of the Company’s loan portfolio, excluding loans held for sale, was the following for the periods presented below:
 
March 31,
 
December 31,
 
2018
 
2017
Commercial:
 
 
 
Commercial and industrial (“C&I”):
 
 
 
       Traditional C&I
$
2,012,462

 
$
1,979,448

Asset-based lending
806,305

 
797,570

Payroll finance
234,379

 
268,609

Warehouse lending
676,783

 
723,335

Factored receivables
238,258

 
220,551

Equipment financing
694,085

 
679,541

Public sector finance
679,276

 
637,767

Total C&I
5,341,548

 
5,306,821

Commercial mortgage:
 
 
 
       Commercial real estate
4,207,135

 
4,138,864

Multi-family
4,892,471

 
4,859,555

       Acquisition, development & construction (“ADC”)
262,591

 
282,792

Total commercial mortgage
9,362,197

 
9,281,211

Total commercial
14,703,745

 
14,588,032

Residential mortgage
4,883,452

 
5,054,732

Consumer
352,048

 
366,219

Total portfolio loans
19,939,245

 
20,008,983

Allowance for loan losses
(82,092
)
 
(77,907
)
Total portfolio loans, net
$
19,857,153

 
$
19,931,076


Total portfolio loans include net deferred loan origination fees of $5,064 and $4,813 at March 31, 2018 and December 31, 2017, respectively.

At March 31, 2018 and December 31, 2017, the Company pledged residential mortgage and commercial real estate loans of $9,055,229 and $9,123,601, respectively, to the FHLB as collateral for certain borrowing arrangements. See Note 8. “Borrowings”.


15

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following tables set forth the amounts and status of the Company’s loans, troubled debt restructurings (“TDRs”) and non-performing loans at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
Current
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 
Total
Traditional C&I
$
1,973,000

 
$
4,200

 
$
355

 
$
30

 
$
34,877

 
$
2,012,462

Asset-based lending
806,305

 

 

 

 

 
806,305

Payroll finance
233,818

 
312

 
249

 

 

 
234,379

Warehouse lending
676,783

 

 

 

 

 
676,783

Factored receivables
238,258

 

 

 

 

 
238,258

Equipment financing
683,872

 
563

 
3,095

 

 
6,555

 
694,085

Public sector finance
679,276

 

 

 

 

 
679,276

Commercial real estate
4,162,119

 
985

 
16,192

 

 
27,839

 
4,207,135

Multi-family
4,887,224

 
1,729

 
3

 

 
3,515

 
4,892,471

ADC
254,198

 
4,204

 

 

 
4,189

 
262,591

Residential mortgage
4,769,568

 
14,388

 
5,848

 
271

 
93,377

 
4,883,452

Consumer
332,960

 
6,834

 
861

 

 
11,393

 
352,048

Total portfolio loans
$
19,697,381

 
$
33,215

 
$
26,603

 
$
301

 
$
181,745

 
$
19,939,245

Total TDRs included above
$
26,614

 
$
351

 
$
414

 
$

 
$
27,089

 
$
54,468

Non-performing loans:
 
 
 
 
 
 
 
 
 
 
 
Loans 90+ days past due and still accruing
 
 
 
 
 
 
 
 
$
301

 
 
Non-accrual loans
 
 
 
 
 
 
 
 
181,745

 
 
Total non-performing loans
 
 
 
 
 
 
 
 
$
182,046

 
 
.

16

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

 
December 31, 2017
 
Current
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 
Total
Traditional C&I
$
1,940,387

 
$
1,232

 
$
187

 
$

 
$
37,642

 
$
1,979,448

Asset-based lending
797,570

 

 

 

 

 
797,570

Payroll finance
268,609

 

 

 

 

 
268,609

Warehouse lending
723,335

 

 

 

 

 
723,335

Factored receivables
220,551

 

 

 

 

 
220,551

Equipment financing
667,083

 
1,143

 
3,216

 

 
8,099

 
679,541

Public sector finance
637,767

 

 

 

 

 
637,767

Commercial real estate
4,104,173

 
8,403

 
4,131

 
437

 
21,720

 
4,138,864

Multi-family
4,853,677

 
595

 
834

 

 
4,449

 
4,859,555

ADC
278,587

 

 

 

 
4,205

 
282,792

Residential mortgage
4,925,996

 
22,416

 
6,038

 
324

 
99,958

 
5,054,732

Consumer
350,502

 
4,364

 
974

 
95

 
10,284

 
366,219

Total portfolio loans
$
19,768,237

 
$
38,153

 
$
15,380

 
$
856

 
$
186,357

 
$
20,008,983

Total TDRs included above
$
13,175

 
$
389

 
$

 
$

 
$
29,325

 
$
42,889

Non-performing loans:
 
 
 
 
 
 
 
 
 
 
 
Loans 90+ days past due and still accruing
 
 
 
 
 
 
 
 
$
856

 
 
Non-accrual loans
 
 
 
 
 
 
 
 
186,357

 
 
Total non-performing loans
 
 
 
 
 
 
 
 
$
187,213

 



17

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following table provides additional analysis of the Company’s non-accrual loans at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
 
Recorded investment total non-accrual loans
 
Unpaid principal balance non-accrual loans
 
Recorded investment total non-accrual loans
 
Unpaid principal balance non-accrual loans
Traditional C&I
$
34,877

 
$
38,114

 
$
37,642

 
$
37,853

Equipment financing
6,555

 
6,555

 
8,099

 
8,099

Commercial real estate
27,839

 
32,757

 
21,720

 
25,739

Multi-family
3,515

 
3,606

 
4,449

 
4,705

ADC
4,189

 
4,392

 
4,205

 
4,205

Residential mortgage
93,377

 
106,825

 
99,958

 
113,002

Consumer
11,393

 
13,089

 
10,284

 
12,096

Total
$
181,745

 
$
205,338

 
$
186,357

 
$
205,699


There were no non-accrual asset-based lending, payroll finance, warehouse lending, factored receivables or public sector finance loans at March 31, 2018 or December 31, 2017.

When the ultimate collectibility of the total principal of an impaired loan is in doubt and the loan is on non-accrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectibility of the total principal of an impaired loan is not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method.

At March 31, 2018 and December 31, 2017, the recorded investment of residential mortgage loans that was in the process of foreclosure was $65,796 and $76,712, respectively, which is included in non-accrual residential mortgage loans above.


18

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at March 31, 2018:
 
Loans evaluated by segment
 
Allowance evaluated by segment
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
PCI loans(1)
 
Total
 loans
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total allowance for loan losses
Traditional C&I
$
45,775

 
$
1,956,996

 
$
9,691

 
$
2,012,462

 
$

 
$
19,410

 
$
19,410

Asset-based lending

 
806,305

 

 
806,305

 

 
6,327

 
6,327

Payroll finance

 
234,379

 

 
234,379

 

 
1,475

 
1,475

Warehouse lending

 
676,783

 

 
676,783

 

 
3,108

 
3,108

Factored receivables

 
238,258

 

 
238,258

 

 
1,169

 
1,169

Equipment financing
1,924

 
692,161

 

 
694,085

 

 
6,572

 
6,572

Public sector finance

 
679,276

 

 
679,276

 

 
1,906

 
1,906

Commercial real estate
15,906

 
4,155,042

 
36,187

 
4,207,135

 

 
24,222

 
24,222

Multi-family
2,405

 
4,876,879

 
13,187

 
4,892,471

 

 
6,747

 
6,747

ADC
4,130

 
258,461

 

 
262,591

 

 
2,032

 
2,032

Residential mortgage
5,198

 
4,760,198

 
118,056

 
4,883,452

 

 
6,019

 
6,019

Consumer
3,122

 
339,413

 
9,513

 
352,048

 

 
3,105

 
3,105

Total portfolio loans
$
78,460

 
$
19,674,151

 
$
186,634

 
$
19,939,245

 
$

 
$
82,092

 
$
82,092


(1) The Company acquired loans for which there was, at acquisition, both evidence of deterioration of credit quality since origination and the probability, at acquisition, that all contractually required payments would not be collected. These loans are classified as purchased credit impaired loans (“PCI loans”).

The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at December 31, 2017:
 
Loans evaluated by segment
 
Allowance evaluated by segment
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
PCI loans
 
Total
 loans
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total allowance for loan losses
Traditional C&I
$
35,921

 
$
1,933,155

 
$
10,372

 
$
1,979,448

 
$

 
$
19,072

 
$
19,072

Asset-based lending

 
797,570

 

 
797,570

 

 
6,625

 
6,625

Payroll finance

 
268,609

 

 
268,609

 

 
1,565

 
1,565

Warehouse lending

 
723,335

 

 
723,335

 

 
3,705

 
3,705

Factored receivables

 
220,551

 

 
220,551

 

 
1,395

 
1,395

Equipment financing
5,341

 
674,200

 

 
679,541

 

 
4,862

 
4,862

Public sector finance

 
637,767

 

 
637,767

 

 
1,797

 
1,797

Commercial real estate
9,663

 
4,090,143

 
39,058

 
4,138,864

 

 
24,945

 
24,945

Multi-family
1,597

 
4,842,898

 
15,060

 
4,859,555

 

 
3,261

 
3,261

ADC
5,208

 
277,322

 
262

 
282,792

 

 
1,680

 
1,680

Residential mortgage

 
4,903,218

 
151,514

 
5,054,732

 

 
5,819

 
5,819

Consumer
3,132

 
352,741

 
10,346

 
366,219

 

 
3,181

 
3,181

Total portfolio loans
$
60,862

 
$
19,721,509

 
$
226,612

 
$
20,008,983

 
$

 
$
77,907

 
$
77,907


Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Evaluation of impairment is generally treated the same across all classes of loans on a loan-by-loan basis. Generally loans of $750 or less are evaluated for

19

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

impairment on a homogeneous pool basis. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment of the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure or liquidation is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is generally recognized through a charge-off to the allowance for loan losses. 

The following table presents the changes in the balance of the accretable yield discount for PCI loans for the three months ended March 31, 2018 and 2017:
 
For the three months ended March 31,
 
2018
 
2017
Balance at beginning of period
$
45,582

 
$
11,117

Accretion of income
(3,371
)
 
(1,199
)
Reclassification from non-accretable difference
410

 
815

Other, adjustments
(15,072
)
 

Balance at end of period
$
27,549

 
$
10,733


Income is not recognized on PCI loans unless the Company can reasonably estimate the cash flows that are expected to be collected over the life of the loan. The balance of PCI loans that were treated under the cost recovery method was $7,840 and $7,992 at March 31, 2018 and December 31, 2017, respectively.

The following table presents loans individually evaluated for impairment, excluding PCI loans, by segment of loans at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
 
Unpaid principal balance
 
Recorded investment
 
Unpaid principal balance
 
Recorded investment
Loans with no related allowance recorded:
 
 
 
 
 
 
Traditional C&I
$
49,364

 
$
45,775

 
$
36,408

 
$
35,921

Equipment financing
1,931

 
1,924

 
5,341

 
5,341

Commercial real estate
17,624

 
15,906

 
10,128

 
9,663

Multi-family
2,405

 
2,405

 
1,597

 
1,597

ADC
4,330

 
4,130

 
5,474

 
5,208

Residential mortgage
5,198

 
5,198

 

 

Consumer
3,122

 
3,122

 
3,132

 
3,132

Total
$
83,974

 
$
78,460

 
$
62,080

 
$
60,862


At March 31, 2018 and December 31, 2017, there were no asset-based lending, payroll finance, warehouse lending, factored receivables, or public sector finance loans that were individually evaluated for impairment.

The Company’s policy generally requires a charge-off of the difference between the present value of the cash flows or the net collateral value of the collateral securing the loan and the Company’s recorded investment. As a result, there were no impaired loans with an allowance recorded at March 31, 2018 or December 31, 2017.

20

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the three months ended March 31, 2018 and March 31, 2017:
 
For the three months ended
 
March 31, 2018
 
March 31, 2017
 
QTD average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
 
QTD average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
Loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Traditional C&I
$
39,928

 
$
140

 
$

 
$
24,912

 
$
7

 
$

Equipment financing
1,411

 

 

 
1,638

 

 

Commercial real estate
12,190

 
44

 

 
14,124

 
40

 

Multi-family
2,001

 
16

 

 

 

 

ADC
4,138

 
3

 

 
5,513

 
51

 

Residential mortgage
2,599

 

 

 
2,545

 

 

Consumer
3,127

 

 

 
1,497

 

 

Total
$
65,394

 
$
203

 
$

 
$
50,229

 
$
98

 
$


For the three months ended March 31, 2018 and 2017, there were no asset-based lending, payroll finance, warehouse lending, factored receivables, or public sector finance loans that were impaired, and there was no cash-basis interest income recognized.
 
 
 
 
 
 
 
 
 
 
 
 

Troubled Debt Restructuring (“TDRs”)
The following tables set forth the amounts and past due status of the Company’s TDRs at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
Current loans
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 
Total
Traditional C&I
$
13,188

 
$
142

 
$

 
$

 
$
18,804

 
$
32,134

Equipment financing
834

 

 

 

 
1,493

 
2,327

Commercial real estate
3,956

 

 

 

 
113

 
4,069

ADC
434

 

 

 

 
4,189

 
4,623

Residential mortgage
6,037

 
209

 
356

 

 
2,262

 
8,864

Consumer
2,165

 

 
58

 

 
228

 
2,451

Total
$
26,614

 
$
351

 
$
414

 
$

 
$
27,089

 
$
54,468

 
December 31, 2017
 
Current loans
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 
Total
Traditional C&I
$
565

 
$

 
$

 
$

 
$
21,083

 
$
21,648

Equipment financing
898

 

 

 

 
826

 
1,724

Commercial real estate
2,921

 

 

 

 
115

 
3,036

ADC
1,495

 

 

 

 
4,205

 
5,700

Residential mortgage
5,154

 
336

 

 

 
2,810

 
8,300

Consumer
2,142

 
53

 

 

 
286

 
2,481

Total
$
13,175

 
$
389

 
$

 
$

 
$
29,325

 
$
42,889


21

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

There were no asset-based lending, payroll finance, warehouse lending, factored receivables, public sector finance, or multi-family loans that were TDRs for either period presented above. The Company did not have outstanding commitments to lend additional amounts to customers with loans classified as TDRs as of March 31, 2018 or December 31, 2017.
There were seven loans modified as a TDR in the three months ended March 31, 2018. The following table presents loans by segment modified as TDRs that occurred during the first three months of 2018 and 2017:
 
March 31, 2018
 
March 31, 2017
 
 
 
Recorded investment
 
 
 
Recorded investment
 
Number
Pre-
modification
 
Post-
modification
 
Number
Pre-
modification
 
Post-
modification
Traditional C&I
1

 
$
12,766

 
$
12,766

 
 
$

 
$

Equipment financing
1

 
670

 
670

 
2
 
3,088

 
3,089

Commercial real estate

 

 

 
2
 
1,724

 
1,724

ADC

 

 

 
1
 
797

 
797

Residential mortgage
5

 
808

 
603

 
1
 
239

 
238

Total TDRs
7

 
$
14,244

 
$
14,039

 
6
 
$
5,848

 
$
5,848


There were no asset-based lending, payroll finance, warehouse lending, factored receivables, public sector finance, multi-family or consumer loans modified as TDRs during the first three months of 2018 and 2017.

During the three months ended March 31, 2018 or 2017, there were no TDRs that experienced a payment default within the twelve months following the modification. A payment default is defined as missing three consecutive monthly payments or being over 90 days past due on a scheduled payment. The traditional C&I loan that was designated as a TDR is a taxi medallion loan that was performing according to its terms at the time of restructuring. TDRs during the periods presented above did not significantly impact the determination of the allowance for loan losses.

(5) Allowance for Loan Losses

Activity in the allowance for loan losses for the three months ended March 31, 2018 and 2017 is summarized below:
 
For the three months ended March 31, 2018
 
Beginning
balance
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision / (reversal of)
 
Ending balance
Traditional C&I
$
19,072

 
$
(3,572
)
 
$
214

 
$
(3,358
)
 
$
3,696

 
$
19,410

Asset-based lending
6,625

 

 

 

 
(298
)
 
6,327

Payroll finance
1,565

 

 
22

 
22

 
(112
)
 
1,475

Warehouse lending
3,705

 

 

 

 
(597
)
 
3,108

Factored receivables
1,395

 
(3
)
 
3

 

 
(226
)
 
1,169

Equipment financing
4,862

 
(4,199
)
 
72

 
(4,127
)
 
5,837

 
6,572

Public sector finance
1,797

 

 

 

 
109

 
1,906

Commercial real estate
24,945

 
(1,353
)
 
16

 
(1,337
)
 
614

 
24,222

Multi-family
3,261

 

 
3

 
3

 
3,483

 
6,747

ADC
1,680

 

 

 

 
352

 
2,032

Residential mortgage
5,819

 
(39
)
 
15

 
(24
)
 
224

 
6,019

Consumer
3,181

 
(125
)
 
131

 
6

 
(82
)
 
3,105

Total allowance for loan losses
$
77,907

 
$
(9,291
)
 
$
476

 
$
(8,815
)
 
$
13,000

 
$
82,092

Annualized net charge-offs to average loans outstanding:
 
 
 
 
 
 
 
0.18
%
 

22

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

 
For the three months ended March 31, 2017
 
Beginning
balance
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision / (reversal of)
 
Ending balance
Traditional C&I
$
12,864

 
$
(687
)
 
$
139

 
$
(548
)
 
$
2,125

 
$
14,441

Asset-based lending
3,316

 

 
3

 
3

 
34

 
3,353

Payroll finance
951

 

 

 

 
204

 
1,155

Warehouse lending
1,563

 

 

 

 
(336
)
 
1,227

Factored receivables
1,669

 
(296
)
 
16

 
(280
)
 
(67
)
 
1,322

Equipment financing
5,039

 
(471
)
 
140

 
(331
)
 
1,331

 
6,039

Public sector finance
1,062

 

 

 

 
187

 
1,249

Commercial real estate
20,466

 
(83
)
 
2

 
(81
)
 
3,053

 
23,438

Multi-family
4,991

 

 

 

 
(889
)
 
4,102

ADC
1,931

 

 
136

 
136

 
(897
)
 
1,170

Residential mortgage
5,864

 
(158
)
 
149

 
(9
)
 
(140
)
 
5,715

Consumer
3,906

 
(114
)
 
41

 
(73
)
 
(105
)
 
3,728

Total allowance for loan losses
$
63,622

 
$
(1,809
)
 
$
626

 
$
(1,183
)
 
$
4,500

 
$
66,939

Annualized net charge-offs to average loans outstanding:
 
 
 
 
 
 
 
0.05
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Quality Indicators
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators, including trends related to (i) the weighted-average risk grade of commercial loans; (ii) the level of classified commercial loans; (iii) the delinquency status of residential mortgage and consumer loans, including HELOC and other consumer loans; (iv) net charge-offs; (v) non-performing loans (see details above); and (vi) the general economic conditions in the greater New York metropolitan region. The Company analyzes loans individually by classifying the loans by credit risk, except residential mortgage loans, HELOC and other consumer loans, which are evaluated on a homogeneous pool basis unless the loan balance is greater than $750. This analysis is performed at least quarterly on all graded 7-Special Mention and lower. The Company uses the following definitions of risk ratings:

1 and 2 - These grades include loans that are secured by cash, marketable securities or cash surrender value of life insurance policies.

3 - This grade includes loans to borrowers with strong earnings and cash flow and that have the ability to service debt. The borrower’s assets and liabilities are generally well-matched and are above average quality. The borrower has ready access to multiple sources of funding, including alternatives such as term loans, private equity placements or trade credit.

4 - This grade includes loans to borrowers with above average cash flow, adequate earnings and debt service coverage ratios. The borrower generates discretionary cash flow, assets and liabilities are reasonably matched, and the borrower has access to other sources of debt funding or additional trade credit at market rates.

5 - This grade includes loans to borrowers with adequate earnings and cash flow and reasonable debt service coverage ratios. Overall leverage is acceptable and there is average reliance upon trade credit. Management has a reasonable amount of experience and depth, and owners are willing to invest available outside capital, as necessary.

6 - This grade includes loans to borrowers where there is evidence of some strain, earnings are inconsistent and volatile, and the borrowers’ outlook is uncertain. Generally, such borrowers have higher leverage than those with a better risk rating. These borrowers typically have limited access to alternative sources of bank debt and may be dependent upon debt funding for working capital support.

7 - Special Mention (OCC definition) - Other Assets Especially Mentioned are loans that have potential weaknesses which may, if not reversed or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. Such assets constitute an undue and unwarranted credit risk but not to the point of justifying a classification of “Substandard.” The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific asset.


23

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

8 - Substandard (OCC definition) - These loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some losses if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

9 - Doubtful (OCC definition) - These loans have all the weakness inherent in one classified as “Substandard” with the added characteristics that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but, because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger, acquisition, liquidating procedures, capital injection, perfecting liens or additional collateral and refinancing plans.

10 - Loss (OCC definition) - These loans are charged-off because they are determined to be uncollectible and unbankable assets. This classification does not indicate that the asset has no absolute recovery or salvage value, but rather it is not practical or desirable to defer writing-off this asset even though partial recovery may be effected in the future. Losses should be taken in the period in which they are determined to be uncollectible.

Loans that are risk-rated 1 through 6, as defined above, are considered to be pass-rated loans. As of March 31, 2018 and December 31, 2017, the risk category of gross loans by segment was as follows:
 
March 31, 2018
 
December 31, 2017
 
Special
mention
 
Substandard
 
Doubtful
 
Special
mention
 
Substandard
 
Doubtful
Traditional C&I
$
9,530

 
$
48,532

 
$
942

 
$
7,453

 
$
53,915

 
$
746

Asset-based lending
14,821

 
5,690

 

 
30,958

 
3,835

 

Payroll finance
8,887

 
8,041

 

 
15,542

 
352

 

Factored receivables
151

 

 

 
187

 

 

Equipment financing
5,803

 
12,381

 

 
4,093

 
9,299

 

Commercial real estate
26,396

 
44,808

 

 
40,438

 
34,529

 

Multi-family
25,696

 
15,801

 

 
26,602

 
14,266

 

ADC
4,204

 
4,623

 

 
4,204

 
4,639

 

Residential mortgage
5,491

 
94,506

 

 
6,038

 
101,149

 

Consumer
925

 
11,528

 
26

 
1,043

 
10,507

 
18

Total
$
101,904

 
$
245,910

 
$
968

 
$
136,558

 
$
232,491

 
$
764


There were no criticized or classified warehouse lending or public sector finance loans for the periods presented. There were no loans rated “loss” at March 31, 2018 or December 31, 2017.

(6) Goodwill and Other Intangible Assets

The balance of goodwill and other intangible assets for the periods presented were as follows:
 
March 31,
 
December 31,
 
2018
 
2017
Goodwill
$
1,579,891

 
$
1,579,891

Other intangible assets:
 
 
 
Core deposits
$
120,975

 
$
126,545

Customer lists
5,435

 
5,854

Non-compete agreements
229

 
292

Trade name
20,500

 
20,500

Total
$
147,139

 
$
153,191


24

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 


The decrease in other intangible assets at March 31, 2018 compared to December 31, 2017 was due to amortization of intangibles.

The estimated aggregate future amortization expense for intangible assets remaining as of March 31, 2018 was as follows:
 
Amortization expense
Remainder of 2018
$
17,594

2019
19,181

2020
16,800

2021
15,104

2022
13,703

2023
12,322

Thereafter
31,935

Total
$
126,639


(7) Deposits

Deposit balances at March 31, 2018 and December 31, 2017 were as follows: 
 
March 31,
 
December 31,
 
2018
 
2017
Non-interest bearing demand
$
4,019,917

 
$
4,080,742

Interest bearing demand
3,928,390

 
3,882,064

Savings
2,792,975

 
2,758,642

Money market
7,377,276

 
7,377,118

Certificates of deposit
2,504,675

 
2,439,638

Total deposits
$
20,623,233

 
$
20,538,204

Total municipal deposits were $1,775,472 and $1,585,076 at March 31, 2018 and December 31, 2017, respectively. See Note 3. “Securities” for the aggregate amount of securities that were pledged as collateral for municipal deposits and other purposes.     
Brokered deposits at March 31, 2018 and December 31, 2017 were as follows:
 
March 31,
 
December 31,
 
2018
 
2017
Interest bearing demand
$
20,538

 
$
23,820

Money market
763,964

 
773,804

Money market - reciprocal brokered deposits
108,706

 
102,259

CDARs1 and ICS2 one way
200,134

 
204,331

Total brokered deposits
$
1,093,342

 
$
1,104,214

1 CDARs are deposits generated through the certificate of deposit account registry service.
2 ICS are deposits generated through the insured cash sweep program.


25

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

(8) Borrowings

The Company’s borrowings and weighted average interest rates were as follows for the periods presented: 
 
March 31,
 
December 31,
 
2018
 
2017
 
Amount
 
Rate
 
Amount
 
Rate
By type of borrowing:
 
 
 
 
 
 
 
FHLB borrowings
$
4,449,829

 
1.90
%
 
$
4,510,123

 
1.69
%
Repurchase agreements
26,850

 
0.75

 
30,162

 
0.64

5.50% Senior Notes
76,891

 
5.98

 
76,805

 
5.98

3.50% Senior Notes
201,253

 
3.19

 
201,404

 
3.19

Subordinated Notes
172,771

 
5.45

 
172,716

 
5.45

Total borrowings
$
4,927,594

 
2.15
%
 
$
4,991,210

 
1.96
%
By remaining period to maturity:
 
 
 
 
 
 
 
Less than one year
$
3,125,831

 
1.99
%
 
$
2,989,093

 
1.69
%
One to two years
725,625

 
1.83

 
775,714

 
1.79

Two to three years
802,863

 
2.37

 
802,650

 
2.34

Three to four years
100,504

 
2.15

 
251,037

 
2.04

Four to five years

 

 

 

Greater than five years
172,771

 
5.45

 
172,716

 
5.45

Total borrowings
$
4,927,594

 
2.15
%
 
$
4,991,210

 
1.96
%

FHLB borrowings and overnight. As a member of the FHLB, the Bank may borrow up to a discounted percentage of the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of March 31, 2018 and December 31, 2017, the Bank had total residential mortgage and commercial real estate loans pledged after discount of $9,055,229 and $9,123,601, respectively. In addition to the pledged mortgages, the Bank had also pledged securities to secure borrowings, which are disclosed in Note 3. “Securities.” As of March 31, 2018, the Bank had unused borrowing capacity at the FHLB of $7,507,624 and may increase its borrowing capacity by pledging securities not required to be pledged for other purposes with a collateral value of approximately $1,274,198.

Repurchase agreements. The Bank enters into sales of securities under agreements to repurchase. These repurchase agreements facilitate the needs of our customers and a portion of our secured short-term funding needs. Securities sold under agreements to repurchase at March 31, 2018 and December 31, 2017 are secured short-term borrowings that mature in one to 45 days and are generally renewed on a continuous basis. Repurchase agreements are stated at the amount of cash received in connection with these transactions. The securities pledged under these repurchase agreements fluctuate in value due to market conditions. The Bank is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

5.50% Senior Notes. On July 2, 2013, the Company issued $100,000 principal amount of 5.50% fixed rate senior notes (the “5.50% Senior Notes”) through a private placement at a discount of 1.75%. The cost of issuance was $303, and, at March 31, 2018 and December 31, 2017 the unamortized discount was $109 and $195, respectively, which will be accreted to interest expense over the life of the 5.50% Senior Notes, resulting in an effective yield of 5.98%. Interest is due semi-annually in arrears on January 2 and July 2 until maturity on July 2, 2018. During 2016, the Company redeemed $23,000 of the Senior Notes.

3.50% Senior Notes. On October 2, 2017, in connection with the Astoria Merger, the Company assumed $200,000 principal amount of 3.50% fixed rate senior notes that mature on June 8, 2020 (the “3.50% Senior Notes”). The 3.50% Senior Notes were issued by Astoria on June 8, 2017 through a public offering. The Company recorded 3.50% Senior Notes at estimated fair value of 100.76% on the acquisition date, which was based on quoted market value. The fair value adjustment, with a remaining balance of $1,252 at March 31, 2018 is being amortized over the remaining maturity using a level-yield methodology, which results in an effective cost of 3.19%.

Subordinated Notes. On March 29, 2016, the Bank issued $110,000 principal amount of 5.25% fixed-to-floating rate subordinated notes (the “Subordinated Notes”) through a private placement at a discount of 1.25%. The cost of issuance was $500. On September 2,

26

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

2016, the Bank reopened the Subordinated Notes offering and issued an additional $65,000 principal amount of Subordinated Notes. The Subordinated Notes issued September 2, 2016 are fully fungible with, rank equally in right of payment with, and form a single series with the Subordinated Notes issued in March 2016. The Subordinated Notes issued September 2016 were issued to the purchasers at a premium of 0.50% and an underwriters discount of 1.25%. The cost of issuance was $275. At March 31, 2018, the net unamortized discount of all Subordinated Notes was $2,284, which will be accreted to interest expense over the life of the Subordinated Notes, resulting in an effective yield of 5.45%. Interest is due semi-annually in arrears on April 1 and October 1 of each year, until April 1, 2021. From and including April 1, 2021, the Subordinated Notes will bear interest at a floating rate per annum equal to three-month LIBOR plus 3.937%, payable quarterly on January 1, April 1, July 1 and October 1 of each year, beginning on July 1, 2021, through maturity on April 1, 2026 or earlier redemption. The Subordinated Notes are also redeemable by the Bank, in whole or in part, on April 1, 2021 and each interest payment date thereafter. The Subordinated Notes are redeemable in whole at any time upon the occurrence of certain specified events. The Subordinated Notes are unsecured, subordinated obligations of the Bank and are subordinated in right of payment to all of the Bank’s existing and future senior indebtedness, including claims of depositors and general creditors. The Subordinated Notes qualify as Tier 2 capital for regulatory purposes. See Note 15. “Stockholders’ Equity” for additional information.

Revolving line of credit. Effective September 5, 2017, the Company renewed and increased to $35,000 its revolving line of credit facility (the “Credit Facility”). The Credit Facility, which is with another financial institution, matures on September 4, 2018. The balance was zero at March 31, 2018 and December 31, 2017. The use of proceeds are for general corporate purposes. The Credit Facility and accrued interest is payable at maturity, and the Company is required to maintain a zero balance for at least 30 days during its term. Loans under the Credit Facility bear interest at one-month LIBOR plus 1.25%. Under the terms of the Credit Facility, the Company and the Bank must maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. The Company and the Bank were in compliance with all requirements of the Credit Facility at March 31, 2018.

(9) Derivatives

The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customers to effectively convert a variable rate loan to a fixed rate loan. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative contracts largely offset each other and do not materially impact results of operations.

The Company has entered into interest rate swap contracts that are both over-the-counter, or OTC, and those that are exchanged on futures markets such as the Chicago Mercantile Exchange (“CME”). At March 31, 2018 and December 31, 2017, the OTC derivatives are included in the financial statements at the gross fair value amount of the asset (included in other assets) and liability (included in other liabilities), which represents the change in the fair value of the contract since inception. Effective for the quarter ended March 31, 2017, the CME amended its rulebook to legally characterize variation margin payments (a payment made based on changes in the fair value of the interest rate swap contracts) as a settlement, referred to as settled-to-market (“STM”). As a result of this change, at March 31, 2018, the Company paid cash as STM in the amount of $9,731 for the net fair value of its CME interest rate swap contracts with another financial institution. The variation margin payment changes daily, positively or negatively, based on a change in the fair value of the underlying interest rate swap contracts.

The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is written into the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Company is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability.


27

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

Summary information as of March 31, 2018 and December 31, 2017 regarding these derivatives is presented below:
 
Notional
amount
 
Average
maturity (in years)
 
Weighted
average
fixed rate 
 
Weighted
average
variable rate
 
Fair value
March 31, 2018
 
 
 
 
 
 
 
 
 
Included in other assets:
 
 
 
 
 
 
 
 
 
Third-party interest rate swap
$
616,052

 
 
 
 
 
 
 
$
2,065

Customer interest rate swap
60,403

 
 
 
 
 
 
 
1,009

Total
$
676,455

 
5.73
 
4.37
%
 
1 m Libor + 2.26%
 
$
3,074

Included in other liabilities:
 
 
 
 
 
 
 
 
 
Third-party interest rate swap
(60,403
)
 
 
 
 
 
 
 
$
(256
)
Customer interest rate swap
(616,052
)
 
 
 
 
 
 
 
(12,549
)
Total
$
(676,455
)
 
5.73
 
4.37
%
 
1 m Libor + 2.26%
 
$
(12,805
)
December 31, 2017
 
 
 
 
 
 
 
 
 
Included in other assets:
 
 
 
 
 
 
 
 
 
Third-party interest rate swap
$
314,754

 
 
 
 
 
 
 
$
1,155

Customer interest rate swap
306,529

 
 
 
 
 
 
 
3,302

Total
$
621,283

 
5.79
 
4.28
%
 
1 m Libor + 1.94%
 
$
4,457

Included in other liabilities:
 
 
 
 
 
 
 
 
 
Third-party interest rate swap
$
(306,529
)
 
 
 
 
 
 
 
$
(4,718
)
Customer interest rate swap
(314,754
)
 
 
 
 
 
 
 
(3,262
)
Total
$
(621,283
)
 
5.79
 
4.28
%
 
1 m Libor + 1.94%
 
$
(7,980
)

The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial instruments; however, the fair value of these commitments is not material.

(10) Income Taxes

Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate for the
following reasons:
 
For the three months ended
 
March 31,
 
2018
 
2017
Income before income tax expense
$
128,328

 
$
56,776

Tax at Federal statutory rate of 21% for 2018 and 35% for 2017
26,948

 
19,872

State and local income taxes, net of Federal tax benefit
6,059

 
2,274

Tax exempt interest, net of disallowed interest
(4,627
)
 
(3,484
)
Bank owned life insurance income
(763
)
 
(462
)
Non-deductible acquisition related costs

 
342

Investments in qualified affordable housing projects
(1,127
)
 
(139
)
Stock-based compensation benefit
(379
)
 
(742
)
FDIC insurance premium limitation
486

 

Other, net
2,859

 
48

Actual income tax expense
$
29,456

 
$
17,709

Effective income tax rate
23.0
%
 
31.2
%

28

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 



 
Net deferred tax assets totaled $99,953 at March 31, 2018 and $97,333 at December 31, 2017. No valuation allowance was recorded against deferred tax assets as of those dates, based upon management’s consideration of historical and anticipated future pre-tax income, and the reversal periods for the items resulting in deferred tax assets and liabilities. There were no unrecognized tax benefits during any of the reported periods.

Interest and/or penalties related to income taxes are reported as a component of other non-interest expense. Such amounts were not material during the reported periods.

The Company is generally no longer subject to examination by Federal, state and local taxing authorities for fiscal years prior to September 30, 2014.

The Tax Cuts and Jobs Act of 2017 reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company was required to remeasure, through income tax expense, the Company’s deferred tax assets and liabilities using the enacted tax rate at which the deferred items are expected to be recovered or settled. The remeasurement of the Company’s net deferred tax assets resulted in additional provisional income tax expense of $40,285 recorded in 2017. The Company is still evaluating certain aspects of the new tax law and once the evaluation is completed it is possible the provisional adjustment could be revised. There were no changes to the provisional income tax expense recorded during the three months ended March 31, 2018.

(11) Stock-Based Compensation

The Company has active stock-based compensation plans, as described below.

The Company’s stockholders approved the 2015 Omnibus Equity and Incentive Plan (the “2015 Plan”) on May 28, 2015. The 2015 Plan permits the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units, deferred stock and other stock-based awards. The total number of shares that may be awarded under the 2015 Plan is 2,800,000 shares plus the remaining shares available for grant under the stockholder approved 2014 Stock Incentive Plan (the “2014 Plan”) as of the date of adoption of the 2015 Plan. At March 31, 2018, there were, in aggregate, 2,360,995 shares available for future grant under the 2015 Plan.

Restricted stock awards are granted with a fair value equal to the market price of the Company’s common stock at the date of grant. Stock option awards are granted with a strike price that is equal to the market price of the Company’s common stock at the date of grant. The restricted stock awards generally vest in equal installments annually on the anniversary date and have total vesting periods ranging from one to five years, while stock options have 10-year contractual terms.


29

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following table summarizes the activity in the Company’s active stock-based compensation plans for the three months ended March 31, 2018:
 
 
 
Non-vested stock awards/stock units outstanding
 
Stock options outstanding
 
Shares available for grant
 
Number of shares
 
Weighted average grant date fair value
 
Number of shares
 
Weighted average exercise price
Balance at January 1, 2018
3,101,327

 
1,238,760

 
$
20.00

 
757,867

 
$
11.15

Granted
(756,423
)
 
756,423

 
23.55

 

 

Stock awards vested

 
(273,489
)
 
13.52

 

 

Exercised

 

 

 
(28,794
)
 
11.44

Forfeited
21,391

 
(16,091
)
 
21.46

 
(5,300
)
 
13.18

Canceled/expired
(5,300
)
 

 

 

 
13.18

Balance at March 31, 2018
2,360,995

 
1,705,603

 
$
22.07

 
723,773

 
$
11.12

Exercisable at March 31, 2018
 
 
 
 
 
 
720,584

 
$
11.10

 
The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $8,273 and $8,249, respectively, at March 31, 2018.

The Company uses an option pricing model to estimate the grant date fair value of stock options granted. There were no stock options granted during the three months ended March 31, 2018 or March 31, 2017.

Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Stock-based compensation expense associated with stock options and non-vested stock awards and the related income tax benefit are presented below:
 
For the three months ended
 
March 31,
 
2018
 
2017
Stock options
$
2

 
$
50

Non-vested stock awards/performance units
2,852

 
1,686

Total
$
2,854

 
$
1,736

Income tax benefit
665

 
564

Proceeds from stock option exercises
329

 
493


Unrecognized stock-based compensation expense as of March 31, 2018 was as follows:
 
March 31, 2018
Stock options
$
2

Non-vested stock awards/performance units
28,170

Total
$
28,172


The weighted average period over which unrecognized stock options expense is expected to be recognized is 0.51 years. The weighted average period over which unrecognized non-vested stock awards/performance units expense is expected to be recognized is 2.10 years.

(12) Pension and Other Post-Retirement Benefits

Total pension and other post-retirement benefits expense is comprised of the following for the periods presented below:

30

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

 
Pension Benefits
 
Other Post Retirement Benefits
 
For the Three Months Ended March 31,
 
For the Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Service cost
$

 
$

 
$
21

 
$

Interest cost
2,122

 

 
273

 
100

Expected return on plan assets
(3,353
)
 

 

 

Net amortization and deferral

 

 

 
9

Net periodic pension and other post-retirement (benefit) expense
$
(1,231
)
 
$

 
$
294

 
$
109


Total net periodic pension and other post-retirement (benefit) expense is included as a component of other non-interest expense.

The Company’s pension benefit plans include all of the assets and liabilities of the Astoria Bank Pension Plan, the Astoria Excess and Supplemental Benefit Plans, Astoria Directors’ Retirement Plan, the Greater New York Savings Bank Directors’ Retirement Plan and the Long Island Bancorp Directors’ Retirement Plan, which were assumed in the Astoria Merger.

The Company’s other post retirement benefit plans include the assumed Astoria Bank Retiree Health Care Plan and the Astoria Bank BOLI plan, along with other non-qualified Supplemental Executive Retirement Plans (“SERPs”) that provide certain directors, officers and executives with supplemental retirement benefits.

The Company contributed $276 and $82 to fund pension and other post retirement benefits during the three months ended March 31, 2018 and 2017, respectively. Total pension and other post-retirement benefits plans liabilities were $88,091 and $89,965 at March 31, 2018 and December 31, 2017, respectively, and are included in other liabilities in the consolidated balance sheets.

(13) Non-Interest Income and Other Non-Interest Expense

(a) Non-Interest Income - Revenue from Contracts with Customers
The Company’s significant sources of non-interest income are presented on the face of the consolidated income statements, which include all income in the scope of the New Revenue Standard. A description of the Company’s revenue streams accounted for under the New Revenue Standard follows:

Deposit fees and service charges. The Company earns fees from its deposit customers mainly for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which includes services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Accounts receivable management / factoring commissions and other fees. The Company earns these fees / commissions from its payroll finance and factoring businesses.

Payroll finance. The Company provides financing and back office support services, which includes preparation of payroll, payroll tax payments, billings and collections, for clients in the temporary staffing industry.  Upon completion of the back office support services, and as payroll remittances are made on behalf of the client to fund their employee payroll, which typically occurs weekly, the COmpany recognizes a portion of the total revenue generated as non-interest income. The Company collects invoices directly from the borrower’s customers and retains the amounts billed for the temporary staffing services provided, and remits remaining funds to the borrower net of amounts advanced, payroll taxes withheld, the Company’s fees, and subject to a reserve to offset potential uncollectible balances.

Factored Receivables. The Company provides accounts receivable management services.  The purchase of a client’s accounts receivable is traditionally known as “factoring” and results in payment by the client of a factoring fee. The factoring fee included in non-interest income represents compensation to the Company for the bookkeeping and collection services provided.  The factoring fee, which is non-refundable, is recognized at the time the receivable is assigned to the Company. Other revenue associated with

31

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

factored receivables includes wire fees, technology fees, field examination fees and UCC fees. All such fees are recognized as income upon receipt, which is when the Company’s obligations are provided to the Company’s customers.

Investment management fees. The Company earns investment management fees from its contracts with customers to manage assets for investment, and / or to transact on their accounts. Advisory fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management at month end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date.

Gains / Losses on sales of OREO. The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform its obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company may adjust the transaction price and related gain (loss) on sale if a significant financing component is present.

Contract Balances. A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as investment management fees based on period-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2018 and December 31, 2017, the Company did not have any significant contract balances.

(b) Other Non-Interest Expense
Other non-interest expense items for the three ended March 31, 2018 and 2017, respectively, are presented in the following table:
 
For the three months ended
 
March 31,
 
2018
 
2017
Other non-interest expense:
 
 
 
   Professional fees
$
3,502

 
$
2,205

   Advertising and promotion
1,543

 
551

Telephone
1,558

 
579

Operational losses
1,275

 
255

Stationery & office supplies
608

 
278

Insurance & surety bond premium
571

 
537

   Other
4,217

 
3,499

Total other non-interest expense
$
13,274

 
$
7,904



32

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

(14) Earnings Per Common Share

The following is a summary of the calculation of earnings per share (“EPS”):
 
For the three months ended
 
March 31,
 
2018
 
2017
 Net income available to common stockholders
$
96,873

 
$
39,067

Weighted average common shares outstanding for computation of basic EPS
224,730,686

 
135,163,347

Common-equivalent shares due to the dilutive effect of stock options and unvested performance share grants(1)
533,461

 
648,374

Weighted average common shares for computation of diluted EPS
225,264,147

 
135,811,721

Earnings per common share:
 
 
 
Basic
$
0.43

 
$
0.29

Diluted
0.43

 
0.29

Weighted average common shares that could be exercised that were anti-dilutive for the period(2)

 

(1) Represents incremental shares computed using the treasury stock method.
(2) Anti-dilutive shares are not included in determining diluted earnings per share. There were no anti-dilutive shares in the three months ended March 31, 2018 or March 31, 2017.
(15) Stockholders’ Equity

(a) Regulatory Capital Requirements
Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines, and additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk-weighting, and other factors.

The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital (as defined in the regulations), Tier 1 capital (as defined in the regulations) and Total capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations, “RWA”), and of Tier 1 capital to adjusted quarterly average total assets (as defined in the regulations, the “Tier 1 leverage ratio”).

The Company’s and the Bank’s Common Equity Tier 1 capital consists of common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital (as defined in the regulations) for both the Bank and the Company includes a permissible portion of the allowance for loan losses and $172,771 and $139,307 of the Subordinated Notes, respectively. During the final five years of the term of the Subordinated Notes, the permissible portion eligible for inclusion in Tier 2 capital decreases by 20% annually.

The Common Equity Tier 1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by RWA. RWA is calculated based on regulatory requirements and includes total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-balance-sheet items, among other items.

The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which excludes goodwill and other intangible assets, among other items. When fully phased-in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 capital to RWA of at least 4.5%, plus a 2.5%

33

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

“capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to RWA of at least 7.0% upon full implementation); (ii) a minimum ratio of Tier 1 capital to RWA of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to RWA of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (iv) a minimum Tier 1 leverage ratio of 4.0%.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and effective January 1, 2018, increased to the 1.875% level and will be phased-in over a four-year period (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to RWA above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following tables present actual and required capital ratios as of March 31, 2018 and December 31, 2017 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2018 and December 31, 2017 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well-capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
 
Actual
 
Minimum capital required - Basel III phase-in schedule
 
Minimum capital required - Basel III fully phased-in
 
Required to be considered well- capitalized
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
$
2,838,760

 
14.23
%
 
$
1,272,195

 
6.375
%
 
$
1,396,920

 
7.00
%
 
$
1,297,140

 
6.50
%
Sterling Bancorp
2,527,350

 
12.65

 
1,273,201

 
6.375

 
1,398,025

 
7.00

 
N/A

 
N/A

Tier 1 capital to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
2,838,760

 
14.23
%
 
1,571,536

 
7.875
%
 
1,696,261

 
8.50
%
 
1,596,481

 
8.00
%
Sterling Bancorp
2,666,376

 
13.35

 
1,572,778

 
7.875

 
1,697,601

 
8.50

 
N/A

 
N/A

Total capital to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
3,094,277

 
15.51
%
 
1,970,656

 
9.875
%
 
2,095,381

 
10.50
%
 
1,995,601

 
10.00
%
Sterling Bancorp
2,888,429

 
14.46

 
1,972,213

 
9.875

 
2,097,037

 
10.50

 
N/A

 
N/A

Tier 1 leverage ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
2,838,760

 
10.00
%
 
1,135,303

 
4.00
%
 
1,135,303

 
4.00
%
 
1,419,129

 
5.00
%
Sterling Bancorp
2,666,376

 
9.39

 
1,136,089

 
4.00

 
1,136,089

 
4.00

 
N/A

 
N/A


34

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

 
Actual
 
Minimum capital required - Basel III phase-in schedule
 
Minimum capital required - Basel III fully phased-in
 
Required to be considered well- capitalized
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
$
2,770,381

 
13.95
%
 
$
1,142,247

 
5.75
%
 
$
1,390,561

 
7.00
%
 
$
1,291,236

 
6.50
%
Sterling Bancorp
2,458,449

 
12.37

 
1,143,045

 
5.75

 
1,391,534

 
7.00

 
N/A

 
N/A

Tier 1 capital to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
2,770,381

 
13.95
%
 
1,440,224

 
7.25
%
 
1,688,539

 
8.50
%
 
1,589,213

 
8.00
%
Sterling Bancorp
2,597,669

 
13.07

 
1,441,231

 
7.25

 
1,689,719

 
8.50

 
N/A

 
N/A

Total capital to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
3,021,658

 
15.21
%
 
1,837,527

 
9.25
%
 
2,085,842

 
10.50
%
 
1,986,516

 
10.00
%
Sterling Bancorp
2,818,404

 
14.18

 
1,838,812

 
9.25

 
2,087,300

 
10.50

 
N/A

 
N/A

Tier 1 leverage ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
2,770,381

 
10.10
%
 
1,097,449

 
4.00
%
 
1,097,449

 
4.00
%
 
1,371,811

 
5.00
%
Sterling Bancorp
2,597,669

 
9.39

 
1,106,977

 
4.00

 
1,106,977

 
4.00

 
N/A

 
N/A


The Bank and the Company are subject to the regulatory capital requirements administered by the FRB, and, for the Bank, the Office of the Comptroller of the Currency. Regulatory authorities can initiate certain mandatory actions if the Bank or the Company fails to meet the minimum capital requirements, which could have a direct material effect on our financial statements. As of March 31, 2018, management believes that the Bank and the Company meet all capital adequacy requirements to which they are subject.
 
(b) Dividend Restrictions
The Company is mainly dependent on dividends from the Bank to provide funds for the payment of dividends to stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that fiscal year combined with the retained net profits for the preceding two fiscal years. Under the foregoing dividend restrictions and while maintaining its “well-capitalized” status, at March 31, 2018, the Bank had capacity to pay aggregate dividends of up to $235,919 to the Company without prior regulatory approval.

(c) Stock Repurchase Plans
From time to time, the Company’s Board of Directors has authorized stock repurchase plans. The Company may purchase up to 10,000,000 common shares, which represents 4.4% of our shares outstanding at March 31, 2018. Repurchases may be made at management’s discretion through open market purchases and block trades in accordance with SEC and regulatory requirements. Any common shares purchased will be held as Treasury stock and made available for general corporate purposes. There were no shares repurchased under the repurchase program during the three months ended March 31, 2018 or March 31, 2017.

(16) Commitments and Contingencies

(a) Off-Balance Sheet Financial Instruments
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in its consolidated balance sheet. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures.

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.  Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are written conditional

35

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

commitments issued by the Company to guarantee the performance of a customer to a third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. Based on the Company’s credit risk exposure assessment of its standby letter of credit arrangements, the arrangements contain security and debt covenants similar to those contained in loan agreements.

The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance sheet financial instruments, are summarized as follows: 
 
March 31,
 
December 31,
 
2018
 
2017
Loan origination commitments
$
410,005

 
$
510,135

Unused lines of credit
1,506,680

 
1,195,656

Letters of credit
184,100

 
166,824


(b) Lease Commitments
The Company leases certain premises and equipment under operating leases with terms expiring through January 2034. Included in occupancy and office operations expense was net rent expense of $4,406 and $2,250 during the three months ended March 31, 2018 and 2017, respectively. Future minimum lease payments due under non-cancelable operating leases at March 31, 2018 were as follows:
Remainder of 2018
$
15,456

2019
18,867

2020
17,666

2021
14,966

2022
11,096

2023
9,252

2024 and thereafter
22,430

 
$
109,733


(c) Litigation
The Company and the Bank are involved in a number of judicial proceedings concerning matters arising from their business activities. These include routine legal proceedings arising in the ordinary course of business. These proceedings also include actions brought against the Company and the Bank with respect to corporate matters and transactions in which the Company and the Bank are or were involved; in particular, the Company has been named as a defendant in shareholder litigation arising out of the announcement of the Astoria Merger. While the Company believes these claims are without merit, the Company has agreed to settle the litigations related to the Astoria Merger, pending court approval, and believes these settlement amounts will be immaterial.

There can be no assurance as to the ultimate outcome of a legal proceeding; however, the Company and the Bank have generally denied liability in all significant litigation pending against them and intend to defend vigorously each case, other than matters that are determined appropriate to be settled. The Company and the Bank accrue a liability for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.

(17) Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risk, etc.) or inputs that are derived principally from, or corroborated by, market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair value of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

In general, fair value is based on quoted market prices, when available. If quoted market prices in active markets are not available, fair value is based on internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other items, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the

36

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates; therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which usually coincide with the Company’s monthly and/or quarterly valuation process.

Investment Securities Available for Sale
The majority of the Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment securities that have a complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are mortgage pass-through securities, state and municipal general obligation or revenue bonds, U.S. agency bullet and callable securities and corporate bonds. Pricing for such instruments is fairly generic and is easily obtained. From time to time, the Company validates, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

As of March 31, 2018, management does not believe any of our securities are OTTI; however, management reviews all of the Company’s securities on at least a quarterly basis to assess whether impairment, if any, is OTTI.
 
Derivatives
The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements, and the creditworthiness of the counterparty as of the measurement date (Level 2 inputs). The Company’s derivatives consist of interest rate swaps. See Note 9. “Derivatives” for additional information.


 

37

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

A summary of such investment securities available for sale and derivatives at March 31, 2018 and December 31, 2017, respectively, were measured at estimated fair value on a recurring basis, is as follows:
 
March 31, 2018
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
Residential MBS(1):
 
 
 
 
 
 
 
Agency-backed
$
2,240,782

 
$

 
$
2,240,782

 
$

CMOs(2)/Other MBS
607,362

 

 
607,362

 

Total residential MBS
2,848,144

 

 
2,848,144

 

Other securities:
 
 
 
 
 
 
 
Federal agencies
326,068

 

 
326,068

 

Corporate
330,495

 

 
330,495

 

State and municipal
255,631

 


 
255,631

 

Total other securities
912,194

 

 
912,194

 

Total available for sale securities
3,760,338

 

 
3,760,338

 

Swaps
3,074

 

 
3,074

 

Total assets
$
3,763,412

 
$

 
$
3,763,412

 
$

Liabilities:
 
 
 
 
 
 
 
Swaps
$
12,805

 
$

 
$
12,805

 
$

Total liabilities
$
12,805

 
$

 
$
12,805

 
$


(1) Residential MBS are debt securities whose cash flows come from residential mortgage and consumer loans, such as mortgages and HELOCs. A residential MBS is comprised of a pool of mortgage loans created by financial institutions, including governmental agencies. The cash flows from each of the mortgage loans included in the pool are structured through a special purpose entity into various classes and tranches, which then issue securities backed by those cash flows to investors.

(2)  CMOs are debt securities that are collateralized by a specific pool of residential mortgage loans, in which the issuer of the CMOs can direct the payments of principal and interest received on the underlying collateral to achieve specific investor cash flow objectives.  The Bank generally acquires planned-amortization class securities and CMOs with a sequential pay structure in order to manage the duration and extension risk inherent in these securities.

38

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

 
December 31, 2017
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
Agency-backed
$
2,150,649

 
$

 
$
2,150,649

 
$

CMOs/Other MBS
649,403

 

 
649,403

 

Total residential MBS
2,800,052

 

 
2,800,052

 

Federal agencies
399,996

 

 
399,996

 

Corporate bonds
148,226

 

 
148,226

 

State and municipal
263,798

 


 
263,798

 

Total other securities
812,020

 

 
812,020

 

Total available for sale securities
3,612,072

 

 
3,612,072

 

Swaps
4,457

 

 
4,457

 

Total assets
$
3,616,529

 
$

 
$
3,616,529

 
$

Liabilities:
 
 
 
 
 
 
 
Swaps
$
7,980

 
$

 
$
7,980

 
$

Total liabilities
$
7,980

 
$

 
$
7,980

 
$


The following categories of financial assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances.

Impaired Loans
Loans that meet certain criteria are evaluated individually for impairment. Generally, loans less than $750 are evaluated for impairment on a pooled basis. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value of the underlying collateral is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market place and are also based on Level 3 inputs. Impaired loans are remeasured at least quarterly and their carrying values are adjusted as needed. Impaired loans subject to non-recurring fair value measurements were $78,460 and $60,862 at March 31, 2018 and December 31, 2017, respectively. Changes in fair value recognized as a charge-off on loans held by the Company were $542 and $0 for the three months ended March 31, 2018 and 2017, respectively.

When an impaired loan is collateral dependent, the Company charges-off the difference between the recorded investment in the loan and the appraised value less cost to sell. A discount for estimated costs to dispose of the asset and overall marketability is used when estimating the amount of impairment.

A summary of the classes with impaired loans at March 31, 2018 and December 31, 2017, respectively, is set forth below:
 
March 31, 2018
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
C&I
$
20,128

 
$

 
$

 
$
20,128

Commercial real estate
4,151

 

 

 
4,151

Total impaired loans measured at fair value
$
24,279

 
$

 
$

 
$
24,279


39

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

 
December 31, 2017
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Commercial & industrial
$
114

 
$

 
$

 
$
114

Commercial real estate
782

 

 

 
782

Total impaired loans measured at fair value
$
896

 
$

 
$

 
$
896

 
Mortgage Servicing Rights
Mortgage servicing rights are carried at the lower of cost or estimated fair value. The fair value of mortgage servicing rights is estimated using a discounted cash flow model that is prepared by an independent third-party valuation provider and is performed on a quarterly basis. The significant assumptions, which are assumptions we believe other market participants would use, include the following: market discount rates, prepayment speeds, servicing revenue, the cost of servicing and loan default rates. The market discount rates and prepayment speeds are considered by management to be two of the most significant inputs into the determination of the estimated fair value. Due to the significant judgment involved, the determination of estimated fair value of mortgage servicing rights relies upon Level 3 inputs.

At March 31, 2018, the assumption for constant prepayment rates (“CPR”) ranged from 8.89 to 19.11, with a weighted average CPR of 9.66, and the assumption for market discount rate ranged from 9.50% to 20.00%, with a weighted average market discount rate of 9.92%. At December 31, 2017, the CPR assumption ranged from 9.79 to 16.76, with a weighted average CPR of 10.30, and the assumption for market discount rate ranged from 9.50% to 20.00%, with a weighted average market discount rate of 9.90%. The fair value of mortgage servicing rights at March 31, 2018 and December 31, 2017 was $10,817 and $10,363, respectively.

Other Real Estate Owned
OREO is initially recorded at fair value less costs to sell when acquired, which establishes a new cost basis. When an asset is acquired, the excess of the recorded investment in the loan over the fair value less cost to sell is charged to the allowance for loan losses. These assets are subsequently accounted for at the lower of cost or fair value less cost to sell and are primarily comprised of commercial and residential real estate property. If the fair value declines, a write-down is recorded in other real estate owned expense, net on the consolidated income statements. Fair value is generally determined using appraisals or other indications of value based on comparable sales of similar properties or assumptions generally observable in the marketplace. Adjustments are routinely made in the appraisal process by independent appraisers for differences between comparable sales and income data available (in the case of income producing properties). The fair value is derived using Level 3 inputs. Appraisals are reviewed by the Company’s credit department and an external loan review consultant and verified by officers in the Company’s credit administration area.

At March 31, 2018 and December 31, 2017, appraisals were discounted by 22.0%, which considers estimated costs to sell and overall marketability of the properties. OREO subject to non-recurring fair value measurement were $24,493 and $27,095 at March 31, 2018 and December 31, 2017, respectively. There were $200 and $1,293 of write-downs related to changes in fair value for OREO held by the Company during the three months ended March 31, 2018 and March 31, 2017, respectively.

Fair Value of Financial Instruments
Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with FASB Accounting Standards Codification Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.


40

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were held for trading purposes) as of March 31, 2018:
 
March 31, 2018
 
Carrying
amount
 

Level 1 inputs
 

Level 2 inputs
 

Level 3 inputs
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
364,331

 
$
364,331

 
$

 
$

Securities available for sale
3,760,338

 

 
3,760,338

 

Securities held to maturity
2,874,948

 

 
2,807,106

 

Loans held for sale
44,440

 

 
44,440

 

Portfolio loans, net
19,857,153

 

 

 
19,742,046

Accrued interest receivable on securities
42,955

 

 
42,955

 

Accrued interest receivable on loans
59,174

 

 

 
59,174

FHLB stock and FRB stock
354,832

 

 

 

Swaps
3,074

 

 
3,074

 

Financial liabilities:
 
 
 
 
 
 
 
Non-maturity deposits
(18,118,558
)
 
(18,118,558
)
 

 

Certificates of deposit
(2,504,675
)
 

 
(2,468,572
)
 

FHLB borrowings
(4,449,829
)
 

 
(4,425,050
)
 

Other borrowings
(26,850
)
 

 
(26,849
)
 

Senior Notes
(278,144
)
 

 
(276,395
)
 

Subordinated Notes
(172,771
)
 

 
(178,885
)
 

Mortgage escrow funds
(161,724
)
 

 
(154,815
)
 

Accrued interest payable on deposits
(1,139
)
 

 
(1,139
)
 

Accrued interest payable on borrowings
(14,718
)
 

 
(14,718
)
 

Swaps
(12,805
)
 

 
(12,805
)
 


Effective January 1, 2018, with the adoption of the New Fair Value Standard, the fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology continues to be based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types (e.g. residential mortgage loans and multi-family loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a Level 3 fair value estimate. In 2017, the fair value estimate of portfolio loans, net was determined using an entrance price methodology based only on the discounted methodology outlined above.

41

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were held for trading purposes) as of December 31, 2017:
 
December 31, 2017
 
Carrying
amount
 

Level 1 inputs
 

Level 2 inputs
 

Level 3 inputs
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
479,906

 
$
479,906

 
$

 
$

Securities available for sale
3,612,072

 

 
3,612,072

 

Securities held to maturity
2,862,489

 

 
2,863,909

 

Loans held for sale
5,246

 

 
5,246

 

Portfolio loans, net
19,931,076

 

 

 
19,903,231

Accrued interest receivable on securities
34,652

 

 
34,652

 

Accrued interest receivable on loans
59,446

 

 

 
59,446

FHLB stock and FRB stock
284,112

 

 

 

Swaps
4,457

 

 
4,457

 

Financial liabilities:

 

 

 

Non-maturity deposits
(18,098,566
)
 
(18,098,566
)
 

 

Certificates of deposit
(2,439,638
)
 

 
(2,412,495
)
 

FHLB borrowings
(4,510,123
)
 

 
(4,496,184
)
 

Other borrowings
(30,162
)
 

 
(30,160
)
 

Senior Notes
(278,209
)
 

 
(278,968
)
 

Subordinated Notes
(172,716
)
 

 
(179,619
)
 

Mortgage escrow funds
(122,641
)
 

 
(117,050
)
 

Accrued interest payable on deposits
(1,103
)
 

 
(1,103
)
 

Accrued interest payable on borrowings
(9,649
)
 

 
(9,649
)
 

Swaps
(7,980
)
 

 
(7,980
)
 


(18) Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss were as follows as of the dates shown below:
 
March 31,
 
December 31,
 
2018
 
2017
Net unrealized holding loss on available for sale securities
$
(103,799
)
 
$
(36,899
)
Related income tax benefit
28,690

 
14,575

Available for sale securities, net of tax
(75,109
)
 
(22,324
)
Net unrealized holding loss on securities transferred to held to maturity
(4,193
)
 
(4,426
)
Related income tax benefit
1,159

 
1,748

Securities transferred to held to maturity, net of tax
(3,034
)
 
(2,678
)
Net unrealized holding loss on retirement plans
(1,246
)
 
(1,924
)
Related income tax benefit
345

 
760

Retirement plans, net of tax
(901
)
 
(1,164
)
Accumulated other comprehensive loss
$
(79,044
)
 
$
(26,166
)

42

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

The following table presents the changes in each component of accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017:
 
Net unrealized holding (loss) gain on available for sale securities
 
Net unrealized holding (loss) gain on securities transferred to held to maturity
 
Net unrealized holding (loss) gain on retirement plans
 
Total
For the three months ended March 31, 2018
 
 
 
 
 
 
 
Balance beginning of the period
$
(22,324
)
 
$
(2,678
)
 
$
(1,164
)
 
$
(26,166
)
Reclassification of the stranded income tax effects from the enactment of the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive loss
(4,376
)
 
(525
)
 
(228
)
 
(5,129
)
Other comprehensive loss before reclassification
(53,830
)
 

 

 
(53,830
)
Amounts reclassified from accumulated other comprehensive loss
5,421

 
169

 
491

 
6,081

Total other comprehensive (loss) income
(48,409
)
 
169

 
491

 
(47,749
)
Balance at end of period
$
(75,109
)
 
$
(3,034
)
 
$
(901
)
 
$
(79,044
)
For the three months ended March 31, 2017
 
 
 
 
 
 
 
Balance beginning of the period
$
(22,637
)
 
$
(3,264
)
 
$
(734
)
 
$
(26,635
)
Other comprehensive gain before reclassification
2,747

 

 

 
2,747

Amounts reclassified from accumulated other comprehensive loss
(14
)
 
147

 
34

 
167

Total other comprehensive income
2,733

 
147

 
34

 
2,914

Balance at end of period
$
(19,904
)
 
$
(3,117
)
 
$
(700
)
 
$
(23,721
)
Location in consolidated income statements where reclassification from accumulated other comprehensive loss is included
Net (loss) gain on sale of securities
 
Interest income on securities
 
Other non-interest expense
 
 
 
 
 
 
 
 
 
 

(19) Recently Issued Accounting Standards Not Yet Adopted

ASU 2016-02,“Leases (Topic 842).” ASU 2016-02 amends existing lease accounting guidance, including the requirement to recognize most lease arrangements on the balance sheet. The adoption of this standard will result in the Company recognizing a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability. ASU 2016-02 is effective for the company on January 1, 2019. ASU 2016-02 requires a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company has aggregated a list of all leases and if the standard would have been effective at March 31, 2018, it would not have had an impact on any borrowings or financial covenants that are relevant to the Company. Management estimates that the impact to the Bank’s and the Company’s regulatory capital ratios would be a decrease of approximately five to seven basis points, which would be due to an increase in total assets and risk-weighted assets, given our lease arrangements for financial centers and other locations.

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 amends current guidance on the impairment of financial instruments. ASU 2016-13 adds an impairment model known as the current expected credit loss (“CECL”) model that is based on expected losses rather than incurred losses. For the Company, the CECL model will apply mainly to held-to-maturity investment securities, loans and loan commitments. ASU 2016-13 will be effective for the Company for fiscal years beginning after December 15, 2019, and the Company is permitted to early adopt the new guidance for fiscal years beginning after December 15, 2018. ASU 2016-13 will significantly change the accounting for credit impairments. The new guidance will require the Company to modify current processes and systems for establishing the allowance for loan losses and OTTI to ensure they comply with the requirements of the new standard. The Company engaged a nationally recognized accounting firm to assist management in performing an implementation readiness assessment. The Company made significant progress in 2017 as

43

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
 

disclosed in our Form 10-K. In 2018, we are focused on mitigation of data gaps, and being in a position to test our CECL model by the fourth quarter of 2018. The Company is unable to estimate the impact of adopting ASU 2016-13 at this time, however, we anticipate the allowance for loan losses will be greater under the CECL model compared to the current incurred loss model and that the composition of the loan and securities portfolio as well as the status of the economic environment will be significant factors that impact the balance at date of adoption.

ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount as discounts continue to be amortized to maturity. ASU No. 2017-08 is effective for the Company on January 1, 2019. The guidance includes a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The impact of adoption will not be significant on our financial statements.

ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for the Company on January 1, 2019 and is not expected to have a significant impact on the Company’s financial statements.

ASU 2018-05, "Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118" ASU 2018-05 amends the Accounting Standards Codification to incorporate various SEC paragraphs pursuant to the issuance of SAB 118. SAB 118 addresses the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. See Note 2. “Acquisitions.”

(20) Subsequent Event - Acquisition of Advantage Funding Management Co., Inc. (“Advantage Funding”)

On April 2, 2018, the Bank acquired 100% of the outstanding common stock of Advantage Funding (the “Advantage Funding Acquisition”). Advantage Funding is a provider of commercial vehicle and transportation financing services based in Lake Success, NY. Advantage Funding had total outstanding loans and leases of $457.0 million on the acquisition date consisting mainly of fixed rate assets. The Bank paid a premium on the balance of gross loans and leases receivable of 4.50% or $20.3 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Sterling Bancorp (“we,” “our” and “us”) makes statements in this report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting us that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “target,” “estimate,” “forecast,” “project,” by future conditional verbs such as “will,” “should,” “would,” “could” or “may,” or by variations of such words or by similar expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of management and the information available to management at the time that these disclosures were prepared.

Forward-looking statements are subject to numerous assumptions, risks (both known and unknown) and uncertainties, and other factors which change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions, risks, uncertainties, and other factors, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements, and future results could differ materially from our historical performance.

The factors described herein in Part II. Item 1A. Risk Factors or otherwise described in our filings with the SEC, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations expressed in our forward-looking statements, including, but not limited to:

44

STERLING BANCORP AND SUBSIDIARIES

difficulties and delays in integrating our and Astoria’s businesses or fully realizing cost savings and other benefits, and business disruption following the Astoria Merger;
difficulties and delays in assimilating and integrating Advantage Funding into our business following the Advantage Funding Acquisition;
our ability to successfully implement growth and strategic initiatives, to increase revenues faster than we grow expenses, and to integrate and fully realize cost savings and other benefits we estimate in connection with acquisitions and limit business disruption arising therefrom;
a deterioration in general economic conditions, either nationally, internationally, or in our market areas, including extended declines in real estate markets and constrained financial markets;
oversight of the Bank by the Consumer Financial Protection Bureau;
adverse publicity, regulatory actions or litigation with respect to us or other well-known financial services companies and the financial services industry in general and a failure to satisfy regulatory standards;
our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and/or require us to materially increase our reserves;
our ability to manage changes in market interest rates, which could adversely affect our financial condition and results of operations;
our use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
our ability to capitalize on our substantial investments in our information technology and operational infrastructure and systems;
the effects of, and changes in, laws and regulations (including laws and regulations concerning banking and taxes) with which we and the Bank must comply;
changes in other economic, competitive, governmental, regulatory and technological factors affecting our markets, operations, pricing, products, services and fees; and
our success at managing the risks involved in the foregoing and managing our business.

These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist the reader in understanding our financial condition and results of operations. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes included in Part I, Item 1 of this report and with our audited consolidated financial statements, including the accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2017 Form 10-K. Operating results discussed herein are not necessarily indicative of the results of any future period.

Tax equivalent adjustments are the result of increasing income from tax exempt securities by an amount equal to the federal taxes that would be paid if the income were fully taxable based on a 21.0% effective income tax rate for 2018, and a 35.0% effective income tax rate for 2017 and prior periods.

Dollar amounts in tables and the accompanying discussion that follows are stated in thousands, except for share and per share amounts and ratios.

Overview and Management Strategy
The Bank operates as a regional bank providing a broad offering of deposit, lending and wealth management products to commercial, consumer and municipal clients in our market area.

Our primary strategic objective is to drive positive operating leverage, which we believe will allow us to generate sustainable growth in revenues and earnings over time. We define operating leverage as the ratio of growth in adjusted total revenue divided by growth in adjusted total operating expenses. (adjusted total revenue is reconciled to GAAP on page 64.) To achieve this goal, we focus on the following initiatives:

Target specific “high value” client segments and geographic markets in which we have competitive advantages.

45

STERLING BANCORP AND SUBSIDIARIES

Deploy a single point of contact, relationship-based distribution strategy through our commercial banking teams and financial centers.
Continuously expand and refine our delivery and distribution channels by rationalizing our investments in businesses that do not meet our risk-adjusted return targets and re-allocating our capital and resources to hiring commercial banking teams and growing other businesses that are in-line with our commercial banking strategy.
Maximize efficiency through a technology enabled, low-cost operating platform and by controlling operating costs.
Create a high productivity culture through differentiated compensation programs based on a pay-for-performance philosophy.
Maintain strong risk management systems and proactively manage enterprise risk.

The Bank targets the following geographic markets: (i) the New York Metro Market, which includes Manhattan and Long Island; and (ii) the New York Suburban Market, which includes Rockland, Orange, Sullivan, Ulster, Putnam and Westchester Counties in New York and Bergen County in New Jersey. The Bank also originates loans and deposits in select markets nationally through our asset-based lending, payroll finance, warehouse lending, factored receivables, equipment finance and public sector finance businesses (collectively, our commercial finance businesses). We believe the Bank operates in an attractive footprint that presents us with significant opportunities to execute our strategy of targeting small and middle market commercial clients and affluent consumers.

We deploy a team-based distribution strategy in which clients are served by a focused and experienced group of relationship managers who are responsible for all aspects of the client relationship and delivery of our products and services. While the Astoria Merger resulted in substantial growth in 2017, our commercial banking teams also generated significant organic originations of loans and deposits. As of March 31, 2018, we had 33 commercial banking teams and 127 full service financial centers. We currently anticipate that we will increase our number of commercial banking teams by three to five annually and will reduce our financial centers as we continue to execute our real estate and financial center consolidation strategy.

Please refer to page 62 for details on our supplemental reporting of non-GAAP financial measures.

Recent Developments
On April 2, 2018, we completed the Advantage Funding Acquisition in a cash transaction. Advantage Funding, formerly a wholly-owned subsidiary of Macquaire Bank Limited, is a leading provider of commercial vehicle and transportation financing services based in Lake Success, NY. At the acquisition date, Advantage Funding had total outstanding loans and leases of $457.0 million with a diversified client base across various industry sectors and geographic markets nationwide. Advantage Funding will be integrated into our established national equipment finance platform, which on a combined basis will have approximately $1.2 billion of loans and leases outstanding.

Our earnings performance reached record levels in the first quarter of 2018, with GAAP net income available to commons stockholders of $98,872, or $0.43 per diluted share, and adjusted net income available to common stockholders of $100,880, or $0.45 per diluted share. This represents growth of 48.3% and 45.2%, respectively, over the same period a year ago. Results for the first quarter of 2018 reflect the ongoing execution our strategy and the progress we have made in the integration of the Astoria Merger. In the first quarter of 2018, our reported operating efficiency ratio was 44.2% and our adjusted operating efficiency ratio, which reached a record low, was 40.3%. Comparing our results to the same quarter a year ago, we generated significant positive operating leverage of 2.7x. Adjusted net income, adjusted diluted EPS, reported operating efficiency ratio and adjusted operating efficiency ratio are non-GAAP financial measures that are reconciled to our GAAP results beginning on page 62.

A significant component of our strategy includes repositioning our earning assets to create a more optimal balance sheet. As of March 31, 2018, our total loan portfolio was $19.9 billion, of which 24.5% consisted of residential mortgage loans, most of which we acquired in the Astoria Merger. We anticipate this portfolio will repay at a rate of approximately $1.0 billion annually, and we intend to replace these assets with higher yielding, more diversified commercial loans originated through our commercial banking teams and commercial finance business lines. By the end of the fourth quarter of 2019, we are targeting achieving a loan composition of approximately 45% C&I loans, which includes our traditional C&I and our commercial finance business lines, 45% commercial real estate loans, which includes multi-family and acquisition development and construction loans, and 10% consumer loans, which includes residential mortgage loans, home equity lines of credit and other personal loans. To accelerate the transition of our loan portfolio, we will continue to evaluate potential acquisitions of commercial finance loan portfolios and other assets that meet our risk-adjusted return criteria, similar to the acquisition of Advantage Funding  We also intend to reduce the proportion of our earning assets which are currently allocated to investment securities. As of March 31, 2018, our investment securities represented 24.7% of our total earning assets; we anticipate decreasing this percentage to 20-22% of total earning assets over time.

As mentioned above, we have made significant progress in the integration of the employees, systems and facilities that we acquired and assumed in the Astoria Merger. As we previously announced, we intend to consolidate between 25 to 30 financial centers

46

STERLING BANCORP AND SUBSIDIARIES

through the fourth quarter of 2019. In the first quarter of 2018 we consolidated one financial center, which reduced our total number of financial centers to 127, and have announced the consolidation of six additional financial centers in the second quarter of 2018. In addition, we are also executing a back-office real estate consolidation strategy, and in the first quarter we announced we had entered into a definitive agreement for the sale of Astoria’s headquarters facility located in Lake Success, NY. The sale is anticipated to close in the second quarter of 2018. We will reinvest a portion of the operating expense savings generated by these consolidations and reduction in our real estate footprint into the hiring of three to five additional commercial banking teams and into our ongoing investment in risk management systems and personnel. We anticipate achieving an annual operating expense run-rate, excluding the impact of amortization of intangible assets, of approximately $425.0 million for the full year 2018.

Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with GAAP and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain; and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for loan losses, business combinations, goodwill, trade names and other intangible assets, and deferred income taxes are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. For additional information regarding critical accounting policies, refer to Note 1. “Basis of Financial Statement Presentation” in the notes to consolidated financial statements included elsewhere in this report and the sections captioned “Critical Accounting Policies” and “Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2017 Form 10-K. There have been no significant changes in our application of critical accounting policies for the three months ended March 31, 2018.

Financial Impact of Recent Acquisitions
The balances of Astoria were included in our balance sheet as of October 2, 2017, and the operating results of Astoria were included in our results of operations from that day forward. There are no balances included in our balance sheet or operating results of Advantage Funding included in our results of operations in this Quarterly Report on Form 10-Q as the Advantage Funding Acquisition occurred after March 31, 2018.

Selected financial condition data, statement of operations data, per share data, performance ratios, capital ratios, and asset quality data and ratios for the comparable periods are presented as follows:.

47

STERLING BANCORP AND SUBSIDIARIES

 
At or for the three months ended March 31,
 
2018
 
2017
End of period balances:
 
 
 
Total securities
$
6,635,286

 
$
3,416,395

Portfolio loans
19,939,245

 
9,763,967

Total assets
30,468,780

 
14,659,337

Non-interest bearing deposits
4,019,917

 
3,196,842

Interest bearing deposits
16,603,316

 
7,054,883

Total deposits
20,623,233

 
10,251,725

Borrowings
4,927,594

 
2,328,576

Stockholders’ equity
4,273,755

 
1,888,613

Tangible common equity1
2,407,700

 
1,127,915

Average balances:
 
 
 
Total securities
$
6,602,175

 
$
3,273,658

Total loans2
19,635,900

 
9,281,516

Total assets
30,018,289

 
14,015,953

Non-interest bearing deposits
3,971,079

 
3,177,448

Interest bearing deposits
16,717,068

 
7,009,167

Total deposits and mortgage escrow
20,688,147

 
10,186,615

Borrowings
4,597,903

 
1,799,204

Stockholders’ equity
4,243,897

 
1,869,085

Tangible common equity1
2,373,794

 
1,107,009

Selected operating data:
 
 
 
Total interest and dividend income
$
281,346

 
$
126,000

Total interest expense
46,976

 
17,210

Net interest income
234,370

 
108,790

Provision for loan losses
13,000

 
4,500

Net interest income after provision for loan losses
221,370

 
104,290

Total non-interest income
18,707

 
12,836

Total non-interest expense
111,749

 
60,350

Income before income tax expense
128,328

 
56,776

Income tax expense
29,456

 
17,709

Net income
$
98,872

 
$
39,067

Per share data:
 
 
 
Reported basic EPS (GAAP)
$
0.43

 
$
0.29

Reported diluted EPS (GAAP)
0.43

 
0.29

Adjusted diluted EPS1 (non-GAAP)
0.45

 
0.31

Dividends declared per common share
0.07

 
0.07

Book value per share
18.34

 
13.93

Tangible book value per common share1
10.68

 
8.32

See legend on following page.

48

STERLING BANCORP AND SUBSIDIARIES

 
At or for the three months ended March 31,
 
2018
 
2017
Common shares outstanding:
 
 
 
Shares outstanding at period end
225,466,266

 
135,604,435

Weighted average shares basic
224,730,686

 
135,163,347

Weighted average shares diluted
225,264,147

 
135,811,721

Other data:
 
 
 
Full time equivalent employees at period end
2,016

 
978

Financial centers at period end
127

 
42

Performance ratios:
 
 
 
Return on average assets
1.31
%
 
1.13
%
Return on average equity
9.26

 
8.48

Reported return on average tangible assets1
1.39

 
1.20

Adjusted return on average tangible assets1
1.45

 
1.27

Reported return on average tangible equity1
16.55

 
14.31

Adjusted return on average tangible equity1
17.24

 
15.19

Reported operating efficiency1
44.16

 
49.62

Adjusted operating efficiency1
40.26

 
43.73

Net interest margin-GAAP
3.54

 
3.42

Net interest margin-tax equivalent3
3.60

 
3.55

Capital ratios (Company):
 
 
 
Tier 1 leverage ratio
9.39
%
 
8.89
%
Common equity Tier 1 capital ratio
12.65

 
8.89

Tier 1 risk-based capital ratio
13.35

 
10.67

Total risk-based capital ratio
14.46

 
12.66

Tangible equity to tangible assets
8.86

 
8.12

Tangible common equity to tangible assets1
8.38

 
8.12

Regulatory capital ratios (Bank):
 
 
 
Tier 1 leverage ratio
10.00
%
 
8.99
%
Tier 1 risk-based capital ratio and common equity Tier 1 capital ratio
14.23

 
10.79

Total risk-based capital ratio
15.51

 
12.95

Asset quality data and ratios:
 
 
 
Allowance for loan losses
$
82,092

 
$
66,939

Non-performing loans (“NPLs”)
182,046

 
72,924

Non-performing assets (“NPAs”)
206,539

 
82,556

Net charge-offs
8,815

 
1,183

NPAs to total assets
0.68
%
 
0.56
%
NPLs to total loans4 
0.91

 
0.75

Allowance for loan losses to non-performing loans
45.09

 
91.79

Allowance for loan losses to total loans4
0.41

 
0.69

Annualized net charge-offs to average loans
0.18

 
0.05

_________________________
1 See a reconciliation of as reported financial measures to as adjusted (non-GAAP) financial measures beginning on page 63 below under the caption “Supplemental Reporting of Non-GAAP Financial Measures.”
2 
Includes loans held for sale but excludes the allowance for loan losses.
3 Tax equivalent basis represents interest income earned on municipal securities divided by the applicable Federal tax rate
of 21% for 2018 and 35% for 2017.
4 Total loans excludes loans held for sale.     


49

STERLING BANCORP AND SUBSIDIARIES




Results of Operations
For the three months ended March 31, 2018, we reported net income available to common stockholders of $96,873, or $0.43 per diluted common share, compared to net income available to common stockholders of $39,067, or $0.29 per diluted common share, for the three months ended March 31, 2017. In the three months ended March 31, 2018, we realized a pre-tax net loss on the sale of securities of $5,421 and amortization of non-compete agreements and acquired customer lists of $295. In the three months ended March 31, 2017, we realized a pre-tax net loss on the sale of securities of $23; pre-tax merger related expense in connection with the Astoria Merger of $3,127; and amortization of non-compete agreements and acquired customer lists of $396.

Details of the changes in the various components of net interest income are further discussed below.

Net Interest Income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing 92.6% and 89.4% of total revenue in the three months ended March 31, 2018 and 2017, respectively. Net interest margin is the ratio of taxable equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest bearing liabilities impact net interest income and net interest margin.

We are primarily funded by core deposits. Core deposits include retail, commercial and municipal transaction, money market and savings accounts and certificates of deposit and exclude brokered deposits except for reciprocal brokered deposits through the Promontory Interfinancial Network, including Insured Cash Sweep (“ICS”) and CDAR balances. As of March 31, 2018, we considered 94.7% of our total deposits to be core deposits compared to 92.0% at March 31, 2017. Non-interest bearing demand deposits were $4,019,917 of our total deposits at March 31, 2018, compared to $3,196,841 at March 31, 2017. We believe that our low cost funding base, combined with our composition of earning assets, would have a positive impact on our net interest income and net interest margin in a scenario in which market interest rates increase.

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

50

STERLING BANCORP AND SUBSIDIARIES

 
For the three months ended March 31,
 
2018
 
2017
 
Average
balance
 
Interest
 
Yield/Rate
 
Average
balance
 
Interest
 
Yield/Rate
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Traditional C&I and commercial finance loans
$
5,000,470

 
$
60,873

 
4.94
%
 
$
3,871,664

 
$
48,237

 
5.05
%
Commercial real estate (includes multi-family)
9,028,849

 
103,281

 
4.64

 
4,190,817

 
43,186

 
4.18

ADC
267,638

 
3,671

 
5.56

 
237,451

 
3,125

 
5.34

Commercial loans
14,296,957

 
167,825

 
4.76

 
8,299,932

 
94,548

 
4.62

Consumer loans
361,752

 
4,411

 
4.95

 
280,650

 
3,132

 
4.53

Residential mortgage loans
4,977,191

 
62,379

 
5.01

 
700,934

 
6,890

 
3.93

Total net loans1
19,635,900

 
234,615

 
4.85

 
9,281,516

 
104,570

 
4.57

Securities taxable
3,997,542

 
27,061

 
2.75

 
2,016,752

 
12,282

 
2.47

Securities tax exempt
2,604,633

 
19,382

 
2.98

 
1,256,906

 
11,720

 
3.73

Interest earning deposits
305,270

 
828

 
1.10

 
210,800

 
254

 
0.49

FRB and FHLB stock
290,577

 
3,530

 
4.93

 
123,604

 
1,276

 
4.19

Total securities and other earning assets
7,198,022

 
50,801

 
2.86

 
3,608,062

 
25,532

 
2.87

Total interest earning assets
26,833,922

 
285,416

 
4.31

 
12,889,578

 
130,102

 
4.09

Non-interest earning assets
3,184,367

 
 
 
 
 
1,126,375

 
 
 
 
Total assets
$
30,018,289

 
 
 
 
 
$
14,015,953

 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
3,941,749

 
$
5,623

 
0.58
%
 
$
1,950,332

 
$
1,960

 
0.41
%
Savings2 deposits
2,917,624

 
1,550

 
0.22

 
797,386

 
1,226

 
0.62

Money market deposits
7,393,335

 
10,912

 
0.60

 
3,681,962

 
4,944

 
0.54

Certificates of deposit
2,464,360

 
6,121

 
1.01

 
579,487

 
1,378

 
0.96

Total interest bearing deposits
16,717,068

 
24,206

 
0.59

 
7,009,167

 
9,508

 
0.55

Senior Notes
278,181

 
2,740

 
3.94

 
76,497

 
1,141

 
6.05

Other borrowings
4,146,987

 
17,678

 
1.73

 
1,550,183

 
4,212

 
1.10

Subordinated Notes
172,735

 
2,352

 
5.45

 
172,524

 
2,349

 
5.45

Total borrowings
4,597,903

 
22,770

 
2.01

 
1,799,204

 
7,702

 
1.74

Total interest bearing liabilities
21,314,971

 
46,976

 
0.89

 
8,808,371

 
17,210

 
0.79

Non-interest bearing deposits
3,971,079

 
 
 
 
 
3,177,448

 
 
 
 
Other non-interest bearing liabilities
488,342

 
 
 
 
 
161,049

 
 
 
 
Total liabilities
25,774,392

 
 
 
 
 
12,146,868

 
 
 
 
Stockholders’ equity
4,243,897

 
 
 
 
 
1,869,085

 
 
 
 
Total liabilities and stockholders’ equity
$
30,018,289

 
 
 
 
 
$
14,015,953

 
 
 
 
Net interest rate spread3
 
 
 
 
3.42
%
 
 
 
 
 
3.30
%
Net interest earning assets4
$
5,518,951

 
 
 
 
 
$
4,081,207

 
 
 
 
Net interest margin - tax equivalent
 
 
238,440

 
3.60
%
 
 
 
112,892

 
3.55
%
Less tax equivalent adjustment
 
 
(4,070
)
 
 
 
 
 
(4,102
)
 
 
Net interest income
 
 
$
234,370

 
 
 
 
 
$
108,790

 
 
Ratio of interest earning assets to interest bearing liabilities
125.9
%
 
 
 
 
 
146.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 Includes the effect of net deferred loan origination fees and costs and non-accrual loans. Interest includes prepayment fees and late charges.
2 Includes club accounts and interest bearing mortgage escrow balances.
3 Net interest rate spread represents the difference between the tax equivalent yield on average interest earning assets and the cost of average interest bearing liabilities.
4 Net interest earning assets represents total interest earning assets less total interest bearing liabilities.

51

STERLING BANCORP AND SUBSIDIARIES

The following table presents the dollar amount of changes in interest income (on a fully tax equivalent basis) and interest expense for the major categories of our interest earning assets and interest bearing liabilities for the periods indicated. Information is provided for each category of interest earning assets and interest bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior period average rate); and (ii) changes attributable to changes in rate (i.e., changes in average rate multiplied by prior period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
 
For the three months ended March 31,
 
2018 vs 2017
 
Increase (Decrease)
due to
 
Total
increase
 
Volume
 
Rate
 
(decrease)
Interest earning assets:
 
 
 
 
 
Traditional C&I and commercial finance loans
$
15,775

 
$
516

 
$
16,291

Commercial real estate (includes multi-family)
54,146

 
2,372

 
56,518

ADC
407

 
61

 
468

Commercial loans
70,328

 
2,949

 
73,277

Consumer loans
968

 
311

 
1,279

Residential mortgage loans
53,097

 
2,392

 
55,489

Total loans
124,393

 
5,652

 
130,045

Securities taxable
13,250

 
1,529

 
14,779

Securities tax exempt
10,366

 
(2,704
)
 
7,662

Interest earning deposits
152

 
422

 
574

FRB and FHLB stock
1,993

 
261

 
2,254

Total interest earning assets
150,154

 
5,160

 
155,314

Interest bearing liabilities:
 
 
 
 
 
Interest bearing demand deposits
2,605

 
1,058

 
3,663

Savings1 deposits
1,526

 
(1,202
)
 
324

Money market deposits
5,374

 
594

 
5,968

Certificates of deposit
4,669

 
74

 
4,743

Total interest bearing deposits
14,174

 
524

 
14,698

Senior Notes
2,095

 
(496
)
 
1,599

Other borrowings
10,129

 
3,337

 
13,466

Subordinated Notes
3

 

 
3

Total borrowings
12,227

 
2,841

 
15,068

Total interest bearing liabilities
26,401

 
3,365

 
29,766

Change in tax equivalent net interest income
123,753

 
1,795

 
125,548

Less tax equivalent adjustment
2,854

 
(2,886
)
 
(32
)
Change in net interest income
$
120,899

 
$
4,681

 
$
125,580

 
 
 
 
 
 
__________________
1 Includes club accounts and interest bearing mortgage escrow balances.

Tax equivalent net interest income increased $125,548 to $238,440 for the three months ended March 31, 2018, compared to $112,892 for the three months ended March 31, 2017. The increase was mainly due to an increase in average interest earning assets of $13,944,344, or 108.2%. Also contributing to the increase in net interest income was an increase in accretion income on acquired loans, which was $30,340 for the three months ended March 31, 2018 compared to $3,482 for the three months ended March 31, 2017. The tax equivalent net interest margin increased five basis points to 3.60% from 3.55% in the first quarter of 2017. The yield on interest earning assets was 4.31% compared to 4.09% for the three months ended March 31, 2017, which was mainly due to the increase in accretion income on acquired loans. The percentage of loans to average earning assets increased to 73.2% from 72.0% for the three months ended March 31, 2017. The cost of interest bearing liabilities increased to 0.89% for the three months ended

52

STERLING BANCORP AND SUBSIDIARIES

March 31, 2018 compared to 0.79% for the three months ended March 31, 2017, which was due mainly to higher interest rates paid on deposits and borrowings due to increases in market interest rates.

The average balance of loans outstanding increased $10,354,384, or 111.6%, for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The increase was mainly due to the Astoria Merger and organic commercial loan growth generated by our commercial banking teams. The average yield on loans was 4.85% compared to 4.57% in the comparable year ago period. The increase in the yield on loans was mainly due to the increase in accretion income on acquired loans.

Interest income on traditional C&I and commercial finance loans increased $16,291 and was $60,873 for the three months ended March 31, 2018 compared to $48,237. This increase was mainly due from organic loan growth. However, the yield on traditional C&I and commercial finance loans declined to 4.94% compared to 5.05% for the three months ended March 31, 2017. The decline in yield was due to lower accretion income on traditional C&I and commercial finance loans.

Interest income on commercial real estate loans and multi-family loans increased $56,518 to $103,281 for the three months ended March 31, 2018 compared to $43,186. The increase was mainly due to loans acquired in the Astoria Merger. The yield on commercial real estate and multi-family loans was 4.64% compared to 4.18% for the three months ended March 31, 2017. The increase in yield was mainly due to an increase of $12,248 in accretion income on acquired loans.

Interest income on residential mortgage loans increased $55,489 to $62,379 for the three months ended March 31, 2018 compared to $6,890 for the three months ended March 31, 2017. This was mainly due to the Astoria Merger which resulted in an increase of $4,276,257 in the average balance of residential mortgage loans. In addition, accretion income on acquired residential loans increased $14,729.

Tax equivalent interest income on securities increased $22,441 to $46,443 for the three months ended March 31, 2018, compared to $24,002 for the three months ended March 31, 2017. This was mainly the result of an increase of $3,328,517 in the average balance of securities between the periods, resulting from the Astoria Merger. The tax equivalent yield on investment securities decreased 12 basis points to 2.85%. This was mainly due to the change in the federal income tax rate as the tax equivalent adjustment assumed a 35% federal tax rate in 2017 compared to a 21% federal tax rate in 2018 as a result of the Tax Cuts and Jobs Act of 2017. Average tax exempt securities balances grew to $2.6 billion compared to $1.3 billion in the first quarter of 2017.

Average deposits increased $10,501,532 to $20,688,147 in the three months ended March 31, 2018, compared to $10,186,615 for the three months ended March 31, 2017. Average interest bearing deposits increased $9,707,901 compared to the first quarter of 2017. The growth in total deposits was primarily due to the Astoria Merger. The average cost of interest bearing deposits was 0.59% compared to 0.55% in the first quarter of 2017. The average cost of total deposits was 0.47% compared to 0.38% in the first quarter of 2017. The increase in the cost of deposits was mainly due to competitive factors in our market.

Average borrowings increased $2,798,699 to $4,597,903 in the three months ended March 31, 2018, compared to $1,799,204 in the same period a year ago. The increase in average borrowings was mainly used to fund the increase in average earning assets, including growth in loans and investment securities. The average cost of borrowings was 2.01% for the first quarter of 2018, compared to 1.74% for the first quarter of 2017. Market interest rates for borrowings have increased in the last 12 months, which was the main factor contributing to the increase in total the cost of borrowings.

Provision for Loan Losses. The provision for loan losses is determined as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level that is our best estimate of probable incurred credit losses inherent in the outstanding loan portfolio. For the three months ended March 31, 2018 and March 31, 2017, the provision for loan losses was $13,000 and $4,500, respectively. See the section captioned “Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets - Provision for Loan Losses” later in this discussion for further analysis of the provision for loan losses.












53

STERLING BANCORP AND SUBSIDIARIES

Non-interest income. The components of non-interest income were as follows for the periods presented below:
 
For the three months ended
 
March 31,
 
2018
 
2017
Deposit fees and service charges
$
7,003

 
$
3,335

Accounts receivable management / factoring commissions and other related fees
5,360

 
3,769

Bank owned life insurance
3,614

 
1,370

Loan commissions and fees
3,406

 
2,987

Investment management fees
1,825

 
231

Net (loss) on sale of securities
(5,421
)
 
(23
)
Other
2,920

 
1,167

Total non-interest income
$
18,707

 
$
12,836


Non-interest income was $18,707 for the three months ended March 31, 2018, compared to $12,836 in the same period a year ago. Included in non-interest income is net loss on sale of securities, which was $5,421 for the three months ended March 31, 2018, compared to $23 for the for the three months ended March 31, 2017. Net loss or gain on sale of securities is impacted significantly by changes in market interest rates and strategies we use to manage yield, liquidity and interest rate risk, and it is difficult to forecast the amount of net losses or gains consistently. As a result, when we analyze the results of our non-interest income, we exclude gains and losses on sales of securities. Excluding net loss on sale of securities, non-interest income was $24,128 compared to $12,859 for the first quarter of 2017. The increase was mainly due to the Astoria Merger.

Our annualized run-rate of non-interest income excluding securities losses was $97,852 in the first quarter of 2018. Our goal for 2018 is to achieve minimum non-interest income excluding securities gains and losses of $100,000. We anticipate we will be able to achieve this goal through growth in other loan fees, loan swap fees, other fee income generated by our commercial banking teams, syndication fees, deposit fees and service charges driven by commercial treasury management services. Additionally, we continue to evaluate potential acquisitions of commercial finance and other businesses that are also fee income generators.

Deposit fees and service charges were $7,003 for the first quarter of 2018, which represented a $3,668 increase compared to $3,335 for the same period a year ago. The increase in deposit fees and service charges is mainly due to the Astoria Merger.

Accounts receivable management / factoring commissions and other related fees represents fees generated in our factoring and payroll finance businesses. A portion of the fees generated in the factoring and payroll finance businesses are allocated to interest income on loans and the remainder is recognized as fee income. In our factored receivables business, we receive a nonrefundable factoring fee, which is generally a percentage of the factored receivables or sales volume, and is designed to compensate us for the bookkeeping and collection services provided and, if applicable, the credit review of the client’s customer and assumption of customer credit risk. In payroll finance, we provide outsourcing support services for clients in the temporary staffing industry. We generate fee income in exchange for providing full back-office, payroll, tax and accounting services to independently-owned temporary staffing companies. Total fee income in these businesses increased $1,591, or 42.2%, to $5,360 for the three months ended March 31, 2018, compared to $3,769 for the year ago period. The increase in fees between the periods is mainly due to a change in the allocation of total client revenue between interest income and fee income. Total revenue generated by factored receivables and payroll finance clients, including fee income and interest income, was $11,881 in the first quarter of 2018 compared to $11,405 in the first quarter of 2017, an increase of 14.9%. The increase in total revenues was mainly due to higher volumes generated from payroll finance and factoring clients.

Bank owned life insurance (“BOLI”) income represents the change in the cash surrender value of life insurance policies owned by us. BOLI income was $3,614 for the first quarter of 2018, compared to $1,370 in the same period a year ago. The increase was mainly due to BOLI acquired in the Astoria Merger.

Loan commissions and fees income includes fees on lines of credit, loan servicing fees, syndication fees, collateral monitoring, and other loan related fees that are not included in interest income. Loan commissions and fees were $3,406 for the three months ended March 31, 2018 compared to $2,987 for the three months ended March 31, 2017. The increase was mainly due to higher syndication fees between the periods.


54

STERLING BANCORP AND SUBSIDIARIES

Investment management fees represent fees from the sale of mutual funds, annuities and insurance commissions. These revenues were $1,825 in the first quarter of 2018 and $231 in the same period a year ago. We have increased our revenues from the sale of mutual funds, and annuities and generated additional insurance agency commissions as a result of the Astoria Merger.

Net (loss) on sale of securities income represents losses or gains incurred on the sale of securities from our available for sale investment securities portfolio. We realized a net loss on sale of securities of $5,421 in the three months ended March 31, 2018 and a net gain on sale of securities of $23 in the three months ended March 31, 2017. The loss on sale of securities in the first quarter of 2018 was due to the sale of $117,810 lower yielding government agency securities and the proceeds were used to fund a portion of the purchase of Advantage Funding.

Other non-interest income principally includes fees for loan swaps, safe deposit rentals and foreign exchange fees. Other non-interest income increased $1,753 to $2,920 for the first quarter of 2018 from $1,167 for the same period a year ago. The increase was mainly due to the Astoria Merger.

Non-interest expense. The components of non-interest expense were as follows for the periods presented below:
 
For the three months ended
 
March 31,
 
2018
 
2017
Compensation and benefits
$
54,680

 
$
31,187

Stock-based compensation plans
2,854

 
1,736

Occupancy and office operations
17,460

 
8,134

Information technology
11,718

 
2,469

Amortization of intangible assets
6,052

 
2,229

FDIC insurance and regulatory assessments
5,347

 
1,888

Other real estate owned expense, net
364

 
1,676

Merger-related expense

 
3,127

Other non-interest expense
13,274

 
7,904

Total non-interest expense
$
111,749

 
$
60,350


Non-interest expense for the three months ended March 31, 2018 was $111,749, a $51,399 increase compared to $60,350 for the three months ended March 31, 2017. Our annualized run-rate of total non-interest expense excluding amortization of intangible assets was $428,660 in the first quarter of 2018. Our goal for 2018 is to achieve operating expense excluding amortization of intangibles of approximately $425,000. Changes in the components of non-interest expense are discussed below.

Compensation and benefits expense was $54,680 for the three months ended March 31, 2018, compared to $31,187 for the three months ended March 31, 2017. As of March 31, 2018, our full-time equivalent employees were 2,016 compared to 978 at March 31, 2017. The increase was mainly due to the Astoria merger.

Stock-based compensation plans expense was $2,854 in the first quarter of 2018, compared to $1,736 in the first quarter of 2017. The increase is due to a greater percentage of compensation paid to our executive management and senior personnel in stock awards to better align the interests of management employees to those of our stockholders. For additional information related to our employee benefit plans and stock-based compensation, see Note 11. “Stock-Based Compensation” in the notes to consolidated financial statements included elsewhere in this report.

Occupancy and office operations expense was $17,460 in the first quarter of 2018, compared to $8,134 in the first quarter of 2017. At March 31, 2018, we had 127 financial center locations, compared to 42 financial centers at March 31, 2017. The increase was mainly due to the Astoria Merger. We anticipate we will reduce our total number of financial centers over time. In the first quarter of 2018 we consolidated one financial center and we also announced the sale of our Lake Success headquarters, which is expected to close in the second quarter of 2018. We anticipate we will consolidate six financial centers in the second quarter of 2018.

Information technology expense mainly includes the cost of our core operating system and contracted service and maintenance associated with other data processing systems and was $11,718 in the first quarter of 2018, compared to $2,469 in the first quarter of 2017. The increase in information technology expense is mainly due to the Astoria Merger.


55

STERLING BANCORP AND SUBSIDIARIES

Amortization of intangible assets expense mainly includes amortization of core deposit intangible assets, customer lists and non-compete agreements. Amortization of intangible assets was $6,052 in the three months ended March 31, 2018, compared to $2,229 for the three months ended March 31, 2017. The increase in amortization expense was due mainly to amortization of the core deposit intangible assets recorded in the Astoria Merger. For additional information, see Note 6. “Goodwill and Other Intangible Assets” in the notes to the consolidated financial statements included elsewhere in this report.

FDIC insurance and regulatory assessments expense was $5,347 for the first quarter of 2018, compared to $1,888 for the first quarter of 2017. The increase was mainly due to the Astoria Merger and organic growth in assets.

Other real estate owned (“OREO”) expense, net includes maintenance costs, taxes, insurance, write-downs (subsequent to any write-down at the time of foreclosure or transfer to OREO), and gains and losses from the disposition of OREO. OREO includes real estate assets that have been foreclosed and owned financial center locations that have been closed and are held for sale. OREO expense, net included the following:
 
For the three months ended
 
March 31,
 
2018
 
2017
(Gain) loss on sale
$
(472
)
 
$
25

Direct property write-downs
200

 
1,293

Rental income
(42
)
 
(13
)
Property tax
143

 
162

Other expenses
535

 
209

OREO expense, net
$
364

 
$
1,676


OREO expense, net was $364 for the three months ended March 31, 2018, compared to $1,676 for the three months ended March 31, 2017. The decrease was mainly due to lower direct property write-downs based on updated appraisals and gain on sales of OREO properties. In the three months ended March 31, 2017 we recorded a significant write-down on a residential property, which was subsequently sold during the year.

Merger-related expense was $0 in the three months ended March 31, 2018, compared to $3,127 for the three months ended March 31, 2017. Merger-related expense for the first quarter of 2017 was incurred in connection with the Astoria Merger and consisted mainly of financial and legal advisory fees.

Other non-interest expense mainly includes professional fees, advertising and promotion, communications and operational losses. Also included in other non-interest expense is loan processing, taxes not included in income tax, travel and client entertainment, and training. For the three months ended March 31, 2018,other non-interest expense was $13,274, compared to $7,904 for the three months ended March 31, 2017. The increase was mainly related to the Astoria Merger. See Note 13. “Non-Interest Income and Other Non-Interest Expense” in the notes to the consolidated financial statements included elsewhere in this report for details on significant components.

Income tax expense was $29,456 for the three months ended March 31, 2018 compared to $17,709 for the three months ended March 31, 2017. Income tax expense for the first quarter of 2018 was recorded at our estimated effective tax rate of 23.3%; including our tax benefit associated with our stock-based compensation plans of $379, our effective income tax rate decreased to 23.0%. Income tax expense for the first quarter of 2017 was recorded at our estimated effective tax rate of 32.5%; including a tax benefit associated with our stock-based compensation plans of $742, our effective income tax rate was 31.2%. See Note 10. “Income Taxes” in the notes to the consolidated financial statements included elsewhere in this report for additional information.












56

STERLING BANCORP AND SUBSIDIARIES

Portfolio Loans
The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the periods indicated.
 
March 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
Commercial:
 
 
 
 
 
 
 
C&I:
 
 
 
 
 
 
 
Traditional C&I
$
2,012,462

 
10.1
%
 
$
1,979,448

 
9.9
%
Asset-based lending
806,305

 
4.0

 
797,570

 
4.0

Payroll finance
234,379

 
1.2

 
268,609

 
1.3

Warehouse lending
676,783

 
3.4

 
723,335

 
3.6

Factored receivables
238,258

 
1.2

 
220,551

 
1.1

Equipment financing
694,085

 
3.5

 
679,541

 
3.4

Public sector finance
679,276

 
3.4

 
637,767

 
3.2

Total C&I
5,341,548

 
26.8

 
5,306,821

 
26.5

Commercial mortgage:
 
 
 
 
 
 
 
Commercial real estate
4,207,135

 
21.1

 
4,138,864

 
20.7

Multi-family
4,892,471

 
24.5

 
4,859,555

 
24.3

ADC
262,591

 
1.3

 
282,792

 
1.4

Total commercial mortgage
9,362,197

 
46.9

 
9,281,211

 
46.4

Total commercial
14,703,745

 
73.7

 
14,588,032

 
72.9

Residential mortgage
4,883,452

 
24.5

 
5,054,732

 
25.3

Consumer
352,048

 
1.8

 
366,219

 
1.8

Total portfolio loans
19,939,245

 
100.0
%
 
20,008,983

 
100.0
%
Allowance for loan losses
(82,092
)
 
 
 
(77,907
)
 
 
Total portfolio loans, net
$
19,857,153

 
 
 
$
19,931,076

 
 
Note the percentages in the table above are rounded to the nearest tenth of a percent.

Overview. Total portfolio loans, net, decreased $73,923, to $19,857,153 at March 31, 2018, compared to $19,931,076 at December 31, 2017, as total commercial loans increased $115,713 while residential loans decreased by $171,280, consistent with our strategy of transitioning our loan composition and utilizing repayments received from residential mortgage loans to originate commercial loans. The Advantage Funding Acquisition will increase our equipment financing loans to over $1,200,000 and accelerate the growth of commercial loans in the second quarter of 2018 and thereafter.

At March 31, 2018, total C&I loans comprised 26.8% of the total loan portfolio, compared to 26.5% at December 31, 2017. Commercial mortgage loans comprised 46.9% and 46.4% of the total loan portfolio at March 31, 2018 and December 31, 2017, respectively. Residential mortgage loans comprised 24.5% of the total loan portfolio at March 31, 2018, compared to 25.3% at December 31, 2017. Included in total C&I loans are commercial finance loan portfolios. Our goal is for traditional C&I to represent 20.0% of the total loan portfolio; commercial finance 25.0%; total commercial mortgage 45.0%; and consumer (including residential mortgage) 10.0% of our total loan portfolio.
 
In the first quarter of 2018, traditional C&I grew $33,014, asset-based lending grew $8,735, factored receivables grew $17,707, equipment finance loans grew $14,544 and public sector finance loans grew $41,509 relative to December 31, 2017. These increases were partially offset by declines of $34,230 in payroll finance loans and $46,552 in warehouse lending loans. The decrease in warehouse lending and payroll finance is consistent with performance in prior years, as these business lines typically experience seasonal lows in the first quarter.

Commercial real estate loans increased $68,271 in the three months ended March 31, 2018. Multi-family loans grew $32,916 in the first three months of 2018. The growth was due to continued strong demand for commercial real estate loans in the greater New York metropolitan area.


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STERLING BANCORP AND SUBSIDIARIES

ADC loans, which are a component of commercial mortgage loans, declined $20,201 in the three months ended March 31, 2018. The decrease was due to completion of a construction project, which resulted in the pay-off of the construction loan.. We originate construction loans mainly to select clients mostly within our immediate footprint, many of our new ADC originations are associated with our low income housing tax credits, which are related to our community reinvestment activities.

Residential loans were $4,883,452 at March 31, 2018 compared to $5,054,732 at December 31, 2017. Included in our residential mortgage portfolio are loans that were originated in 2010 or earlier that are interest-only adjustable rate mortgages (“ARM loans”) with terms of up to forty years, which have an initial fixed rate for five or seven years and convert into one year interest-only ARM loans at the end of the initial fixed rate period. Interest-only ARM loans require the borrower to pay interest only during the first ten years of the loan term, which typically results in a material increase in the borrower’s monthly payments upon conversion. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining term. There were $496,688 of interest-only loans and loans that converted to principal amortization status within the past 24 months at March 31, 2018 compared to $599,714 at December 31, 2017.

Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets

Past Due, Non-Performing Loans, Non-Performing Assets (Risk Elements). The table below sets forth the amounts and categories of our NPAs at the dates indicated. There were no asset-based lending, payroll finance, warehouse lending, factored receivables or public sector finance, loans that were non-performing at such dates.
 
March 31,
 
December 31,
 
2018
 
2017
Non-accrual loans:
 
 
 
Traditional C&I
$
34,877

 
$
37,642

Equipment financing
6,555

 
8,099

Commercial real estate
27,839

 
21,720

Multi-family
3,515

 
4,449

ADC
4,189

 
4,205

Residential mortgage
93,377

 
99,958

Consumer
11,393

 
10,284

Total non-accrual loans
181,745

 
186,357

Accruing loans past due 90 days or more
301

 
856

Total NPLs
182,046

 
187,213

OREO
24,493

 
27,095

Total NPAs
$
206,539

 
$
214,308

TDRs accruing and not included above
$
27,379

 
$
13,564

Ratios:
 
 
 
NPLs to total loans
0.91
%
 
0.94
%
NPAs to total assets
0.68

 
0.71


NPAs and NPLs. NPLs include non-accrual loans and accruing loans past due 90 days or more. NPAs include NPLs and OREO. At March 31, 2018, total NPLs declined $5,167 to $182,046 compared to $187,213 at December 31, 2017. This was mainly due to charge-offs, repayments and loans transferred to OREO. Non-accrual loans were $181,745 and loans 90 days past due and still accruing interest which were well secured and in the process of collection were $301 as of March 31, 2018. Non-accrual loans declined $4,612 from $186,357 at December 31, 2017. Loans past due 90 days or more and still accruing declined $555 between the periods.
 
TDRs. TDRs still accruing interest income are loans modified for borrowers that have experienced financial difficulties but are performing in accordance with the terms of their loan and were performing prior to the modification. Loan modification concessions may include actions such as an extension of the maturity date or the lowering of interest rates and monthly payments. At March 31, 2018, current TDRs were $26,614 compared to $13,175 at December 31, 2017. The increase was the result of the designation of a taxi medallion relationship as TDR during the three months ended March 31, 2018 (see “Taxi Medallion Loans” below). This taxi medallion relationship is performing under existing terms. At December 31, 2017, performing TDR loans were mainly secured by real estate. Total TDRs were $54,468 at March 31, 2018, compared to $42,889 at December 31, 2017, of which $27,089 were non-accrual and none were 90 days past due and accruing interest income for the first quarter of 2018. Total TDRs were $42,889 at December 31, 2017, of which $29,325 were non-accrual, none were 90 days past due and accruing, and $13,564 were performing according to their terms and accruing interest income. The decline in non-accrual TDR was mainly due to a charge-off of $2,143 of

58

STERLING BANCORP AND SUBSIDIARIES

on a taxi medallion relationship, in which we also received payments of $136 to further reduce principal outstanding balances. TDR balances are detailed in the TDR section of Note 4. “Portfolio Loans” in the notes to the consolidated financial statements included elsewhere in this report. As of March 31, 2018, there were no commitments to lend additional funds to borrowers with loans that have been classified as TDRs.

OREO. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO until such time as it is sold. In addition, financial centers that were closed or consolidated that are held for sale are also classified as OREO. When real estate is transferred to OREO, it is recorded at fair value less costs to sell. If the fair value less cost to sell is less than the loan balance, the difference is charged against the allowance for loan losses. If the fair value of a financial center that we hold for sale is less than its prior carrying value, we recognize a charge included in other operating expense to reduce the recorded value of the investment to fair value, less costs to sell. After transfer to OREO, we regularly update the fair value of the properties. Subsequent declines in fair value are charged to current earnings and included in other non-interest expense as part of OREO expense.
At March 31, 2018, we had OREO properties with a recorded balance of $24,493, compared to $27,095 at December 31, 2017. The decrease was due to $7,118 in sales and $200 of write-downs to reflect the estimated current sale value of the properties. This was partially offset by OREO additions of $4,716 in the period.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality, such as “substandard”, “doubtful”, or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are charged-off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as “special mention”. As of March 31, 2018, we had $101,904 of loans designated as “special mention” compared to $136,558 at December 31, 2017. The decrease in loans designated as “special mention” at March 31, 2018 compared to December 31, 2017 was mainly due to one special mention asset-based lending loan with a balance of $19,336 at December 31, 2017, which paid in full during the first quarter of 2018; one payroll finance loan that was reclassified to substandard, and two commercial real estate loans that were downgraded to substandard from special mention.

Our determination as to the classification of our assets and the amount of our loan loss allowance are subject to review by our regulators, which can direct the charge-off of loans and order the establishment of additions to our allowance for loan losses. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at March 31, 2018, classified assets consisted of loans of $246,878 and OREO of $24,493. Classified loans were $233,255 and OREO was $27,095 at December 31, 2017. The increase in classified loans in the three months ended March 31, 2018 was mainly due to the payroll finance and commercial real estate loans discussed above that were downgraded from special mention, which was partially offset by charge-offs and repayments.

Taxi Medallion Loans. At March 31, 2018, we had three taxi medallion relationships that totaled $43,570, or 0.22% of portfolio loans, compared to $45,976, or 0.23% of portfolio loans, at December 31, 2017. The decline in the balance between the periods of $2,406 was due to partial charge-offs of $2,143, to reflect the decline in the value of collateral on one of our taxi medallion relationships, and repayments of $263. Our taxi medallion loans are collateralized by New York City taxi medallions, and other corporate and personal collateral of the borrowers. All taxi medallion relationships are classified substandard, two of the relationships are on non-accrual and totaled $30,804 at March 31, 2018, compared to $33,083 at December 31, 2017. The third relationship, which is a performing TDR, had a balance of $12,766 at March 31, 2018. We continue to closely monitor the collateral values, cash flows and performance of each of these loans and are working with our borrowers to reduce these outstanding balances.

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. Our process for determining the appropriate level of allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of, and trends related to, non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries and loan documentation exceptions, among other factors. See Note 5.

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STERLING BANCORP AND SUBSIDIARIES

“Allowance for Loan Losses” in the notes to consolidated financial statements included elsewhere in this report for further information regarding the allowance for loan losses.

The allowance for loan losses increased from $77,907 at December 31, 2017 to $82,092 at March 31, 2018, as the provision for loan losses exceeded net charge-offs by $4,185. The allowance for loan losses at March 31, 2018 represented 45.1% of non-performing loans and 0.41% of total portfolio loans. At December 31, 2017, the allowance for loan losses represented 41.6% of non-performing loans and 0.39% of total portfolio loans. Loans acquired in prior merger transactions were recorded with a fair value adjustment as of the acquisition date that included estimated lifetime credit losses and interest rate adjustments, among other factors (the “loan mark”). A substantial portion of portfolio loans covered by the loan mark continue to carry no allowance for loan losses. As a result, we believe our allowance for loan losses to portfolio loans may not be comparable to other banking entities that have not engaged in mergers and acquisitions.

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (excluding loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
March 31, 2018
 
December 31, 2017
 
Allowance
for loan
losses
 
Loan
balance
 
% of total loans
 
Allowance
for loan
losses
 
Loan
balance
 
% of total loans
Traditional C&I
$
19,410

 
$
2,012,462

 
10.1
%
 
$
19,072

 
$
1,979,448

 
9.9
%
Asset-based lending
6,327

 
806,305

 
4.0

 
6,625

 
797,570

 
4.0

Payroll finance
1,475

 
234,379

 
1.2

 
1,565

 
268,609

 
1.3

Warehouse lending
3,108

 
676,783

 
3.4

 
3,705

 
723,335

 
3.6

Factored receivables
1,169

 
238,258

 
1.2

 
1,395

 
220,551

 
1.1

Equipment financing
6,572

 
694,085

 
3.5

 
4,862

 
679,541

 
3.4

Public sector finance
1,906

 
679,276

 
3.4

 
1,797

 
637,767

 
3.2

Commercial real estate
24,222

 
4,207,135

 
21.1

 
24,945

 
4,138,864

 
20.7

Multi-family
6,747

 
4,892,471

 
24.5

 
3,261

 
4,859,555

 
24.3

ADC
2,032

 
262,591

 
1.3

 
1,680

 
282,792

 
1.4

Residential mortgage
6,019

 
4,883,452

 
24.5

 
5,819

 
5,054,732

 
25.3

Consumer
3,105

 
352,048

 
1.8

 
3,181

 
366,219

 
1.8

Total
$
82,092

 
$
19,939,245

 
100.0
%
 
$
77,907

 
$
20,008,983

 
100.0
%

Impaired Loans. A loan is impaired when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loan values are based on one of three measures: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, our practice is to write-down the loan against the allowance for loan losses so the recorded investment matches the impaired value of the loan. Impaired loans generally include a portion of non-performing loans and accruing and performing TDR loans. At March 31, 2018, we had $78,460 in impaired loans compared to $60,862 at December 31, 2017. The increase in impaired loans between March 31, 2018 and December 31, 2017 was mainly due to designation as a TDR of a taxi medallion relationship that is performing under the terms of its agreement.

PCI Loans. A PCI loan is an acquired loan that has demonstrated evidence of deterioration in credit quality subsequent to origination. As of March 31, 2018, the balance of PCI loans was $186,634, compared to $226,612 at December 31, 2017 and is mainly comprised of loans acquired in the Astoria Merger. The decline was due to borrower repayments, amounts charged-off against the purchase accounting adjustment, and loans that moved to OREO. At March 31, 2018 and December 31, 2017, we held $7,840 and $7,992, respectively, of PCI loans, which are accounted for under the cost-recovery method and were included in our non-accrual loan totals above. The decline between the periods was mainly due to borrower repayments. The remaining PCI loans of $178,794 and $218,620 at March 31, 2018 and December 31, 2017, respectively, are accounted for under applicable guidance, which results in an accretable yield that represents the amount of expected cash flows that exceeds the initial investment in the loan. See the tables of loans evaluated for impairment by segment and changes in accretable yield for PCI loans in Note 4. “Portfolio Loans” in the notes to consolidated financial statements included elsewhere in this report for additional information.

Provision for Loan Losses. We recorded $13,000 in loan loss provision for the three months ended March 31, 2018, compared to $4,500 for the three months ended March 31, 2017. Net charge-offs for the three months ended March 31, 2018 were $8,815, or

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STERLING BANCORP AND SUBSIDIARIES

0.18% of average loans on an annualized basis, compared to net charge-offs of $1,183, or 0.05% of average loans on an annualized basis for the three months ended March 31, 2017. Provision expense for the first three months of 2018 was driven mainly by loans acquired in prior mergers and acquisitions that are now subject to our allowance for loan losses. In addition, organic loan growth and changes in loan classification affected the level of provision in the periods.

Changes in Financial Condition between March 31, 2018 and December 31, 2017

Total assets increased $109,239, or 0.4%, to $30,468,780 at March 31, 2018, compared to $30,359,541 at December 31, 2017. Components of the change in total assets were:
Total portfolio loans decreased by $69,738, or 0.3%, to $19,939,245 at March 31, 2018, compared to $20,008,983 at December 31, 2017. The decrease was mainly due to residential mortgage loan repayments.
Total investment securities increased by $160,725, or 2.5%, to $6,635,286 at March 31, 2018, compared to $6,474,561 at December 31, 2017. This increase was mainly due to our purchase of MBS, corporate securities, and high investment grade tax exempt securities issued by New York State, New York City, other municipal entities in New York, and by other states. Investment securities were 21.8% of total assets at March 31, 2018, compared to 21.3% at December 31, 2017.
Cash and cash equivalents declined by $115,575 to $364,331 at March 31, 2018, compared to $479,906 at December 31, 2017. Cash holdings at December 31, 2017 were elevated based on timing of deposit inflows. The average balance of cash, both interest bearing and non-interest bearing, fluctuated less than $10,000 between the periods.
Other changes in assets included the following:
an increase in Federal Reserve Bank of New York (“FRBNY”) common stock holdings, which we acquired in the first quarter of 2018 as a result of the Astoria Merger. FRBNY common stock increased $73,726 at March 31, 2018 compared to December 31, 2017. Partially offsetting this increase was a decline in Federal Home Loan Bank of New York common stock.
an increase of $39,194 in loans held for sale, which mainly represents originations from our loan syndications team.

Total liabilities increased $75,662, or 0.3%, to $26,195,025 at March 31, 2018, compared to $26,119,363 at December 31, 2017. This increase was mainly due to the following:
Total deposits increased $85,029, or 0.4%, to $20,623,233 at March 31, 2018, compared to $20,538,204 at December 31, 2017. Our core retail, commercial and municipal transaction, money market and savings accounts were $19,538,410, at March 31, 2018, which represented 94.7% of our total deposit balances. The increase in deposits was driven in part by our commercial banking teams, as several of our recent commercial banking hires are focused on growing deposits, as well as growth in municipal deposits. Municipal deposits, excluding municipal certificates of deposits, increased $190,396 to $1,775,472 at March 31, 2018, compared to $1,585,076 at December 31, 2017.
FHLB borrowings decreased $60,294, to $4,449,829 at March 31, 2018, compared to $4,510,123 at December 31, 2017. The decrease in FHLB borrowings was related to growth in deposits and a lower balance of loans outstanding.
 
Supplemental Reporting of Non-GAAP Financial Measures
The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance and to assess our performance compared to our annual budget and strategic plans. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors, analysts, regulators and others information that we use to manage and evaluate our performance each period. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements, and notes thereto, for the quarter ended March 31, 2018, included elsewhere in this report and the year ended December 31, 2017, included in the 2017 Annual Report on Form 10-K.

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STERLING BANCORP AND SUBSIDIARIES

 
March 31,
 
2018
 
2017
The following table shows the reconciliation of stockholders’ equity to tangible common equity and the tangible common equity ratio 1:
Total assets
$
30,468,780

 
$
14,659,337

Goodwill and other intangibles
(1,727,030
)
 
(760,698
)
Tangible assets
28,741,750

 
13,898,639

Stockholders’ equity
4,273,755

 
1,888,613

Preferred stock
(139,025
)
 

Goodwill and other intangibles
(1,727,030
)
 
(760,698
)
Tangible common stockholders’ equity
$
2,407,700

 
$
1,127,915

Common stock outstanding at period end
225,466,266

 
135,604,435

Common stockholders’ equity as a % of total assets
13.57
%
 
12.88
%
Book value per common share
$
18.34

 
$
13.93

Tangible common equity as a % of tangible assets
8.38
%
 
8.12
%
Tangible book value per common share
$
10.68

 
$
8.32

______________
See legend beginning on page 64.
 
For the three months ended March 31,
 
2018
 
2017
The following table shows the reconciliation of reported net income and reported earnings per share (GAAP) to adjusted net income available to common stockholders (non-GAAP) and adjusted diluted EPS (non-GAAP)2:
Income before income tax expense
$
128,328

 
$
56,776

Income tax expense
29,456

 
17,709

Net income (GAAP)
98,872

 
39,067

Adjustments:
 
 
 
Net loss on sale of securities
5,421

 
23

Merger-related expense

 
3,127

Amortization of non-compete agreements and acquired customer lists
295

 
396

Total pre-tax adjustments
5,716

 
3,546

Adjusted pre-tax income
134,044

 
60,322

Adjusted income tax expense
(31,165
)
 
(18,861
)
Adjusted net income (non-GAAP)
102,879

 
41,461

Preferred stock dividend
1,999

 

Adjusted net income available to common stockholders (non-GAAP)
$
100,880

 
$
41,461

 
 
 
 
Weighted average diluted shares
225,264,147

 
135,811,721

Diluted EPS as reported (GAAP)
$
0.43

 
$
0.29

Adjusted diluted EPS (non-GAAP)
0.45

 
0.31

______________
See legend beginning on page 64.


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STERLING BANCORP AND SUBSIDIARIES

 
For the three months ended March 31,
 
2018
 
2017
The following table shows the reconciliation of the reported operating efficiency ratio and adjusted operating efficiency ratio 3:
Net interest income
$
234,370

 
$
108,790

Non-interest income
18,707

 
12,836

Total net revenue
253,077

 
121,626

Tax equivalent adjustment on securities
4,070

 
4,102

Net loss on sale of securities
5,421

 
23

Adjusted total revenue (non-GAAP)
262,568

 
125,751

Non-interest expense
111,749

 
60,350

Merger-related expense

 
(3,127
)
Amortization of intangible assets
(6,052
)
 
(2,229
)
Adjusted non-interest expense (non-GAAP)
$
105,697

 
$
54,994

Reported operating efficiency ratio
44.2
%
 
49.6
%
Adjusted operating efficiency ratio (non-GAAP)
40.3

 
43.7

__________________________
See legend beginning on page 64.
 
For the three months ended March 31,
 
2018
 
2017
The following table shows the reconciliation of reported return on average tangible assets and adjusted return on average tangible assets 4:
Average assets
$
30,018,289

 
$
14,015,953

Average goodwill and other intangibles
(1,730,952
)
 
(762,076
)
Average tangible assets
$
28,287,337

 
$
13,253,877

Net income available to common stockholders
96,873

 
39,067

Net income, if annualized
392,874

 
158,438

Reported return on average tangible assets
1.39
%
 
1.20
%
Adjusted net income (non-GAAP)
$
100,880

 
$
41,461

Annualized adjusted net income
409,124

 
168,147

Adjusted return on average tangible assets (non-GAAP)
1.45
%
 
1.27
%
___________________________
See legend beginning below.



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STERLING BANCORP AND SUBSIDIARIES

 
For the three months ended March 31,
 
2018
 
2017
The following table shows the reconciliation of reported return on average tangible equity and adjusted return on average tangible equity 5:
Average stockholders’ equity
$
4,243,897

 
$
1,869,085

Average preferred stock
(139,151
)
 

Average goodwill and other intangibles
(1,730,952
)
 
(762,076
)
Average tangible common stockholders’ equity
2,373,794

 
1,107,009

Net income available to common stockholders
96,873

 
39,067

Net income, if annualized
392,874

 
158,438

Reported return on average tangible common stockholders’ equity
16.55
%
 
14.31
%
Adjusted net income (non-GAAP)
$
100,880

 
$
41,461

Annualized adjusted net income
409,124

 
168,147

Adjusted return on average tangible common stockholders’ equity (non-GAAP)
17.24
%
 
15.19
%
_______________________
See legend beginning below.

1 Stockholders’ equity as a percentage of total assets, book value per common share, tangible common equity as a percentage of tangible assets and tangible common book value per share provides information to help assess our capital position and financial strength. We believe tangible book value measures improve comparability to other banking organizations that have not engaged in acquisitions that have resulted in the accumulation of goodwill and other intangible assets.

2 Adjusted net income available to common stockholders and adjusted EPS present a summary of our earnings which includes adjustments to exclude certain revenues and expenses (generally associated with discrete merger transactions and non-recurring strategic plans) to help in assessing our recurring profitability.

3 The reported operating efficiency ratio is a non-GAAP measure calculated by dividing our GAAP non-interest expense by the sum of our GAAP net interest income plus GAAP non-interest income. The adjusted operating efficiency ratio is a non-GAAP measure calculated by dividing non-interest expense adjusted for intangible asset amortization and certain expenses generally associated with discrete merger transactions and non-recurring strategic plans by the sum of net interest income plus non-interest income plus the tax equivalent adjustment on securities income and elimination of the impact of gain or loss on sale of securities. The adjusted operating efficiency ratio is a measure we use to assess our operating performance.

4 Reported return on average tangible assets and adjusted return on average tangible assets measures provide information to help assess our profitability.

5 Reported return on average tangible common equity and the adjusted return on average tangible common equity measures provide information to evaluate the use of our tangible common equity.

Liquidity and Capital Resources

Capital. Stockholders’ equity was $4,273,755 as of March 31, 2018, an increase of $33,577 relative to December 31, 2017. The increase was mainly the result of net income available to common stockholders of $96,873. Also contributing was an increase of stock option exercises and stock-based compensation, which totaled $341. These increases were offset by a decline in accumulated other comprehensive loss of $52,878, which was primarily due to a change in the fair value of our available for sale securities portfolio, as well as declared dividends of $15,693 on common stock and $2,194 on preferred stock.

We paid dividends of $0.07 per common share in each quarter of 2017. Most recently, our Board of Directors declared a dividend of $0.07 per common share on April 24, 2018, which is payable May 21, 2018 to our holders as of the record date of May 7, 2018. In addition, on April 16, 2018, we paid a dividend of $2,194 on the Preferred Shares.

Basel III Capital Rules. The Basel III Capital Rules became effective for us on January 1, 2015 (subject to a phase-in period for certain provisions). The rules are discussed in Note 15. “Stockholders’ Equity - Regulatory Capital Requirements” in the notes to consolidated financial statements included elsewhere in this report.

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STERLING BANCORP AND SUBSIDIARIES


Liquidity. As discussed in our 2017 Form 10-K, our liquidity position is continuously monitored and we make adjustments to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset / liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic activity, volatility in the financial markets, unexpected credit events or other significant occurrences. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of March 31, 2018, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, including the Basel III liquidity framework, which, if implemented, would have a material adverse effect on us.

At March 31, 2018, the Bank had $390,011 in cash and cash equivalents on hand and unused borrowing capacity at the FHLB of $7,507,624. In addition, the Bank may purchase federal funds from other institutions and enter into additional repurchase agreements. The Bank had $1,274,198 of securities available to pledge as collateral as of March 31, 2018. The Bank was required to maintain $87,342 of cash on hand or on deposit with the FRB to meet regulatory reserve and clearing requirements at March 31, 2018.

We are a bank holding company and do not conduct operations. Our primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. At March 31, 2018, the Bank had capacity to pay approximately $235,919 of dividends to us and maintain its “well capitalized” status under regulatory guidelines as well as internal capital management policies and procedures. We had cash on hand of $89,941 at March 31, 2018. We currently anticipate that we will use cash on hand, and dividends received from the Bank, to redeem the $77,000 of outstanding 5.50% Senior Notes that mature on July 2, 2018.

On September 5, 2017, we renewed and increased our Credit Facility, which is more fully described in Note 8. “Borrowings” in the notes to consolidated financial statements included elsewhere in this report. The use of proceeds are for general corporate purposes. The Credit Facility has no outstanding balance and requires us and the Bank to maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. We and the Bank were in compliance with all requirements at March 31, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Management believes that our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to limit the exposure of our net interest income to changes in market interest rates. The Bank’s Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment, and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. A committee of our Board of Directors reviews ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.

Management actively evaluates interest rate risk in connection with our lending, investing, and deposit activities. Management emphasizes the origination of commercial real estate loans, C&I loans, and consumer loans. We also invest in shorter-term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest earning assets by increasing our investments in shorter-term loans and securities may help us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.

Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income (“NII”) under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in our and the Bank’s economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The model assumes estimated loan prepayment rates, reinvestment rates and deposit decay rates that management believes is reasonable, based on historical experience during prior interest rate changes.


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STERLING BANCORP AND SUBSIDIARIES

Estimated Changes in EVE and NII. The table below sets forth, as of March 31, 2018, the estimated changes in our (i) EVE that would result from the designated instantaneous changes in the forward rate curves; and (ii) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied on as indicative of actual results.

Interest rates
 
Estimated
 
Estimated change in EVE
 
Estimated
 
Estimated change in NII
(basis points)
 
EVE
 
Amount
 
Percent
 
NII
 
Amount
 
Percent
 
 
(Dollars in thousands)
+300
 
$
4,126,220

 
$
(683,889
)
 
(14.2
)%
 
$
1,019,004

 
$
51,080

 
5.3
 %
+200
 
4,408,410

 
(401,699
)
 
(8.4
)
 
1,008,130

 
40,206

 
4.2

+100
 
4,656,089

 
(154,020
)
 
(3.2
)
 
992,483

 
24,559

 
2.5

0
 
4,810,109

 

 

 
967,924

 

 

-100
 
4,831,664

 
21,555

 
0.4

 
935,013

 
(32,911
)
 
(3.4
)

The table above indicates that at March 31, 2018, in the event of an immediate 200 basis point increase in interest rates, we would expect to experience a 8.4% decrease in EVE and a 4.2% increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on EVE and NII beyond -100 basis points.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and NII require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The EVE and NII table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the re-pricing characteristics of specific assets and liabilities. Accordingly, although the EVE and NII table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes that market interest rates may have on our net interest income. Actual results will likely differ.

During the first quarter of 2018, the federal funds target rate increased a quarter point to 1.50 - 1.75%. U.S. Treasury yields with two year maturities increased 38 basis points from 1.89% to 2.27% over the three months ended March 31, 2018, while the yield on U.S. Treasury 10-year notes increased 34 basis points from 2.40% to 2.74% over the same three month period. The increase in interest rates on longer-term maturities relative to the greater increase in interest rates on short-term maturities resulted in a flatter 2-10 year U.S. Treasury yield curve at March 31, 2018 compared to December 31, 2017.  At its March 2018 meeting, the Federal Open Markets Committee (the “FOMC”) stated that its monetary policy remains accommodative.  The FOMC further stated that it expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate and the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. However, should economic conditions improve at a faster pace than anticipated, the FOMC could increase the federal funds target rate quicker. This could cause the shorter end of the yield curve to rise disproportionately relative to the longer end, thereby resulting in an even flatter yield curve, which may result in greater margin compression.

Item 4. Controls and Procedures

The Company’s management, including the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in our reports filed with the SEC under the Securities Exchange Act of 1934, as amended, is: (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls 


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STERLING BANCORP AND SUBSIDIARIES

There were no changes in the Company’s internal controls over financial reporting during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II
Item 1. Legal Proceedings

The “Litigation” section of Note 16. “Commitments and Contingencies” in the notes to consolidated financial statements included in Part I, Item 1 is incorporated herein by reference.

Item 1A. Risk Factors
For information regarding factors that could affect our business, results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A of our 2017 Form 10-K. There have been no material changes in these risk factors.

The risks described in our 2017 Form 10-K and Form 10-Q for the quarter ended March 31, 2018 are not the only risks that we encounter. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, results of operations, financial condition and/or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosure

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

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Exhibit Number
 
Description
3.1
 
3.2
 
3.3
 
4.1
 
4.2
 
4.3
 
4.4
 
4.5
 
4.6
 
4.7
 
4.8
 
4.9
 
31.1
 
31.2
 
32.0
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document

The Company agrees to furnish to the SEC, upon request, any instrument with respect to long-term debt that the Company has not filed as an exhibit pursuant to the exemption provided by Item 601(b)(4)(iii)(A) of Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Sterling Bancorp
Date:
 
May 4, 2018
By:
/s/ Jack Kopnisky
 
 
 
 
Jack Kopnisky
 
 
 
 
President, Chief Executive Officer and Director
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Date:
 
May 4, 2018
By:
/s/ Luis Massiani
 
 
 
 
Luis Massiani
 
 
 
 
Senior Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
 



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