MOVING FORWARD
DELIVERING PERFORMANCE
2014 Annual Report
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Sterling Bancorp, of which the principal subsidiary is
Sterling National Bank, specializes in the delivery of ser-
vice and solutions to business owners, their families, and
consumers within the communities we serve through teams
of dedicated and experienced relationship managers. Sterling
National Bank offers a complete line of commercial, business, and
consumer banking products and services.
To Our
SHAREHOLDERS:
STERLING BANCORP’S EFFORTS TO BUILD A HIGH PERFORMANCE REGIONAL
BANK MADE A MAJOR LEAP FORWARD IN FISCAL 2014. THE MERGER WITH LEGACY
STERLING HAS BEEN INTEGRATED SUCCESSFULLY. THROUGH THE DEDICATION
AND SKILL OF OUR COLLEAGUES, WE ARE REALIZING NEW REVENUE GROWTH
AND COST EFFICIENCY OPPORTUNITIES.
And we have continued to invest in the expan-
sion of our team-based banking model, which
Realizing Opportunities
When we announced the merger between
enables a more holistic approach to client serv-
legacy Provident and legacy Sterling, which
ice and enhances our ability to capture profit-
we completed on October 31, 2013, we aimed
able loan, deposit and fee-based relationships.
to create a combined banking institution that
To date, the execution of our strategies has
produced strong financial results, reflected
in rising core earnings, compelling returns
on investment, and a $1 billion plus market
capitalization, among other measures. But, we
are not resting on our laurels—in November
2014 we announced a planned merger with
Hudson Valley Holding Corp. that will take our
strategic plans to the next level. Overall, we
would thrive by serving small-to-middle market
commercial and consumer clients in the greater
New York metropolitan area. We are pleased to
report that the opportunities we envisioned at
the time of the merger have met—and in many
cases exceeded—our expectations. We finished
fiscal 2014 as a larger, more profitable company
with over $7.3 billion in assets, $4.8 billion in
total loans and $5.3 billion in deposits.
remain relentlessly focused on achieving our
The “new” Sterling has a greater diversity of
longer-term goals, and are encouraged by
products and services, clients and revenue
our progress to date in driving performance
streams, and is a stronger competitor in a
and delivering growing value to clients and
dynamic marketplace. The integration of the
shareholders.
two companies continues to be achieved
2014 Annual Report 1
0
5
10
15
20
25
30
Net Income
(for the fiscal year ended
September 30)
($ in millions)
$27.7
$25.3
$19.9
Net Income
(for the fiscal year ended
September 30)
($ in millions)
Total Gross Loans
(at September 30)
($ in millions)
0
2014
1000
2000
3000
4000
5000
$27.7
2013
2012
2014
2013
2012
$25.3
$19.9
$4,760
$2,413
$2,119
0
5
10
15
20
25
30
0
1000
2000
3000
4000
5000
Net Income
(for the fiscal year ended
September 30)
($ in millions)
$27.7
Deposit
$25.3
Composition
Total Deposits: $5.3 Billion1
$19.9
Cost of Deposits: 0.18%2
Demand 41%
Muni 19%
Money Market 18%
Savings 13%
CDs and Other 9%
Total Gross Loans
(at September 30)
($ in millions)
2014
2013
2012
Deposit
Composition
Total Deposits: $5.3 Billion1
Cost of Deposits: 0.18%2
$4,760
$2,413
$2,119
2014
2013
2012
2014
2013
2012
0
5
10
15
20
25
30
0
1000
2000
3000
4000
5000
Total Gross Loans
(at September 30)
($ in millions)
2014
2013
2012
$2,413
$2,119
$4,760
ahead of schedule. We have reallocated our
resources to revenue generating opportuni ties,
by hiring more client relationship teams while
consolidating some financial centers and auto-
mating or outsourcing various back office
functions. Overall, we have proven that merger
integration is a differentiating strength of our
team, which will serve the company and its
shareholders well as the financial industry con-
tinues to consolidate.
Taking the Next Strategic Step
In early November 2014, we announced the
Demand 41%
Muni 19%
Money Market 18%
Savings 13%
next step in our high-performance banking
evolution: the signing of a definitive merger
CDs and Other 9%
agreement between Sterling Bancorp and
Hudson Valley Holding Corp. As was true of
legacy Sterling and Provident, this will be a
combination of institutions with complemen-
tary strengths, a shared relationship-based
service culture, and exciting future potential.
When the merger is completed, Sterling will
have approximately $10.7 billion in assets,
0
3
6
9
12
15
$6.6 billion in gross loans, and deposits of
$8.1 billion. The resulting institution will have a
Loan Composition
Total Loans: $4.8 Billion1
Yield on Loans: 4.93%2
footprint spanning New York City, Westchester
County, the Hudson Valley, Long Island and
Commercial and Industrial 44%
Commercial Real Estate 38%
Residential 12%
New Jersey.
Consumer 4%
$12.79
ADC 2%
Hudson Valley is the largest banking institution
0
3
6
9
12
15
Share Price
(at September 30)
2014
2013
2012
$12.79
$10.89
$9.41
Deposit
Composition
Total Deposits: $5.3 Billion1
Cost of Deposits: 0.18%2
Loan Composition
Total Loans: $4.8 Billion1
Yield on Loans: 4.93%2
Demand 41%
Muni 19%
Money Market 18%
Savings 13%
Commercial and Industrial 44%
CDs and Other 9%
Commercial Real Estate 38%
Residential 12%
Consumer 4%
ADC 2%
Share Price
(at September 30)
2014
2013
2012
$10.89
$9.41
Loan Composition
Total Loans: $4.8 Billion1
Yield on Loans: 4.93%2
Commercial and Industrial 44%
Commercial Real Estate 38%
Residential 12%
Consumer 4%
ADC 2%
0
3
6
9
12
15
Share Price
(at September 30)
2014
2013
2012
$12.79
$10.89
$9.41
2 Sterling Bancorp
headquartered in New York’s Westchester
County, and is a perfect strategic fit with
Sterling. In particular, Sterling’s commercial
lending expertise will be complemented by
Hudson Valley’s attractive deposit base. The
resulting institution will have strong asset gen-
eration capabilities, a cost effective funding
mix, and a broad footprint in the dynamic
marketplace centered on New York City and
its surrounding region.
The merger is expected to close in the second
quarter of calendar 2015, subject to approval by
both companies’ shareholders and customary
0
5
10
15
20
25
30
0
1000
2000
3000
4000
5000
0
5
10
15
20
25
30
0
2014
1000
2000
3000
4000
5000
$4,760
Total Gross Loans
(at September 30)
($ in millions)
Total Gross Loans
(at September 30)
($ in millions)
2013
2012
2014
2013
2012
$2,413
$2,119
$2,413
$2,119
$4,760
Net Income
(for the fiscal year ended
September 30)
($ in millions)
Net Income
(for the fiscal year ended
September 30)
($ in millions)
2014
2013
2012
2014
2013
2012
$27.7
$25.3
$19.9
$27.7
$25.3
$19.9
0
0
3
3
6
6
9
9
12
15
12
15
$12.79
$10.89
$9.41
$12.79
$10.89
$9.41
Share Price
(at September 30)
Share Price
(at September 30)
2014
2013
2012
2014
2013
2012
regulatory approvals. The resulting company
will operate under the Sterling Bancorp name
and our principal banking subsidiary will oper-
ate under the name Sterling National Bank.
The leadership team of the “new” company
will reflect the talent of both organizations.
I will continue to serve as Sterling Bancorp’s
President and Chief Executive Officer and Luis
Massiani will continue as Chief Financial Officer.
We are excited by the opportunity to build
on our collective strengths to serve our
combined client base, deliver value to stock-
holders, and support the economies of our
local communities.
Driving Financial Performance
A solid increase in profitability was a highlight
of Sterling Bancorp’s performance over the
past year. Core net income was $57.8 million
for fiscal 2014, excluding the impact of certain
merger-related expenses and other charges,
and core earnings per diluted share were
Deposit
Composition
Total Deposits: $5.3 Billion1
Cost of Deposits: 0.18%2
Deposit
Composition
Total Deposits: $5.3 Billion1
Cost of Deposits: 0.18%2
Demand 41%
Muni 19%
Money Market 18%
Savings 13%
CDs and Other 9%
Demand 41%
Muni 19%
Money Market 18%
Savings 13%
CDs and Other 9%
Loan Composition
Total Loans: $4.8 Billion1
Yield on Loans: 4.93%2
Loan Composition
Total Loans: $4.8 Billion1
Yield on Loans: 4.93%2
Commercial and Industrial 44%
Commercial Real Estate 38%
Residential 12%
Consumer 4%
ADC 2%
Commercial and Industrial 44%
Commercial Real Estate 38%
Residential 12%
Consumer 4%
ADC 2%
1 at September 30, 2014
2 for the fiscal year ended September 30, 2014
$0.72. This represented an increase of 157.4%
compared with fiscal 2013 and is approaching
and 41.2%, respectively, over fiscal 2013. On a
our efficiency ratio target of 55%. In the fourth
GAAP basis, fiscal 2014 net income was $27.7
quarter of fiscal 2014, our core operating effi-
million, or $0.34 per diluted share, compared
ciency ratio was 54.7%.
to net income of $25.3 million, or $0.58 per
diluted share, for the prior fiscal year.
Credit quality remained sound. Non-performing
loans ended fiscal 2014 at $51.0 million, or 1.07%
We are especially proud of Sterling’s progress
of total loans, which has declined steadily over
toward achieving our long-term profitability and
the last several quarters and is below the pre-
return targets. Core return on average tangible
merger level. Net charge-offs have declined
assets for the full year was 0.91% and core
from a year ago. The allowance for loan losses
return on average tangible equity was 11.8%.
at September 30, 2014 was $40.6 million, which
In the fourth quarter of fiscal 2014 we delivered
represented 79.7% of non-performing loans
a 1.06% ROTA and 13.8% ROTE.
and 0.85% of our total loan portfolio.
Creating positive operating leverage by growing
Our capital is strong and we have ample capital
revenues at a faster pace than expenses has
and liquidity to support our organic growth
been key to achieving our profitability targets.
and execute our strategy. At September 30,
As a result, our core operating efficiency ratio
2014, the tangible equity to tangible assets
for fiscal 2014 was 59.4%, which represented
ratio was 7.63% and the Tier 1 leverage ratio
an improvement of over 400 basis points
was 8.12%. At Sterling National Bank, our Tier 1
2014 Annual Report 3
leverage ratio was 9.34%. In June 2014, the
company redeemed all its issued and out-
Building for the Future
While we have more to do in our quest to build
standing 8.375% Cumulative Trust Preferred
a high performance regional bank, our efforts
Securities, an important initiative in reducing
in recent years have gained significant traction.
our cost of capital.
Delivering Growth
We have experienced strong loan growth across
Comparing today’s Sterling Bancorp to the
company as it was in 2011, when we embarked
on our transformational strategy, loans have
increased 179% and deposits are up 131%. Over
multiple asset classes, due to the expanded
the same period, core earnings have grown
range of lending products resulting from the
634%, ROTA has increased more than three-
merger and our investment in additional rela-
fold, and ROTE has nearly quadrupled. Finally,
tionship teams. Total loans were $4.8 billion
our share price has more than doubled in
at the end of fiscal 2014, which represented
three years.
growth of 16% since the completion of the
legacy Sterling merger. Our mix of business
is well balanced across commercial and indus-
trial, commercial real estate and consumer
asset classes.
Our progress to date reinforces our confi-
dence in Sterling’s potential to become the
high performance institution that we have
envisioned. And the recently announced
Hudson Valley transaction is another major
Total deposits were $5.3 billion at September
step toward that goal.
30, 2014. Our funding base remains extremely
cost efficient, with retail, commercial and
municipal transaction, money market and sav-
ings accounts of $4.8 billion, or 90.2% of total
deposit balances and a cost of deposits of
approximately 18 basis points in fiscal 2014.
During the year we continued to refine our
team-based, relationship banking approach
to serving our clients by adding new teams
and individual team members. Sterling has
a total of 21 relationship teams, which offer
small-to-midsized businesses in New York City,
Westchester County, Long Island, New Jersey,
and the Hudson Valley a highly client-focused
level of service and deliver our full range of
financial services.
We deeply appreciate the loyalty of our clients,
the commitment of our employees, and the
confidence of our shareholders, and we look
forward to rewarding your support through
our continued growth and performance.
Jack L. Kopnisky
President and Chief Executive Officer
4 Sterling Bancorp
MOVING FORWARD
DELIVERING PERFORMANCE
2014 Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2014 Commission File Number: 001-35385
________________________
STERLING BANCORP
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
400 Rella Blvd., Montebello, New York
(Address of Principal Executive Office)
80-0091851
(IRS Employer
Identification Number)
10901
(Zip Code)
(845) 369-8040
(Registrant’s Telephone Number including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, par value $0.01 per share
Name of Each Exchange On Which Registered
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
____________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act YES
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
shorter period that the registrant was required to submit and post such files) YES
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer — See definition of
“accelerated and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).
NO
NO
NO
NO
Large Accelerated Filer
Non-Accelerated Filer
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the
common stock as of March 31, 2014 was $1,057,670,927
NO
As of November 25, 2014 there were 83,899,070 outstanding shares of the Registrant’s common stock.
___________________________________
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders (Part III) to be filed within 120 days after the end of the Registrant’s fiscal year ended
September 30, 2014.
STERLING BANCORP
FORM 10-K TABLE OF CONTENTS
September 30, 2014
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
SIGNATURES
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13
18
19
19
19
20
23
27
60
61
125
125
125
126
126
126
126
126
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130
ITEM 1. Business
PART I
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Forward-Looking Statements”
in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary
statements set forth elsewhere in this report.
Sterling Bancorp
Sterling Bancorp (“Sterling” or the “Company”) is a Delaware corporation that owns all of the outstanding shares of common stock of
Sterling National Bank (the “Bank”), which is the Company’s principal subsidiary. At September 30, 2014, the Company had, on a
consolidated basis, $7.3 billion in assets, $5.3 billion in deposits, stockholders’ equity of $961.1 million and 83,628,267 shares of common
stock outstanding. Our financial condition and results of operations are discussed herein on a consolidated basis with the Bank.
On October 31, 2013, Provident New York Bancorp (“Legacy Provident”) and the former Sterling Bancorp (“Legacy Sterling”) merged.
In connection with the merger, the Company completed the following corporate actions:
• Legacy Sterling merged with and into Legacy Provident, the accounting acquirer and the surviving entity.
• The Company changed its legal entity name to Sterling Bancorp and became a bank holding company and a financial holding
•
company, as defined by the Bank Holding Company Act of 1956, as amended.
Sterling National Bank, which was owned by Legacy Sterling, merged into Provident Bank, which was owned by Legacy
Provident.
• The Bank changed its legal entity name to Sterling National Bank.
We refer to the transactions detailed above collectively as the “Merger”.
The Merger was a stock-for-stock transaction valued at $457.8 million based on the closing price of Legacy Provident’s common stock
on October 31, 2013. Under the terms of the Merger, each share of Legacy Sterling was converted into the right to receive 1.2625 shares
of Legacy Provident’s common stock. Consistent with our strategy of expanding in the greater New York metropolitan region, we believe
the Merger has created a larger, more diversified company and accelerated the build-out of our differentiated strategy targeting small-to-
middle market commercial clients and consumers. See additional disclosure regarding the Merger in Note 2. “Acquisitions” to the
consolidated financial statements.
Pending Acquisition of Hudson Valley Holding Corp.
On November 5, 2014, the Company announced it had entered into a definitive merger agreement with Hudson Valley Holding Corp.
(NYSE: HVB) (the “HVB Merger”). In the HVB Merger, which is a stock-for-stock transaction valued at approximately $539 million based
on the closing price of Company common stock on November 4, 2014, Hudson Valley Holding Corp. shareholders will receive a fixed
ratio of 1.92 shares of Company common stock for each share of Hudson Valley Holding Corp. common stock. Upon closing, the
Company’s shareholders will own approximately 69% of stock in the combined company and Hudson Valley Holding Corp. shareholders
will own approximately 31%.
On a pro forma combined basis, for the twelve months ended September 30, 2014, the companies had revenue of $363 million and $22
million in net income. Upon completion of the HVB Merger, the combined company is expected to have approximately $10.7 billion in
assets, $6.6 billion in gross loans, and deposits of $8.1 billion. The HVB Merger will further the Company’s strategy of expanding in
the greater New York metropolitan region by providing the Company with a significant presence and deposit market share in Westchester
County, New York, and will create an opportunity to realize significant operating expense savings. The transaction is expected to be
accretive to earnings per share in fiscal 2015 and 2016.
The transaction is subject to approval by shareholders from both companies, regulatory approval and other customary closing conditions,
and is expected to close in the second calendar quarter of 2015.
Senior Notes Capital Raise
In connection with the Merger, the Company completed the offering of $100 million of its senior notes due 2018 (the “Senior Notes”)
on July 2, 2013. The Senior Notes, which bear interest at 5.50% annually, were issued under an indenture dated July 2, 2013 (the
“Indenture”) between the Company and U.S. Bank National Association, as trustee. The Senior Notes were sold in a private placement
1
and resold by the initial purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended
(the “Securities Act”).
The Senior Notes are unsecured obligations of the Company and rank equally with all other unsecured unsubordinated indebtedness, and
will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and
structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries. Interest on the Senior Notes is payable
on January 2 and July 2 and began January 2, 2014. Interest is calculated on the basis of a 360-day year of twelve 30-day months. The
Senior Notes will mature on July 2, 2018.
Acquisition of Gotham Bank of New York
On August 10, 2012, the Company acquired Gotham Bank of New York (“Gotham”), a New York state-chartered banking corporation
with approximately $431.5 million in assets, $205.5 million in loans, and $368.9 million in deposits and one branch location in midtown
Manhattan. At the closing, Gotham was merged with and into the Bank, with the Bank as the surviving entity. The shareholders of Gotham
received cash equal to 125% of adjusted tangible net worth, subject to fair value adjustments. The aggregate cash consideration to Gotham
shareholders and option holders was approximately $41 million.
Common Equity Capital Raise
On August 7, 2012, the Company sold directly to several institutional investors an aggregate of 6,258,504 shares of its common stock at
a price of $7.35 per share. The Company received net proceeds of approximately $46 million, which were used to fund the acquisition
of Gotham and for general corporate purposes.
Sterling National Bank
The Bank is a growing full-service regional bank founded in 1888. Headquartered in Montebello, New York, the Bank specializes in the
delivery of services and solutions to business owners, their families and consumers within the communities we serve through teams of
dedicated and experienced relationship managers. Sterling National Bank offers a complete line of commercial, business, and consumer
banking products and services. As of September 30, 2014, the Bank had $7.3 billion in assets, $5.3 billion in deposits and 836 full-time
equivalent employees.
Subsidiaries
The Company and the Bank maintain a number of wholly-owned subsidiaries, including a real estate investment trust that holds real
estate mortgage loans, several subsidiaries that hold foreclosed properties acquired by the Bank, a Vermont captive insurance company
and other subsidiaries that have an immaterial impact on the financial condition or results of operations of the Company.
Additional Information
The Company’s website (www.sterlingbancorp.com) contains a direct link to the Company’s filings with the Securities and Exchange
Commission (“SEC”), including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to these filings, registration statements on Form S-4, as well as ownership reports on Forms 3, 4 and 5 filed by the
Company’s directors and executive officers. Copies may also be obtained, without charge, by written request to Sterling Bancorp, 400
Rella Boulevard, Montebello, New York 10901, Attention: Investor Relations. Sterling’s website is not part of this Annual Report on
Form 10-K.
Strategy
Through its subsidiary Sterling National Bank, the Company operates as a regional bank providing a broad offering of deposit, lending
and wealth management products to commercial, consumer and municipal clients in its market area. The Bank seeks to differentiate itself
by focusing on the following principles:
Prioritize client relationships over transactions.
•
• Compete on service experience versus price superiority.
• Deploy a single point of contact, relationship-based distribution strategy through our commercial banking teams and financial
centers.
Focus on specific customer segments and geographic markets.
•
• Maximize efficiency through a technology enabled, low-cost operating platform.
• Maintain strong risk management systems.
Our strategic objectives include generating sustainable growth in revenues and earnings by expanding client acquisitions, improving asset
quality and increasing operating efficiency. To achieve these goals we are: 1) focusing on high value client segments; 2) expanding our
2
delivery and distribution channels; 3) creating a high productivity and performance culture; 4) controlling our operating costs; and 5)
proactively managing enterprise risk.
We focus on delivering products and services to small and middle market commercial businesses and affluent consumers. We believe
that this is a client segment that is underserved by larger bank competitors in our market area.
The Bank targets the following geographic markets: the New York Metro Market, which includes Manhattan and Long Island; and the
New York Suburban Market, which consists of Rockland, Orange, Sullivan, Ulster, Putnam and Westchester counties in New York and
Bergen County in New Jersey. We believe the Bank operates in an attractive footprint that presents us with significant opportunities to
execute our strategy. Based on data from Oxxford Information Technology, we estimate the total number of small and middle market
businesses in our footprint exceeds 550 thousand.
We deploy a team-based distribution strategy in which clients are served by a focused and experienced group of relationship managers
that are responsible for all aspects of the client relationship and delivery of our products and services. A significant portion of the Bank’s
organic growth in 2014 was driven by the recruitment of new teams. As of September 30, 2014, the Bank had 21 commercial banking
teams. We expect to continue to grow deposits and loan balances through the addition of new teams.
The Bank focuses on building client relationships that allow us to gather low cost, core deposits and originate high quality loans. The
Bank maintains a disciplined pricing strategy on deposits that allows us to compete for loans while maintaining an appropriate spread
over funding costs. We offer diverse loan products to commercial businesses, real estate owners, real estate developers and consumers.
In 2014, we continued to emphasize growth in our commercial loan balances; as a result, we believe that we have a high quality, diversified
loan portfolio with a favorable mix of loan types, maturities and yields.
The Company augments organic growth with opportunistic acquisitions. Between fiscal 2002 and October 2013, the Company completed
seven acquisitions, including: National Bank of Florida in 2002; Ellenville National Bank in 2004; Warwick Community Bancorp in
2005; a branch office of HSBC Bank USA in 2005; Hudson Valley Investment Advisors in 2007; Gotham Bank of New York in August
2012; and Legacy Sterling on October 31, 2013. These acquisitions have supported the expansion of the Company into attractive markets
and diversified businesses. See additional disclosure of our acquisitions in Note 2. “Acquisitions” to the consolidated financial statements.
On November 5, 2014, the Company announced its pending acquisition of Hudson Valley Holding Corp. which is detailed previously in
this section.
Competition
The greater New York metropolitan region is a highly competitive market area with a concentration of financial institutions, many of
which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying
degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions,
insurance companies and other financial services companies. Our most direct competition for deposits has historically come from
commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such
as mutual funds, securities and brokerage firms and insurance companies. We have emphasized relationship banking and the advantage
of local decision-making in our banking business. We do not rely on any individual, group, or entity for a material portion of our deposits.
Net interest income could be adversely affected should competitive pressures cause us to increase the interest rates paid on deposits in
order to maintain our market share.
Employees
As of September 30, 2014, we had 836 full-time equivalent employees. The employees are not represented by a collective bargaining
unit and we consider our relationship with our employees to be good.
Supervision and Regulation
General
Sterling Bancorp and Sterling National Bank are subject to extensive regulation under federal and state laws. The regulatory framework
is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the
protection of stockholders and creditors.
Significant elements of the laws and regulations applicable to the Company and the Bank are described below. The description is qualified
in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and
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policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes,
regulations or regulatory policies applicable to Sterling and its subsidiaries could have a material effect on the business, financial condition
and results of operations of the Company. While the Bank currently has less than $10 billion in assets, after the completion of the HVB
Merger, the Bank’s total assets could exceed $10 billion, thus subjecting it to additional supervision and regulation, including by the
Consumer Financial Protection Bureau (“CFPB”), with such additional supervision and regulation discussed throughout this section.
Regulatory Reforms
The Dodd-Frank Act significantly restructures the financial regulatory regime in the United States, and will continue to affect, into the
immediate future, the lending and investment activities and general operations of depository institutions and their holding companies.
This will particularly be the case for the Company and the Bank if, as anticipated, the Bank’s total assets exceed $10 billion as a result
of the HVB Merger.
The Dodd-Frank Act made many changes in banking regulation, including:
•
•
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forming the CFPB with broad powers to adopt and enforce consumer protection regulations;
the standard maximum amount of deposit insurance per customer was permanently increased to $250,000;
the assessment base for determining deposit insurance premiums has been expanded from domestic deposits to average
assets minus average tangible equity; and
the Federal Reserve Board (the “FRB”) has imposed on financial institutions with assets of $10 billion or more a cap on
the debit card interchange fees the financial institutions may charge.
In addition, the Dodd-Frank Act requires that the FRB establish minimum consolidated capital requirements for bank holding companies
that are as stringent as those required for insured depository institutions, and that the components of Tier 1 capital be restricted to capital
instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred
securities will be excluded from Tier 1 capital unless (i) such securities are issued by bank holding companies with assets of less than
$500 million, or (ii) such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with assets of less
than $15 billion.
Many of the provisions of the Dodd-Frank Act are not yet effective. The Dodd-Frank Act requires various federal agencies to promulgate
numerous and extensive implementing regulations over the next several years. Although it is difficult to predict at this time what impact
the Dodd-Frank Act and the implementing regulations will have on the Company and the Bank, they may have a material impact on
operations through, among other things, heightened regulatory supervision and increased compliance costs. The Company continues to
analyze the impact of rules adopted under the Dodd-Frank Act on the Company’s business. However, the full impact will not be known
until the rules, and other regulatory initiatives that overlap with the rules, are finalized and their combined impacts can be understood.
Regulatory Agencies
Sterling Bancorp is a legal entity separate and distinct from Sterling National Bank and its other subsidiaries. As bank and a financial
holding company, Sterling Bancorp is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and its
subsidiaries are subject to inspection, examination and supervision by the FRB as its primary federal regulator.
As a national bank, the Bank is principally subject to the supervision, examination and reporting requirements of the Office of the
Comptroller of the Currency (the “OCC”), as its primary federal regulator, as well as the Federal Deposit Insurance Corporation (the
“FDIC”). Insured banks, including the Bank, are subject to extensive regulations that relate to, among other things: (a) the nature and
amount of loans that may be made by the Bank and the rates of interest that may be charged; (b) types and amounts of other investments;
(c) branching; (d) permissible activities; (e) reserve requirements; and (f) dealings with officers, directors and affiliates.
Bank Holding Company Activities
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities
that the FRB has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies
that qualify and elect to be financial holding companies such as the Company, may engage in any activity, or acquire and retain the shares
of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the
FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk
to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior
approval of the FRB.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well
capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements
for this status discussed in the section captioned “Prompt Corrective Action.” A depository institution subsidiary is considered “well
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managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial
holding company’s status will also depend upon it maintaining its status as “well capitalized” and “well managed” under applicable FRB
regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide
that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management
requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct
of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies
or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance
within 180 days, the FRB may require divestiture of the holding company’s depository institutions.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in
any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have
received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or
control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of banks and banking companies. The BHC
Act requires the prior approval of the FRB for the direct or indirect acquisition by the Company of more than 5% of the voting shares or
substantially all of the assets of a bank or bank holding company. Under the Bank Merger Act, the prior approval of the FRB or other
appropriate bank regulatory authority is required for the Bank to merge with another bank or purchase the assets or assume the deposits
of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will
consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined
organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community
Reinvestment Act and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.
Capital Requirements
As a bank holding company, the Company is subject to consolidated regulatory capital requirements administered by the FRB. The Bank
is subject to similar capital requirements administered by the OCC. The federal regulatory authorities’ risk-based capital guidelines are
based upon the 1988 capital accord (“Basel I”) of the Basel Committee, which are intended to ensure that banking organizations have
adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations
are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet
items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance
sheet commitments and obligations are assigned to various risk categories. A banking organization’s capital, in turn, is classified in tiers,
depending on type:
Core Capital (Tier 1)
Currently, Tier 1 capital includes common equity, retained earnings, qualifying noncumulative perpetual preferred stock, minority interests
in equity accounts of consolidated subsidiaries, and, under existing standards, a limited amount of qualifying trust preferred securities,
and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill, most intangible assets and certain other
assets.
Supplementary Capital (Tier 2)
Currently, Tier 2 capital includes, among other things, perpetual preferred stock not meeting the Tier 1 definition, qualifying mandatory
convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.
Under the existing risk-based capital rules, the Company and the Bank are currently required to maintain Tier 1 capital and total capital
(the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various
off-balance-sheet items, such as standby letters of credit). For a depository institution to be considered “well capitalized,” its Tier 1 and
total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively.
The elements currently comprising Tier 1 capital and Tier 2 capital and the minimum Tier 1 capital and total capital ratios may in the
future be subject to change, as discussed in more detail below.
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio
of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements
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necessitate a minimum leverage ratio of 3.0% for financial holding companies and banking organizations that have the highest supervisory
rating. All other banking organizations are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified
by an appropriate regulatory authority. For a depository institution to be considered “well capitalized,” its leverage ratio must be at least
5.0%. The bank regulatory agencies have encouraged banking organizations to operate with capital ratios substantially in excess of the
stated ratios required to maintain “well capitalized” status. In light of the foregoing, the Company and the Bank expect that they will
maintain capital ratios in excess of well capitalized requirements.
Prompt Corrective Action
The Federal Deposit Insurance Act (“FDIA”) requires, among other things, the federal banking agencies to take “prompt corrective action”
in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers:
“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A
depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain
other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage
ratio.
Currently, a depository institution will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any regulatory order
agreement or written directive to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the
institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio
of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less
than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized”
if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio
of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of total assets. An
institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined
to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s
capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not
constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying
any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized”
institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a
plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the
depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding
company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide
appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount
equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or
would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution
as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly
undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits
from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as
adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines
(after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging
in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory
provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically
undercapitalized) based on supervisory information other than the capital levels of the institution.
Sterling believes that, as of September 30, 2014, its bank subsidiary, Sterling National Bank, was “well capitalized” based on the
aforementioned ratios. For further information regarding the capital ratios and leverage ratio of the Company and the Bank, see the
discussion under the section captioned “Capital and Liquidity” included in Item 7. “Management’s Discussion and Analysis of Financial
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Condition and Results of Operations” and Note 14. “Stockholder’s Equity - Regulatory Capital Requirements” in the notes to consolidated
financial statements included in Item 8. “Financial Statements and Supplementary Data”, elsewhere in this report.
Basel III Capital Rules
In July 2013, the Company’s and the Bank’s primary federal regulators, the FRB and the OCC, respectively, approved final rules known
as the “Basel III Capital Rules” that substantially revise the risk-based capital and leverage capital requirements applicable to bank holding
companies and depository institutions with total consolidated assets of $500 million or more, including the Company and the Bank. The
Basel III Capital Rules address the components of capital and other issues affecting the numerator in banking institutions’ regulatory
capital ratios. Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to
credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules will come into effect for the Company and the Bank
on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules, among other things, (i) introduce as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specify
that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly
by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv)
expand the scope of the adjustments as compared to existing regulations. CET1 capital consists of common stock instruments that meet
the eligibility criteria in the final rules, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority
interest.
When fully phased-in on January 1, 2019, Basel III Capital Rules require banking organizations to maintain (i) a minimum ratio of CET1
to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer
is phased-in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a
minimum ratio of Tier 1 capital to risk-weighted assets 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 capital) to risk-weighted assets 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) as a newly adopted international standard, a minimum leverage ratio of 4.0%, calculated as
the ratio of Tier 1 capital to adjusted average consolidated assets.
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with
a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of
dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.
With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the
Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with
the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each
category, with the minimum Tier 1 risk-based capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and
(iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% leverage ratio
and still be well-capitalized.
Management believes that, as of September 30, 2014, the Company and the Bank would meet all capital adequacy requirements under
the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective. Requirements to maintain higher
levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income.
Dividend Restrictions
The Company depends on funds maintained or generated by its subsidiaries, principally the Bank, for its cash requirements. Various
legal restrictions limit the extent to which the Bank can pay dividends or make other distributions to the Company. All national banks
are limited in the payment of dividends without the approval of the OCC to an amount not to exceed the net profits (as defined by OCC
regulations) for that year-to-date combined with its retained net profits for the preceding two calendar years, less any required transfers
to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after
deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing restrictions, and while maintaining
its “well capitalized” status, as of September 30, 2014, the Bank could pay dividends of approximately $47.9 million to the Company,
without obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future
periods.
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Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution, such as the Bank, may
not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends
by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital. The
appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a
bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit such payment.
The appropriate federal regulatory authorities have indicated that paying dividends that deplete a banking organization’s capital base to
an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends
only out of current operating earnings.
Source of Strength Doctrine
FRB policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary
banks. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company
may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks.
Deposit Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and
the Bank is subject to deposit insurance assessments to maintain the DIF. Due to the decline in economic conditions, the deposit insurance
provided by the FDIC per account owner was raised to $250,000 for all types of accounts. That change, initially intended to be temporary,
was made permanent by the Dodd-Frank Act.
As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, DIF-insured institutions. It also may prohibit
any DIF-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF.
The FDIC also has the authority to take enforcement actions against insured institutions. Under the Federal Deposit Insurance Act, as
amended (“FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based upon supervisory
evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments. An institution’s
assessment rate depends upon the category to which it is assigned and certain other factors. Historically, assessment rates ranged from
seven to 77.5 basis points of each institution’s deposit assessment base. On February 7, 2011, as required by the Dodd-Frank Act, the
FDIC published a final rule to revise the deposit insurance assessment system. The rule, which took effect April 1, 2011, changed the
assessment base used for calculating deposit insurance assessments from deposits to total assets less tangible (Tier 1) capital. Since the
new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total
amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment
base.
As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, an institution must pay an additional premium
equal to 50 basis points on every dollar (above 3% of an institution’s Tier 1 capital) of long-term, unsecured debt held that was issued
by another insured depository institution (excluding debt guaranteed under the Temporary Liquidity Guarantee Program). The FDIC has
the authority to raise or lower assessment rates, subject to limits, and to impose special additional assessments.
The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured
deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more,
as expected the Bank will reach after the completion of the HVB Merger, are supposed to fund the increase. The Dodd-Frank Act eliminated
the 1.5% maximum fund ratio, leaving it, instead, to the discretion of the FDIC. The FDIC has recently exercised that discretion by
establishing a long-range fund ratio of 2%, which could result in our paying higher deposit insurance premiums in the future.
FDIC deposit insurance expense totaled $5.0 million, $2.4 million and $2.5 million in fiscal 2014, 2013 and 2012, respectively. FDIC
deposit insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding
bonds issued by FICO in the late 1980s to recapitalize the now defunct Federal Savings & Loan Insurance Corporation. The FICO
assessments will continue until the bonds mature in 2017 to 2019.
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Safety and Soundness Regulations
In accordance with the FDIA, the federal banking agencies adopted guidelines establishing general standards relating to internal controls,
information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset
quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices
to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services
performed by an executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal banking
agencies authorize the agencies to require that an institution that has been given notice that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, the institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions
and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective
action” provisions of FDIA. If the institution fails to comply with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
Incentive Compensation
The Dodd-Frank Act requires the federal bank regulatory agencies and the Securities and Exchange Commission (the “SEC”) to establish
joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company
and the Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee,
director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity.
In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based
compensation arrangements. The agencies proposed such regulations in April 2011, but the regulations have not been finalized. If the
regulations are adopted in the form initially proposed, they will impose limitations on the manner in which the Company may structure
compensation for its executives.
In June 2010, the FRB, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that
the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by
encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of
an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive
compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively
identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong
corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are
incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, discussed above.
The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking
organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization
based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The
findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s
supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be
taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to
correct the deficiencies.
Loans to One Borrower
The Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital
and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable
collateral, which generally does not include real estate. As of September 30, 2014, the Bank was in compliance with the loans-to-one-
borrower limitations.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market
areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit
needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository
institutions are periodically examined for compliance with the CRA and are assigned ratings that must be publicly disclosed. In order for
a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new
activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received
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a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA
ratings when considering approval of certain applications. The Bank received a rating of “satisfactory” in its most recent CRA exam.
Financial Privacy
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information
about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations
affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe
the federal banking agencies’ expectations for the creation, implementation and maintenance of an information security program, which
would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature
and scope of its activities.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist
financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money
laundering laws and regulations by imposing significant new compliance and due diligence obligations of financial institutions, creating
new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Failure of a financial institution to maintain
and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or
regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory
authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even
if approval is not required.
Stress Testing
On October 9, 2012, the FDIC and the FRB issued final rules requiring certain large insured depository institutions and bank holding
companies to conduct annual capital-adequacy stress tests. Recognizing that banks and their parent holding companies may have different
primary federal regulators, the FDIC and FRB have attempted to ensure that the standards of the final rules are consistent and comparable
in the areas of scope of application, scenarios, data collection, reporting, and disclosure. To implement section 165(i) of the Dodd-Frank
Act, the rules would apply to FDIC-insured state non-member banks and bank holding companies with total consolidated assets of more
than $10 billion (“covered institutions”). While the Bank currently has less than $10 billion in assets, after completion of the HVB Merger,
the Bank’s total assets could exceed $10 billion. The final rule requirement for public disclosure of a summary of the stress testing results
for $10 billion to $50 billion covered institutions is being implemented starting with the 2014 stress test, with the disclosure occurring
by June 30, 2015. The final rules define a stress test as a process to assess the potential impact of economic and financial scenarios on
the consolidated earnings, losses and capital of the covered institution over a set planning horizon, taking into account the current condition
of the covered institution and its risks, exposures, strategies and activities.
Under the rules, each covered institution with between $10 billion and $50 billion in assets would be required to conduct annual stress
tests using the bank’s and the bank holding company’s financial data as of September 30 of that year to assess the potential impact of
different scenarios on the consolidated earnings and capital of that bank and its holding company and certain related items over a nine-
quarter forward-looking planning horizon, taking into account all relevant exposures and activities. On or before March 31 of each year,
each covered institution, including the Bank and the Company, would be required to report to the FDIC and the FRB, respectively, in the
manner and form prescribed in the rules, the results of the stress tests conducted by the covered institution during the immediately
preceding year. Based on the information provided by a covered institution in the required reports to the FDIC and the FRB, as well as
other relevant information, the FDIC and FRB would conduct an analysis of the quality of the covered institution’s stress test processes
and related results. The FDIC and FRB envision that feedback concerning such analysis would be provided to a covered institution through
the supervisory process. Consistent with the requirements of the Dodd-Frank Act, the rule would require each covered institution to
publish a summary of the results of its annual stress tests within 90 days of the required date for submitting its stress test report to the
FDIC and the FRB.
Volcker Rule
The Dodd-Frank Act amended the BHC Act to require the federal bank regulatory agencies to adopt rules that prohibit banks and their
affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as
hedge funds and private equity funds), commonly referred to as the “Volcker Rule.” The Volcker Rule also requires covered banking
entities to implement certain compliance programs, and the complexity and rigor of such programs is determined based on the asset size
of the covered company. Upon completion of the HVB Merger, we will be subject to heightened compliance requirements as a covered
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banking entity with over $10 billion in assets. The rules were effective April 1, 2014, but the conformance period has been extended from
its statutory end date of July 21, 2014 until July 21, 2015. We continue to evaluate the impact of the Volcker Rule and the final rules
adopted by the Federal Reserve thereunder, and whether it will require the Bank to divest any securities in its portfolio as a result of the
Volcker Rule. The Bank may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule.
Durbin Amendment
The Dodd-Frank Act included provisions which restrict interchange fees to those which are “reasonable and proportionate” for certain
debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. This statutory provision is known
as the “Durbin Amendment.” The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. In the
final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points in order to be eligible for a safe harbor
such that the fee is conclusively determined to be reasonable and proportionate. The interchange fee restrictions contained in the Durbin
Amendment, and the rules promulgated thereunder, only apply to debit card issuers with $10 billion or more in total consolidated assets,
which we expect the Bank will reach after the completion of the HVB Merger.
Transactions with Affiliates
Transactions between the Bank and its affiliates are regulated by the FRB under sections 23A and 23B of the Federal Reserve Act and
related FRB regulations. These regulations limit the types and amounts of covered transactions engaged in by the Bank and generally
require those transactions to be on an arm’s-length basis. The term “affiliate” is defined to mean any company that controls or is under
common control with the Bank and includes the Company and its non-bank subsidiaries. “Covered transactions” include a loan or
extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB)
from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the
affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, these
regulations require that any such transaction by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of
specified collateral and must be limited to certain thresholds on an individual and aggregate basis.
Federal law also limits the Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities
controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially
the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with
unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other
unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the
aggregate, which limits are based, in part, on the amount of the Bank’s capital.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal
Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan
Bank of New York (“FHLBNY”), the Bank is required to acquire and hold shares of capital stock of the FHLBNY in an amount at least
equal to the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the
activity-based stock purchase requirement, determined on a daily basis. For the Bank, the membership stock purchase requirement is
0.15% of the Mortgage-Related Assets, as defined by the FHLBNY, which consists principally of residential mortgage loans and mortgage-
backed securities, held by the Bank. The activity-based stock purchase requirement is equal to the sum of: (1) a specified percentage
ranging from 4.0% to 5.0%, which for the Bank is 4.5%, of outstanding borrowings from the FHLBNY; (2) a specified percentage ranging
from 4.0% to 5.0%, which for the Bank is inapplicable, of the outstanding principal balance of Acquired Member Assets, as defined by
the FHLBNY, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet
items, which for the Bank is inapplicable; and (4) a specified percentage ranging from 0% to 5%, which for the Bank is inapplicable, of
the carrying value on the FHLBNY’s balance sheet of derivative contracts between the FHLBNY and the Bank. The FHLBNY can adjust
the specified percentages and dollar amount from time to time within the ranges established by the FHLBNY capital plan. As of
September 30, 2014, the Bank was in compliance with the minimum stock ownership requirement.
Federal Reserve System
FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand
deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $13.3 million and $89.0 million
(subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion
of total transaction accounts in excess of $89.0 million. The first $13.3 million of otherwise reservable balances (subject to adjustment
by the FRB) is exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements.
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Consumer Protection Regulations
The Bank is subject to federal consumer protection statutes and regulations promulgated under those laws, including, but not limited to
the following:
• Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;
• Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home
mortgage and refinanced loans;
• Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, creed, or other prohibited factors
in extending credit;
Fair Credit Reporting Act and Regulation V, governing the provision of consumer information to credit reporting agencies and
the use of consumer information; and
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies.
•
•
Deposit operations are also subject to:
• The Truth in Savings Act and Regulation DD, which requires disclosure of deposit terms to consumers;
• Regulation CC, which relates to the availability of deposit funds to consumers;
• The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records; and
• Electronic Funds Transfer Act and Regulation E, governing automatic deposits to, and withdrawals from, deposit accounts and
customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
In addition, the Bank may be subject to certain state laws and regulations designed to protect consumers.
Many of the foregoing laws and regulations are subject to change resulting from the provisions in the Dodd-Frank Act, which in many
cases calls for revisions to implementing regulations. In addition, oversight responsibilities of these and other consumer protection laws
and regulations will, in large measure, transfer from the Bank’s primary regulators to the CFPB, which will have supervisory authority
over the Bank if, as anticipated, the Bank’s assets exceed $10 billion after the completion of the HVB Merger. We cannot predict the
effect that being regulated by the CFPB, or any new or revised regulations that may result from its establishment, will have on our
businesses.
Consumer Financial Protection Bureau
Created under the Dodd-Frank Act, and given extensive implementation and enforcement powers over all banks with over $10 billion in
assets, which the Bank expects to reach with the HVB Merger, the CFPB has broad rulemaking authority for a wide range of consumer
financial laws that apply to all banks including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and
practices. Abusive acts or practices are defined as those that (1) materially interfere with a consumer’s ability to understand a term or
condition of a consumer financial product or service, or (2) take unreasonable advantage of a consumer’s (a) lack of financial savvy,
(b) inability to protect himself in the selection or use of consumer financial products or services, or (c) reasonable reliance on a covered
entity to act in the consumer’s interests. The CFPB has the authority to investigate possible violations of federal consumer financial law,
hold hearings and commence civil litigation. The CFPB can issue cease-and-desist orders against banks and other entities that violate
consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in
order to impose a civil penalty or an injunction.
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ITEM 1A. Risk Factors
Changes in laws, government regulation and monetary policy may have a material effect on our results of operations
Financial institutions are the subject of significant legislative and regulatory laws, rules and regulations and may be subject to further
additional legislation, rulemaking or regulation in the future, none of which is within our control. Significant new laws, rules or regulations
or changes in, or repeals of, existing laws, rules or regulations, including, but not limited to, those with respect to federal and state taxation,
may cause our results of operations to differ materially. In addition, the costs and burden of compliance have significantly increased and
could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for the
Bank, as well as for our borrowers, particularly as implemented through the Federal Reserve System, primarily through open market
operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of
these conditions could have a material impact on the Bank or our borrowers, and therefore on our results of operations.
Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions
and requirements that could detrimentally affect our business.
The Dodd-Frank Act and the rules and regulations promulgated thereunder have and continue to significantly impact the United States
bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their
holding companies.
The Dodd-Frank Act broadens the base for FDIC insurance assessments. The FDIC insures deposits at FDIC-insured financial institutions,
including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a specific level. In addition, the
Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits
and the FDIC must seek to achieve the 1.35% ratio by September 30, 2020. The FDIC has issued regulations to implement these provisions
of the Dodd-Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute,
although there is no implementation deadline for the 2% ratio. The FDIC may increase the assessment rates or impose additional special
assessments in the future to keep the DIF at the statutory target level. The Bank’s FDIC insurance premiums increased substantially
beginning in 2009, and we continue to expect to pay high premiums in the future. Any increase in our FDIC premiums could have a
materially adverse effect on the Bank’s financial condition, results of operations and its ability to pay dividends.
Additionally, on December 10, 2013, five financial regulatory agencies, including the Bank’s primary federal regulator, the OCC, adopted
final rules implementing a provision of the Dodd-Frank Act, commonly referred to as the Volcker Rule. The Volcker Rule prohibits
banking entities from, among other things, engaging in short-term proprietary trading of securities, derivatives, commodity futures and
options on these instruments for their own account; or owning, sponsoring, or having certain relationships with hedge funds or private
equity funds, referred to as “covered funds.” The Volcker Rule also requires covered banking entities to implement certain compliance
programs, policies and procedures. The complexity and rigor of such programs is determined based on the asset size of the covered
company. Upon completion of the HVB Merger, we will be subject to heightened compliance requirements as a covered banking entity
with over $10 billion in assets. The rules were effective April 1, 2014, but the conformance period has been extended from its statutory
end date of July 21, 2014 until July 21, 2015. We are currently evaluating the Volcker Rule. If we are required to divest any securities in
our portfolio, hire additional compliance or personnel, design and implement additional internal controls or incur other significant expenses
as a result of the Volcker Rule, it could result in impairments that could materially adversely affect our financial condition, results of
operations and our ability to pay dividends or repurchase shares.
The Dodd-Frank Act also significantly impacts the various consumer protection laws, rules and regulations applicable to financial
institutions. First, it rolls back the federal preemption of state consumer protection laws that was enjoyed by national banks by (1) requiring
that a state consumer financial law prevent or significantly interfere with the exercise of a national bank’s powers before it can be
preempted, (2) mandating that any preemption decision be made on a case by case basis rather than a blanket rule, and (3) ending the
applicability of preemption to subsidiaries and affiliates of national banks. As a result, we may now be subject to state consumer protection
laws in each state where we do business, and those laws may be interpreted and enforced differently in each state. In addition, the Dodd-
Frank Act created the CFPB, which has assumed responsibility for supervising financial institutions which have assets of $10 billion or
more for their compliance with the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit
Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Savings Act, among others (institutions which have assets
of $10 billion or less will continue to be supervised in this area by their primary federal regulators) . While the Bank currently has less
than $10 billion in assets, after the completion of the HVB Merger we believe that the Bank’s total assets will exceed $10 billion, thus
making it subject to the CFPB’s supervision. Thus, in addition to a variety of new consumer protection laws, rules and regulations that
we may be subject to, the Bank may also be subject to a new agency with evolving regulations and practices.
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The scope and impact of many of the Dodd-Frank Act provisions, including the authority provided to the CFPB, will continue to be
determined over time as rules and regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the
Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities
in an efficient manner, or otherwise adversely affect our business, financial condition, results of operations and our ability to pay dividends
or repurchase shares. However, it is expected that at a minimum they will increase our operating and compliance costs. Compliance with
these requirements may necessitate that we hire additional compliance or other personnel, design and implement additional internal
controls, or incur other significant expenses, any of which could have a material adverse effect on our business, financial condition or
results of operations and our ability to pay dividends or repurchase shares.
We are subject to extensive regulatory oversight.
We and our subsidiaries are subject to extensive supervision and regulation. The Company is supervised and regulated by the Federal
Reserve and the Bank is supervised and regulated by the OCC. The application of laws, rules and regulations may vary as administered
by the Federal Reserve and the OCC. In addition, the Company is subject to consolidated capital requirements and must serve as a source
of strength to the Bank.
As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing.
This regulatory structure is designed primarily for the protection of the DIF and our depositors, as well as other consumers and not to
benefit our shareholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount
of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes, all of
which can have a material adverse effect on our financial condition, results of operations and our ability to pay dividends or repurchase
shares. Our regulators have also intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money
laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced
by the Office of Foreign Assets Control. In order to comply with laws, rules, regulations, guidelines and examination procedures in the
anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain
that the policies, procedures and systems we have in place to ensure compliance are without error and there is no assurance that in every
instance we are in full compliance with these requirements.
Our failure to comply with applicable laws, rules and regulations could result in a range of sanctions, legal proceedings and enforcement
actions, including the imposition of civil monetary penalties, formal agreements and cease and desist orders. In addition, the OCC and
the FDIC have specific authority to take “prompt corrective action,” depending on our capital levels. For example, currently, we are
considered “well-capitalized” for prompt corrective action purposes. If we are designated by the OCC as “adequately capitalized,” we
would become subject to additional restrictions and limitations, such as the Bank’s ability to take brokered deposits becoming limited.
If we were to be designated by the OCC in one of the lower capital levels (such as “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized”) we would be required to raise additional capital and also would be subject to progressively more severe
restrictions on our operations, management and capital distributions; replacement of senior executive officers and directors; and, if we
became “critically undercapitalized,” to the appointment of a conservator or receiver.
In addition, and as mentioned above in “Risk Factors - Recent legislative and regulatory initiatives to support the financial services
industry have been coupled with numerous restrictions and requirements that could detrimentally affect our business,” the Dodd-Frank
Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in
total assets, including compliance with portions of the Federal Reserve’s enhanced prudential oversight requirements and annual stress
testing requirements. Compliance with the annual stress testing requirements, part of which must be publicly disclosed, may also be
misinterpreted by the market generally or our customers and, as a result, may adversely affect our stock price or our ability to retain our
customers or effectively compete for new business opportunities. To ensure compliance with these heightened requirements when effective,
our regulators may require us to fully comply with these requirements or take actions to prepare for compliance even before the completion
of the HVB Merger, when our or the Bank’s total assets could equal or exceed $10 billion. As a result, we may incur compliance-related
costs before we might otherwise be required. Our regulators may also consider our preparation for compliance with these regulatory
requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests
for approvals on unrelated matters.
New capital rules that were recently issued generally require insured depository institutions and their holding companies to hold more
capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.
In 2013, the Federal Reserve, the FDIC and the OCC adopted final rules for the Basel III capital framework. These rules substantially
amend the regulatory risk-based capital rules applicable to us. The rules phase in over time beginning in 2015 and will become fully
effective in 2019. The rules apply to the Company as well as to the Bank. Beginning in 2015, our minimum capital requirements will be
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(i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus Additional Tier 1 capital) of 6% and (iii) a total
capital ratio of 8% (the current requirement). Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately
resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required common
Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements
will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish
a maximum percentage of eligible retained income that could be utilized for such actions.
General economic conditions in our market area could adversely affect us.
We are affected by the general economic conditions in the local markets in which we operate. When the recession began in 2008, the
market experienced a significant downturn in which we saw falling home prices, rising foreclosures and an increased level of commercial
and consumer delinquencies. Although economic conditions have improved, many businesses and individuals are still experiencing
difficulty as a result of the recent economic downturn and protracted recovery. If economic conditions do not continue to improve, we
could experience further adverse consequences, including a decline in demand for our products and services and an increase in problem
assets, foreclosures and loan losses. Future economic conditions in our market will depend on factors outside of our control such as
political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military
and fiscal policies and inflation, any of which could negatively affect our performance and financial condition.
An inadequate allowance for loan losses would negatively impact our results of operations.
We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing
the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent in the lending business and could have a material
adverse effect on our operating results. Volatility and deterioration in the broader economy may also increase our risk of credit losses.
The determination of an appropriate level of allowance for loan losses is an inherently uncertain process and is based on numerous
assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in
interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectability of our loan
portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as, including, but not limited to:
the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency
trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and
industry loan concentrations. If any of our evaluations are incorrect and/or borrower defaults result in losses exceeding our allowance
for loan losses, our results of operations could be significantly and adversely affected. We cannot assure you that our allowance will be
adequate to cover probable loan losses inherent in our portfolio.
The need to account for assets at market prices may adversely affect our results of operations.
We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value we use
quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books
at their fair value, we may incur losses even if the assets in question present minimal credit risk. We may be required to recognize other-
than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment
recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated
recovery period.
Changes in the value of goodwill and intangible assets could reduce our earnings.
The Company accounts for goodwill and other intangible assets in accordance with GAAP (as defined below), which, in general, requires
that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step
approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting
units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions
used. As of September 30, 2014, the fair value of Sterling Bancorp shares exceeds the recorded book value. Changes in the local and
national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates
and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great
unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge
at a future date.
Commercial real estate, commercial & industrial and ADC loans expose us to increased risk and earnings volatility.
We consider our commercial real estate loans, commercial & industrial loans and ADC loans to be higher risk categories in our loan
portfolio. These loans are particularly sensitive to economic conditions. At September 30, 2014, our portfolio of commercial real estate
loans, including multi-family loans, totaled $1.8 billion, or 38.1% of total loans, our portfolio of commercial & industrial loans totaled
$2.1 billion, or 43.7% of total loans, and our portfolio of ADC loans totaled $92.1 million, or 1.9% of total loans. We plan to continue
to emphasize the origination of these types of loans, other than ADC loans, which we now make only on an exception basis.
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Commercial real estate loans generally involve a higher degree of credit risk than residential loans because they typically have larger
balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate
often depend on the successful operation and management of the businesses which hold the loans, repayment of such loans may be
affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in
government regulation. In the case of commercial & industrial loans, although we strive to maintain high credit standards and limit
exposure to any one borrower, the collateral for these loans often consists of accounts receivable, inventory and equipment. This type of
collateral typically does not yield substantial recovery in the event we need to foreclose on it and may rapidly deteriorate, disappear, or
be misdirected in advance of foreclosure. This adds to the potential that our charge-offs will be more volatile than we have experienced
in the past, which could significantly negatively affect our earnings in any quarter. In addition, some of our ADC loans pose higher risk
levels than the levels expected at origination, as projects may stall or sell at prices lower than expected. We continue to seek pay downs
on loans with or without sales activity. While this portfolio may cause us to incur additional bad debt expense even if losses are not
realized, such loans only comprise 1.9% of our loan portfolio.
In addition, many of our borrowers also have more than one commercial real estate, commercial business or ADC loan outstanding with
us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to significantly greater risk
of loss.
Our continuing concentration of loans in our primary market area may increase our risk.
Our success depends primarily on the general economic conditions in the counties in which we conduct most of our business. Most of
our loans and deposits are generated from customers primarily in the New York City metropolitan region and in Rockland and Orange
Counties in New York. We also have a presence in Ulster, Sullivan, Westchester and Putnam Counties in New York and in Bergen County,
New Jersey. Our expansion into New York City and continued growth in Westchester County and Bergen County has helped us diversify
our geographic concentration with respect to our lending activities. Deterioration in economic conditions in our market area would
adversely affect our results of operations and financial condition.
Changes in market interest rates could adversely affect our financial condition and results of operations.
Our financial condition and results of operations are significantly affected by changes in market interest rates. Our results of operations
substantially depend on our net interest income, which is the difference between the interest income that we earn on our interest-earning
assets and the interest expense that we pay on our interest-bearing liabilities. In recent years, our balance sheet has become more asset
sensitive because our assets mature or re-price at a faster pace than our liabilities. If interest rates were to continue at existing levels or
decline, net interest income would be adversely affected as asset yields would be expected to decline at faster rates than deposit or
borrowing costs. A decline in net interest income may also occur, offsetting a portion or all gains in net interest income from assets re-
pricing and increases in volume, if competitive market pressures limit our ability to maintain or lag deposit costs. Wholesale funding
costs may also increase at a faster pace than asset re-pricing. As of September 30, 2014, we have $200.0 million in structured advances
with the FHLB at an average cost of 4.23%. If interest rates were to approach or exceed this level, the FHLB may call those borrowings
and offer replacement borrowings at current market rates which would be higher.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of
loans and securities. Decreases in interest rates often result in increased prepayments of loans and securities, as borrowers refinance their
loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to
reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest
rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or may make it more difficult
for borrowers to repay adjustable rate loans.
Changes in interest rates also affect the value of our interest earning assets and in particular our securities portfolio. Generally, the value
of our securities fluctuates inversely with changes in interest rates. At September 30, 2014, our available for sale securities portfolio
totaled $1.1 billion. Unrealized losses on securities available for sale, net of tax, amounted to $2.8 million and are reported as part of
other comprehensive income (loss), included as a separate component of stockholders’ equity. Further decreases in the fair value of
securities available for sale could have an adverse effect on stockholders’ equity.
Our ability to pay dividends is subject to regulatory limitations and other limitations which may affect our ability to pay dividends to
our stockholders or to repurchase our common stock.
Sterling Bancorp is a separate legal entity from its subsidiary, Sterling National Bank, and does not have significant operations of its
own. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial
condition of the Bank and other factors, that the Bank’s regulators could assert that payment of dividends or other payments may result
in an unsafe or unsound practice. In addition, under the Dodd-Frank Act, Sterling Bancorp is subjected to consolidated capital requirements
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and must serve as a source of strength to the Bank. If the Bank is unable to pay dividends to Sterling Bancorp or Sterling Bancorp is
required to retain capital or contribute capital to the Bank, we may not be able to pay dividends on our common stock or to repurchase
shares of common stock.
A breach of information security could negatively affect our earnings.
Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and
networks, and over the Internet from both internal sources and external, third-party vendors. While to date we have not been subject to
material cyber-attacks or other cyber incidents, we cannot guarantee all our systems are free from vulnerability to attack, despite safeguards
we and our vendors have instituted. In addition, disruptions to our vendors’ systems may arise from events that are wholly or partially
beyond our and our vendors’ control (including, for example, computer viruses or electrical or telecommunications outages). If information
security is breached, despite the controls we and our third-party vendors have instituted, information can be lost or misappropriated,
resulting in financial losses or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance
coverage, if any, which would adversely affect our earnings. In addition, our reputation could be damaged which could result in loss of
customers, greater difficulty in attracting new customers, or an adverse effect on the value of our common stock.
We are subject to competition from both banks and non-bank companies.
The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits,
loans and other financial services in our market area. Our principal competitors include commercial banks, savings banks and savings
and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions,
mortgage companies, real estate investment trusts (REITs), private issuers of debt obligations, venture capital firms, and suppliers of
other investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation
as we are and have advantages over us in providing certain services. Many of our competitors are significantly larger than we are and
have greater access to capital and other resources. Also, our ability to compete effectively is dependent on our ability to adapt successfully
to technological changes within the banking and financial services industry.
Various factors may make takeover attempts more difficult to achieve.
Our Board of Directors (the “Board”) has no current intention to sell control of Sterling Bancorp. Provisions of our certificate of
incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons
to acquire control of Sterling Bancorp without the consent of our Board. A shareholder may want a takeover attempt to succeed because,
for example, a potential acquirer could offer a premium over the then prevailing market price of our common stock. The factors that may
discourage takeover attempts or make them more difficult include:
(a) Certificate of Incorporation and statutory provisions.
Provisions of the certificate of incorporation and bylaws of Sterling Bancorp and Delaware law may make it more difficult and expensive
to pursue a takeover attempt that our Board opposes. These provisions also would make it more difficult to remove our current Board,
or to elect new directors. These provisions also include limitations on voting rights of beneficial owners of more than 10% of our common
stock, super majority voting requirements for certain business combinations, and plurality voting. Our bylaws also contain provisions
regarding the timing and content of stockholder proposals and nominations and qualification for service on the Board.
(b) Required change in control payments and issuance of stock options and recognition and retention plan shares.
We have entered into employment agreements with executive officers, which require payments to be made to them in the event their
employment is terminated following a change in control of Sterling Bancorp or Sterling National Bank. We have issued stock grants and
stock options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan and the Sterling Bancorp 2014 Stock Incentive
Plan. In the event of a change in control, the vesting of stock and option grants would accelerate. In 2006, we adopted the Provident
Bank & Affiliates Transition Benefit Plan. The plan calls for severance payments ranging from 12 weeks to one year for employees not
covered by separate agreements if they are terminated in connection with a change in control of the Company.
Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not provide the
requisite approvals.
We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses from time
to time that we expect may further our business strategy, including through participation in FDIC-assisted acquisitions or assumption of
deposits from troubled institutions. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that
we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could
involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration,
difficulties and costs associated with consolidation and streamlining inefficiencies, diversion of management’s attention from other
business activities, changes in relationships with customers, and the potential loss of key employees. In addition, we may not be successful
17
in identifying acquisition candidates, integrating acquired institutions, or preventing deposit erosion or loan quality deterioration at
acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on
attractive terms. There can be no assurance that we will be successful in completing or will even pursue future acquisitions, or if such
transactions are completed, that we will be successful in integrating acquired businesses into operations. Our ability to grow may be
limited if we choose not to pursue or are unable to successfully make acquisitions in the future.
Moreover, as noted previously, Hudson Valley and the Company have entered into a definitive agreement to merge the two companies.
The HVB Merger will be subject to regulatory approval and the approval of both companies’ shareholders, and there can be no assurance
that such approvals will be obtained in a timely manner or at all. Even if the approvals are obtained, the success of the HVB Merger,
including anticipated benefits and cost savings, will depend, in part, on the Company’s ability to successfully combine and integrate the
businesses of the predecessor companies in a manner that permits growth opportunities and does not result in the loss of key employees,
the disruption of either company’s ongoing businesses, including existing customer relationships, or inconsistencies in standards, controls,
procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors
and employees or to achieve the anticipated benefits and cost savings of the HVB Merger. Such integration will likely require the
consolidation of financial centers in overlapping market areas to reduce redundancy and promote efficiency. As was the case with the
Merger in the first quarter of fiscal 2014, consolidation of overlapping financial centers following the HVB Merger may result in
restructuring charges, charges for asset write-downs and severance costs that we may not recoup until a date in the future, if at all. If the
Company experiences difficulties with the integration process, the anticipated benefits of the HVB Merger may not be realized fully or
at all, or may take longer to realize than expected.
Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies
in foreclosure practices, including delays and challenges in the foreclosure process.
Over the past few years, foreclosure time lines have increased due to, among other reasons, delays associated with the significant increase
in the number of foreclosure cases as a result of the economic downturn, federal and state legal and regulatory actions, including additional
consumer protection initiatives related to the foreclosure process and voluntary and, in some cases, mandatory programs intended to
permit or require lenders to consider loan modifications or other alternatives to foreclosure. Residential mortgages in particular may
present us with foreclosure process issues. Residential mortgages, for example, are 12% of our total loan portfolio, but constitute 32.1%
of our non-accrual loans. Collateral for many of our residential loans is located within the State of New York, where there may continue
to be foreclosure process and timeline issues. Further increases in the foreclosure time-line may have an adverse effect on collateral values
and our ability to minimize our losses.
The Company depends on its executive officers and key personnel to continue the implementation of its long-term business strategy
and could be harmed by the loss of their services.
The Company believes that its continued growth and future success will depend in large part on the skills of its management team and
its ability to motivate and retain these individuals and other key personnel. In particular, the Company relies on the leadership of its Chief
Executive Officer, Jack Kopnisky. The loss of service of Mr. Kopnisky or one or more of the Company’s other executive officers or key
personnel could reduce the Company’s ability to successfully implement its long-term business strategy, its business could suffer and the
value of the Company’s common stock could be materially adversely affected. Leadership changes will occur from time to time and the
Company cannot predict whether significant resignations will occur or whether the Company will be able to recruit additional qualified
personnel. The Company believes its management team possesses valuable knowledge about the banking industry and the Company’s
markets and that their knowledge and relationships would be very difficult to replicate. Although the Chief Executive Officer, Chief
Financial Officer and other executive officers have entered into employment agreements with the Company, it is possible that they may
not complete the term of their employment agreements or renew them upon expiration. The Company’s success also depends on the
experience of its branch managers and lending officers and on their relationships with the customers and communities they serve. The
loss of these key personnel could negatively impact the Company’s banking operations. The loss of key personnel, or the inability to
recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business, financial condition or
operating results.
ITEM 1B. Unresolved Staff Comments
Not Applicable.
18
ITEM 2. Properties
We maintain our executive offices, commercial lending division and wealth management and back office operations departments at a
leased facility located at 400 Rella Boulevard, Montebello, New York consisting of 48,623 square feet. At September 30, 2014, we
conducted our business through 32 full-service financial centers which serve the New York Metro Market and the New York Suburban
Market. Of these financial centers, seven are located in Orange County, New York and nine in Rockland County, New York. We operate
five offices in Ulster, Sullivan, Westchester and Putnam Counties in New York, seven offices in New York City, three offices in Long
Island and 1 office in Bergen County, New Jersey. Additionally, 12 of our financial centers are owned and 20 are leased.
In addition to our financial center network and corporate headquarters, we lease four additional properties which are used for general
corporate purposes and 26 other real estate owned properties located in Putnam, Orange, Rockland, Sullivan and Ulster counties. See
Note 5. “Premises and Equipment, net” to the consolidated financial statements for further detail on our premises and equipment.
Item 3. Legal Proceedings
Note 16. “Commitments and Contingencies - Litigation” to the consolidated financial statements contained in Item 8. hereof is incorporated
herein by reference. The Company does not anticipate that the aggregate liability arising out of litigation pending against the Company
and its subsidiaries will be material to its consolidated financial statements.
ITEM 4. Mine Safety Disclosures
Not Applicable.
19
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Prices and Dividends
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “STL”. The following table
sets forth the high and low intra-day sales prices per share of Sterling Bancorp common stock and the cash dividends declared per share
for the past two fiscal years.
Quarter ended
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
High
Low
Cash dividends
declared
$
$
13.34
13.00
13.34
13.52
11.32
9.55
9.71
9.83
$
11.60
10.84
11.73
10.71
9.36
8.69
8.59
8.62
0.07
0.07
0.07
—
0.12
0.06
0.06
0.06
As of September 30, 2014, there were 83,628,267 shares of the Company’s common stock outstanding held by 5,471 holders of record
(excluding the number of persons or entities holding stock in street name through various brokerage firms). The closing price per share
of common stock on September 30, 2014, the last trading day of the Company’s fiscal year, was $12.79.
The Board is committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because
they are dependent upon the Company’s future earnings, capital requirements and financial condition. In connection with the Merger,
the Company accelerated the dividend that would have been regularly declared in the quarter ended December 31, 2013 to the quarter
ended September 30, 2013. Therefore, the Company declared cash dividends of $0.12 per share in the quarter ended September 30, 2013
and did not declare a dividend in the quarter ended December 31, 2013.
See the section captioned “Regulation” included in Item 1. “Business”, the section captioned “Capital and Liquidity” included in Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14. “Stockholders’ Equity” to the
consolidated financial statements all of which are included elsewhere in this report, for additional information regarding our common
stock and our ability to pay dividends.
20
Performance Graph
Set forth below is a stock performance graph comparing the cumulative total shareholder return on Sterling Bancorp common stock with
(a) the cumulative total return on the S&P 500 Composite Index and (b) the SNL Mid-Atlantic Bank Index, measured as of the last trading
day of each year shown. The graph assumes an investment of $100 on September 30, 2009 and reinvestment of dividends on the date
of payment without commissions. The performance graph represents past performance and should not be considered to be an indication
of future stock performance.
Index
Sterling Bancorp
S&P 500 Index
SNL Mid-Atlantic Bank Index
2009
2010
2011
2012
2013
2014
100.00
100.00
100.00
90.20
110.16
89.97
64.30
111.42
71.02
107.17
145.07
94.54
127.21
173.13
127.03
152.93
207.30
145.65
Performance at September 30,
This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this
Form 10-K under the Securities Act, or the Securities Exchange Act of 1934, as amended, except to the extent that Sterling Bancorp
specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
21
Issuer Purchases of Equity Securities
The following table reports information regarding purchases of the Company’s common stock during the fourth fiscal quarter of 2014
and the stock repurchase plan approved by the Board:
Total Number
of shares
(or units)
purchased
Average
price paid
per share
(or unit)
Total number of
shares (or units)
purchased as part
of publicly
announced plans
or programs (1)
Maximum number
(or approximate
dollar value) of
shares (or units)
that may yet be
purchased under the
plans or programs (1)
— $
—
—
— $
—
—
—
—
—
—
—
—
776,713
776,713
776,713
Period (2014)
July 1 — July 31
August 1 — August 31
September 1 — September 30
Total
1
The Company announced its fifth repurchase program on December 17, 2009 authorizing the repurchase of 2,000,000
shares of which 776,713 remain available for repurchase.
22
ITEM 6. Selected Financial Data
The following summary data is based in part on the consolidated financial statements and accompanying notes, and other schedules
appearing elsewhere in this Form 10-K. Comparability of the selected financial data at or for the year ended September 30, 2014 to
earlier periods is affected by the Merger. See discussion of the Merger in Item 1. “Business”, in Item 7. “Management’s Discussion and
Analysis, and in Note 2. “Acquisitions” in the consolidated financial statements. Historical data is also based in part on, and should be
read in conjunction with, prior filings with the SEC. Additional information is provided in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the consolidated financial statements and related notes included as Item 7 and Item 8
of this Report, respectively.
23
Selected financial condition data:
Period end:
Total assets
Loans, net (1)
Securities available for sale
Securities held to maturity
Deposits
Borrowings
Stockholders’ equity
Average:
Total assets
Loans, net (1)
Securities available for sale
Securities held to maturity
Deposits
Borrowings
Stockholders’ equity
Selected income statement data:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Per share data:
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Dividend payout ratio
Book value per share
Common shares outstanding:
2014
7,337,387
4,719,826
1,110,813
579,075
5,298,654
939,069
961,138
6,757,094
4,120,749
1,175,618
517,270
4,921,930
814,409
906,134
246,906
28,918
217,988
19,100
198,888
47,370
208,428
37,830
10,152
27,678
0.34
0.34
0.21
61.8%
11.49
$
$
$
$
$
$
$
$
$
$
$
$
2013
At or for the year ended September 30,
2012
(Dollars in thousands)
2011
4,049,172
2,384,021
954,393
253,999
2,962,294
560,986
482,866
3,815,609
2,216,871
950,628
172,642
2,856,640
446,916
489,412
132,061
19,894
112,167
12,150
100,017
27,692
91,041
36,668
11,414
25,254
0.58
0.58
0.30
51.7%
10.89
$
$
$
$
$
$
4,022,982
2,091,190
1,010,872
142,376
3,111,151
345,176
491,122
3,195,299
1,806,136
801,792
165,722
2,366,263
356,296
447,065
115,037
18,573
96,464
10,612
85,852
32,152
91,957
26,047
6,159
19,888
0.52
0.52
0.24
45.2%
11.12
$
$
$
$
$
$
3,137,402
1,675,882
739,844
110,040
2,296,695
323,522
431,134
2,949,251
1,665,360
880,624
28,787
2,082,727
422,816
427,290
112,614
21,324
91,290
16,584
74,706
29,951
90,111
14,546
2,807
11,739
0.31
0.31
0.24
77.4%
11.39
$
$
$
$
$
$
2010
3,021,025
1,670,698
901,012
33,848
2,142,702
363,751
430,955
2,913,560
1,656,016
836,130
42,903
1,978,380
488,330
425,408
119,774
26,440
93,334
10,000
83,334
27,201
83,170
27,365
6,873
20,492
0.54
0.54
0.24
44.4%
11.26
Weighted average shares basic
Weighted average shares diluted
80,268,970
80,534,043
43,734,425
43,783,053
38,227,653
38,248,046
37,452,596
37,453,542
37,161,180
38,185,122
_________________________
See legend on the following page.
24
Performance ratios:
Return on assets (ratio of net income to
average total assets)
Return on equity (ratio of net income to
average equity)
Net interest margin (2)
Core operating efficiency ratio(3)
Capital ratios (Company):(4)
Equity to total assets at end of period
Average equity to average assets
Tier 1 leverage ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Regulatory capital ratios (Bank):
Tier 1 leverage ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Asset quality data and ratios:
Allowance for loan losses
Non-performing loans
Non-performing assets
Net charge-offs
2014
At or for the year ended September 30,
2011
2012
2013
(Dollars in Thousands)
2010
0.41%
0.63%
0.62%
0.40%
0.70%
3.1
3.74
59.4
13.10%
13.41
8.12
10.33
11.10
9.34%
11.94
12.71
5.2
3.37
63.7
11.90%
12.82
—
—
—
9.33%
13.18
14.24
4.5
3.51
69.7
12.21%
13.99
—
—
—
7.56%
12.16
13.36
2.8
3.65
72.1
13.74%
14.49
—
—
—
8.14%
11.85
13.03
4.8
3.78
69.1
14.27%
14.60
—
—
—
8.43%
12.09
13.34
$
$
40,612
50,963
58,543
7,365
$
28,877
26,906
32,928
11,555
$
28,282
39,814
46,217
10,247
$
27,917
40,567
45,958
19,510
30,843
26,840
30,731
9,207
Non-performing assets to total assets
Non-performing loans to total loans (1)
Allowance for loan losses to non-
performing loans
Allowance for loan losses to total loans
Net charge-offs to average loans
0.80%
1.07
80
0.85
0.24
0.81%
1.12
107
1.20
0.52
1.15%
1.88
71
1.47
0.56
1.46%
2.38
69
1.64
1.17
1.02%
1.58
115
1.81
0.56
_________________________
(1)
Excludes loans held for sale.
(2)
(3)
(4)
The net interest margin represents net interest income as a percent of average interest-earning assets for the period. Net interest
income is commonly presented on a tax-equivalent basis. This is to the extent that some component of the institution’s net interest
income will be exempt from taxation (e.g., was received as a result of its holdings of state or municipal obligations), an amount
equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered
helpful in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a
different proportion of tax-exempt items in their portfolios.
The core operating efficiency ratio is a non-GAAP measure and is reconciled on page 27.
Prior to the Merger, the Company was a unitary savings and loan holding company and as a result was not required to maintain
or report regulatory capital ratios. The Company became a bank holding company in connection with the Merger and has
maintained and reported regulatory capital ratios since December 31, 2013.
25
The following tables show the reconciliation of the core operating efficiency ratio, core net income and core earnings per share which
are non-GAAP financial measures:
For the year ended September 30,
Net interest income
Non-interest income
Total net revenues
Tax equivalent adjustment on securities interest
income
Net (gain) on sale of securities
Other than temporary loss on securities
Other (other gains and fair value loss on interest rate
caps)
Core total revenues
Non-interest expense
Merger-related expense
Charge for asset write-downs, banking systems
conversion, retention and severance
Gain on sale of financial center and redemption of
TRUPs
Amortization of intangible assets
Charge on benefit plan settlement
Core non-interest expense
Core operating efficiency ratio
Income before income tax expense
Income tax expense
Net income
Net (gain) on sale of securities
Gain on sale of financial center and redemption of
TRUPs
Merger-related expense
Charge for asset write-downs, banking systems
conversion, retention and severance
Charge on benefit plan settlement
Amortization of non-compete agreements
Total charges (gains)
Income tax (benefit)
Total non-core charges (gains) net of taxes
Core net income
Weighted average diluted shares
Diluted EPS as reported
Core diluted EPS (excluding total charges)
2014
2013
2012
(Dollars in Thousands)
$
$
$
$
217,988
47,370
265,358
112,167
27,692
139,859
96,464
32,152
128,616
2011
2010
91,290
29,951
121,241
$
93,334
27,201
120,535
5,628
(641)
—
(93)
270,252
208,428
(9,455)
3,060
(7,391)
32
77
135,637
91,041
(2,772)
3,498
(10,452)
47
(12)
121,697
91,957
(5,925)
4,007
(10,011)
278
197
115,712
90,111
(255)
(26,590)
(564)
—
(3,201)
1,637
(9,408)
(4,095)
160,517
59.4%
2014
37,830
10,152
27,678
$
$
—
(1,296)
—
86,409
$
—
(1,245)
—
84,787
$
—
(1,426)
(1,772)
83,457
63.7%
69.7%
72.1%
For the year ended September 30,
2013
2012
(Dollars in Thousands)
$
$
36,668
11,414
25,254
26,047
6,159
19,888
2011
14,546
2,807
11,739
4,186
(8,157)
—
1,160
117,724
83,170
—
—
—
(1,849)
—
81,321
69.1%
2010
27,365
6,873
20,492
$
$
(641)
(7,391)
(10,452)
(10,011)
(8,157)
(1,637)
9,455
—
2,772
—
5,925
—
255
—
—
26,591
4,095
5,489
43,352
(13,188)
30,164
57,842
80,534,043
0.34
0.72
564
—
—
(4,055)
1,245
(2,778)
22,476
43,783,053
0.58
0.51
$
$
—
—
—
(4,527)
1,070
(3,457)
16,431
38,248,046
0.52
0.43
3,201
1,772
—
(4,783)
923
(3,860)
7,879
37,453.542
0.31
0.21
$
$
$
$
—
—
—
(8,157)
2,049
(6,108)
14,384
38,185,122
0.54
0.38
$
$
$
$
$
$
The Company believes the non-GAAP information shown above provides useful information to investors to assess the Company’s core
operating performance.
26
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
We make 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 Sterling Bancorp 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 the 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 following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations,
anticipations, estimates and intentions expressed in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
our Company’s ability to successfully implement growth, expense reduction and other strategic initiatives and to integrate
and fully realize cost savings and other benefits we estimate in connection with acquisitions generally;
continued implementation of our team based business strategy, including customer acceptance of our products and services
and the perceived overall value, pricing and quality of them, compared to our competitors;
the possibility that the benefits anticipated from the HVB Merger will not be fully realized, the possibility the HVB Merger
may not close, and other risks in connection with the proposed transaction and integration of HVB;
legislative and regulatory changes such as the Dodd-Frank Act and its implementing regulations that adversely affect our
business, including changes in regulatory policies and principles or the interpretation of regulatory capital or other rules;
adverse publicity, regulatory actions or litigation with respect to us or other well-known companies and the financial services
industry in general and a failure to satisfy regulatory standards;
the effects of and changes in monetary and fiscal policies of the Board of Governors of the Federal Reserve System and the
U.S. Government;
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 require us to materially increase our reserves;
our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result
in significant declines in valuation;
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit
interest rates, our net interest margin and funding sources;
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.
Additional factors that may affect our results are discussed in this Report on Form 10-K under “Item 1A, Risk Factors” and elsewhere
in this Report or in other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. You should read such statements carefully.
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and conform to general practices within the banking industry. Accounting policies considered critical to our financial
results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes
and the recognition of interest income.
27
Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by the Company to be a critical
accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes
in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate
our loans at least quarterly, review their risk components, the carrying value of loans as a part of that evaluation and the allowance is
adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance
may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part
of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to
recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
See Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” to our notes to the consolidated
financial statements for a discussion of the risk components. We consistently review the risk components to identify any changes in trends.
Business Combinations. The Company accounts for business combinations under the purchase method of accounting. The application
of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets
acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or
depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based
upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal
and valuation firms.
Goodwill, Trade Names and Other Intangible Assets. The Company accounts for goodwill, trade names and other intangible assets in
accordance with GAAP, which, in general, requires that goodwill and trade names not be amortized, but rather that they be tested for
impairment at least annually. The Company assesses qualitative factors to determine whether it is more likely than not (i.e., a likelihood
of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely
than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances
(e.g., macroeconomic conditions, industry and market considerations, overall financial performance and other relevant Company-specific
events). If, after assessing the totality of events or circumstances such as those described above, the Company determines that it is not
more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill
impairment test are unnecessary. Testing for impairment of goodwill, trade names and other intangible assets is performed annually and
involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of
judgment and subjectivity in the assumptions used. Changes in the local and national economy, the federal and state legislative and
regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or
significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of
publicly traded financial institutions and could result in an impairment charge at a future date.
We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits
(defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business
combinations. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more
favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of
the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits
were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than
was estimated, we will write down the asset by expensing the amount that is impaired.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the
deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future
taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Interest income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless the Company considers
the collection of interest to be doubtful. Loans are placed on non-accrual status upon the earlier of (i) when payments are contractually
past due 90 days or more, or (ii) when we have determined that the borrower is unlikely to meet contractual principal or interest obligations,
unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income
for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on
non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are
returned to accrual status when collectability is no longer considered doubtful. Loans the Company acquired in mergers are initially
28
recorded at fair value which involves estimating the amount and timing of principal and interest cash flows initially expected to be
collected on the loans and discounting those cash flows at an appropriate market rate of interest. The Company continues to evaluate
reasonableness of expectations for the timing and amount of cash to be collected. Subsequent decreases in expected cash flows may
result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being
considered impaired.
General
The following discussion and analysis presents the more significant factors affecting the Company’s financial condition as of September
30, 2014 and 2013 and results of operations for each of the years in the three-year period ended September 30, 2014. The Merger was
effective October 31, 2013, which significantly impacts comparisons to earlier periods. The Merger and the acquisition of Gotham Bank
of New York were accounted for as purchase transactions, and accordingly, their related results of operations are included from the date
of acquisition. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial
statements and other information contained in this report.
On October 31, 2013, we completed the Merger of Legacy Sterling and Legacy Provident. This acquisition was consistent with our
strategy of expanding in the greater New York metropolitan region and focusing on commercial banking. We believe the Merger has
created a larger, more a more profitable company by combining Legacy Provident’s differentiated team-based distribution channels with
Legacy Sterling’s diverse commercial and consumer lending product capabilities. The Merger has allowed us to accelerate loan growth,
improve our ability to gather low cost core deposits and generate substantial cost savings and revenue enhancement opportunities.
The Merger has significantly diversified our business. Legacy Sterling was predominately a commercial & industrial lender which has
complemented our loan portfolio, which was substantially collateralized by real estate. Further, Legacy Sterling provides us greater non-
interest income revenue streams. On a combined basis, we anticipate greater than 20% of our total revenues will consist of non-interest
income over time.
Results of Operations
In fiscal 2014, the Company reported net income of $27.7 million, or $0.34 per diluted common share, compared to net income of $25.3
million, or $0.58 per diluted common share, in fiscal 2013 and $19.9 million, or $0.52 per diluted common share in fiscal 2012. In
connection with the Merger, the Company issued 39.1 million common shares, which increased weighted average diluted shares
outstanding from 43.8 million in fiscal 2013 to 80.5 million in fiscal 2014.
The table below summarizes the Company’s results of operations on a tax-equivalent basis. Tax equivalent adjustments are the result of
increasing income from tax-free securities by an amount equal to the taxes that would be paid if the income were fully taxable based on
a 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
Selected income statement data, net interest margin, return on average assets, return on average common equity and dividends per common
share for the comparable periods follows:
29
Tax equivalent net interest income
Less tax equivalent adjustment
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share - basic
Earnings per common share - diluted
Dividends per common share
Return on assets
Return on common equity
Average equity to average assets
For the fiscal year ended September 30,
2014
2013
2012
(Dollars in Thousands)
$
223,616
$
115,227
$
(5,628)
217,988
19,100
47,370
208,428
37,830
10,152
27,678
0.34
0.34
0.21
0.41%
3.1
13.4
$
$
(3,060)
112,167
12,150
27,692
91,041
36,668
11,414
25,254
0.58
0.58
0.30
0.63%
5.2
12.8
$
$
$
$
99,962
(3,498)
96,464
10,612
32,152
91,957
26,047
6,159
19,888
0.52
0.52
0.24
0.62%
4.5
14.0
Net income increased $2.4 million in fiscal 2014 compared to fiscal 2013. Results in fiscal 2014 were positively impacted by the Merger
and organic growth generated through our commercial banking teams. This resulted in a $108.4 million increase in tax equivalent net
interest income and a $19.7 million increase in non-interest income between the periods. Results in fiscal 2014 were also impacted by
merger-related expenses associated with the Merger, and charges for asset write-downs, the settlement of benefit plan obligations, costs
associated with our banking systems conversion and other charges, which totaled $45.6 million. Excluding the impact of these items,
net income was $57.8 million, and diluted earnings per share were $0.72 in fiscal 2014. Please refer to Item 6. “Selected Financial Data”
for a reconciliation of this non-GAAP financial measure.
Details of the changes in the various components of net income are further discussed below.
Net Interest Income is the 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 the Company’s largest source
of revenue, representing 82.1% of total revenue in fiscal 2014. 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.
The Company is primarily funded by core deposits, with non-interest bearing demand deposits being a significant source of funding.
This lower cost funding base has had a positive impact on the Company’s net interest income and net interest margin and is expected to
do so in a rising interest rate environment.
30
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years 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.
2014
For the year ended September 30,
2013
2012
Average
balance
Interest
Yield/
Rate
Average
balance
Interest
Yield/
Rate
Average
balance
Interest
Yield/
Rate
(Dollars in thousands)
$ 4,120,749
1,371,703
$ 202,982
30,067
4.93% $ 2,216,871
948,884
2.19%
$ 107,810
17,509
4.86% $ 1,806,136
778,994
1.85%
$ 91,010
16,537
321,185
109,626
56,104
16,081
292
3,112
5.01%
0.27%
5.55%
174,386
59,375
23,905
8,742
193
867
5.01%
0.33%
3.63%
188,520
51,351
18,901
9,996
127
865
5.04%
2.12%
5.30%
0.25%
4.58%
5,979,367
777,727
$ 6,757,094
252,534
4.22%
3,423,421
392,188
$ 3,815,609
135,121
3.95%
2,843,902
351,397
$ 3,195,299
118,535
4.17%
$
706,160
$
571
0.08% $
466,110
$
391
0.08% $
399,819
$
483
876
5,096
2,421
4,401
15,553
0.14%
0.35%
0.44%
5.98%
2.17%
572,246
819,442
352,469
24,478
422,438
973
2,436
2,123
1,431
12,540
0.17%
0.30%
0.60%
5.85%
2.97%
485,624
671,325
289,230
19,136
337,160
393
2,194
2,511
753
12,239
0.12%
0.08%
0.33%
0.87%
3.93%
3.65%
28,918
0.70%
2,657,183
19,894
0.75%
2,202,294
18,573
0.84%
646,373
22,641
3,326,197
489,412
520,265
25,675
2,748,234
447,065
$ 3,815,609
$ 3,195,299
3.52%
3.20%
3.33%
$
766,238
$
641,608
223,616
3.74%
115,227
3.37%
99,962
3.51%
(5,628)
$ 217,988
(3,060)
$ 112,167
(3,498)
$ 96,464
143.9%
128.8%
129.1%
Interest earning assets:
Loans (1)
Securities taxable
Securities tax exempt
Interest earning deposits
FRB and FHLB Stock
Total interest earnings
assets
Non-interest earning assets
Total assets
Interest bearing liabilities:
Demand deposits
Savings deposits (2)
Money market deposits
Certificates of deposit
Senior notes(3)
Other borrowings
Total interest bearing
liabilities
Non-interest bearing deposits
Other non-interest bearing
liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
622,414
1,458,852
554,396
98,202
716,207
4,156,231
1,580,108
114,621
5,850,960
906,134
$ 6,757,094
Stockholders’ equity
Net interest rate spread (4)
Net interest earning assets (5) $ 1,823,136
Net interest margin
Less tax equivalent
adjustment
Net interest income
Ratio of interest earning
assets to interest bearing
liabilities
Includes the effect of net deferred loan origination fees and costs, allowance for loan losses, and non-accrual loans. Includes prepayment fees and late charges.
Includes club accounts and interest bearing mortgage escrow balances.
(1)
(2)
(3) Senior notes for fiscal 2014 and 2013 represent the notes issued July 2, 2013, as described in Note 8. “Borrowings and Senior Notes” in the consolidated financial
statements. The balance of senior notes shown in fiscal 2012 represents FDIC insured senior unsecured debt that was repaid in February 2012.
(4) 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.
(5) Net interest earning assets represents total interest earning assets less total interest bearing liabilities.
31
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. 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 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.
2014 vs. 2013
Increase (Decrease)
due to
Volume
Rate
2013 vs. 2012
Increase (Decrease)
due to
Rate
Total
increase
(decrease)
Volume
(Dollars in thousands)
Total
increase
(decrease)
Interest earning assets:
Loans
Securities taxable
Securities tax exempt
Interest earning deposits
FRB and FHLB Stock
$
95,915
$
8,891
7,339
141
1,612
(743) $
3,667
—
(42)
633
95,172
$
20,489
$
12,558
7,339
99
2,245
3,269
(725)
22
180
Total interest earning assets
113,898
3,515
117,413
23,235
Interest bearing liabilities:
NOW deposits
Savings deposits
Money market deposits
Certificates of deposit
Senior notes
Other borrowings
Total interest bearing liabilities
Less tax equivalent adjustment
180
82
2,192
973
3,378
6,508
13,313
2,568
—
(179)
468
(675)
(408)
(3,495)
(4,289)
—
180
(97)
2,660
298
2,970
3,013
9,024
2,568
Change in net interest income
$
98,017
$
7,804
$
105,821
$
76
79
456
485
247
(3,689) $
(2,297)
(529)
44
(178)
(6,649)
(168)
501
(214)
(873)
431
16,800
972
(1,254)
66
2
16,586
(92)
580
242
(388)
678
301
1,321
(438)
15,703
2,764
4,107
(245)
19,373
$
(2,463)
(2,786)
(193)
(3,670) $
Tax equivalent net interest income in fiscal 2014 increased $108.4 million, or 94.1%, compared to fiscal 2013. The increase was the result
of an increase in average balances in interest earning assets due to the Merger and organic growth generated by our commercial banking
teams. The average volume of interest earning assets increased $2.6 billion, or 74.7% in fiscal 2014 relative to the prior year. In addition,
net interest margin increased 37 basis points to 3.74% in fiscal 2014 from 3.37% in fiscal 2013. The increase in net interest margin was
mainly due to an increase in the yield on interest earning assets which was 4.22% in fiscal 2014 compared to 3.95% in fiscal 2013. The
increase was principally the result of higher yielding loans acquired in the Merger and a rebalancing of earning assets from investment
securities to higher yielding loans. For the fiscal year ended September 30, 2014, our securities to earning assets ratio was 28.3% versus
32.8% at September 30, 2013.
Tax equivalent net interest income increased $15.3 million in fiscal 2013 compared to the prior year. The increase was due to an increase
in average loan balances of $410.7 million to $2.2 billion, which increased interest income by $20.5 million. This was partially offset
by an 18 basis points decline in the yield on loans to 4.86% in fiscal 2013 as compared to 5.04% in fiscal 2012 which reduced interest
income on loans by $3.7 million. The increase in loan volume was due to organic growth generated by our commercial banking teams
and our successful retention of Gotham Bank clients and interest earning assets; the decline in loan yields reflects mainly the repayment
of loans originated in prior periods that were replaced with new loan originations at lower rates of interest in the current market environment.
The balance of average loans outstanding increased $1.9 billion, or 85.9% in fiscal 2014. In connection with the Merger, we acquired
$1.7 billion of loans on October 31, 2013 and increased average loans outstanding during the year through organic growth. Loans
accounted for 68.9% of average interest earning assets in fiscal 2014 compared to 64.8% in fiscal 2013 and 63.5% in fiscal 2012. The
average yield on loans was 4.93% in fiscal 2014 compared to 4.86% in fiscal 2013 and 5.04% in fiscal 2012.
32
Tax equivalent interest income on securities increased $19.9 million, or 75.8% in fiscal 2014, which was mainly the result of an increase
of $569.6 million, or 50.7% in the average balance of securities over the period. In connection with the Merger, we acquired $607.9
million of securities on October 31, 2013. The tax equivalent yield on securities was 2.73% in fiscal 2014 compared to 2.34% in fiscal
2013 and 2.74% in fiscal 2012. The increase in tax equivalent yield in fiscal 2014 was mainly due to the proportion of tax exempt securities
which comprised 19.0% of average securities in fiscal 2014 compared to 15.5% in fiscal 2013 and a rebalancing of the securities portfolio
due to the Merger, which increased the yield on taxable securities in fiscal 2014 to 2.19% compared to 1.85% in fiscal 2013. The 40
basis point decline in the tax equivalent yield on securities between fiscal 2012 and 2013 was due to overall declines in market rates of
interest.
Average deposits increased $2.1 billion, or 72.3% in fiscal 2014 and were $4.9 billion compared to $2.9 billion in fiscal 2013 and $2.4
billion in fiscal 2012. The increase in the average balance of deposits was mainly due to the Merger, as we assumed $2.3 billion in deposits
on October 31, 2013. Average interest bearing deposits increased $1.1 billion, or 51.2%, in fiscal 2014 and $364.3 million, or 19.7%, in
fiscal 2013 compared to fiscal 2012. Average non-interest bearing deposits increased $933.7 million and were $1.6 billion in fiscal 2014
compared to $646.4 million in fiscal 2013 and $520.3 million in fiscal 2012. The average cost of interest bearing deposits was 0.27%
in fiscal 2014 and 2013 and was 0.30% in fiscal 2012. The cost of deposits reflects the current low interest rate environment.
Average borrowings increased $367.5 million, or 82.2% in fiscal 2014 and were $814.4 million compared to $446.9 million in fiscal
2013 and $356.3 million in fiscal 2012. The increase in average borrowings in fiscal 2014 was required to fund loan growth and included
the $100.0 million of senior notes issued in connection with the Merger. Average borrowings also included $25.7 million of subordinated
debentures which were redeemed in June 2014. The average cost of borrowings was 2.45% for fiscal 2014 compared to 3.13% in fiscal
2013 and 3.65% in fiscal 2012. The decline in the average cost of borrowings between the periods was mainly due to an increase in
short-term FHLB borrowings as a percentage of total average borrowings.
Provision for Loan Losses. The provision for loan losses is determined by the Company 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 the Company’s best estimate of probable
incurred credit losses inherent in the outstanding loan portfolio. The provision for loan losses totaled $19.1 million in fiscal 2014 compared
to $12.2 million in fiscal 2013 and $10.6 million in fiscal 2012. See the section captioned “Loans - Provision for Loan Losses” elsewhere
in this discussion for further analysis of the provision for loan losses.
Non-interest income. The components of non-interest income were as follows:
For the year ended September 30,
2014
2013
2012
(Dollars in Thousands)
Accounts receivable management / factoring commissions and other related fees
$
13,146
$
— $
Mortgage banking income
Deposit fees and service charges
Net gain on sale of securities
Bank owned life insurance
Investment management fees
Other
Total non-interest income
8,086
15,595
641
3,080
2,209
4,613
1,979
10,964
7,391
1,998
2,413
2,947
—
1,897
11,377
10,452
2,050
3,143
3,233
$
47,370
$
27,692
$
32,152
33
Non-interest income was $47.4 million in fiscal 2014, compared to $27.7 million in fiscal 2013 and $32.2 million in fiscal 2012. Included
in non-interest income is net gain on sale of securities which was $641 thousand in fiscal 2014, compared to $7.4 million in fiscal 2013
and $10.5 million in fiscal 2012. Net gain on sale of securities is impacted significantly by changes in market interest rates and strategies
we use to manage liquidity and interest rate risk. Excluding net gain on sale of securities, non-interest income was $46.7 million in fiscal
2014 compared to $20.3 million in fiscal 2013 and $21.7 million in fiscal 2012. The main driver of growth between fiscal 2013 and
fiscal 2014 were fees generated in accounts receivable management and mortgage banking income as a result of the Merger. Our goal
is to grow non-interest income excluding securities gains to over 20% of net interest income plus non-interest income excluding securities
gains. This ratio was 17.7% in fiscal 2014 compared to 15.3% in fiscal 2013 and 18.4% in fiscal 2012.
Accounts receivable management / factoring commissions and other related fees represents fees generated in our factoring and payroll
finance businesses. In factoring, 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. Accounts receivable management / factoring commissions and other
related fees totaled $13.1 million in fiscal 2014.
Mortgage banking income represents mortgage banking and brokerage business conducted through loan production offices located
principally in New York City and through our financial centers. The Merger substantially increased our mortgage banking volume;
mortgage banking revenue was $8.1 million in fiscal 2014 compared to $2.0 million in fiscal 2013 and $1.9 million in fiscal 2012.
Deposit fees and service charges increased by $5.6 million to $15.6 million in fiscal 2014, as the average balance of deposits increased
by $2.1 billion over average balances in fiscal 2013. The decline in deposit fees and service charges of $413 thousand in fiscal 2013
compared to fiscal 2012 was mainly caused by a change in the composition of our deposits, as deposits gathered by our commercial
banking teams are generally higher balance deposits but typically generate lower levels of fees and service charges than retail deposits.
Bank owned life insurance(“BOLI”) income represents the change in the cash surrender value of life insurance policies owned by the
Bank. BOLI income increased by $1.1 million and was $3.1 million in fiscal 2014, as we acquired Legacy Sterling’s BOLI balances in
connection with the Merger. The decrease in BOLI income between fiscal 2013 and fiscal 2012 was due to a decline in the interest
crediting rate we receive from the insurance carriers given the current low interest rate environment.
Investment management fees principally represent fees from the sale of mutual funds and annuities and were $2.2 million in fiscal 2014
compared to $2.4 million in fiscal 2013 and $3.1 million in fiscal 2012. In fiscal 2012, we sold the assets of our former subsidiary that
was active in the investment management business. We commenced a new wealth management initiative in fiscal 2013 focused on
partnering with a third-party vendor to deliver wealth management products through our financial centers and commercial banking teams.
Other non-interest income principally includes loan servicing revenues, miscellaneous loan fees earned, letter of credit fees, and safe
deposit box rentals. Other non-interest income increased by $1.7 million to $4.6 million in fiscal 2014 as a result of the Merger.
34
Non-interest expense. The components of non-interest expense were as follows:
Compensation and employee benefits
Stock-based compensation plans
Occupancy and office operations
Amortization of intangible assets
FDIC insurance and regulatory assessments
Other real estate owned expense
Merger-related expense
Other
Total non-interest expense
For the fiscal year ended September 30,
2014
2013
2012
(Dollars in Thousands)
$
94,310
$
47,833
$
3,703
27,726
9,408
6,146
(237)
9,455
57,917
$
208,428
$
2,239
14,953
1,296
3,010
1,562
2,772
17,376
91,041
$
46,038
1,187
14,457
1,245
3,096
1,618
5,925
18,391
91,957
Non-interest expense in fiscal 2014 increased $117.4 million to $208.4 million compared to $91.0 million fiscal 2013 and $92.0 million
in fiscal 2012. The changes in the various components of non-interest expense between fiscal 2014 and fiscal 2013 were mainly the result
of the Merger, which significantly increased the Company’s personnel, facilities and operating expense base. The decline in non-interest
expense between fiscal 2012 and fiscal 2013 is mainly due to lower merger-related expenses. Merger-related expenses in fiscal 2012 of
$5.9 million included expenses related to due diligence, restructuring costs and other charges in connection with the acquisition of Gotham
Bank in August 2012.
Compensation and employee benefits in fiscal 2014 increased $46.5 million, or 97.2% to $94.3 million compared to $47.8 million in the
prior year. At September 30, 2014, we had 21 commercial banking teams, as compared to September 30, 2013 and 2012 when we had
16 commercial banking teams. Our full-time equivalent employees were 836 at September 30, 2014 compared to 477 at September 30,
2013 and 493 at September 30, 2012. The increase in personnel in fiscal 2014 was due to the Merger. The decline in personnel between
fiscal 2012 and fiscal 2013 was the result of operational efficiencies generated by the acquisition of Gotham Bank and the consolidation
of several financial centers.
Included in compensation and employee benefits expense are expenses associated with the Company’s defined benefit pension plan and
ESOP plan. During fiscal 2014, we merged the Legacy Provident defined benefit pension plan and the Legacy Sterling defined benefit
pension plan and settled $44.8 million of the merged plan benefit obligations through the purchase of annuities for certain retirees. We
also terminated the Company’s ESOP plan in fiscal 2014. Compensation and employee benefits expense in fiscal 2014 included a charge
of $3.9 million on the purchase of the annuities referenced above.
Stock-based compensation plans were $3.7 million in fiscal 2014 compared to $2.2 million in fiscal 2013 and $1.2 million in fiscal 2012.
The increase in fiscal 2014 was mainly due to an increase in personnel due to the Merger. The increase between fiscal 2012 and fiscal
2013 was mainly due to a shift in our compensation plans which increased the proportion of stock-based compensation to total compensation
for key personnel and the number of key personnel receiving stock-based compensation.
For additional information related to the Company’s employee benefit plans and stock-based compensation, see Note 11. “Employee
Benefit Plans and Stock-Based Compensation Plans” in the consolidated financial statements included elsewhere in this Report.
Occupancy and office operations increased $12.8 million to $27.7 million in fiscal 2014 compared to $15.0 million in fiscal 2013 and
$14.5 million in fiscal 2012. The increase between fiscal 2013 and fiscal 2014 was due to an increase in financial centers and other
locations acquired in the Merger. As discussed below, we moved certain financial center locations to other real estate owned and are
actively marketing these properties and other leased locations with the objective of reducing our occupancy and office operations expense
over time.
35
Amortization of intangible assets mainly includes amortization of core deposit intangible assets and non-compete agreements.
Amortization of intangible assets increased $8.1 million to $9.4 million in fiscal 2014 compared to $1.3 million in fiscal 2013 and $1.2
million in fiscal 2012. The increase in fiscal 2014 was a result of core deposit intangibles and non-compete agreement intangibles recorded
in connection with the Merger. Amortization of intangible assets is expected to be $6.1 million in fiscal 2015. See Note 6. “Goodwill
and Other Intangible Assets” in the consolidated financial statements included elsewhere in this Report.
FDIC insurance and regulatory assessments expense increased $3.1 million and was $6.1 million in fiscal 2014 compared to $3.0 million
in fiscal 2013 and $3.1 million in fiscal 2012. The increase in deposit insurance and regulatory fees in fiscal 2014 was due to the Merger
as these assessments are mainly based on the average balance of total assets on a quarterly basis. The decline during fiscal 2013 relative
to fiscal 2012 was mainly due to a change in the deposit insurance assessment base.
Other real estate owned expense (“OREO”) 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
foreclosed and financial center locations that are held for sale. OREO expense declined $1.8 million in fiscal 2014 compared to fiscal
2013 and declined $56 thousand in fiscal 2013 compared to fiscal 2012. The net benefit of $237 thousand in fiscal 2014 was due to a
$925 thousand gain on the sale of a financial center location that was acquired in the Merger.
Merger-related expense was $9.5 million in fiscal 2014, $2.8 million in fiscal 2013 and $5.9 million in fiscal 2012. Merger-related
expense in fiscal 2013 included due diligence costs and financial advisor fees only, which were incurred due to the Merger. Merger-
related expense in fiscal 2014 and fiscal 2012 included due diligence, restructuring costs and other charges incurred in connection with
the Merger and the acquisition of Gotham Bank, respectively.
Other non-interest expense for fiscal 2014 increased $40.5 million to $57.9 million compared to $17.4 million in fiscal 2013 and $18.4
million in fiscal 2012. Included in other non-interest expense for fiscal 2014 were charges of $26.6 million that included asset write-
downs to consolidate our financial center and other locations, retention and severance payments and charges incurred on the conversion
of our banking systems. Excluding these charges, other non-interest expense was $31.3 million in fiscal 2014 compared to $17.4 million
in fiscal 2013 and $18.4 million in fiscal 2012. Other non-interest expense mainly includes professional fees, data processing, insurance,
communications, advertising, supplies, loan processing and postage. The increase in fiscal 2014 compared to fiscal 2013 was principally
due to the Merger.
Income Tax expense was $10.2 million for fiscal 2014, compared to $11.4 million for fiscal 2013, and $6.2 million for fiscal 2012. This
represented an effective tax rate of 26.8%, 31.1%, and 23.6%, respectively. The effective income tax rates differed from the 35% federal
statutory rate during the periods primarily due to the effect of tax exempt income from securities and BOLI income. The effective tax
rate in fiscal 2014 was the result of a higher proportion of income being tax exempt given the Merger-related expenses and other charges
detailed above. The higher effective tax rate recognized in fiscal 2013 was mainly the result of Merger-related expenses incurred that
were fully non-tax deductible and a higher proportion of taxable vs. non-taxable income versus fiscal 2012.
Sources and Uses of Funds
The following table illustrates the mix of the Company’s funding sources and the assets in which those funds are invested as a percentage
of the Company’s total assets for the period indicated. Average assets totaled $6.8 billion in fiscal 2014 compared to $3.8 billion in fiscal
2013 and $3.2 billion in fiscal 2012.
36
Sources of Funds:
Non-interest bearing deposits
Interest bearing deposits
FHLB and other borrowings
Subordinated debentures
Senior notes
Other non-interest bearing liabilities
Stockholders’ equity
Total
Uses of Funds:
Loans
Securities
Interest bearing deposits
FHLBNY and FRB stock
Other non-interest earning assets
Total
For the fiscal year ended September 30,
2014
2013
2012
23.4%
17.0%
16.3%
49.5
10.4
0.2
1.4
1.7
57.9
11.1
—
0.6
0.6
57.8
10.5
—
0.6
0.8
13.4
100.0%
12.8
100.0%
14.0
100.0%
61.0%
58.1%
56.5%
25.1
1.6
0.8
11.5
29.4
1.6
0.6
10.3
30.3
1.6
0.6
11.0
100.0%
100.0%
100.0%
General. Deposits, borrowings, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds
from maturing securities and cash flows from operations are our primary sources of funds for use in lending, investing and for other
general corporate purposes. Average deposits increased $2.1 billion, or 72.3%, in fiscal 2014 compared to fiscal 2013 and increased
$490.3 million, or 20.7% in fiscal 2013 compared to fiscal 2012. Non-interest bearing deposits and low cost deposits are a significant
source of our funding, and generating and maintaining these deposits through our commercial banking teams and financial centers is key
to our strategy. Average non-interest bearing deposits were 32.1% of total average deposits in fiscal 2014 compared to 22.6% in fiscal
2013 and 22.0% in fiscal 2012.
The Company primarily invests funds in loans and securities. Average loans increased $1.9 billion, or 85.9% compared to fiscal 2013
and increased $410.7 million, or 22.7% in fiscal 2013 compared to fiscal 2012. Average securities increased $569.6 million or 50.7% in
fiscal 2014 compared to fiscal 2013 and increased $155.8 million or 16.1% in fiscal 2013 compared to fiscal 2012.
37
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.
2014
2013
September 30,
2012
2011
2010
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in thousands)
Commercial:
Commercial & industrial
$ 1,164,537
24.5% $
434,932
18.0% $
343,307
16.2% $
209,923
12.3% $
217,927
12.8%
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Total commercial
Commercial mortgage:
Commercial real estate
Multi-family
Acquisition, development &
construction
Residential mortgage
Consumer
Total loans
Total commercial mortgage
1,909,725
145,474
192,003
181,433
393,027
3.1
4.0
3.8
8.3
—
4,855
—
—
—
0.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,076,474
43.7
439,787
18.2
343,307
16.2
209,923
12.3
217,927
12.8
1,449,052
368,524
92,149
570,431
203,808
30.4
7.7
1.9
40.0
12.0
4.3
969,490
307,547
102,494
1,379,531
400,009
193,571
40.2
12.7
4.2
57.1
16.6
8.1
896,746
175,758
144,061
1,216,565
350,022
209,578
42.3
8.3
6.8
57.4
16.5
9.9
592,201
111,155
175,931
879,287
389,765
224,824
34.8
6.6
10.3
51.7
22.9
13.1
535,227
44,005
231,258
810,490
434,900
238,224
31.5
2.5
13.6
47.6
25.5
14.1
4,760,438
100.0%
2,412,898
100.0%
2,119,472
100.0%
1,703,799
100.0%
1,701,541
100.0%
Allowance for loan losses
(40,612)
Total loans, net
$ 4,719,826
(28,877)
$ 2,384,021
(28,282)
$ 2,091,190
(27,917)
$ 1,675,882
(30,843)
$ 1,670,698
Overview. Total loans increased $2.3 billion to $4.7 billion at September 30, 2014 compared to $2.4 billion at September 30, 2013. Prior
to fiscal 2014, the Bank’s loan portfolio was concentrated in real estate loans, mainly commercial mortgages, residential mortgages and
other consumer loans collateralized by real estate. In connection with the Merger, the Bank became a national bank and more evenly
balanced its loan portfolio between commercial loans and real estate loans. At September 30, 2014, commercial loans comprised 43.7%
of the loan portfolio compared to 18.2% at September 30, 2013 and commercial mortgage loans comprised 40.0% of the loan portfolio,
compared to 57.1% a year ago.
General. Our commercial banking teams focus on the origination of commercial loans and commercial mortgage loans. We also originate
residential mortgage loans and consumer loans such as home equity lines of credit, homeowner loans and personal loans in our market
area. We sell many of the residential mortgage loans we originate and we enter into loan participations in some commercial loans for
portfolio management purposes.
Loan Approval/Authority and Underwriting. The Board has established the Credit Risk Committee (the “CRC”) a sub-committee of the
Company’s Enterprise Risk Committee, to oversee the lending functions of the Bank. The CRC oversees the performance of the Bank’s
loan portfolio and its various components, assists in the development of strategic initiatives to enhance portfolio performance, and
considers loans for approval and recommendation to the Board.
The Senior Credit Committee (the “SCC”) consists of the Chief Executive Officer, Chief Banking Officer, Chief Credit Officer, and other
senior lending personnel. The SCC is authorized to approve all loans within the legal lending limit of the Bank.
The SCC may also authorize lending authority to individual Bank officers for both single and dual initial approval authority. Other than
overdrafts, the only single initial lending authorities are for credit secured small business loans up to $250,000 and up to $500,000 if
secured by residential property.
We have established a risk rating system for our commercial & industrial loans, commercial real estate loans and ADC loans. The risk
rating system assesses a variety of factors to rank the risk of default and risk of loss associated with the loan. These ratings are assessed
by commercial credit personnel who do not have responsibility for loan originations. We determine our maximum loan-to-one-borrower
limits based on the rating of the loan and the relative risk associated with the borrower’s portfolio type.
38
In connection with our residential mortgage and commercial real estate loans, we generally require property appraisals to be performed
by independent appraisers who are approved by the Board. Appraisals are then reviewed by the appropriate loan underwriting areas.
Under certain conditions, appraisals may not be required for loans under $250,000 or in other limited circumstances. We also require title
insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. Title insurance is not required for
consumer loans under $100,000, such as home equity lines of credit and homeowner loans and in connection with certain residential
mortgage refinances.
Commercial & Industrial Lending. We make various types of secured and unsecured commercial & industrial loans to small and medium-
sized businesses in our market area including loans collateralized by assets, such as accounts receivable, inventory, marketable securities,
other liquid collateral, equipment and other assets. The terms of these loans generally range from less than one year to seven years. The
loans are either structured on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate that is determined internally,
or a short-term market rate index. At September 30, 2014, commercial loans totaled $2.1 billion, or 43.7% of our total loan portfolio.
In the Merger, we acquired the following commercial lending businesses:
Payroll Finance Lending. The Bank provides financing and human resource business process outsourcing support services to the
temporary staffing industry. The Bank provides full back-office, computer and tax accounting services, and financing to independently-
owned staffing companies located throughout the United States. Loans typically are structured as an advance used by our clients to fund
their payroll and are outstanding on average for 40 to 45 days.
Warehouse Lending. The Bank provides residential mortgage warehouse funding services to mortgage bankers. These loans consist of
a line of credit used by the mortgage banker as a form of temporary financing during the period between the closing of a mortgage loan
until its sale into the secondary market, which typically lasts from 15 to 30 days. The Bank provides warehouse lines ranging from $5
million to $35 million. The warehouse lines are collateralized by high quality first mortgage loans, which include mainly conventional
Fannie Mae and Freddie Mac, jumbo and FHA loans.
Factored Receivables Lending. We provide 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 nonrefundable factoring fee, which is generally a percentage
of the factored receivables or sales volume and is designed to compensate the Bank for the bookkeeping and collection services provided
and, if applicable, its credit review of the client’s customer and assumption of customer credit risk. When the Bank “factors” (i.e., purchases)
an account receivable from a client, it records the receivable as an asset (included in “Gross loans” ), records a liability for the funds due
to the client (included in “Other liabilities”) and credits to non-interest income the nonrefundable factoring fee (included in
“Accounts receivable management/factoring commissions and other fees”). The Bank also may advance funds to its client prior to the
collection of receivables, charging interest on such advances (in addition to any factoring fees) and normally satisfying such advances
by the collection of receivables. The accounts receivable factoring is primarily for clients engaged in the apparel and textile industries.
Equipment Finance Lending. The Bank offers equipment financing across the United States through direct lending programs, third-
party sources and vendor programs. The Bank finances full payout leases and secured loans for various types of business equipment,
generally written on a recourse basis—with personal guarantees of the principals, with terms generally ranging from 24 to 60 months.
The above four categories of loans acquired in the Merger, plus our commercial & industrial loans are referred to as commercial loans
in the discussion below.
Underwriting of a commercial loan is based on an assessment of the applicant’s willingness and ability to repay in accordance with the
proposed terms, as well as an overall assessment of the risks involved. This includes an evaluation of the applicant to determine character
and capacity to manage. Personal guarantees of the principals are generally required, except in the case of certain factored receivables
the Bank accepts on a non-recourse basis from publicly owned and not-for-profit corporations. In addition to an evaluation of the loan
applicant’s financial statements, we analyze the adequacy of the primary and secondary sources of repayment to be relied upon in the
transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness. Checking
with other banks and trade investigations may also be conducted. Collateral supporting a secured transaction also is analyzed to determine
its marketability.
Commercial Real Estate and Multi-Family Lending. We originate real estate loans secured predominantly by first liens on commercial
real estate and multi-family properties. The underlying collateral of our commercial real estate loans consists of multi-family properties,
retail properties including shopping centers and strip centers, office buildings, nursing homes, industrial and warehouse properties, hotels,
motels, restaurants, and schools. To a lesser extent, we originate commercial real estate loans for medical use, non-profits, gas stations
39
and other categories. We may, from time to time, purchase commercial real estate loan participations. At September 30, 2014, loans
secured by commercial real estate and multi-family properties totaled $1.8 billion, or 38.2% of our total loan portfolio. Substantially all
of our commercial real estate loans are secured by properties located in our primary market area.
The majority of our commercial real estate loans have a term of ten years and are structured as five-year fixed rate loans with a rate
adjustment for the second five-year period or as ten-year fixed-rate loans. Amortization on these loans is typically based on 20 to 25
year terms with balloon maturities generally in five or ten years. Interest rates on commercial real estate loans generally range from 200
basis points to 300 basis points above a reference index.
In the underwriting of commercial real estate loans, we generally lend up to 75% of the appraised value. Decisions to lend are based on
the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan,
we primarily emphasize the ratio of the projected net cash flow to the debt service requirement (generally targeting a minimum ratio of
120%), computed after deductions for a vacancy factor and property expenses we deem appropriate. In addition, a personal guarantee of
the loan or a portion thereof is generally required from the principal(s) of the borrower, except for loans secured by multi-family properties,
which meet certain debt service coverage and loan to value thresholds. We require title insurance insuring the priority of our lien, fire
and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying
property.
Commercial real estate loans typically involve significant loan balances concentrated with single borrowers or groups of related borrowers.
In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of
the related real estate project and may be subject to adverse conditions in the real estate market and in the general economy. For commercial
real estate loans in which the borrower is a significant tenant, repayment experience also depends on the successful operation of the
borrower’s underlying business.
Acquisition, Development and Construction Lending. We originate acquisition, development and construction (“ADC”) loans to selected
builders in our market area. Since 2011, the Company has deemphasized this lending activity and we currently originate ADC loans on
an exception basis.
ADC loans help finance the purchase of land intended for further development, including single-family homes, multi-family housing,
and commercial income properties. Historically, we have made an acquisition loan before the borrower received approval to develop the
land as planned; however, we did not originate any such loans in fiscal 2014 or 2013. In general, the maximum loan-to-value ratio for a
land acquisition loan is 50% of the appraised value of the property, although higher loan-to-value ratios may be allowed for certain
borrowers we deem to be lower risk. We also fund development loans to builders in our market area to finance improvements to real
estate, consisting mainly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development
costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved
building lots may be sold to another builder. The maximum loan amount is generally limited to the cost of the improvements plus limited
approval of soft costs subject to an overall loan-to-value limitation. In general, we do not originate loans with interest reserves. Advances
are made in accordance with a schedule reflecting the cost of the improvements.
We also make construction loans to finance the cost of completing homes on the improved property. Advances on construction loans are
made in accordance with a schedule reflecting the cost of construction. Repayment of construction loans on residential subdivisions is
normally expected from the sale of units to individual purchasers except in cases of owner occupied construction loans. In the case of
income-producing property, repayment is usually expected from permanent financing upon completion of construction. We provide
permanent mortgage financing on most of our construction loans on income-producing property. Collateral coverage and risk profile are
maintained by restricting the number of model or speculative units in each project.
ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans generally depends on
the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we
make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be
granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and
construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and
projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
Large Credit Relationships. The Company originates and maintains large credit relationships with numerous commercial customers in
the ordinary course of business. The Company considers large credit relationships to be those with commitments equal to or in excess
of $10.0 million, prior to any portion being sold. Large relationships also include loan participations purchased if the credit relationship
40
with the agent is equal to or in excess of $10.0 million. In addition to the Company’s normal policies and procedures related to the
origination of large credits, the Senior Credit Committee of the Bank must approve all new and renewed credit facilities which are part
of large credit relationships. The Senior Credit Committee meets regularly and reviews large credit relationship activity and discusses
the current loan pipeline, among other things. The following table provides additional information on the Company’s large credit
relationships outstanding at September 30:
Number of
Relationships
2014
Period end balances
Committed
Outstanding
Number of
Relationships
2013
Period end balances
Committed Outstanding
(Dollars in Thousands)
Committed amount:
$20.0 million and greater
$10.0 million to $19.9 million
45
78
$ 1,256,487
$
1,055,628
681,187
835,360
4
48
$
92,630 $
613,865
87,261
543,933
The average commitment per large credit relationship in excess of $20.0 million totaled $27.9 million at September 30, 2014 and
$23.2 million at September 30, 2013. The average outstanding balance per large credit relationship with a commitment in excess of
$20.0 million totaled $15.1 million at September 30, 2014 and $21.8 million at September 30, 2013. The average commitment per large
credit relationship between $10.0 million and $19.9 million totaled $13.5 million at September 30, 2014 and $12.8 million at September
30, 2013. The average outstanding balance per large credit relationship with a commitment between $10 million and $19.9 million totaled
$10.7 million at September 30, 2014 and $11.3 million at September 30, 2013.
Industry concentrations. As of September 30, 2014 and 2013, there were no concentrations of loans within any single industry in excess
of 10% of company total loans, as segregated by Standard Industrial Classification code (“SIC code”). The SIC code is a federally
designed standard industrial numbering system used by the Company to categorize loans by the borrower’s type of business. The majority
of the Bank’s loans are to borrowers located in the greater New York metropolitan region. The Bank has no foreign loans.
Residential Mortgage Lending. We offer conforming and non-conforming, fixed-rate and adjustable-rate (“ARM”) residential mortgage
loans with maturities up to 30 years and maximum loan amounts generally up to $4.0 million that are fully amortizing with monthly or
bi-weekly loan payments. Our residential mortgage loan portfolio totaled $570.4 million, or 12.0% of our total loan portfolio at September
30, 2014.
Residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines for loans they designate as
acceptable for purchase. Loans that conform to such guidelines are referred to as “conforming loans.” We generally originate fixed-rate
loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac, which are currently $417
thousand in many locations in the continental U.S. and are $625.5 thousand in high-cost areas such as New York City and surrounding
counties. Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%. The Bank operates a
residential mortgage banking and brokerage business through offices located in the greater New York Metropolitan area, Virginia, and
other mid-Atlantic states. In order to manage our exposure to rising interest rates, we sell the majority of our conforming fixed rate
residential mortgage loans, in the secondary market to nationally known entities including government sponsored entities such as Fannie
Mae and Freddie Mac.
We also originate loans above conforming limits, referred to as “jumbo loans,” which have been underwritten to substantially the same
credit standards as conforming loans. These loans are generally intended to be held in our residential mortgage loan portfolio. Our bi-
weekly residential mortgage loans result in shorter repayment schedules than conventional monthly mortgage loans, and are repaid through
an automatic deduction from the borrower’s savings or checking account. We retained the servicing rights on a portion of loans sold;
however, in fiscal 2014 the majority of loans sold were sold with servicing rights released. As of September 30, 2014, residential mortgage
loans serviced for others, excluding loan participations, totaled approximately $234.4 million. Effective October 1, 2013, we transferred
the servicing function for residential mortgage loans we own and service for others to a nationally recognized mortgage loan servicer.
We currently offer several ARM loan products secured by residential properties with rates that are fixed for a period ranging from six
months to ten years. After the initial term, if the loan is not already refinanced, the interest rate on these loans generally resets every year
based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one
year, as published weekly by the Federal Reserve Board and subject to certain periodic and lifetime limitations on interest rate changes.
Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. ARM
41
loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers
rise as interest rates rise, thereby increasing the potential for default.
We require title insurance on all of our residential mortgage loans, and we also require that borrowers maintain fire and extended coverage
or all risk casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the
replacement cost of the improvements, but in any event in an amount calculated to avoid the effect of any coinsurance clause. Residential
mortgage loans generally are required to have a mortgage escrow account from which disbursements are made for real estate taxes and
for hazard and flood insurance.
Consumer Lending. We originate a variety of consumer loans, including homeowner loans, home equity lines of credit, new and used
automobile loans, and personal unsecured loans, including fixed-rate installment loans and variable lines of credit. As of September 30,
2014, consumer loans totaled $203.8 million, or 4.3%, of the total loan portfolio.
We offer fixed-rate, fixed-term second mortgage loans, referred to as homeowner loans, and we also offer adjustable-rate home equity
lines of credit secured by junior liens on residential properties. As of September 30, 2014, homeowner loans totaled $23.9 million or
0.5% of our total loan portfolio. The disbursed portion of home equity lines of credit totaled $59.9 million, or 3.4%, of our total loan
portfolio at September 30, 2014, with $99.0 million remaining undisbursed.
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30,
2014. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year
or less. Weighted average rates are computed based on the rate of the loan at September 30, 2014.
Commercial:
Commercial & industrial
$
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Total commercial
Commercial mortgage:
Commercial real estate
Multi-family
Acquisition, development & construction
Total commercial mortgage
Residential mortgage
Consumer
Total loans
Less than one year
One to five years
Over five years
Total
Amount
Rate
Amount
Rate
Amount
Rate
Amount
Rate
(Dollars in thousands)
696,389
145,474
192,003
181,433
21,296
1,236,595
114,678
14,153
44,259
173,090
8,855
4,274
4.13% $
362,907
3.90% $
105,241
4.12% $
1,164,537
4.06%
9.00
3.34
5.00
4.26
4.71
4.83
5.14
4.36
4.74
4.81
13.82
—
—
—
338,369
701,276
654,341
174,188
38,187
866,716
36,148
9,343
—
—
—
4.38
4.13
4.37
3.88
4.29
4.27
4.59
6.52
—
—
—
33,362
138,603
680,033
180,183
9,703
869,919
525,428
190,191
—
—
—
4.30
4.16
4.47
4.04
3.40
4.37
4.22
4.14
145,474
192,003
181,433
393,027
2,076,474
1,449,052
368,524
92,149
1,909,725
570,431
203,808
9.00
3.34
5.00
4.37
4.48
4.45
4.01
4.23
4.35
4.25
4.45
$
1,422,814
4.74% $
1,613,483
4.23% $
1,724,141
4.28% $
4,760,438
4.40%
42
The following table sets forth the composition of fixed-rate and adjustable-rate loans at September 30, 2014 that are contractually due
after September 30, 2015:
Commercial & industrial
Equipment financing
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Total loans
$
$
Fixed
284,166
371,731
733,681
171,339
7,053
284,811
28,553
1,881,334
Adjustable
(Dollars in thousands)
$
$
183,982
—
600,693
183,032
40,837
276,765
170,981
1,456,290
$
$
Total
468,148
371,731
1,334,374
354,371
47,890
561,576
199,534
3,337,624
All payroll finance, warehouse lending and factored receivables are contractually due within 12 months.
43
Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets
Loan Portfolio Delinquencies. The following table sets forth certain information on our loan portfolio delinquencies at the dates indicated.
Loans delinquent for
30-89 Days
Number
Amount
90 days or more still
accruing & non-accrual
Number
Amount
(Dollars in thousands)
Total
Number
Amount
At September 30, 2014:
Commercial & industrial
Payroll finance
Factored receivables
Equipment finance
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
At September 30, 2013:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total
At September 30, 2012:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential Mortgage
Consumer
Total
At September 30, 2011:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total
At September 30, 2010:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total
15
1
—
2
6
—
1
41
48
114
5
8
2
6
14
35
7
7
9
10
22
55
2
4
4
8
20
38
2
4
2
1
27
36
9,359
99
—
851
4,281
—
56
6,059
4,574
25,279
180
4,335
768
621
566
6,470
237
1,875
7,067
1,352
1,816
12,347
490
1,105
4,265
1,212
794
7,866
3,403
1,469
6,681
113
681
12,347
$
$
$
$
$
$
$
$
$
$
44
8
2
2
1
36
2
21
97
61
230
8
26
11
52
28
125
2
30
29
56
21
138
3
34
24
40
26
127
6
26
11
36
22
101
$
$
$
$
$
$
$
$
$
$
4,324
346
370
262
10,966
131
12,361
16,460
5,743
50,963
789
8,769
5,420
9,316
2,612
26,906
344
10,453
15,404
11,314
2,299
39,814
243
13,214
16,984
7,976
2,150
40,567
1,376
9,857
5,730
8,033
1,844
26,840
23
3
2
3
42
2
22
138
109
344
13
34
13
58
42
160
9
37
38
66
43
193
5
38
28
48
46
165
8
30
13
37
49
137
$
$
$
$
$
$
$
$
$
$
13,683
445
370
1,113
15,247
131
12,417
22,519
10,317
76,242
969
13,104
6,188
9,937
3,178
33,376
581
12,328
22,471
12,666
4,115
52,161
733
14,319
21,249
9,188
2,944
48,433
4,779
11,326
12,411
8,146
2,525
39,187
Collection Procedures for Residential and Commercial Mortgage Loans and Consumer Loans. A late payment notice is generated
after the 16th day of the loan payment due date requesting the payment due plus any late charge assessed. Legal action, notwithstanding
ongoing collection efforts, is generally initiated after 90 days of the original due date for failure to make payment. Unsecured consumer
loans are generally charged-off after 120 days. For commercial loans, procedures vary depending on individual circumstances.
Past Due, Non-Performing Loans, Non-Performing Assets (Risk Elements). The table below sets forth the amounts and categories of
our non-performing assets at the dates indicated.
Non-accrual loans:
Commercial & industrial
Factored receivables
Equipment finance
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Accruing loans past due 90 days or more
Total non-performing loans
OREO
Total non-performing assets
TDRs accruing and not included above
Ratios:
Non-performing loans to total loans
Non-performing assets to total assets
2014
2013
September 30,
2012
(Dollars in thousands)
2011
2010
$
$
$
4,324
370
262
10,445
131
12,361
15,926
5,743
1,401
50,963
7,580
58,543
17,653
$
$
$
500
—
—
5,573
1,622
5,420
7,484
2,208
4,099
26,906
6,022
32,928
23,895
$
$
$
344
—
—
7,319
1,496
15,404
9,051
1,830
4,370
39,814
6,403
46,217
14,077
$
$
$
243
—
—
11,225
—
16,538
7,485
986
4,090
40,567
5,391
45,958
8,470
$
$
$
1,376
—
—
6,886
—
5,730
6,080
1,341
5,427
26,840
3,891
30,731
16,047
1.07%
0.80
1.12%
0.81
1.87%
1.15
2.38%
1.46
1.58%
1.02
Loans are reviewed on a regular basis and are placed on non-accrual status upon the earlier of (i) when full payment of principal or interest
is in doubt, or (ii) when either principal or interest is 90 days or more past due, unless the loan is well secured and in the process of
collection. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed against interest income. Interest
payments received on non-accrual loans are generally applied to the principal balance of the outstanding loan. However, based on an
assessment of the borrower’s financial condition and payment history, an interest payment may be applied to interest income on a cash
basis. Appraisals are performed at least annually on classifieds loans. At September 30, 2014, we had non-accrual loans of $49.6 million,
and we had $1.4 million of loans 90 days past due and still accruing interest which were well secured and in the process of collection.
At September 30, 2013, we had non-accrual loans of $22.8 million and $4.1 million of loans 90 days past due and still accruing interest.
Non-performing loans (“NPLs”) increased $24.1 million to $51.0 million at September 30, 2014 compared to $26.9 million at
September 30, 2013. Included in this increase are $3.8 million of loans acquired in the Merger that were identified as purchased credit
impaired loans, of which $1.5 million were commercial & industrial loans, $2.1 million were residential mortgage loans and $139 thousand
were commercial real estate loans. Non-performing loans in the ADC portfolio increased by $6.9 million in fiscal 2014 to $12.3 million;
the increase consisted of three loans which are well secured and one loan which has performed as expected in fiscal 2014. We continue
to actively manage and reduce outstanding balances in the ADC portfolio. Residential mortgage non-performing loans increased $8.4
million and consumer non-performing loans increased $3.5 million at September 30, 2014 as compared to September 30, 2013. This
increase is mainly attributed to the extended period of time necessary to foreclose on residential mortgages in New York state. In fiscal
2014, we outsourced all residential mortgage servicing activities to a third-party vendor, which we anticipate will allow us to better service
our residential mortgage portfolio and reduce non-performing balances over time.
Troubled Debt Restructuring. The Company has formally modified loans to certain borrowers who experienced financial difficulty. If
the terms of the modification include a concession, as defined by GAAP, the loan is considered a troubled debt restructuring (“TDR”),
which are also considered impaired loans. Nearly all of these loans are secured by real estate. Total TDRs were $29.6 million at
September 30, 2014, of which $11.9 million were non-accrual and $17.7 million were performing according to terms and still accruing
interest income. TDRs still accruing interest income are loans modified for borrowers that have experienced one or more financial
45
difficulties and are still performing in accordance with the terms of their loan prior to the modification. Loan modifications include actions
such as extension of maturity date or the lowering of interest rates and monthly payments. As of September 30, 2014, there were no
commitments to lend additional funds to borrowers with loans that have been modified.
Other Real Estate Owned. 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 due to the Merger that are held for sale are also
classified as OREO. When real estate is transfered to OREO, it is recorded at the lower of our investment in the loan/asset or fair value
less cost 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. At September 30, 2014, we had
34 OREO properties with a recorded balance of $7.6 million. After transfer to OREO, we regularly update the fair value of the property.
Subsequent declines in fair value are charged to current earnings and included in other non-interest expense as part of OREO expense.
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 September 30, 2014, we had
$39.6 million of assets designated as “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 order the establishment of an additional valuation allowance. 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 September 30, 2014, classified assets consisted of loans of $73.1 million, OREO of $5.2 million and $2.9 million of private label
mortgage-backed securities.
For the year ended September 30, 2014, gross interest income that would have been recorded had the non-accrual loans at the end of the
year remained on accrual status throughout the year amounted to approximately $1.5 million. Interest income actually recognized on
such loans totaled $425 thousand.
Allowance for Loan Losses. We believe the allowance for loan losses is critical to the understanding of our financial condition and results
of operations. Selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are
susceptible to change. In the event that different assumptions or conditions were to occur, and depending upon the severity of such
changes, materially different financial conditions or results of operations is a reasonable possibility. In addition, as an integral part of
their examination process, our regulatory agencies periodically review our allowance for loan losses. Such agencies may require us to
recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
We maintain our allowance for loan losses at a level that the Company believes is adequate to absorb probable losses inherent in the
existing loan portfolio based on an evaluation of the collectibility of loans, underlying collateral, geographic and other concentrations,
and prior loss experience. We use a risk rating system for all commercial loans, including commercial real estate loans, to evaluate the
adequacy of the allowance for loan losses. With this system, each loan, with the exception of those included in large groups of smaller-
balance homogeneous loans, is risk rated between one and ten, by credit administration, loan review or loan committee, with one being
the best case and ten being a loss or the worst case. Loans with risk ratings between seven and nine are monitored more closely by the
credit administration team and may result in specific valuation allowances. We calculate an average loss experience by loan type that is
a twelve quarter average for commercial loans and eight quarter average for consumer loans. To the loss experience, we apply individual
qualitative loss factors that result in an overall loss factor at an appropriate level for the allowance for loan losses for a particular loan
type. These qualitative loss factors are determined by management, based on historical loss experience for the applicable loan category,
and are adjusted to reflect our evaluation of:
•
•
•
levels of, and trends in, delinquencies and non-accruals;
trends in volume and terms of loans;
effects of any changes in lending policies and procedures;
46
•
•
•
•
experience, ability, and depth of lending management and staff;
national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and
for commercial loans, trends in risk ratings.
The allowance for loan losses also includes an element for estimated probable but undetected losses. The Company analyzes loans by
two broad segments or classes: real estate secured loans and loans that are either unsecured or secured by other collateral. The segments
or classes considered real estate secured are: residential mortgage loans; commercial real estate loans; multi-family loans; ADC loans;
homeowner loans; and home equity lines of credit. The segments or classes considered unsecured or secured by other than real estate
collateral are: commercial & industrial loans, including payroll finance; warehouse lending; factored receivables; and equipment finance
and consumer loans. Commercial loan segments and residential mortgage loans over $500,000 are reviewed for impairment once they
are past due 90 days or more. If a loan is deemed to be impaired in one of the real estate secured segments, and it is anticipated that our
ultimate source of repayment will be through foreclosure and sale of the underlying collateral, it is generally considered collateral
dependent. If the value of the collateral securing a collateral dependent impaired loan is less than the carrying value of the loan, a charge-
off is recognized equal to the difference between the appraised value and the book value of the loan. In addition, included in impairment
losses are charges recognized for estimated costs to hold and to liquidate the collateral. The ranges for the costs to hold and liquidate are
12-22% for the following segments: commercial real estate, residential and ADC loans and 7-13% for homeowner loans and home equity
lines of credit.
For loans in the consumer segment, we charge-off the full amount of the loan when it becomes 90 to 120 days or more past due, or earlier
in the case of bankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan. For loans in the
commercial & industrial loan segment, we conduct a cash flow projection, and charge-off the difference between the net present value
of the cash flows discounted at the effective note rate and the carrying value of the loan, and generally recognize an additional impairment
reserve to account for the imprecision of our estimates.
ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans depends on the sale of
the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an
acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or
will be delayed. These events may adversely affect the borrower and the collateral value of the property. ADC loans also expose us to
the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate
sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring and
pricing of the loan. We have deemphasized this type of loan.
Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service
the debt or the borrower may use the cash flow for other purposes. In addition, the foreclosure process, if necessary, may be slow and
properties may deteriorate in the process. The market values are also subject to a wide variety of factors, including general economic
conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.
Commercial & industrial lending also exposes us to risk because repayment depends on the successful operation of the business which
is subject to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety
of risks because we must gain control of assets used in the borrower’s business before foreclosing, which we cannot be assured of doing,
and the value in a foreclosure sale or other means of liquidation may be uncertain.
47
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.
Balance at beginning of period
Charge-offs:
Commercial & industrial
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Total charge-offs
Recoveries:
Commercial & industrial
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Ratios:
2014
$
28,877
$
For the year ended September 30,
2011
2012
2013
(Dollars in thousands)
$
28,282
27,917
$
30,843
(2,901)
(758)
—
(211)
(1,074)
(741)
(418)
(1,479)
(963)
(786)
(9,331)
1,073
—
—
9
194
161
92
—
323
114
1,966
(7,365)
19,100
40,612
(1,354)
—
—
—
—
(3,285)
(440)
(3,422)
(2,547)
(2,009)
(13,057)
410
—
—
—
—
567
10
182
101
232
1,502
(11,555)
12,150
28,877
$
(1,526)
—
—
—
—
(2,682)
(25)
(4,124)
(2,551)
(1,901)
(12,809)
1,116
—
—
—
—
528
—
299
356
263
2,562
(10,247)
10,612
28,282
(5,400)
—
—
—
—
(1,752)
(50)
(8,939)
(2,140)
(1,989)
(20,270)
605
—
—
—
—
2
—
10
15
128
760
(19,510)
16,584
27,917
$
$
$
2010
$
30,050
(6,578)
—
—
—
—
(984)
(3)
(848)
(749)
(1,168)
(10,330)
670
—
—
—
—
23
—
261
3
166
1,123
(9,207)
10,000
30,843
$
Net charge-offs to average loans outstanding
Allowance for loan losses to non-performing loans
Allowance for loan losses to total loans
0.24%
80
0.85
0.52%
107
1.20
0.56%
71
1.33
1.17%
69
1.64
0.56%
115
1.81
The allowance for loan losses increased from $28.9 million to $40.6 million as the provision for loan losses exceeded net charge-offs by
$11.7 million. The allowance for loan losses at September 30, 2014 represented 79.7% of non-performing loans and 0.85% of the total
loan portfolio. Net charge-offs for the year ended September 30, 2014 were $7.4 million, or 0.24% of average loans, compared to net
charge-offs of $11.6 million, or 0.52% of average loans for the prior year. The decrease in net charge-offs as a percentage of average
loans was mostly due to improved collateral values and performance in our commercial real estate and ADC loans.
Provision for Loan Losses. We recorded $19.1 million in loan loss provisions for the year ended September 30, 2014 compared to $12.2
million in the prior year, an increase of approximately $7 million. Loans acquired in the Merger were initially recorded at fair value and
in accordance with GAAP did not carry an allowance for loan losses at the acquisition date. In fiscal 2014, we recorded provision for
loan losses as a result of organic growth and renewed loans from the Legacy Sterling acquired portfolio. Provision for loan losses was
$12.2 million in fiscal 2013, an increase of approximately $1.5 million as compared to fiscal 2012. Net charge-offs in the loan portfolio
were $11.6 million in fiscal 2013 compared to $10.2 million in the prior year.
48
Our loss experience indicates classified loans, those rated substandard or worse, require higher levels of provision for loan losses and
allowance for loan losses than loans that are not classified. Classified loans increased from $61.1 million at September 30, 2013 to $73.1
million at September 30, 2014 primarily due to classified loans acquired in the Merger. Special mention loans increased from $13.5
million at September 30, 2013 to $39.6 million at September 30, 2014, also mainly due to the Merger.
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, the Bank’s 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 September 30, 2014, we had $36.2 million in impaired
loans compared to $36.8 million at September 30, 2013 and $53.3 million at September 30, 2012. The decline between 2012 and 2013
was mainly due to the resolution of several ADC relationships. In fiscal 2013, we modified the methodology we use to determine the
allowance for loan losses required for residential mortgage loans and equity lines of credit. In prior periods, we evaluated these loans for
impairment on an individual basis. In fiscal 2013, we began evaluating residential mortgage loans and equity lines of credit with an
outstanding balance of $500 or less on a homogeneous pool basis. This modified approach to our methodology did not have a material
impact on the allowance for loan losses.
Allocation of Allowance for Loan Losses. The following tables set 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.
2014
September 30,
2013
2012
Allowance
for loan
losses
Loan
balance
% of total
loans
Allowance
for loan
losses
Loan
balance
% of total
loans
Allowance
for loan
losses
Loan
balance
% of total
loans
(Dollars in thousands)
Commercial & industrial
$
9,536
$ 1,164,537
24.5% $
5,302
$ 434,932
18.0% $
4,603
$ 343,307
16.2%
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Commercial real estate
Multi-family
Acquisition, development &
construction
Residential mortgage
Consumer
Total
1,379
630
1,294
2,621
145,474
192,003
181,433
393,027
10,844
1,449,052
1,867
368,524
2,120
5,837
4,484
92,149
570,431
203,808
3.1
4.0
3.8
8.3
30.4
7.7
1.9
12.0
4.3
—
—
—
—
7,567
2,400
5,806
4,474
3,328
—
4,855
—
—
969,490
307,547
102,494
400,009
193,571
—
0.2%
—
—
40.2
12.7
4.2
16.6
8.1
—
—
—
—
5,754
1,476
8,526
4,359
3,564
—
—
—
—
896,746
175,758
144,061
350,022
209,578
—
—
—
—
42.3
8.3
6.8
16.5
9.9
$
40,612
$ 4,760,438
100.0% $
28,877
$2,412,898
100.0% $
28,282
$ 2,119,472
100.0%
49
Commercial & industrial
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Total
September 30,
2011
2010
Allowance
for loan
losses
Loan
balance
% of total
loans
Allowance
for loan
losses
Loan
balance
% of total
loans
(Dollars in thousands)
$
5,945
$
209,923
12.3% $
8,970
$
217,927
12.8%
5,123
445
9,895
3,498
3,011
592,201
111,155
175,931
389,765
224,824
34.8
6.6
10.3
22.9
13.1
5,739
176
9,752
2,641
3,565
535,227
44,005
231,258
434,900
238,224
31.5
2.5
13.6
25.5
14.1
$
27,917
$ 1,703,799
100.0% $
30,843
$ 1,701,541
100.0%
The allowance allocated to commercial & industrial loans, payroll finance, warehouse lending, factored receivables and equipment
financing mainly increased in fiscal 2014 as a result of higher loan balances due to the Merger and organic loan growth. The loans
acquired in the Merger were recorded at fair value with no allowance for loan losses at the acquisition date. The reserve allocated to
commercial loans in total was $15.5 million, or 38.1% of the allowance for loan losses at September 30, 2014 compared to $5.3 million
or 18.4% of the allowance for loan losses at September 30, 2013. This increase reflects mainly the increase in commercial loans as a
percentage of the total loan portfolio. Commercial real estate loans, including multi-family loans, represented 38.1% of the loan portfolio
at September 30, 2014 and 31.3% of the allowance for loan losses as compared to September 30, 2013, in which commercial real estate
loans were 52.9% of the loan portfolio and 34.5% of the allowance for loan losses. The allowance allocated to acquisition, development
and construction loans declined to $2.1 million at September 30, 2014 compared to $5.8 million at September 30, 2013. The decrease
in the allowance allocated to acquisition, development and construction loans was mainly due to a reduction in the trailing loan loss
allocation factor, which is the main component in determining the estimated allowance required for each class of loan, and also to a
change in the composition of the non-performing ADC loans at September 30, 2014, which included several loans that management has
determined are well-secured. In our allowance for loan losses methodology the allocation of loss on commercial real estate loans increases
as the loan ages during the initial two years of the life of the loan, which results in a higher allocation of the allowance for loan losses as
the loan portfolio becomes more seasoned. The increase in the allowance for loan losses on residential mortgage loans and consumer
loans is primarily related to the increase in non-performing residential mortgage and consumer loans.
50
Investment Securities
Available for Sale Portfolio. The following table sets forth the composition of our available for sale securities portfolio at the dates
indicated.
2014
Amortized
cost
Fair value
September 30,
2013
Amortized
cost
(Dollars in thousands)
Fair value
2012
Amortized
cost
Fair value
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
$
$
477,003
115,395
592,398
$
477,705
114,145
591,850
$
284,837
169,336
454,173
$
282,529
166,654
449,183
$
241,598
191,867
433,465
Federal agencies
Corporate bonds
State and municipal
158,114
195,547
131,715
37,684
—
Total other securities
523,060
Total available for sale securities $ 1,115,458
Trust Preferred
Equities
152,814
192,839
134,898
38,412
—
518,963
273,637
118,575
127,324
—
—
519,536
261,547
114,933
128,730
—
—
505,210
404,820
—
146,136
—
1,087
552,043
$ 1,110,813
$
973,709
$
954,393
$
985,508
$ 1,010,872
251,445
193,064
444,509
408,823
—
156,481
—
1,059
566,363
Held to Maturity Portfolio. The following table sets forth the composition of our held to maturity securities portfolio at the dates indicated.
2014
September 30,
2013
2012
Amortized
cost
Fair value
Amortized
cost
Fair value
Amortized
cost
Fair value
(Dollars in thousands)
$
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
State and municipal
Other
Total other securities
Total held to maturity securities
$
142,329
62,690
205,019
136,413
232,643
5,000
374,056
579,075
$
$
143,586
61,495
205,081
138,085
239,334
5,338
382,757
587,838
$
$
130,371
25,776
156,147
77,341
19,011
1,500
97,852
253,999
$
$
130,979
25,494
156,473
73,883
19,021
1,519
94,423
250,896
$
$
71,343
27,921
99,264
22,236
19,376
1,500
43,112
142,376
$
$
73,902
28,119
102,021
22,342
20,435
1,526
44,303
146,324
Overview. The Board’s Enterprise Risk Committee oversees our investment program and evaluates our investment policy and objectives.
Our Chief Financial Officer, Chief Executive Officer, Chief Investment Officer/Treasurer and certain other senior officers have the
authority to purchase and sell securities within specific guidelines established in the investment policy. In addition, a summary of all
transactions is reviewed by the Enterprise Risk Committee at least quarterly.
The Company’s objectives for the investment securities is to maintain a high quality portfolio that consists primarily of liquid investment
securities with a duration that is designed to limit the impact of fair value declines in a rising interest rate environment. The primary use
of funds from deposit growth and the primary source of interest income is expected to be from loan growth. The investment portfolio
provides for flexibility in interest rate risk management and additional liquidity, in addition to contributing to our overall earnings.
Investment securities are also utilized for pledging purposes as collateral for borrowings from FHLB, municipal deposits, and other
51
borrowings. The Company regularly evaluates the portfolio against its overall balance sheet optimization strategy of producing growth
in earnings per share, and contributing to return on assets. The Company evaluates the portfolio size, risk and duration on a daily basis.
At September 30, 2014, the portfolio represented 23.0% of total assets. Our goal is to establish and maintain the investment portfolio at
18.0% to 20.0% of total assets over time.
FASB ASC Topic 320, Investments - Debt and Equity Securities, requires that, at the time of purchase, we designate a security as held
to maturity, available for sale, or trading, depending on our intent and ability to hold the security. Securities designated available for sale
are reported at fair value, while securities designated held to maturity are reported at amortized cost. We do not have a trading portfolio.
The carrying value of investment securities is comprised of the fair value of investment securities available for sale and the amortized
cost of held to maturity securities.
Investment portfolio activity. At September 30, 2014, the carrying value of investment securities was $1.7 billion, an increase of $481.5
million compared to September 30, 2013. At September 30, 2013, the carrying value of the portfolio was $1.2 billion, an increase of
$55.1 million as compared to September 30, 2012. In connection with the Merger, the Company acquired securities with a fair value of
$607.9 million.
In accordance with FASB ASC Subtopic 320-10-25-6, in a significant business combination a company may transfer held to maturity
securities to available for sale securities to maintain the company’s existing interest rate risk position or credit risk policy. Based on
management’s review of the combined investment securities portfolio and implications for asset and liability management, investment
securities totaling $165.2 million were transferred from held to maturity to available for sale. Investment securities that were transferred
included residential mortgage-backed securities, federal agency securities and state and municipal securities and was based mainly on
the premium amortization and extension risk inherent in these securities. Concurrent with this repositioning, a total of $221.9 million of
investment securities were also transferred from available for sale to held to maturity. Substantially all of the securities transferred from
available for sale to held to maturity have a maturity date in 2020 or beyond. Management believes the transfers of investment securities
highlighted above maintain the Company’s interest rate risk position and credit risk profile on a combined basis post-Merger.
Portfolio Maturities and Yields. The following table summarizes the composition, maturities and weighted average yield of our investment
securities portfolio at September 30, 2014. Maturities are based on the final contractual payment dates and do not reflect the impact of
prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax equivalent basis.
1 Year or Less
1-5 years
5-10 years
10 years or more
Amortized
cost
Yield
Amortized
cost
Yield
Amortized
cost
Yield
Amortized
cost
Yield
Amortized
cost
Total
Fair
Value
Yield
(Dollars in thousands)
Available for sale:
Residential MBS:
Agency-backed
CMO/Other MBS
Residential MBS
Federal agencies
Corporate
State and municipal
Trust Preferred
Total
Held to maturity:
Residential MBS:
Agency-backed
CMO/Other MBS
Residential MBS
Federal agencies
State and municipal
Other
Total
$
—
—
—
—
—
—% $
—
—
—
—
2,100
—
1.96
—
9,088
2,130
11,218
24,996
66,473
50,039
—
1.93% $ 111,629
2.27% $ 356,286
2.49% $ 477,003
$ 477,705
2.43%
3.22
2.17
1.35
2.02
3.06
—
11,022
122,651
133,118
129,074
72,103
—
1.92
2.24
1.52
2.41
2.94
—
102,243
458,529
—
—
7,473
37,684
2.21
2.43
—
—
3.97
6.60
115,395
592,398
158,114
195,547
131,715
37,684
114,145
591,850
152,814
192,839
134,898
38,412
2.20
2.39
1.49
2.28
3.03
6.60
$
2,100
1.96% $ 152,726
2.26% $ 456,946
2.19% $ 503,686
2.87% $1,115,458
$1,110,813
2.46%
$
—
—
—
—
8,846
—
—% $
—
—
—
2.18
$
8,846
2.18% $
—
—
—
—
4,388
4,750
9,138
—% $
42,796
2.77% $
99,533
2.55% $ 142,329
$ 143,586
2.62%
—
—
—
3.30
3.09
—
42,796
108,317
80,928
250
—
2.77
2.50
3.00
3.75
62,690
162,223
28,096
138,481
—
1.95
2.32
2.56
3.52
—
62,690
205,019
136,413
232,643
5,000
61,495
205,081
138,085
239,333
5,338
1.95
2.42
2.51
3.03
3.12
3.20% $ 232,291
2.73% $ 328,800
2.85% $ 579,075
$ 587,837
2.69%
52
Mortgage-Backed Securities. Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the
pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically
represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities
are collateralized by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government
sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of
securities to investors, such as us, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed
securities involve a risk in addition to the guarantee of repayment of principal outstanding that actual prepayments will be greater or less
than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion
of any discount relating to such instruments, thereby affecting the net yield and duration of such securities. We review prepayment
estimates for our mortgage-backed securities at purchase to ensure that prepayment assumptions are reasonable considering the underlying
collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed
securities portfolio. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates
require modification that would cause amortization or accretion adjustments.
A portion of our mortgage-backed securities portfolio is invested in collateralized mortgage obligations (“CMOs”), including Real Estate
Mortgage Investment Conduits (“REMICs”), backed by Fannie Mae and Freddie Mac. CMOs and REMICs are types of debt securities
issued by special-purpose entities that aggregate pools of mortgages and mortgage-backed securities and create different classes of
securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk
characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending
priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities
are distributed pro rata to all security holders. Our practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate
tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with an emphasis on the relative trade-offs
between lifetime rate caps, prepayment risk, and interest rates.
Government and Agency Securities. While these securities generally provide lower yields than other investments such as mortgage-
backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity
purposes and as collateral for borrowings and municipal deposits.
Corporate Bonds. Corporate bonds have a higher risk of default due to potential for adverse changes in the creditworthiness of the issuer.
In recognition of this risk, our policy limits investments in corporate bonds to securities with maturities of ten years or less and rated
“A-” or better by at least one nationally recognized rating agency at time of purchase, and to a total investment size of no more than $20.0
million per issuer. Our total corporate bond portfolio limit is the lesser of 5% of total assets or 75% of risk-based capital.
State and Municipal Bonds. The investment policy limits municipal bonds to securities with maturities of 20 years or less and rated as
investment grade by at least one nationally recognized rating agency at the time of purchase. However, we also purchase securities that
are issued by local government entities within our service area. Such local entity obligations generally are not rated, and are subject to
internal credit reviews. In addition, the policy generally imposes an investment size limit of $5.0 million per municipal issuer and a total
municipal bond portfolio limit of 10% of assets. At September 30, 2014, we did not hold any obligations that were rated less than “A-”
as available for sale.
Trust preferred securities. The Company owns securities of single-issuer bank trust preferred securities, all of which are paying in
accordance with their terms and have no deferrals of interest or other deferrals. Management analyzes the credit risk and the probability
of impairment on the contractual cash flows of applicable securities. Based upon our analysis, all of the issuers have maintained
performance levels adequate to support the contractual cash flows of the securities.
53
Deposits
The following table sets forth the distribution of average deposit accounts by account category and the average rates paid at the dates
indicated.
Non-interest bearing demand
Interest bearing demand
Savings
Money market
Certificates of deposit
Total interest bearing deposits
Total deposits
2014
September 30,
2013
2012
Average
balance
Rate
Average
balance
Rate
Average
balance
Rate
(Dollars in thousands)
$ 1,580,108
—% $
646,373
—% $
520,265
—%
706,160
622,414
1,458,852
554,396
3,341,822
$ 4,921,930
0.08
0.14
0.35
0.44
0.27
0.18
466,110
572,246
819,442
352,469
2,210,267
$ 2,856,640
0.08
0.17
0.30
0.60
0.27
0.21
399,819
485,624
671,325
289,230
1,845,998
$ 2,366,263
0.12
0.08
0.33
0.87
0.30
0.24
Average deposits increased $2.1 billion, or 72.3% in fiscal 2014 and were $4.9 billion compared to $2.9 billion in fiscal 2013 and $2.4
billion in fiscal 2012. The increase in the average balance of deposits from 2013 to 2014 was mainly due to the Merger. The ratio of
average non-interest bearing deposits to total deposits was 32.1% in the fiscal year ended September 30, 2014 compared to 22.6% in
fiscal 2013 and 22.0% in fiscal 2012. The average cost of interest bearing and total deposits was 0.27% and 0.18% during fiscal 2014
compared to 0.27% and 0.21% during fiscal 2013 and 0.30% and 0.24% during fiscal 2012.
Distribution of Deposit Accounts by Type. The following table sets forth the distribution of total deposit accounts, by account type, at
the dates indicated.
Non-interest bearing demand
Interest bearing demand
Savings
Money market
Subtotal
Certificates of deposit
Total deposits
2014
Amount
%
September 30,
2013
Amount
(Dollars in thousands)
%
2012
Amount
%
$ 1,799,685
766,852
698,443
1,595,803
4,860,783
437,871
$ 5,298,654
34.0% $
943,934
31.9% $
947,304
14.5
13.2
30.1
91.8
8.2
434,398
580,125
735,709
2,694,166
268,128
100.0% $ 2,962,294
14.7
19.6
24.8
91.0
9.0
448,123
506,538
821,704
2,723,669
387,482
100.0% $ 3,111,151
30.4%
14.4
16.3
26.4
87.5
12.5
100.0%
54
The following table presents the proportion of each component of total deposits for the periods presented:
Retail and business deposits
Municipal deposits
Wholesale deposits
September 30,
2014
2013
2012
77.1%
18.7
4.2
72.7%
25.5
1.8
69.0%
29.0
2.0
100.0%
100.0%
100.0%
As of September 30, 2014, 2013 and 2012, the Company had $992.8 million, $757.1 million and $901.7 million, respectively, in municipal
deposits. A significant portion of the municipal deposits at September 30 are associated with school district tax collections and we generally
retain these deposits only for a short period of time. Wholesale deposits were $220.7 million, $53.1 million and $62.0 million at September
30, 2014, 2013 and 2012, respectively. Wholesale deposits consist of brokered deposits and deposits acquired through listing services.
Certificates of Deposit by Interest Rate Range. The following table sets forth information concerning certificates of deposit by interest
rate range at the dates indicated.
At September 30, 2014
Period to maturity
1 year or
less
1-2 years
2-3 years
3 years or
more
Total
(Dollars in thousands)
% of
total
At September 30,
2013
2012
$ 299,149
32,360
6,068
3,235
1
—
$ 340,813
$
$
41,600
11,172
547
—
—
—
53,319
$
$
3,702
31,930
—
—
—
—
35,632
$
$
7,642
465
—
—
—
—
8,107
$ 352,093
75,927
6,615
3,235
1
—
$ 437,871
80.4% $ 236,786
8,880
17.3
10,257
1.5
5,838
0.8
6,367
—
—
—
100.0% $ 268,128
$ 239,149
114,836
11,569
9,101
12,524
303
$ 387,482
Interest rate range:
1.00% and below
1.01% to 2.00%
2.01% to 3.00%
3.01% to 4.00%
4.01% to 5.00%
5.01% to 6.00%
Total
Certificates of Deposit by Time to Maturity. The following table sets forth certificates of deposit by time remaining until maturity as of
September 30, 2014.
3-6
months
Period to maturity
6-12
months
(Dollars in thousands)
$
35,391
35,719
$
Over 12
months
17,773
$ 147,388
52,649
88,368
$
52,840
88,231
$
79,285
97,058
290,483
$ 437,871
0.26%
0.70
0.55%
Total
Rate
Certificates of deposit less than $100,000
Certificates of deposit $100,000 or more
3 months or
less
$
$
58,505
105,709
164,214
$
$
55
Brokered Deposits. We utilize brokered deposits on a limited basis and maintain limits for the use of wholesale deposits and other short-
term funding in general to be less than 10% of total assets. Most of the brokered deposit funding maintained by the Bank has a maturity
to coincide with the anticipated inflows of deposits through municipal tax collections.
Listed below are the Company’s brokered deposits:
Money market
Reciprocal CDAR’s 1
CDAR’s one way
Total brokered deposits
1 Certificate of deposit account registry service
September 30,
2014
2013
(Dollars in thousands)
$
$
84,022
34,017
3,028
121,067
$
$
34,571
1,343
768
36,682
Short-term Borrowings. The Company’s primary source of short-term borrowings (which include borrowings with a maturity less than
one year) are advances from the Federal Home Loan Bank of New York. Short-term borrowings also include federal funds purchased
and repurchase agreements.
The following table sets forth information concerning balances and interest rates on our short-term borrowings at the dates indicated.
Balance at end of year
Average balance during year
Maximum amount outstanding at any month end
Weighted average interest rate at end of year
Weighted average interest rate during year
$
At or for the fiscal year ended September 30,
2013
2014
(Dollars in thousands)
$
2012
$
370,365
264,249
563,085
158,897
88,779
295,652
10,136
27,286
103,500
0.69%
0.68
0.95%
0.57
1.88%
0.78
Short-term borrowings balances have been mainly used to fund continued loan growth. On a daily and average balance basis, the amount
of short-term borrowings will fluctuate based on the inflows and outflows of municipal deposits and other deposits.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not
recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate
purposes or for customer needs. The Company minimizes its exposure to loss under these commitments by subjecting them to credit
approval and monitoring procedures.
The Company’s off-balance sheet arrangements, which principally include lending commitments, are described below.
Lending Commitments. Lending commitments include loan commitments, unused credit lines, and letters of credit. These instruments
are not recorded in the consolidated balance sheet until funds are advanced under the commitments.
For our non-real estate commercial customers, loan commitments generally take the form of revolving credit arrangements to finance
customers’ working capital requirements. At September 30, 2014 these commitments totaled $225.8 million. For our real estate businesses,
loan commitments are generally for residential construction, multi-family and commercial construction projects, which totaled $114.8
million at September 30, 2014. Loan commitments for our retail customers are generally home equity lines of credit secured by residential
property and totaled $99.0 million. In addition loan commitments for overdrafts were $17.7 million. Letters of credit issued by the
Company generally are standby letters of credit. Standby letters of credit are commitments issued by the Company on behalf of its
customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary’s compliance
56
with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor’s
completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Standby letters of credit are conditional commitments to support performance, typically of a
contract or the financial integrity of a customer to a third-party, and represent an independent undertaking by the Company to the third-
party. Letters of credit as of September 30, 2014 totaled $97.5 million.
See Note 15. “Off-Balance-Sheet Financial Instruments” to the consolidated financial statements for additional information regarding
lending commitments.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include
operating leases for premises and equipment.
Payments Due by Period. The following table summarizes our significant fixed and determinable contractual obligations and other
funding needs by payment date at September 30, 2014. The payment amounts represent those amounts due to the recipient.
Contractual obligations:
FHLB borrowings
Other borrowings
Senior notes
Time deposits
Operating leases
Other commitments:
Letters of credit
Undrawn lines of credit
Total
Payments due by period
1 year or less
1-3 years
3-5 years
(Dollars in thousands)
5 years or
more
Total
$
$
$
324,726
45,639
—
340,812
8,984
720,161
$
397,786
—
—
88,951
16,207
502,944
$
70,000
—
98,402
8,108
14,089
190,599
81,599
520,275
1,322,035
$
7,492
—
510,436
$
—
—
190,599
$
2,516
—
—
—
27,012
29,528
8,377
—
37,905
$
$
795,028
45,639
98,402
437,871
66,292
1,443,232
97,468
520,275
2,060,975
See Note 16. “Commitments and contingencies” to the consolidated financial statements for additional information regarding our
contractual obligations.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of the Company have been prepared in accordance with GAAP, which generally
requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in
the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest
rates have a greater impact on performance than the effects of inflation.
Liquidity and Capital Resources
Capital. At September 30, 3014, stockholders’ equity totaled $961.1 million compared to $482.9 million at September 30, 2013. In
connection with the Merger, the Company issued 39,057,968 shares of its common stock with a value of $457.8 million on October 31,
2013. Other significant increases in stockholders’ equity included net income of $27.7 million, other comprehensive income, net of tax
of $3.9 million, and stock-based compensation of $6.6 million which were partially offset by dividends declared of $17.7 million.
The accumulated other comprehensive loss component of stockholders’ equity totaled a net, after-tax, unrealized loss of $11.5 million
compared to a net, after-tax unrealized loss of $15.3 million at September 30, 2013. The increase was the result of a $9.2 million net
after-tax increase in the value of securities available for sale, a $214 thousand after-tax decrease in the net actuarial loss on the defined
benefit pension plan and a net after-tax decrease in the net unrealized loss on securities transferred to held maturity of $5.1 million.
57
Under current regulatory requirements, amounts reported as accumulated other comprehensive (loss) income related to securities available
for sale, securities transferred to held to maturity, and defined benefit pension plans do not reduce or increase regulatory capital and are
not included in the calculation of leverage and risk-based capital ratios. Regulatory agencies for banks and bank holding companies
utilize capital guidelines to measure Tier 1 and total capital and to take into consideration the risk inherent in both on-balance sheet and
off-balance sheet items. See Note 14. “Stockholders’ Equity” in the consolidated financial statements included elsewhere in this Report.
The Company paid a $0.06 dividend per common share in the first fiscal quarter of 2014 and paid a dividend of $0.07 per common share
in the second, third and fourth fiscal quarters of 2014. Dividends of $0.06 were paid in each fiscal quarter of 2013.
The Company’s board of directors has authorized the repurchase of the Company’s common stock. At September 30, 2014, there are
776,713 shares available for repurchase. No shares were repurchased under this plan during fiscal 2014 or 2013. See Part II, Item 5.
“Market for Registrants Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities”, included elsewhere in
this Report.
Basel III Capital Rules. In July 2013, the Company’s primary federal regulators published final rules (the “Basel III Capital Rules”)
establishing a new comprehensive capital framework for U.S. banking organizations. The rules are discussed under “Supervision and
Regulation - Capital Requirements - Basel III Capital Rules.”
Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial
institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate
market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure,
its ability to liquidate assets and its access to alternative sources of funds. The objective of the Company’s liquidity management is to
manage cash flow and liquidity reserves so that they are adequate to fund the Company’s operations and to meet obligations and other
commitments on a timely basis and at a reasonable cost. The Company seeks to achieve this objective and ensure that funding needs are
met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time
to maturity of financial assets and financial liabilities on the Company’s balance sheet. The Company’s liquidity position is enhanced by
its ability to raise additional funds as needed in the wholesale markets.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid
assets include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to
maturity.
Liability liquidity is provided by access to funding sources which include core deposits, federal funds purchased and repurchase
agreements. The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources
and uses of funds as deemed appropriate. Liquidity risk management is an important element in the Company’s asset/liability management
process. The Company regularly models 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 the Company’s contingency funding plan, which provides the basis for the identification of the Company’s liquidity
needs. As of September 30, 2014, management is not aware of any events that are reasonably likely to have a material adverse effect on
the Company’s 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 the
Company.
At September 30, 2014 the Bank had $176.6 million in cash on hand and unused borrowing capacity at the FHLB of $785.1 million. In
addition, the Bank may purchase additional federal funds from other institutions and enter into additional repurchase agreements.
The Company is a bank holding company and does not conduct operations. Its 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 September 30, 2014, the Bank had capacity to pay up to $47.9 million of dividends to the Company. At September 30, 2014 the
Company had cash of $23.4 million, and $15 million available under a revolving line of credit facility.
In September 2014, the Company entered into a $15 million revolving line of credit facility with a third-party financial institution that
matures on September 5, 2015. The use of proceeds are for general corporate purposes. The facility has not been used and requires the
Company and the Bank to maintain certain ratios related to capital, nonperforming asset to capital, reserves to nonperforming loans and
debt service coverage. The Company and the Bank were in compliance with all requirements at September 30, 2014.
58
The Company has an effective shelf registration covering $29 million of debt and equity securities remaining available for use, subject
to Board authorization and market conditions, to issue equity or debt securities at our discretion. While we seek to preserve flexibility
with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms
at any given time or at all.
59
ITEM 7A. 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 the Board 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.
We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of
commercial real estate loans, commercial & industrial loans, residential fixed-rate mortgage loans that are repaid monthly and bi-weekly,
and adjustable-rate residential and consumer loans. Depending on market interest rates and our capital and liquidity position, we may retain
all of the fixed-rate, fixed-term residential mortgage loans that we originate or we may sell or securitize all, or a portion of such longer-
term loans, generally on a servicing-released basis. 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 the Company’s 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 seem reasonable, based on historical experience during prior interest rate changes.
Estimated Changes in EVE and NII. The table below sets forth, as of September 30, 2014, the estimated changes in our (1) EVE that
would result from the designated instantaneous changes in the forward rate curves, and (2) 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
(basis points)
Estimated
EVE
Estimated change in EVE
Percent
Amount
Estimated
NII
(Dollars in thousands)
Estimated change in NII
Amount
Percent
+300
+200
+100
0
-100
$
916,800
$
936,800
955,109
948,728
927,870
(31,928)
(11,928)
6,381
—
(20,858)
(3.4)% $
278,113
$
(1.3)
(0.7)
—
(2.2)
268,343
257,610
247,805
229,429
30,308
20,538
9,805
—
(18,376)
12.2%
8.3
4.0
—
(7.4)
The table above indicates that at September 30, 2014, in the event of an immediate 200 basis point increase in interest rates, we would
expect to experience a 1.3% decrease in EVE and a 8.3% 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 requires 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 in market interest rates may
have on our net interest income. Actual results will likely differ.
60
During the fiscal year 2014, the federal funds target rate remained in a range of 0.00 - 0.25% as the Federal Open Market Committee
(“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities increased 25 basis points from
0.33% to 0.58% in fiscal 2014 while the yield on U.S. Treasury 10-year notes decreased 12 basis points from 2.64% to 2.52% over the
same twelve month period. The decrease in rates on longer-term maturities coupled with the increase in rates on the short-term maturities
resulted in a flatter 2-10 year treasury yield curve at the end of fiscal 2014 relative to the beginning of the fiscal year. During the fourth
quarter, the FOMC reaffirmed its willingness to maintain an accommodative stance on monetary policy stating that it intends to do so even
after employment and inflation are near mandate consistent levels should economic conditions warrant keeping the target federal funds rate
below levels the committee views as normal in the longer run. However, should economic conditions improve, the FOMC could increase
the federal funds target rate. This could cause the shorter end of the yield curve to rise disproportionately relative to the longer end, thereby
resulting in a short-term margin compression.
ITEM 8. Financial Statements and Supplementary Data
The following are included in this item:
(A)
(B)
(C)
(D)
(E)
(F)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2014 and 2013
Consolidated Income Statements for the fiscal years ended September 30, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended September 30, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly financial data) is provided in Note 21. “Quarterly Results of
Operations (Unaudited)” to the consolidated financial statements.
61
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Sterling Bancorp
We have audited the accompanying consolidated balance sheets of Sterling Bancorp as of September 30, 2014 and 2013, and the related
consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three
year period ended September 30, 2014. We also have audited Sterling Bancorp’s internal control over financial reporting as of September
30, 2014, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Sterling Bancorp’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying, Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on these consolidated financial statements and an opinion on the company's internal control over financial reporting
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sterling
Bancorp as of September 30, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three year period
ended September 30, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
Sterling Bancorp maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014, based
on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
New York, New York
November 28, 2014
/s/ Crowe Horwath LLP
62
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
ASSETS:
Cash and due from banks
Securities:
Available for sale, at fair value
Held to maturity, at amortized cost (fair value of $587,838 and $250,896 in 2014 and 2013,
respectively)
Total securities
Loans held for sale
Gross loans
Allowance for loan losses
Total loans, net
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost
Accrued interest receivable
Premises and equipment, net
Goodwill
Core deposit and other intangible assets
Bank owned life insurance
Other real estate owned
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits
FHLB borrowings
Other borrowings (federal funds purchased and repurchase agreements)
Senior notes
Mortgage escrow funds
Other liabilities
Total liabilities
Commitments and Contingent liabilities (See Note 16.)
STOCKHOLDERS’ EQUITY:
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or
outstanding)
Common stock (par value $0.01 per share; 190,000,000 shares authorized; 91,246,024 and
52,188,056 issued for 2014 and 2013, respectively; 83,628,267 and 44,351,046 shares
outstanding in 2014 and 2013, respectively)
Additional paid-in capital
Unallocated common stock held by employee stock ownership plan (“ESOP”); 0 and 549,262
unallocated shares outstanding in 2014 and 2013, respectively
Treasury stock, at cost (7,617,757 shares in 2014 and 7,837,010 shares in 2013)
Retained earnings
Accumulated other comprehensive (loss), net of tax (benefit) of ($8,470) in 2014 and ($10,482) in
2013
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
63
September 30,
2014
2013
$
177,619
$
113,090
1,110,813
954,393
579,075
1,689,888
17,846
4,760,438
(40,612)
4,719,826
66,085
19,667
43,286
388,926
45,278
119,486
7,580
41,900
7,337,387
5,298,654
795,028
45,639
98,402
4,494
134,032
6,376,249
$
$
253,999
1,208,392
1,011
2,412,898
(28,877)
2,384,021
24,312
11,698
36,520
163,117
5,891
60,914
6,022
34,184
4,049,172
2,962,294
462,953
—
98,033
12,646
30,380
3,566,306
$
$
—
—
912
860,564
—
(86,339)
197,460
522
403,816
(5,493)
(88,538)
187,889
(11,459)
961,138
7,337,387
$
(15,330)
482,866
4,049,172
$
STERLING BANCORP AND SUBSIDIARIES
Consolidated Income Statements
For the year ended September 30,
(Dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees
Taxable securities
Non-taxable securities
Other earning assets
Total interest and dividend income
Interest expense:
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Accounts receivable management / factoring commissions and other related
fees
Mortgage banking income
Deposit fees and service charges
Net gain on sale of securities
Bank owned life insurance
Investment management fees
Other
Total non-interest income
Non-interest expense:
Compensation and employee benefits
Stock-based compensation plans
Occupancy and office operations
Amortization of intangible assets
FDIC insurance and regulatory assessments
Other real estate owned (income) expense, net
Merger-related expense
Other
Total non-interest expense
Income before income taxes
Income taxes
Net income
Weighted average common shares:
Basic
Diluted
Earnings per common share:
Basic
Diluted
See accompanying notes to consolidated financial statements.
64
2014
2013
2012
$
$
$
202,982
30,067
10,453
3,404
246,906
8,964
19,954
28,918
217,988
19,100
198,888
13,146
8,086
15,595
641
3,080
2,209
4,613
47,370
94,310
3,703
27,726
9,408
6,146
(237)
9,455
57,917
208,428
37,830
10,152
27,678
80,268,970
80,534,043
0.34
0.34
$
$
$
107,810
17,509
5,682
1,060
132,061
5,923
13,971
19,894
112,167
12,150
100,017
—
1,979
10,964
7,391
1,998
2,413
2,947
27,692
47,833
2,239
14,953
1,296
3,010
1,562
2,772
17,376
91,041
36,668
11,414
25,254
43,734,425
43,783,053
0.58
0.58
$
91,010
16,538
6,497
992
115,037
5,581
12,992
18,573
96,464
10,612
85,852
—
1,897
11,377
10,452
2,050
3,143
3,233
32,152
46,038
1,187
14,457
1,245
3,096
1,618
5,925
18,391
91,957
26,047
6,159
19,888
38,227,653
38,248,046
0.52
0.52
$
$
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the year ended September 30,
(Dollars in thousands, except share data)
Net income
Other comprehensive income (“OCI”) (loss):
Change in unrealized holding gains (losses) on securities available for sale
Related income tax (expense) benefit
Change in net unrealized (loss) on securities transferred to held to maturity
Related income tax benefit
Reclassification adjustment for net realized (gains) included in net income
Related income tax expense
Reclassification adjustment for other than temporary impaired losses included
in net income
Related income tax benefit
Total OCI securities component
Acceleration of future amortization of accumulated other comprehensive loss
on defined benefit pension plan and change in funded status of defined
benefit plans
Related income tax (expense)
Other comprehensive income (loss)
Total comprehensive income
See accompanying notes to consolidated financial statements.
2014
2013
2012
$
27,678
$
25,254
$
19,888
15,948
(6,778)
(8,947)
3,803
(641)
272
—
—
3,657
372
(158)
3,871
$
31,549
$
(37,324)
15,157
—
—
(7,391)
3,001
32
(13)
(26,538)
7,255
(2,946)
(22,229)
3,025
$
12,866
(5,224)
—
—
(10,452)
4,245
47
(19)
1,463
505
(205)
1,763
21,651
65
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S
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended September 30,
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provisions for loan losses
(Gain) loss and write-downs on other real estate owned
(Gain) on redemption of Subordinated Debentures
Depreciation of premises and equipment
Impairment of premises and equipment
Amortization of intangibles
Amortization of low income housing tax credit
Net gain on sale of securities
Net gains on loans held for sale
(Gain) loss on sale of premises and equipment
Net amortization of premium and discount on securities
Change in unamortized acquisition costs and premiums
Accretion of premium on borrowings (includes calls on borrowings), net
Amortization of pre-payment fees on restructured borrowings
ESOP and restricted stock expense
Stock option compensation expense
Originations of loans held for sale
Proceeds from sales of loans held for sale
Increase in cash surrender value of bank owned life insurance
Deferred income tax (benefit) expense
Other adjustments (principally net changes in other assets and other liabilities)
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of securities:
Available for sale
Held to maturity
Proceeds from maturities, calls and other principal payments on securities:
Available for sale
Held to maturity
Proceeds from sales of securities available for sale
Proceeds from sales of securities held to maturity
Loan originations, net
(Purchases) of FHLB and FRB stock, net
Proceeds from sales of other real estate owned
Purchases of premises and equipment
Proceeds from sale of Hudson Valley Investment Advisors
Proceeds from sale of fixed assets
Purchase low income housing tax credit
Cash received from acquisitions
Net cash (used in) investing activities
67
2014
2013
2012
$
27,678
$
25,254
$
19,888
19,100
(1,208)
(712)
6,507
11,043
9,408
520
(641)
(8,086)
(93)
3,176
1,028
(446)
1,302
2,803
901
(462,030)
483,622
(3,198)
(3,507)
40,497
127,664
12,150
1,285
—
4,243
—
1,296
—
(7,391)
(1,979)
75
2,068
1,050
87
1,466
1,544
695
(85,657)
94,130
(1,998)
719
(26,413)
22,624
10,612
694
—
4,746
—
1,245
—
(10,452)
(1,897)
(75)
(1,006)
—
(67)
1,459
667
521
(80,579)
79,147
(2,050)
(64)
2,237
25,026
(407,438)
(172,899)
(490,160)
(169,320)
(679,553)
(95,157)
163,199
31,227
529,107
—
(659,013)
(34,093)
9,645
(2,584)
—
310
(1,966)
277,798
(266,707)
168,771
55,866
339,123
1,187
(310,615)
(5,063)
4,730
(2,355)
4,738
—
—
—
(403,098)
174,497
63,037
344,431
—
(226,616)
(620)
3,468
(1,853)
—
75
—
126,818
(291,473)
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended September 30,
(Dollars in thousands)
Cash flows from financing activities:
Net increase (decrease) in transaction, savings and money market deposits
Net (decrease) in time deposits
Net increase (decrease) in short-term FHLB borrowings
Net increase (decrease) in long-term FHLB borrowings
Net (decrease) in repurchase agreements and other short-term borrowings
Redemption of Subordinated Debentures
Payments of pre-payment fees on FHLB borrowings
Repayment of senior unsecured note
Net proceeds from Senior Notes
Net increase in mortgage escrow funds
Stock option transactions
Other stock-based compensation transactions
Equity capital raise
Cash dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information:
Interest payments
Income tax payments
Real estate acquired in settlement of loans
Unsettled securities transactions
Dividends declared, not yet paid
Acquisitions:
Non-cash assets acquired:
Securities available for sale
Securities held to maturity
Loans held for sale
Total loans, net
FHLB stock
Accrued interest receivable
Goodwill
Trade name
Core deposit intangibles
Bank owned life insurance
Premises and equipment, net
Other real estate owned
Other assets
Total non-cash assets acquired
68
2014
2013
2012
301,028
(261,858)
103,000
147,506
(37,177)
(26,140)
—
—
—
(8,152)
2,980
62
—
(17,677)
203,572
64,529
113,090
177,619
29,419
12,473
2,542
—
—
$
$
(29,503)
(119,354)
91,528
24,783
—
—
—
—
97,946
727
62
35
—
(10,642)
55,582
(324,892)
437,982
113,090
18,831
4,475
5,634
—
2,661
$
$
499,340
(53,786)
(5,000)
(5,244)
—
—
(278)
(51,499)
—
2,218
102
164
46,000
(9,100)
422,917
156,470
281,512
437,982
18,447
1,873
6,148
41,758
—
$
$
$
233,190
$
— $
54,994
374,721
30,341
1,698,108
7,680
6,590
225,809
20,500
20,089
55,374
23,594
5,815
20,933
2,722,744
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
205,453
1,045
417
5,535
—
4,818
—
490
—
1,793
274,545
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended September 30,
(Dollars in thousands)
Liabilities assumed:
Deposits
FHLB and other borrowings
Other borrowings
Subordinated debentures
Other liabilities
Total liabilities assumed
Net non-cash (liabilities) acquired
Cash and cash equivalents acquired in acquisitions
See accompanying notes to consolidated financial statements.
2014
2013
2012
2,297,190
100,619
62,465
26,527
55,960
—
—
—
—
—
368,902
30,784
—
—
1,677
$ 2,542,761
$
179,983
277,798
$
$
— $
401,363
— $
(126,818)
—
126,818
69
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies
Merger with Sterling Bancorp
On October 31, 2013, Provident New York Bancorp (“Legacy Provident”) merged with Sterling Bancorp (“Legacy Sterling”). In
connection with the merger, the following corporate actions occurred:
• Legacy Sterling merged with and into Legacy Provident. Legacy Provident was the accounting acquirer and the surviving entity.
• Legacy Provident changed its legal entity name to Sterling Bancorp and became a bank holding company and a financial holding
company as defined by the Bank Holding Company Act of 1956, as amended (“Sterling” or the “Company”).
Provident Bank converted to a national bank charter.
Sterling National Bank merged into Provident Bank.
Provident Bank changed its legal entity name to Sterling National Bank.
Provident Municipal Bank merged into Sterling National Bank.
•
•
•
•
We refer to the transactions detailed above collectively as the “Merger.”
The consolidated financial statements include the accounts of Sterling; STL Holdings, Inc. (formerly PBNY Holdings, Inc.) which has
an investment in Sterling Silver Title Agency L.P. (formerly PB Madison Title Agency L.P.), a company that provides title searches and
title insurance for residential and commercial real estate; LandSave Development, LLC an inactive subsidiary, which was dissolved on
September 30, 2014; Sterling Risk Management, Inc. (formerly Provident Risk Management, Inc., a captive insurance company); Sterling
National Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries. These subsidiaries included at September 30, 2014: (i) Sterling
REIT, Inc. a real estate investment trust that holds a portion of the Company’s real estate loans; (ii) Provest Services Corp. I, which has
invested in a low-income housing partnership; (iii) Provest Services Corp. II, which has engaged a third-party provider to sell mutual
funds and annuities to the Bank’s customers and (iv) several limited liability companies which hold other real estate owned. Intercompany
transactions and balances are eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America. Certain amounts from prior years have been reclassified to conform to the current fiscal year presentation.
Reclassifications had no affect on prior year net income or stockholders’ equity.
(a) Nature of Business
Since October 31, 2013, Sterling is a bank holding company and financial holding company under the Bank Holding Company Act
of 1956. Sterling is a Delaware corporation that owns all of the outstanding shares of the Bank. Sterling is listed on the New York
Stock Exchange (“NYSE”) under the symbol STL.
The Bank, an independent, full-service bank founded in 1888, is headquartered in Montebello, New York and is the principal bank
subsidiary of Sterling. The Bank accounts for substantially all of Sterling’s consolidated assets and net income. The Bank operates
through commercial banking teams and financial centers which serve the greater New York metropolitan region. 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 consists of Rockland, Orange, Sullivan, Ulster, Putnam and Westchester counties in New York and
Bergen County in New Jersey.
The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing
in various types of loans and securities. In connection with the Merger, the Bank became a national bank and its deposits are insured
up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Office of the
Comptroller of the Currency (“OCC”) and the Federal Reserve Board are the primary regulators for the Bank and the Company,
respectively.
(b) Use of estimates
The consolidated financial statements have been prepared in conformity with GAAP. In preparing the consolidated financial
statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income
and expense. Actual results could differ significantly from these estimates. An estimate that is particularly susceptible to significant
near-term change is the allowance for loan losses, which is discussed below. Also subject to change are estimates involving goodwill
impairment evaluations, mortgage servicing rights, benefit plans, deferred income taxes and fair values of financial instruments.
70
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(c) Cash Flows
For purposes of reporting cash flows, cash equivalents include highly liquid, short-term investments such as overnight federal funds,
as well as cash and deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions
and short-term borrowings with an original maturity of 90 days or less.
(d) Restrictions on Cash
The Bank was required to have $28.7 million and $14.6 million of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve and clearing requirements at September 30, 2014 and 2013.
(e) Long-Term Assets
Premises and equipment, core deposit and other intangible assets are reviewed annually for impairment or when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
(f) Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed
in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates. (See Note 17. “Fair Value Measurements”)
(g) Adoption of New Accounting Standards
Accounting Standards Update (ASU) 2014-01 - Investments - Equity method and Joint Ventures (Topic 323): Accounting for
Investments in Qualified Affordable Housing Projects was issued. This standard provides reporting guidance for entities that invest
in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The
amendments in this ASU eliminate the effective yield election and permit the Company to make an accounting policy election to
account for its investment in qualified affordable housing projects using the proportional amortization method if certain conditions
are met. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the
tax credits and other tax benefits received and recognizes the net investment performance in the statement of operations as a component
of income tax expense. The amendments in this ASU should be applied retrospectively to all periods presented. The Company adopted
this ASU in the quarter ended March 31, 2014, which coincided with the Company’s initial recognition of low income housing tax
credits. The adoption of this ASU resulted in a $508 income tax benefit and a $520 expense associated with the amortization of the
Company’s investment for the fiscal year ended September 30, 2014.
(h) Securities
Securities include U.S. Treasury, U.S. Government Agency and Government Sponsored Agencies, municipal and corporate bonds,
mortgage-backed securities, collateralized mortgage obligations and trust preferred securities.
The Company can classify its securities among three categories: held to maturity, trading, and available for sale. The Company
determines the appropriate classification of the Company’s securities at the time of purchase.
Held to maturity securities are limited to debt securities for which there is the intent and the ability to hold to maturity. These securities
are reported at amortized cost.
Trading securities are debt and equity securities held principally for the purpose of selling them in the near-term. These securities
are reported at fair value, with unrealized gains and losses included in earnings. The Company does not engage in securities trading
activities.
All other debt and marketable equity securities are classified as available for sale. These securities are reported at fair value, with
unrealized gains and losses (net of the related deferred income tax effect) excluded from earnings and reported in a separate component
of stockholders’ equity (accumulated other comprehensive income or loss). Available for sale securities include securities that the
Company intends to hold for an indefinite period of time, such as securities to be used as part of the Company’s asset/liability
management strategy or securities that may be sold to fund loan growth, in response to changes in interest rates, changes in prepayment
risks, the need to increase capital, or similar factors.
Premiums and discounts on debt securities are recognized in interest income on a level yield basis over the period to maturity.
Amortization of premiums and accretion of discounts on mortgage-backed securities are based on the estimated cash flows of the
71
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
mortgage-backed securities, periodically adjusted for changes in estimated lives, on a level yield basis. The cost of securities sold
is determined using the specific identification method.
Securities are evaluated for impairment at least quarterly, and more frequently when economic and market conditions warrant such
an evaluation. For securities in an unrealized loss position, we consider the extent and duration of the unrealized loss, and the financial
condition of the issuer. The Company also assesses whether it intends to sell, or is more likely than not that it will be required to sell,
a security in an unrealized loss position before recovery of its amortized cost basis. If either criteria regarding intent to sell is met,
the entire difference between amortized cost and fair value is recognized as impairment through earnings. If the Company does not
expect to recover the entire amortized cost basis of the security, the Company does not intend to sell the security and it is not more
likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than
temporary impairment is separated into a) the amount representing the credit loss and b) the amount related to all other factors. The
amount of other than temporary impairment related to credit loss is recognized in earnings while the amount related to other factors
is recognized in other comprehensive income, net of applicable taxes. The cost basis of individual equity securities is written down
to estimated fair value through a charge to earnings when declines in value below cost are considered to be other than temporary.
As of September 30, 2014, the Company does not intend to sell nor is it more likely than not that it would be required to sell any of
its debt securities with unrealized losses prior to recovery of its amortized cost basis less any current period credit loss.
(i) Loans Held For Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as
determined by outstanding commitments from investors. In the absence of commitments from investors, fair value is based on current
investor yield requirements. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Historically mortgage loans held for sale were generally sold with servicing rights retained. The carrying value of mortgage loans
sold is reduced by the amount allocated to the value of the servicing rights which is its fair value. Gains and losses on sales of
mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
(j) Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement
effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when
available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be
amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying
loans.
Under the amortization measurement method, the Company subsequently measures servicing rights at fair value at each reporting
date and records any impairment in value of servicing assets in earnings in the period in which the impairment occurs. The fair values
of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default
rates and losses.
Servicing fee income, which is reported on the income statement as other income, is recorded for fees earned for servicing loans.
The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan, and are recorded as income
when earned. Servicing fees totaled $911, $778 and $695 for the years ended September 30, 2014, 2013 and 2012, respectively. Late
fees and ancillary fees related to loan servicing are not material. Effective October 1, 2013, the Bank outsourced servicing of
residential mortgage loans to a nationally recognized mortgage loan servicing company.
(k) Loans
Loans where Sterling has the intent and ability to hold for the foreseeable future or until maturity or payoff (other than loans held
for sale) are reported at amortized cost less the allowance for loan losses. Interest income on loans is accrued on the unpaid principal
balance.
A loan is placed on non-accrual status upon the earlier of (i) when Sterling determines that the borrower may likely be unable to
meet contractual principal or interest obligations, or (ii) when payments are 90 days or more past due, unless well secured and in the
process of collection. Accrual of interest ceases and, in general, uncollected past due interest is reversed and charged against current
interest income. Interest payments received on non-accrual loans, including impaired loans, are not recognized as income unless
warranted based on the borrower’s financial condition and payment record. Furthermore, negative tax escrow will be included in
the unpaid principal for loans individually evaluated for impairment, as this is part of the customer’s legal obligation to the Company.
72
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company defers nonrefundable loan origination and commitment fees, and certain direct loan origination costs, and amortizes
the net amount as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid or sold, the net deferred amount
is recognized in the statement of income at that time. Interest and fees on loans include prepayment fees and late charges collected.
(l) 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 incurred credit losses inherent in the loan portfolio. The allowance for loan losses is a critical
accounting estimate and requires substantial judgment of management. The allowance for loan losses includes allowance allocations
calculated in accordance with ASC Subtopic 450-20, “Loss Contingencies” and ASC Subtopic 310-35-2, “Loan Impairment.” The
level of the allowance reflects management’s continuing evaluation of loan loss experience, specific credit risks, current loan portfolio
quality, industry and loan type concentrations, economic and regulatory conditions and unidentified losses inherent in the loan
portfolios, as well as trends in the foregoing. The Company analyzes loans by two broad segments: real estate secured loans and
loans that are either unsecured or secured by other collateral.
The classes considered real estate secured are: residential mortgage loans; commercial real estate (“CRE”) loans; business banking
CRE; multi-family loans; acquisition, development and construction (“ADC”) loans; homeowner loans, and home equity lines of
credit. The classes considered unsecured or secured by other than real estate collateral are: commercial & industrial (“C&I”) loans;
payroll finance loans, warehouse lending; factored receivables; equipment finance loans; business banking C&I loans and consumer
loans. In all segments or classes, significant loans are reviewed for impairment once they are past due 90 days or more or are classified
substandard or doubtful. Generally the Company considers a homogeneous residential mortgage or home equity line of credit to be
significant if the Company’s investment in the loan is greater than $500. If a loan is deemed to be impaired in one of the real estate
secured segment, it is generally considered collateral dependent. If the value of the collateral securing a collateral dependent impaired
loan is less than the loan’s carrying value, a charge-off is recognized equal to the difference between the appraised value and the
book value of the loan. Additionally, impairment reserves are recognized for estimated costs to hold and liquidate and for a 10%
discount on the appraisal value. The range for costs to hold and liquidate is 12-22% for CRE, business banking CRE and ADC loans
and is 7-13% for homeowner loans, home equity lines of credit, and residential mortgage loans. Impaired loans in the real estate
secured segments are re-appraised using a summary or drive-by appraisal report every six to nine months.
For loans in the business banking C&I class we charge-off the full amount of the loan when it becomes 90 days or more past due,
or earlier in the case of bankruptcy, after giving effect to any cash or marketable securities pledged as collateral for the loan. For
other classes of C&I loans, we prepare a cash flow projection, and charge-off the difference between the net present value of the
cash flows discounted at the effective note rate and the carrying value of the loan, and generally recognize a 10% impairment reserve
to account for the potential imprecision of our estimates. However, on most of these cases receipt of future cash flows is too unreliable
to be considered probable, resulting in the charge-off of the entire balance of the loan. For unsecured consumer loans, charg0- offs
are recognized once the loan is 90 to 120 days or more past due or the borrower files for bankruptcy protection.
Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses consists of amounts
specifically allocated to non-performing loans and other criticized or classified loans (if any), as well as allowances determined for
the pass rated loans in each major loan category. After we establish an allowance for loan losses for loans that are known to be non-
performing, criticized or classified, we calculate a percentage to apply to the remaining loan portfolio to estimate the probable incurred
losses inherent in that portion of the portfolio. These percentages are determined by management, based on historical loss experience
for the applicable loan class, and are adjusted to reflect our evaluation of:
•
•
•
•
•
•
levels of, and trends in, delinquencies and non-accruals;
trends in volume and terms of loans;
effects of any changes in lending policies and procedures;
experience, ability, and depth of lending management and staff;
national and local economic trends and conditions;
concentrations of credit by such factors as location, industry, inter-relationships, and borrower; and for commercial loans, trends
in risk ratings.
Commercial real estate loans subject us to the risks that the property securing the loan may not generate sufficient cash flow to service
the debt or the borrower may use the cash flow for other purposes. In addition, if necessary, the foreclosure process may be slow
and properties may deteriorate in the process. The market values are also subject to a wide variety of factors, including general
economic conditions, industry specific factors, environmental factors, interest rates and the availability and terms of credit.
73
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Commercial business lending presents a risk because repayment depends on the successful operation of the business which is subject
to a wide range of risks and uncertainties. In addition, the ability to successfully liquidate collateral, if any, is subject to a variety of
risks because we must gain control of assets used in the borrower’s business before foreclosing which we cannot be assured of doing,
and the value in a foreclosure sale or other means of liquidation is uncertain.
Acquisition, development and construction (“ADC”) lending is considered higher risk and exposes us to greater credit risk than
permanent mortgage financing. The repayment of ADC loans depends upon the sale of the property to third parties or the availability
of permanent financing upon completion of all improvements. In the event we make a land acquisition loan on property that is not
yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property. Development and construction loans also expose us to the risk
that improvements will not be completed on time or in accordance with specifications and projected costs. In addition, the ultimate
sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring
and pricing of the loan. We have deemphasized this type of lending.
When we evaluate residential mortgage loans and home equity loans we weigh both the credit capacity of the borrower and the
collateral value of the home. If unemployment or underemployment increase, the credit capacity of underlying borrowers will
decrease, which increases our risk. Similarly, as we obtain a mortgage on the property, if home prices decline, we are exposed to
risk in both our first mortgage and equity lending programs due to declines in the value of our collateral. We are also exposed to risk
because the time to foreclose is significant and has become longer under current market conditions.
(m) Troubled Debt Restructuring
Troubled debt restructuring (“TDR”) is a formally renegotiated loan in which the Bank, for economic or legal reasons related to a
borrower’s financial difficulties, grants a concession to the borrower that would not have been granted to the borrower otherwise.
Not all loans that are restructured as a TDR are classified as non-accrual before the restructuring occurs. Restructured loans can
convert from non-accrual to accrual status when said loans have demonstrated performance, generally evidenced by six months of
consistent payment performance in accordance with the restructured terms, or by the presence of other significant items.
(n) Federal Reserve Bank of New York and Federal Home Loan Bank Stock
As a member of the Federal Reserve Bank of New York (“FRB”) and the Federal Home Loan Bank of New York (“FHLB”), the
Bank is required to hold a certain amount of FRB and FHLB common stock. This stock is a non-marketable equity security and, is
reported at cost.
(o) Premises and Equipment
Land is reported at cost, while premises and equipment are reported at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three
years for equipment and 40 years for premises. Leasehold improvements are amortized on a straight-line basis over the terms of the
respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Routine holding
costs are charged to expense as incurred, while significant improvements are capitalized. The Company recognizes an impairment
charge based on the excess of the carrying amount of assets (generally assets associated with a financial center) over the fair value
of the assets. Fair value is determined by third-party valuations and evaluations prepared by management. For the fiscal year ended
September 30, 2014, the Company recognized premises and equipment impairment charges of $9.3 million related to financial center
consolidations as a result of the Merger. These charges were included in other non-interest expense in the income statement.
(p) Goodwill, Trade Names and Other Intangible Assets
Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of
businesses acquired. Goodwill and trade names acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but tested for impairment at least annually. Goodwill and trade name are the only intangible assets with
an indefinite life on our balance sheet.
The Company accounts for goodwill, trade names and other intangible assets in accordance with GAAP, which, in general, requires
that goodwill and trade names not be amortized, but rather that they be tested for impairment at least annually at the reporting unit
level. The Company has the option to first perform a qualitative assessment to test goodwill for impairment on a reporting-unit-by-
reporting-unit basis. If, after performing the qualitative assessment, the Company concludes that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount, the Company will perform the two-step process described below:
74
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
1.
2.
Identify potential impairments by comparing the fair value of a reporting unit to its carrying amount, including goodwill.
Goodwill is not considered impaired as long as the fair value of the reporting unit is greater than its carrying value.
The second step is only required if a potential impairment to goodwill is identified in step one.
Compare the implied fair value of goodwill to its carrying amount, where the implied fair value of goodwill is computed
on a residual basis, that is, by subtracting the sum of the fair values of the individual asset categories (tangible and
intangible) from the indicated fair value of the reporting unit as determined under step one. If the carrying amount of
goodwill exceeds its implied fair value, an impairment loss is recognized. That loss is equal to the carrying amount of
goodwill that is in excess of its implied fair value, and it must be presented as a separate line item on financial statements.
At September 30, 2014, the Company assessed goodwill for impairment using qualitative factors and concluded the two-step process
was unnecessary.
Core deposit intangibles recorded in acquisitions are amortized to expense using an accelerated method over their estimated lives
of 8 to 10 years. Non-compete agreements are amortized on a straight line basis over their estimated life. Prior to March 31, 2014,
intangibles related to the naming rights on Provident Bank Ball Park were amortized over 10 years on a straight-line basis. Impairment
losses on intangible assets are charged to expense, if and when they occur.
(q) Other Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded initially at estimated fair value, less expected sales costs, with
any resulting write-down charged to the allowance for loan losses. Other real estate owned also includes the fair value of the Bank’s
financial centers that are held for sale. Any write-down associated with the transfer of a financial center from premises and equipment
to other real state owned was included as a charge to other non-interest income in the income statement. Subsequent valuations of
other real estate owned are performed by management, and the carrying amount of a property is adjusted by a charge to expense to
reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and other available
information. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized. Gains and
losses on sales of real estate owned properties are recognized upon disposition.
(r) Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to a counterparty under an agreement to repurchase the identical
securities at a fixed price on a future date. These agreements are accounted for as secured financing transactions since the Company
maintains effective control over the transferred securities and the transfer meets other specified criteria. Accordingly, the transaction
proceeds are recorded as borrowings and the underlying securities continue to be carried in the Company’s investment securities
portfolio. Disclosure of the pledged securities is made in the consolidated balance sheets if the counterparty has the right by contract
to sell or re-pledge such collateral.
(s) Income Taxes
Net deferred taxes are recognized for the estimated future tax effects attributable to “temporary differences” between the financial
statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the
period that includes the enactment date of the change.
A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is
recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation
allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, we determine
that it is more likely than not that some portion, or all of the deferred tax asset will not be realized.
The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment
about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited,
respectively, to income tax expense. The Company recognizes interest and/or penalties related to income tax matters in income tax
expense.
The Company evaluates uncertain tax positions in a two step process. The first step is recognition, which requires a determination
of whether it is more likely than not that a tax position will be sustained upon examination. The second step is measurement. Under
the measurement step, a tax position that meets the more likely than not recognition threshold is measured at the largest amount of
75
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet
the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that
threshold is met. A previously recognized tax position that no longer meets the more likely than not recognition threshold should be
derecognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company did not have
any such position as of September 30, 2014. (See Note 10 “Income Taxes”).
(t) Bank Owned Life Insurance (BOLI)
The Company owns life insurance policies (purchased and acquired) on certain officers and key executives. Bank owned life insurance
is recorded at its cash surrender value (or the amount that can be realized).
(u) Stock-Based Compensation Plans
Compensation expense for stock options, non-vested stock awards/stock units is based on the fair value of the award on the
measurement date, which is the date of grant. The expense is recognized ratably over the service period of the award. The fair value
of stock options is estimated using a Black-Scholes valuation model. the fair value of non-vested stock awards/stock units is generally
the market price of the Company’s common stock on the date of grant.
(v) Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income applicable to common stock by the weighted average number
of common shares outstanding during the period.
Diluted EPS is computed in a similar manner, except that the weighted average number of common shares is increased to include
incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock
options were exercised and unvested restricted stock became vested during the periods. For purposes of computing both basic and
diluted EPS, outstanding shares include earned ESOP shares.
(w) Segment Information
Public companies are required to report certain financial information about significant revenue-producing segments of the business
for which such information is available and utilized by the chief operating decision maker. Substantially all of the Company’s
operations occur through the Bank and involve the delivery of loan and deposit products to customers. Management makes operating
decisions and assesses performance based on an ongoing review of its banking operation, which constitutes the Company’s only
operating segment for financial reporting purposes.
(x) Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The Company does not believe there are
such matters that will have a material effect on the financial statements.
(y) Derivatives
At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s
intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of
cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging
designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain
on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative
is reported in other comprehensive income and is reclassified into earnings in the same period during which the hedged transaction
affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes
in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of
derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. Net cash settlements
on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.
Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on
hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective
and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking
fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative
76
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company
discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or
cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged
firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income.
When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing
basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued
but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other
comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
(z) Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
(2) Acquisitions
On October 31, 2013, the Company completed the Merger. Under the terms of the Agreement and Plan of Merger, Legacy Sterling
shareholders received 1.2625 shares of Legacy Provident’s common stock, par value $0.01 per share, for each share of Legacy Sterling
common stock, which resulted in the issuance of 39,057,968 shares. Based on the closing stock price of $11.72 per share on October 31,
2013, the aggregate consideration paid to Legacy Sterling shareholders was $457,781, including $23 paid in cash for fractional shares,
and $6 which represented outstanding vested stock options. Consistent with the Company’s strategy, the primary reason for the Merger
was the expansion of the Company’s geographic footprint and diversification of its business in the greater New York metropolitan region
and beyond.
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 31, 2013 based on management’s best estimate using the
information available as of the Merger date. The application of the acquisition method of accounting resulted in the recognition of goodwill
of $225,809, a core deposit intangible of $20,089 and a trade name intangible of $20,500. As of October 31, 2013, Legacy Sterling had
assets with a book value of approximately $2,759,628, loans including loans held for sale with a book value of approximately $1,735,142,
and deposits with a book value of approximately $2,296,713. The table below summarizes the amounts recognized as of the Merger date
for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the
Company’s financial statements at fair value at the Merger date:
77
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Consideration paid through Sterling Bancorp common stock issued to Legacy Sterling shareholders
Cash and cash equivalents
Investment securities
Loans held for sale
Loans
Federal Reserve Bank stock
Bank owned life insurance
Premises and equipment
Accrued interest receivable
Core deposit and other intangibles
Trade name intangible
Other real estate owned
Other assets
Deposits
FHLB borrowings
Other borrowings
Subordinated Debentures
Other liabilities
Total identifiable net assets
Goodwill recorded in the Merger
Goodwill at September 30, 2013
Goodwill at September 30, 2014
Legacy Sterling
carrying value
Fair value
adjustments
$
$
277,798
613,154
30,341
1,704,801
7,680
55,374
21,293
6,590
—
—
1,720
40,877
(2,296,713)
(100,346)
(62,465)
(25,774)
(60,462)
213,868
$
$
—
(5,243) (a)
—
(6,693) (b)
—
—
2,301 (c)
—
20,089 (d)
20,500 (e)
4,095 (f)
(19,944) (g)
(477) (h)
(273) (i)
—
(753) (j)
4,502 (k)
18,104
$
$
$
$
457,781
As recorded at
acquisition
277,798
607,911
30,341
1,698,108
7,680
55,374
23,594
6,590
20,089
20,500
5,815
20,933
(2,297,190)
(100,619)
(62,465)
(26,527)
(55,960)
231,972
225,809
163,117
388,926
Explanation of certain fair value related adjustments:
(a) Represents the fair value adjustment on investment securities held to maturity.
(b) Represents the elimination of Legacy Sterling’s allowance for loan losses and an adjustment of the amortized cost of loans to
estimated fair value, which includes an interest rate mark and credit mark. Gross loans acquired were $1,723,447; of the acquired
loans, $1,699,271 were not considered purchased credit impaired and we recorded a fair value adjustment of $14,440.
(c) Represents an adjustment to reflect the fair value of leasehold improvements.
(d) Represents intangible assets recorded to reflect the fair value of core deposits and below market rent on leased premises. The
core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated
average life of the deposit base. The below market rent intangible asset will be amortized on a straight-line basis over the
remaining term of the leases.
(e) Represents the estimated fair value of Legacy Sterling’s trade name. This intangible asset will not be amortized and will be
reviewed at least annually for impairment.
(f) Represents an adjustment to an acquired property which Legacy Sterling utilized as a financial center and recorded as premises
and equipment. The Company included this asset in OREO as it was held for sale. This asset was sold during the fiscal year
ended September 30, 2014.
(g) Consists primarily of adjustments in net deferred tax assets resulting from the fair value adjustments related to the acquired
assets, liabilities assumed and identifiable intangibles recorded.
(h) Represents the fair value adjustment on deposits as the weighted average interest rate of deposits assumed exceeded the cost of
similar funding available in the market at the time of the Merger.
(i) Represents the fair value adjustment on FHLB borrowings as the weighted average interest rate of FHLB borrowings assumed
exceeded the cost of similar funding available in the market at the time of the Merger.
78
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(j) Represents the fair value adjustment on subordinated debentures as the weighted average interest rate of the debentures assumed
exceeded the cost of similar debt funding available in the market at the time of the Merger.
(k) Represents the fair value of other liabilities assumed at the Merger date.
Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Legacy Sterling were
estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future
credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted
market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the
value of the underlying collateral, assuming the fair values of the loans were derived from the eventual sale of the collateral. These values
were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure
and disposition of the collateral. There was no carryover of Legacy Sterling’s allowance for loan losses associated with the loans that
were acquired, as the loans were initially recorded at fair value on the date of the Merger.
The impaired loans acquired in the Merger as of October 31, 2013 were accounted for in accordance with ASC Topic 310-30 Accounting
for Certain Loans or Debt Securities Acquired in a Transfer (“ASC 310-30”) and were comprised of collateral dependent loans with
deteriorated credit quality as follows:
Contractual principal balance at acquisition
Principal not expected to be collected (non-accretable discount)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable discount)
Fair value of acquired loans
ASC 310-30 loans
$
$
24,176
(10,927)
13,249
—
13,249
The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the
accelerated method. Other intangibles consist of below market rents which are amortized over the remaining life of each lease using the
straight-line method.
Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax
purposes.
The fair value of premises and equipment and other real estate owned was estimated using appraisals of like kind properties and assets.
Premises, equipment and leasehold improvements will be amortized or depreciated over their estimated useful lives ranging from one to
five years for equipment or over the life of the lease for leasehold improvements. Other real estate owned is not amortized and is carried
at estimated fair value determined by the appraised value less costs to sell.
The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts
have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future
cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated
by discounting the future cash flows using market rates for similar borrowings.
Direct acquisition and integration costs of the Merger were expensed as incurred and totaled $9,455 and $2,772, for the fiscal years ended
September 30, 2014 and 2013, respectively. These items were recorded as Merger-related expenses in the income statement. Other direct
integration costs of the Merger for the fiscal year ended September 30, 2014, totaled $26,591 and included a charge for asset write-downs,
banking systems conversion, employee retention and severance compensation. These items were recorded in non-interest expense in the
income statement.
The following table presents selected unaudited pro forma financial information reflecting the Merger assuming it was completed as of
October 1, 2012. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative
of the financial results of the combined companies had the Merger actually been completed at the beginning of the periods presented,
nor does it indicate future results for any other interim or full fiscal year period. Pro forma basic and diluted earnings per common share
were calculated using the Company’s actual weighted average shares outstanding for the periods presented, plus the incremental shares
issued, assuming the Merger occurred at the beginning of the periods presented. The unaudited pro forma information is based on the
actual financial statements of the Company for the periods presented, and on the actual financial statements of Legacy Sterling for the
79
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
2012 period presented and in 2013 until the date of the Merger, at which time Legacy Sterling’s results of operations were included in
the Company’s financial statements.
The unaudited pro forma information set forth below for the fiscal years ended September 30, 2014 and 2013, reflects adjustments related
to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest
income and expense due to amortization of premiums and accretion of discounts. Direct Merger-related expenses and charges incurred
in fiscal years ended September 30, 2014 and 2013 to write-down assets and accrue for retention and severance compensation are assumed
to have occurred prior to October 1, 2012. Furthermore, the unaudited pro forma information does not reflect management’s estimate
of any revenue enhancement opportunities or anticipated potential cost savings.
Net interest income
Non-interest income
Non-interest expense
Net income
Pro forma earnings per share:
Basic
Diluted
Pro forma for the
fiscal year ended September 30,
2014
2013
$
198,776
$
54,396
187,306
44,460
180,030
65,749
189,136
39,190
$
$
0.53
0.53
0.47
0.47
On August 10, 2012, the Company acquired 100% of the outstanding common shares of Gotham Bank of New York (“Gotham”) in
exchange for $40,510 in cash. Under the terms of the acquisition, common shareholders received cash equal to 125% of adjusted tangible
net worth. The acquisition of Gotham provided a strategic expansion into the metropolitan New York City market, enabling the Company
to grow its small-to-middle market commercial business. Gotham delivered a core asset and deposit base, long-term client relationships,
an advantageous location in midtown Manhattan and an initial commercial banking team. Gotham’s results of operations are included in
the Company’s results for all periods presented in these financial statements.
80
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(3) Securities
A summary of amortized cost and estimated fair value of our securities is presented below:
September 30, 2014
Gross
Gross
unrealized
unrealized
losses
gains
Amortized
cost
Fair
value
Amortized
cost
September 30, 2013
Gross
Gross
unrealized
unrealized
losses
gains
Fair
value
Available for Sale
Residential MBS:
Agency-backed
$ 477,003
$
2,257
$
(1,555) $ 477,705
$ 284,837
$
1,849
$
CMO/Other MBS
115,395
242
(1,492)
114,145
169,336
356
(4,157) $
(3,038)
282,529
166,654
Total residential
MBS
Other securities:
Federal agencies
Corporate
State and
municipal
Trust preferred
Total other securities
Total available for
sale
Held to Maturity
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
State and municipal
Other
Total other securities
Total held to
maturity
592,398
2,499
(3,047)
591,850
454,173
2,205
(7,195)
449,183
158,114
195,547
131,715
37,684
523,060
3
149
3,439
766
4,357
(5,303)
(2,857)
(256)
(38)
(8,454)
152,814
192,839
134,898
38,412
518,963
273,637
118,575
127,324
—
519,536
—
153
3,447
—
3,600
(12,090)
(3,795)
(2,041)
—
(17,926)
261,547
114,933
128,730
—
505,210
$ 1,115,458
$
6,856
$ (11,501) $1,110,813
$ 973,709
$
5,805
$ (25,121) $
954,393
September 30, 2014
Gross
unrealized
gains
Gross
unrealized
losses
Amortized
cost
Fair
value
Amortized
cost
September 30, 2013
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$
$ 142,329
62,690
205,019
136,413
232,643
5,000
374,056
1,360
9
1,369
2,634
6,814
338
9,786
$
(103)
(1,204)
(1,307)
143,586
61,495
205,081
(962)
(123)
—
(1,085)
138,085
239,334
5,338
382,757
130,371
25,776
156,147
77,341
19,011
1,500
97,852
716
33
749
—
556
19
575
(108)
(315)
(423)
130,979
25,494
156,473
(3,458)
(546)
—
(4,004)
73,883
19,021
1,519
94,423
$ 579,075
$
11,155
$
(2,392) $587,838
$ 253,999
$
1,324
$
(4,427) $250,896
In accordance with ASC Subtopic 320-10-25-6, in a significant business combination a company may transfer held to maturity securities
to available for sale securities to maintain the company’s existing interest rate risk position or credit risk policy. Based on management’s
review of the combined investment securities portfolio and implications for asset and liability management, investment securities
totaling $165,230 were transferred from held to maturity to available for sale in connection with the Merger. Investment securities that
were transferred included residential mortgage-backed securities, federal agency securities and state and municipal securities and was
based mainly on the premium amortization and extension risk inherent in these securities. Concurrent with this repositioning, a total
of $221,904 of investment securities were also transferred from available for sale to held to maturity. Substantially all of the securities
transferred from available for sale to held to maturity have a maturity date in 2020 or beyond. At the date of transfer, these securities
were in an unrealized loss position of $9,657, which will be accreted into interest income using the level yield method over the life of
the securities, which is estimated to be approximately 5.3 year. At September 30, 2014 the remaining unrealized loss was $8,947. The
81
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
unrealized loss amount is included in accumulated other comprehensive (loss) on an after-tax basis. Management believes the transfers
of investment securities discussed above maintain the Company’s interest rate risk position and credit risk profile on a combined basis
post-Merger.
The amortized cost and estimated fair value of securities at September 30, 2014 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 mortgage-
backed securities are shown separately since they are not due at a single maturity date.
Other securities remaining period to contractual maturity:
One year or less
One to five years
Five to ten years
Greater than ten years
Total other securities
Residential MBS
Total securities
September 30, 2014
Available for sale
Held to maturity
Amortized
cost
Fair
value
Amortized
cost
Fair
value
$
2,100
$
2,112
$
8,847
$
141,508
334,295
45,157
523,060
592,398
141,748
328,902
46,201
518,963
591,850
9,138
189,494
166,577
374,056
205,019
$
1,115,458
$
1,110,813
$
579,075
$
8,897
9,624
192,109
172,127
382,757
205,081
587,838
Sales of securities for the periods indicated below were as follows:
Available for sale:
Proceeds from sales
Gross realized gains
Gross realized losses
Income tax expense on realized net gains
Held to maturity: (1)
Proceeds from sales
Gross realized gains
Income tax expense on realized gains
For the fiscal year ended September 30,
2014
2013
2012
$
529,107
$
339,123
$
1,964
(1,323)
172
7,709
(377)
2,282
$
— $
1,187
$
—
—
59
18
344,431
10,468
—
2,475
—
—
—
(1) During the fiscal year ended September 30, 2013, the Company sold held to maturity securities after the Company had already collected
at least 85% of the principal balance outstanding at acquisition.
82
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except 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:
Continuous unrealized loss position
Less than 12 months
Fair
value
Unrealized
losses
12 months or longer
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
Available for sale
September 30, 2014
Residential MBS:
Agency-backed
CMO/other MBS
Total residential MBS
Other securities:
Federal agencies
Corporate
State and municipal
Trust preferred
Total other securities
Total
September 30, 2013
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
State and municipal
Corporate
Total other securities
Total
$
137,693
$
62,507
200,200
6,153
97,833
8,170
3,907
116,063
$
316,263
$
$
137,265
$
122,324
259,589
261,547
43,585
95,013
400,145
$
659,734
$
(516) $
(446)
(962)
41,516
$
29,499
71,015
(1,039) $
(1,046)
(2,085)
179,209
$
92,006
271,215
(144)
(1,348)
(58)
(38)
(1,588)
(2,550) $
146,416
66,440
12,809
—
225,665
296,680
$
(5,159)
(1,509)
(198)
—
(6,866)
(8,951) $
152,569
164,273
20,979
3,907
341,728
612,943
$
(11,501)
— $
— $
137,265
$
7,820
7,820
—
112
—
112
7,932
$
(296)
(296)
130,144
267,409
—
(8)
—
(8)
(304) $
261,547
43,697
95,013
400,257
667,666
$
(25,121)
(1,555)
(1,492)
(3,047)
(5,303)
(2,857)
(256)
(38)
(8,454)
(4,157)
(3,038)
(7,195)
(12,090)
(2,041)
(3,795)
(17,926)
(4,157) $
(2,742)
(6,899)
(12,090)
(2,033)
(3,795)
(17,918)
(24,817) $
83
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table summarizes securities held to maturity with unrealized losses, segregated by the length of time in a continuous
unrealized loss position:
Continuous unrealized loss position
Less than 12 months
Fair
value
Unrealized
losses
12 months or longer
Fair
value
Unrealized
losses
Total
Fair
value
Unrealized
losses
Held to maturity
September 30, 2014
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
State and municipal
Total other securities
Total
September 30, 2013
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
State and municipal
Total other securities
Total
$
$
$
$
20,616
14,928
35,544
23,756
13,943
37,699
73,243
10,963
31,412
42,375
73,883
9,530
83,413
125,788
$
$
$
$
(103) $
(368)
(471)
(62)
(100)
(162)
(633) $
(86) $
(337)
(423)
(3,458)
(546)
(4,004)
(4,427) $
— $
— $
(836)
(836)
20,616
57,574
78,190
(900)
(23)
(923)
(1,759) $
47,857
15,422
63,279
141,469
$
42,646
42,646
24,101
1,479
25,580
68,226
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
10,963
31,412
42,375
73,883
9,530
83,413
125,788
$
$
$
$
(103)
(1,204)
(1,307)
(962)
(123)
(1,085)
(2,392)
(86)
(337)
(423)
(3,458)
(546)
(4,004)
(4,427)
Substantially all of the unrealized losses at September 30, 2014 relate to investment grade debt securities and are attributable to changes
in market interest rates subsequent to purchase. At September 30, 2014, a total of 99 available for sale securities were in a continuous
unrealized loss position for less than 12 months and 118 securities were in an unrealized loss position for 12 months or longer. For
securities with fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable
that it will collect all amounts due according to the contractual terms of the investment.
Declines in the fair value of available for sale and held to maturity 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 losses (“OTTI”),
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 the investment for a
period of time sufficient to allow for an anticipated recovery in cost.
84
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Securities pledged for borrowings at FHLB and other institutions, and securities pledged for municipal deposits and other purposes
were as follows:
Available for sale securities pledged for borrowings, at fair value
$
268,316
$
Available for sale securities pledged for municipal deposits, at fair value
Available for sale securities pledged for customer back-to-back swaps, at fair value
Held to maturity securities pledged for borrowings, at amortized cost
Held to maturity securities pledged for municipal deposits, at amortized cost
532,770
1,934
58,509
430,611
Total securities pledged
$
1,292,140
$
199,642
580,756
4,645
55,497
167,926
1,008,466
September 30,
2014
2013
(4) Loans
The composition of the Company’s loan portfolio, excluding loans held for sale, was the following:
Commercial:
Commercial & industrial
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Total commercial
Commercial mortgage:
Commercial real estate
Multi-family
Acquisition, development & construction
Total commercial mortgage
Total commercial and commercial mortgage
Residential mortgage
Consumer:
Home equity lines of credit
Other consumer loans
Total consumer
Total loans
Allowance for loan losses
Total loans, net
September 30,
2014
2013
$
1,164,537
$
439,787
145,474
192,003
181,433
393,027
—
—
—
—
2,076,474
439,787
1,449,052
368,524
92,149
1,909,725
3,986,199
570,431
159,944
43,864
203,808
4,760,438
(40,612)
4,719,826
$
969,490
307,547
102,494
1,379,531
1,819,318
400,009
156,995
36,576
193,571
2,412,898
(28,877)
$
2,384,021
Total loans include net deferred loan origination costs of $1,261 at September 30, 2014 and $1,201 at September 30, 2013.
Loans acquired from Legacy Sterling were a total of $1,698,108, net of purchase accounting adjustments and were comprised of $1,683,454
of loans that were not considered impaired at the acquisition date and $13,249 of loans that were determined to be impaired at the time
of acquisition. The impaired loans were accounted for in accordance with ASC 310-30. At September 30, 2014, the net recorded amount
of loans accounted for under ASC 310-30 was $3,763.
85
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loans acquired in the Merger that were determined to be purchased credit impaired were all considered collateral dependent loans.
Therefore, estimated fair value calculations and projected cash flows included only return of principal and no interest income. There
was no accretable yield associated with these loans during the twelve months ended September 30, 2014.
At September 30, 2014, the Company pledged loans totaling $1,246,315 to the FHLB as collateral for certain borrowing arrangements.
See Note 8. “Borrowings and Senior Notes”.
The following tables set forth the amounts and status of the Company’s loans and TDRs at September 30, 2014 and September 30,
2013:
30-59
days
past due
Current
September 30, 2014
60-89
days
past due
90+
days
past due
Non-
accrual
Total
Commercial & industrial
$ 1,150,854
$
2,316
$
7,043
$
— $
4,324
$ 1,164,537
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Total loans
Total TDRs included above
Non-performing loans:
Loans 90+ days past due and still accruing
Non-accrual loans
Total non-performing loans
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total loans
Total TDRs included above
Non-performing loans:
Loans 90+ days past due and still accruing
Non-accrual loans
Total non-performing loans
145,029
192,003
181,063
391,914
1,433,805
368,393
79,732
547,912
193,491
99
—
—
689
93
—
—
4,023
3,087
—
—
—
162
4,188
—
56
2,036
1,487
346
—
—
—
521
—
—
534
—
—
—
370
262
145,474
192,003
181,433
393,027
10,445
1,449,052
131
12,361
15,926
5,743
368,524
92,149
570,431
203,808
$ 4,684,196
$
17,138
$
$
10,307
346
$
$
14,972
169
$
$
1,401
$
49,562
$ 4,760,438
— $
11,944
$
29,597
$
$
1,401
49,562
50,963
30-59
days
past due
Current
September 30, 2013
90+
60-89
days
days
past due
past due
$
438,818
$
178
$
2
$
289
$
1,263,933
1,978
2,357
96,306
390,072
190,393
768
354
566
—
267
—
$ 2,379,522
$
23,754
$
$
3,844
$
2,626
$
— $
— $
1,574
—
1,832
404
4,099
141
$
$
$
$
Non-
accrual
500
7,195
5,420
7,484
2,208
Total
439,787
1,277,037
102,494
400,009
193,571
22,807
$ 2,412,898
2,199
$
26,094
4,099
22,807
26,906
86
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Activity in the allowance for loan losses for the fiscal years ended September 30, 2014, 2013 and 2012 is summarized below:
Beginning
balance
Charge-offs
Recoveries
Commercial & industrial
$
5,302
$
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Total loans
—
—
—
—
9,967
—
5,806
4,474
3,328
$
28,877
$
(2,901) $
(758)
—
(211)
(1,074)
(741)
(418)
(1,479)
(963)
(786)
(9,331) $
Annualized net charge-offs to average loans outstanding
Beginning
balance
Charge-offs
Recoveries
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total loans
$
4,603
$
7,230
8,526
4,359
3,564
$
28,282
$
(1,354) $
(3,725)
(3,422)
(2,547)
(2,009)
(13,057) $
Annualized net charge-offs to average loans outstanding
Beginning
balance
Charge-offs
Recoveries
Commercial & industrial
$
5,945
$
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total loans
5,568
9,895
3,498
3,011
$
27,917
$
(1,526) $
(2,707)
(4,124)
(2,551)
(1,901)
(12,809) $
Annualized net charge-offs to average loans outstanding
9
$
—
—
1,073
September 30, 2014
Net
charge-offs
(1,828)
(758)
—
(202)
(880)
(580)
(326)
(1,479)
(640)
(672)
(7,365)
1,966
194
323
114
161
92
—
$
$
410
September 30, 2013
Net
charge-offs
(944)
(3,148)
(3,240)
(2,446)
(1,777)
$ (11,555)
1,502
577
232
182
101
$
1,116
September 30, 2012
Net
charge-offs
(410)
(2,179)
(3,825)
(2,195)
(1,638)
$ (10,247)
2,562
263
528
356
299
Provision
$
6,062
$
2,137
630
1,496
3,501
1,457
2,193
(2,207)
2,003
1,828
Ending
balance
9,536
1,379
630
1,294
2,621
10,844
1,867
2,120
5,837
4,484
$
19,100
$
40,612
0.24%
Provision
$
1,643
$
5,885
520
2,561
1,541
Ending
balance
5,302
9,967
5,806
4,474
3,328
$
12,150
$
28,877
0.52%
Provision
$
(932) $
3,841
2,456
3,056
2,191
Ending
balance
4,603
7,230
8,526
4,359
3,564
$
10,612
$
28,282
0.56%
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. Determination of impairment is
treated the same across all classes of loans on a loan-by-loan basis, except residential mortgage loans and home equity lines of credit
with an outstanding balance of $500 or less, which are evaluated for 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
87
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 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.
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.
The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at September 30, 2014:
Loans evaluated by segment
Purchased
credit
impaired
loans
Collectively
evaluated for
impairment
Allowance evaluated by segment
Total
loans
Individually
evaluated for
impairment
Collectively
evaluated
for
impairment
Total
allowance
for loan
losses
Individually
evaluated for
impairment
Commercial & industrial
Payroll finance
$
4,177
—
$ 1,158,837
145,474
$
1,523
—
$ 1,164,537
145,474
$
— $
—
Warehouse lending
Factored receivables
Equipment financing
Commercial real estate
Multi-family
Acquisition, development &
construction
Residential mortgage
Consumer
—
—
—
192,003
181,433
393,027
13,750
1,435,163
—
368,524
17,766
515
—
74,383
567,815
203,808
—
—
—
139
—
—
2,101
—
192,003
181,433
393,027
1,449,052
368,524
92,149
570,431
203,808
—
—
—
—
—
—
—
—
9,536
1,379
630
1,294
2,621
10,844
1,867
2,120
5,837
4,484
$
9,536
1,379
630
1,294
2,621
10,844
1,867
2,120
5,837
4,484
Total loans
$
36,208
$ 4,720,467
$
3,763
$ 4,760,438
$
— $
40,612
$ 40,612
There was no amount included in the allowance for loan losses associated with purchased credit impaired loans at September 30, 2014,
as there was no further deterioration in the credit quality of these loans since the Merger date.
The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at September 30, 2013:
Loans evaluated by segment
Allowance evaluated by segment
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Total
loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
$
2,631
$
437,156
$
439,787
$
14,091
1,262,946
1,277,037
19,582
515
2
82,912
399,494
193,569
102,494
400,009
193,571
249
803
540
—
1
$
5,053
$
9,164
5,266
4,474
3,327
Total
allowance
for loan
losses
5,302
9,967
5,806
4,474
3,328
$
36,821
$ 2,376,077
$ 2,412,898
$
1,593
$
27,284
$
28,877
Commercial & industrial
Commercial real estate
Acquisition, development &
construction
Residential mortgage
Consumer
Total loans
88
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents loans individually evaluated for impairment by segment of loans at September 30, 2014 and September 30,
2013:
With no related allowance recorded:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Subtotal
With an allowance recorded:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Consumer
Subtotal
Total
September 30, 2014
September 30, 2013
Unpaid
principal
balance
Recorded
investment
Related
allowance
Unpaid
principal
balance
Recorded
investment
Related
allowance
$
4,177
$
4,177
$
— $
2,175
$
2,131
$
13,886
18,676
515
37,254
13,750
17,766
515
36,208
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,451
17,971
515
33,112
500
3,150
2,753
2
6,405
11,820
17,945
515
32,411
500
2,271
1,637
2
4,410
$
37,254
$
36,208
$
— $
39,517
$
36,821
$
—
—
—
—
—
249
803
540
1
1,593
1,593
During the quarter ended March 31, 2014, the Company modified its allowance for loan loss policy to generally require a charge-off of
the difference between the book balance of a collateral dependent impaired loan and the net value of the collateral securing the loan.
The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for
impairment by segment for the fiscal year September 30, 2014 and 2013:
With no related allowance recorded:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Subtotal
With an allowance recorded:
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Subtotal
Total
September 30, 2014
September 30, 2013
YTD
average
recorded
investment
Interest
income
recognized
Cash-basis
interest
income
recognized
YTD
average
recorded
investment
Interest
income
recognized
Cash-basis
interest
income
recognized
$
4,180
$
— $
— $
1,821
$
91
$
14,016
20,525
515
—
39,236
—
—
—
—
—
—
186
239
—
—
425
—
—
—
—
—
—
180
239
—
—
419
—
—
—
—
—
—
17,325
12,827
309
61
286
631
—
—
32,343
1,008
705
6,646
1,104
1,602
228
10,285
—
7
—
14
—
21
86
275
587
—
—
948
—
7
—
10
—
17
$
39,236
$
425
$
419
$
42,628
$
1,029
$
965
89
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
In the fiscal year ended September 30, 2012, the Company recognized interest income of $1,878 including cash-basis interest income
recognized of $1,136 on $58,195 of average impaired loans.
Troubled Debt Restructuring:
The following tables set forth the amounts and past due status of the Company’s TDRs at September 30, 2014 and 2013:
Current
loans
30-59
days
past due
September 30, 2014
60-89
days
past due
90+
days
past due
Non-
accrual
Total
Commercial & industrial
Equipment financing
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total
Allowance for loan losses
$
$
$
275
435
4,838
5,732
5,858
—
$
— $
—
— $
—
— $
—
—
—
346
—
—
—
169
—
169
31
—
—
—
—
17,138
409
$
$
$
346
— $
$
$
— $
— $
11,944
451
$
$
$
1,618
—
447
6,817
2,841
221
1,893
435
5,285
12,549
9,214
221
29,597
891
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total loans
Allowance for loan losses
Current
loans
30-59
days
past due
September 30, 2013
60-89
days
past due
90+
days
past due
Non-
accrual
Total
$
1,843
$
— $
— $
141
$
— $
5,305
14,190
2,416
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
23,754
438
$
$
— $
— $
— $
— $
141
$
— $
—
151
1,792
256
2,199
439
$
$
1,984
5,305
14,341
4,208
256
26,094
877
The Company had outstanding commitments to lend additional amounts of $0 and $4,101 to customers with loans classified as TDRs as
of September 30, 2014 and September 30, 2013, respectively.
The following table presents loans by segment modified as TDRs that occurred during the twelve months ended September 30, 2014 and
2013:
September 30, 2014
September 30, 2013
Commercial & industrial
Commercial real estate
Acquisition, development & construction
Residential mortgage
Consumer
Total restructured loans
— $
—
2
—
—
2
$
Number
Recorded investment
Post-
Pre-
modification
modification Number
—
5
— $
Recorded investment
Post-
Pre-
modification
modification
2,001
$
2,001
$
—
1,060
—
—
1,060
$
—
1,060
—
—
1,060
2
7
6
1
21
2,682
5,772
1,436
302
12,193
$
$
2,682
5,772
1,372
302
12,129
90
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
There were 12 TDRs in the fiscal year ended September 30, 2012, with a pre-modification balance of $9,160 and a post-modification
balance of $8,945.
The TDRs presented above increased the allowance for loan losses by $0, $300 and $134 and resulted in charge-offs of $0, $110 and $0
for the years ended September 30, 2014, 2013, and 2012, respectively.
There were no TDRs that were modified during the last twelve months that had subsequently defaulted during the year.
Credit Quality Indicators
As part of the on-going 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 consumer loans (residential mortgage and home equity lines of credit (“HELOC”)), (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 Bank analyzes loans individually by classifying the loans as to credit risk, except residential mortgage loans and consumer loans,
which are evaluated on a homogeneous pool basis unless the loan balance is greater than $500. This analysis is performed at least quarterly
on all criticized/classified loans. The Bank 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 debt. 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 (OAEM) are loans that have potential weaknesses which
may, if not reviewed 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.
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 include proposed merger, acquisition, or 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 reflect 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.
91
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loans that are risk-rated 1 through 6 as defined above are considered to be pass-rated loans. As of September 30, 2014 and 2013, the
risk category of gross loans by segment was as follows:
Commercial & industrial
Payroll finance
Factored receivables
Equipment financing
Commercial real estate
Multi-family
Acquisition, development & construction
Residential mortgage
Consumer
Total
September 30, 2014
September 30, 2013
Special
mention
Substandard
Doubtful
Special
mention
Substandard
Doubtful
$
24,980
$
5,749
$
— $
3,545
$
3,855
$
—
46
—
8,720
—
1,040
2,988
1,779
39,553
$
$
346
370
262
26,826
131
16,456
16,981
5,972
73,093
—
—
—
—
—
—
—
—
—
—
7,279
—
1,867
824
—
— $
15
13,530
$
$
—
—
—
24,561
—
19,410
9,786
2,891
60,503
$
365
—
—
—
227
—
—
—
—
592
92
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) Premises and Equipment, Net
Premises and equipment are summarized as follows:
Land and land improvements
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Total premises and equipment, gross
Accumulated depreciation and amortization
Total premises and equipment, net
(6) Goodwill and Other Intangible Assets
September 30,
2014
2013
$
$
6,048
22,888
32,963
50,343
112,242
(68,956)
43,286
$
$
7,282
30,558
8,136
40,164
86,140
(49,620)
36,520
Goodwill and other intangible assets are presented in the tables below. The increase in goodwill and certain other intangible assets in
fiscal 2014 was related to the acquisition of Legacy Sterling, which is described more fully in Note 2. “Acquisitions.”
Goodwill
The change in goodwill in the fiscal years ended September 30, 2014 and 2013 was as follows:
Beginning of year balance
Acquisitions
Disposals
End of year balance
September 30,
2014
2013
163,117
$
163,247
225,809
—
(130)
—
388,926
$
163,117
$
$
During the fiscal year ended September 30, 2013, the Company decreased the goodwill recorded in connection with the Gotham Bank
acquisition by $130 based on the completion of the analysis of fair value of the net assets acquired.
Other intangible assets
The balance of other intangible assets at September 30, 2014 and 2013 was as follows:
Gross
intangible
assets
Accumulated
amortization
Net intangible
assets
September 30, 2014
Core deposits
Non-compete agreements
Trade name
Fair value of below market leases
Provident Bank Ball Park naming rights
September 30, 2013
Core deposits
Provident Bank Ball Park naming rights
$
24,182
$
10,308
20,500
725
2,414
58,129
4,818
2,414
$
$
(4,694) $
(5,490)
—
(253)
(2,414)
(12,851) $
(798) $
(543)
7,232
$
(1,341) $
19,488
4,818
20,500
472
—
45,278
4,020
1,871
5,891
$
$
$
Included in other intangible assets was an intangible asset associated with the naming rights to Provident Bank Ball Park which is located
in Rockland County, New York. At the time of the Merger, the Company wrote-off the remaining book value.
93
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Other intangible assets are amortized on a straight-line or accelerated bases over their estimated useful lives, which range from one to
10 years. Amortization expense related to core deposits, non-compete agreements and naming rights totaled $9,408, $1,296 and $1,245
for the fiscal years ended September 30, 2014, 2013, and 2012, respectively. The amortization of the fair value of below market leases
was included in rent expense for the fiscal year ended September 30, 2014. The estimated aggregate future amortization expense for other
intangible assets remaining as of September 30, 2014 was as follows:
2015
2016
2017
2018
2019
Thereafter
(7) Deposits
Deposit balances at September 30, 2014 and 2013 are summarized as follows:
Non-interest bearing demand
Interest bearing demand
Savings
Money market
Certificates of deposit
Total deposits
Amortization
expense
$
6,113
5,042
2,598
2,178
2,058
6,786
$
24,775
September 30,
2014
1,799,685
766,852
698,443
1,595,803
437,871
5,298,654
$
$
2013
943,934
434,398
580,125
735,709
268,128
2,962,294
$
$
Municipal deposits totaled $992,761 and $757,065 at September 30, 2014 and September 30, 2013, respectively. See Note 3. “Securities”
for the amount of securities that were pledged as collateral for municipal deposits and other purposes.
Certificates of deposit had remaining periods to contractual maturity as follows:
Remaining period to contractual maturity:
Less than one year
One to two years
Two to three years
Three to four years
Four to five years
Total certificates of deposit
September 30,
2014
2013
$
$
340,813
53,319
35,632
4,000
4,107
437,871
$
$
239,104
17,248
5,185
3,062
3,529
268,128
94
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Certificates of deposit accounts with a denomination of $100 or more totaled $290,483 and $104,225 at September 30, 2014 and 2013,
respectively. Listed below are the Company’s brokered deposits at September 30, 2014 and 2013:
Money market
Reciprocal CDAR’s 1
CDAR’s one way
Total brokered deposits
1 Certificate of deposit account registry service
(8) Borrowings and Senior Notes
The Company’s borrowings and weighted average interest rates are summarized as follows:
September 30,
2014
2013
$
$
84,022
34,017
3,028
121,067
$
$
34,571
1,343
768
36,682
By type of borrowing:
FHLB advances and overnight
Repurchase agreements
Fed funds purchased
Senior notes
Total borrowings
By remaining period to maturity:
Less than one year
One to two years
Two to three years
Three to four years
Four to five years
Greater than five years
Total borrowings
September 30,
2014
2013
Amount
Rate
Amount
Rate
$
$
$
$
795,028
25,639
20,000
98,402
939,069
370,365
140,344
257,442
168,402
—
2,516
939,069
1.75% $
0.39
0.31
5.98
2.12% $
0.69% $
0.59
3.52
4.38
—
4.92
2.12% $
442,602
20,351
—
98,033
560,986
158,897
78,717
191
202,414
118,033
2,734
560,986
2.77%
0.88
—
5.98
3.26%
0.95%
1.97
5.32
4.21
5.57
4.92
3.26%
FHLB advances and overnight. As a member of the FHLB, the Bank may borrow up to the amount of eligible mortgages and securities
that have been pledged as collateral under a blanket security agreement. As of September 30, 2014 and 2013, the Bank had pledged
residential mortgage and commercial real estate loans totaling $1,246,315 and $784,422, respectively. The Bank had also pledged securities
to secure borrowings, which are disclosed in Note 3. “Securities.” As of September 30, 2014, the Bank may increase its borrowing
capacity by pledging securities and mortgage loans not required to be pledged for other purposes with a collateral value of $703,486.
FHLB borrowings which are putable quarterly at the discretion of the FHLB were $200,000 at September 30, 2014 and 2013. These
borrowings have a weighted average remaining term to the contractual maturity dates of approximately 2.56 years and 3.56 years and a
weighted average interest rates of 4.23% at both September 30, 2014 and 2013, respectively.
Repurchase agreements. Securities sold under agreements to repurchase at September 30, 2014 are secured short-term borrowings that
mature in one to 17 days. Repurchase agreements are stated at the amount of cash received in connection with these transactions. The
Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank had two $10,000
long-term repurchase agreements which were redeemed during the fiscal year ended September 30, 2014.
Fed funds purchased. Fed funds purchased are short-term borrowings that typically mature daily and are recorded at the amount of funds
received.
95
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Revolving line of credit. On September 5, 2014, the Company entered into a $15,000 revolving line of credit facility with a financial
institution that matures on September 5, 2015. The balance was zero at September 30, 2014. The use of proceeds are for general corporate
purposes. The line and accrued interest is payable at maturity, and is required to maintain a zero balance for at least 30 days during its
term. The line bears interest at one-month LIBOR plus 1.25%. Under the terms of the 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 line at September 30, 2014.
Senior Notes. On July 2, 2013, the Company issued $100,000 principal amount of 5.50% fixed rate Senior Notes through a private
placement at a discount of 1.75%. The cost of issuance was $303, and at September 30, 2014 and 2013 the unamortized discount was
$1,597 and $1,967, respectively, which will be accreted to interest expense over the life of the 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. The Senior Notes were
issued under an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee.
The Senior Notes are unsecured obligations of the Company and rank equally with all other unsecured unsubordinated indebtedness, and
will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and
structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries.
The indenture includes provisions that, among other things, restrict the Company’s ability to dispose of or issue shares of voting stock
of a principal subsidiary bank (as defined in the Indenture) or transfer the entirety of, or a substantial amount of, the Company’s assets
or merge or consolidate with or into other entities, without satisfying certain conditions.
The Senior Notes will not be registered under the Securities Act and may not be offered or sold in the U.S. absent registration or an
applicable exemption from registration requirements.
Trust preferred capital securities. In connection with the Merger, the Company assumed $25,000 of trust preferred capital securities (the
“Subordinated Debentures”). The capital securities, which were due March 31, 2032 and bore interest at 8.375%, were issued by Sterling
Bancorp Trust I, a wholly-owned, non-consolidated statutory business trust. The trust was formed with initial capitalization of common
stock and for the exclusive purpose of issuing the capital securities. The trust used the proceeds from the issuance of the capital securities
to acquire $25,774 junior subordinated debenture securities that paid interest at 8.375% issued by the Company. The Company was not
considered the primary beneficiary of the trust (which is a VIE); therefore, the trust was not consolidated in the Company’s financial
statements and the subordinated debentures were recorded as a liability. The debt securities were due concurrently with the capital
securities.
On June 1, 2014, the Company redeemed all of the outstanding capital securities at a redemption price equal to 100% of the liquidation
amount of the securities plus accumulated and unpaid interest, with such redemption payment made on June 2, 2014. In connection with
the redemption, the Company eliminated the unamortized premium recorded to reflect the fair value of the Subordinated Debentures at
the date of the Merger. The balance of the unamortized premium was $712 and this amount was recognized as a gain on extinguishment
of debt and recorded as a reduction of other non-interest expense in the fiscal year ended September 30, 2014.
(9) Derivatives
The Company has two interest rate caps to offset a portion of interest rate exposure should short-term rate increases lead to rapid increases
in general levels of market interest rates on deposits. These caps are linked to LIBOR and have strike prices of 3.5% and 4.0%. These
caps are stand alone derivatives and therefore changes in fair value are reported in current period earnings. Losses recognized in earnings
were $0 and $2 in fiscal 2014 and 2013, respectively. The fair value of the interest rate caps at September 30, 2014, is reflected in other
assets with a corresponding credit (charge) to income recorded as a gain (loss) to non-interest income.
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. Because the Company acts as an intermediary for its customer, changes
96
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s
results of operations.
The Company pledged collateral to another financial institution in the form of investment securities with an amortized cost of $5,034
and a fair value of $4,836 as of September 30, 2014. 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. The Company may need to post additional collateral
to swap counterparties in the future in proportion to potential increases in unrealized loss positions.
Summary information as of September 30, 2014 and 2013 regarding these derivatives is presented below:
September 30, 2014
Interest rate caps
3rd party interest rate swap
Customer interest rate swap
September 30, 2013
Interest rate caps
3rd party interest rate swap
Customer interest rate swap
Notional
amount
Average
maturity (in
years)
Weighted
average
fixed rate
Weighted
average
variable rate
Fair value
$
$
50,000
50,729
(50,729)
50,000
54,180
(54,180)
0.18
4.86
4.86
1.18
5.76
5.76
3.75%
4.20
4.20
3.75%
4.22
4.22
NA $
1 m Libor + 2.44
1 m Libor + 2.44
NA $
1 m Libor + 2.45
1 m Libor + 2.45
—
1,096
(1,096)
—
997
(997)
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.
97
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(10) Income Taxes
Income tax expense for the periods indicated consists of the following:
For the year ended September 30,
2013
2014
2012
Current tax expense:
Federal
State
Total current tax expense
Deferred tax (benefit) expense:
Federal
State
Total deferred tax (benefit) expense
Total income tax expense
$
$
11,613
1,598
13,211
(2,745)
(314)
(3,059)
10,152
$
$
9,146
1,549
10,695
522
197
719
11,414
$
$
5,538
685
6,223
(261)
197
(64)
6,159
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 year ended September 30,
2013
2014
2012
Tax at Federal statutory rate of 35%
State and local income taxes, net of Federal tax benefit
Tax-exempt interest, net of disallowed interest
BOLI income
Non-deductible acquisition related costs
Low income housing tax credits
Other, net
Actual income tax expense
Effective income tax rate
$
$
13,241
834
(3,824)
(1,110)
712
(165)
464
10,152
$
$
12,833
1,135
(2,192)
(699)
416
—
(79)
11,414
$
$
9,116
573
(2,448)
(718)
418
—
(782)
6,159
26.8%
31.1%
23.6%
98
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company’s funding policy is to contribute annually an amount sufficient to meet statutory minimum funding requirements, but not
in excess of the maximum amount deductible for Federal income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for benefits expected to be earned in the future.
The following is a description of the valuation methodologies used for assets measured at fair value. There were no changes in the
methodologies used at September 30, 2014 and 2013. See Note 17. “Fair Value Measurements” for a detailed discussion of the three
levels of inputs that may be used to measure fair values.
The fair value of the Plan assets is based on the lowest level of any input that is significant to the fair value measurement within the fair
value hierarchy. Plan assets consisted of pooled separate accounts at September 30, 2014. The fair value of shares of units of participation
in pooled separate accounts are based on the net asset values of the funds reported by the fund managers as of September 30, 2014 and
recent transaction prices (Level 2 inputs). Assets allocated to these pooled separate accounts can include, but are not limited to stocks
(both domestic and foreign), bonds and mutual funds. While some pooled separate accounts may have publicly quoted prices (Level 1
inputs), the units of separate accounts are not publicly quoted and are therefore classified as Level 2. The fair value of Plan assets by
asset category as of September 30, 2014 and 2013, was the following:
Asset category:
Intermediate term bond
Long-term bond
Total assets
Asset category:
Large cap U.S. equity
Small and mid cap U.S. equity
International equity
Total equity
Total balanced asset allocation
High yield bond
Intermediate term bond
Total fixed income
Total assets
September 30, 2014
Fair value
Level 1 inputs Level 2 inputs Level 3 inputs
8,629
59,892
68,521
$
$
— $
—
— $
8,629
59,892
68,521
$
$
—
—
—
September 30, 2013
Fair value
Level 1 inputs Level 2 inputs Level 3 inputs
16,378
4,443
3,654
24,475
1,691
1,018
8,233
9,251
35,417
$
$
— $
—
—
—
—
—
—
—
— $
16,378
4,443
3,654
24,475
1,691
1,018
8,233
9,251
35,417
$
$
—
—
—
—
—
—
—
—
—
$
$
$
$
The Company’s policy is to invest the Plan assets in a prudent manner for the purpose of providing benefit payments to participants and
offsetting reasonable expenses of administration. Historically, the Company’s investment strategy was designed to provide a total return
that, over the long-term, placed a strong emphasis on the preservation of capital and compliance with applicable regulations and laws.
Management intends to terminate the Plan in fiscal 2015 subject to obtaining required approvals from the Internal Revenue Service and
other regulators. Therefore, the investment allocation of Plan assets was shifted in fiscal 2014 to a liability driven investment strategy
which is more heavily weighted towards long-term fixed income assets with a similar duration profile to the Plan liabilities. As of
September 30, 2014, the majority of the Plan assets were invested in funds specifically designed for liability driven investment strategies
and had a weighted average expected rate of return of 4.0%.
102
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Plan’s investment policy prohibits the direct investment in real estate but allows the Plan’s mutual funds to include a small percentage
of real estate related investments. The investment strategy utilizes asset allocation as a principal determinant for establishing an appropriate
risk profile. Weighted average pension plan asset allocations based on the fair value of such assets at September 30, 2014 and September 30,
2013 and target allocation ranges for 2014, by asset category, are as follows:
Large cap U.S. equity
Small and mid cap U.S. equity
International equity
Total equity
Total balanced asset allocation
High yield bond
Intermediate term bond
Long-term bond
Total fixed income
Total assets
Cash
2014
2013
Target allocation
range 2014
Weighted
average expected
rate of return
—%
—
—
—
—
—
13
87
100
100%
—
44%
11
10
65
5
3
27
—
30
100%
—
0%
95% - 100%
0% to 5%
—%
—
—
—
—
—
—
—
4.0
4.0%
—
There were no pension plan assets consisting of Sterling Bancorp equity securities (common stock) at September 30, 2014 or at
September 30, 2013.
The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate
by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations
of the plans. At this time, the Company has not determined whether contributions in fiscal 2015 will be made.
(b) Other Post Retirement Benefit Plans
The Company provides other post retirement benefit plans, which are unfunded. Included in the tables below is information regarding
the Company’s optional medical, dental and life insurance benefits to retirees plan, Supplemental Executive Retirement Plan to certain
former directors and officers of the Company, life insurance benefits to certain directors, officers and former officers of Legacy Sterling.
103
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Data relating to other post retirement benefit plans is the following:
Changes in accumulated post retirement benefit obligation:
Beginning of year
Obligations assumed from Legacy Sterling
Service cost
Interest cost
Actuarial loss
Curtailment (gain)
Benefits paid
End of year
Changes in fair value of plan assets:
Beginning of year
Employer contributions
Plan participants’ contributions
Benefits paid
End of year
Funded status
September 30,
2014
2013
$
$
$
$
3,302
9,644
51
683
79
(2,485)
(284)
10,990
— $
284
—
(284)
—
(10,990) $
3,103
—
48
134
177
—
(160)
3,302
—
160
—
(160)
—
(3,302)
Components of net periodic (benefit) expense for other post retirement benefit plans was the following:
For the year ended September 30,
2013
2014
2012
Service cost
Interest cost
Amortization of transition obligation
Amortization of prior service cost
Amortization of net actuarial (gain) loss
Curtailment (gain)
Total
$
$
$
51
683
34
270
(45)
(2,485)
(1,492) $
48
134
24
47
2
—
255
$
$
46
125
24
47
(25)
—
217
The Company terminated the optional medical and dental plan to retirees effective September 30, 2014 and all payments under the plan
will cease on December 31, 2014. Net periodic benefit expense for other post retirement benefit plans is included in non-interest expense
- compensation and employee benefits for the fiscal years ended September 30, 2014, 2013 and 2012. The Company’s liability under its
other post retirement benefit plans is included in other liabilities in the balance sheet at September 30, 2014 and 2013.
Estimated future benefit payments are the following for the years ending September 30:
2015
2016
2017
2018
2019
2020 - 2024
104
$
660
231
271
319
373
2,370
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Plan assumptions for the other post retirement medical, dental and vision plans include the following:
Medical trend rate next year
Ultimate trend rate
Discount rate
Discount rate used to value periodic cost
For the year ended September 30,
2014
2013
4.5%
4.5
3.50% to 4.27%
3.50% to 4.20%
4.5%
4.5
4.2
4.1
There is no impact of a 1% increase or decrease in health care trend rate due to the Company’s cap on cost.
(c) Employee Savings Plan
The Company also sponsors a defined contribution plan established under Section 401(k) of the IRS Code. Eligible employees may elect
to contribute up to 50.0% of their compensation to the plan. The Company currently makes matching contributions equal to 50.0% of a
participant’s contributions up to a maximum matching contribution of 3.0% of eligible compensation. The plan also provides for a
discretionary profit sharing component, in addition to the matching contributions. Fiscal year 2014 did not include a profit sharing
component. Voluntary matching and profit sharing contributions are invested in accordance with the participant’s direction in one or a
number of investment options. Savings plan expense was $1,614, $935 and $1,029 for the years ended September 30, 2014, 2013 and
2012, respectively.
(d) Employee Stock Ownership Plan (“ESOP”)
In connection with the Second-Step Stock Conversion and Offering in January 2004, the Company established an ESOP for substantially
all eligible employees who meet certain age and service requirements. The ESOP borrowed $9,987 from Sterling and used the funds to
purchase 998,650 shares of common stock in the offering. The term of this ESOP loan was twenty years.
On October 30, 2013, the Company terminated the ESOP. In accordance with the provisions of the plan, all participants received
contributions for calendar year 2013 and became 100% vested in their accounts. On February 4, 2014, the ESOP held 499,330 shares
of the Company’s common stock. Of these shares, 488,403 were used to retire the ESOP trust outstanding loan obligation, which was
$5,983 including accrued interest. In accordance with the provisions of the ESOP, the remaining 10,927 shares were allocated ratably
to ESOP participants. ESOP expense was $295, $497, and $390 for the years ended September 30, 2014, 2013 and 2012, respectively.
(e) Stock Compensation Plans
The Company has active stock compensation plans as described below.
The Company’s stockholders approved the 2014 Stock Incentive Plan (the “2014 Plan”) on February 20, 2014. The 2014 Plan permits
the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units,
performance units, deferred stock, and other stock-based awards for up to 3,400,000 shares of common stock. At September 30, 2014
there were 3,350,761 shares available for future grant. The 2014 Plan replaced the Company’s 2012 Stock Incentive Plan (the “2012
Plan”) described below.
Under the 2014 Plan, any shares that are subject to stock options or stock appreciation rights are counted as one share deducted from the
2014 Plan for every one share delivered under those awards. Any shares granted under the 2014 Plan that are subject to awards other
than stock options and stock appreciation rights are counted as 3.5 shares deducted from the 2014 Plan for every one share delivered
under those awards.
The 2012 Plan was a shareholder-approved plan that permitted the grant of stock options, stock appreciation rights, restricted stock (both
time-based and performance-based), restricted stock units, performance units, deferred stock and other stock-based awards. Prior to the
approval of the 2014 Plan, there were 566,554 shares remaining for issuance under the 2012 Plan. These shares are included in the
aggregate 3,400,000 shares available under the 2014 Plan. The Company will no longer make awards under the 2012 Plan.
The Company’s 2004 Stock Incentive Plan (the “2004 Plan”), was a shareholder-approved plan that permitted the grant of stock options
to its employees for up to 2,796,220 shares of common stock. The Company will no longer make awards under the 2004 Plan. As of
September 30, 2014, 11,533 restricted shares awarded under the 2004 Plan were potentially subject to accelerated vesting as the employees
were eligible for retirement.
105
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Stock option awards are granted with a fair value equal to the market price of the Company’s common stock at the date of grant; the
awards generally vest in equal installments annually on the anniversary date and have total vesting periods ranging from 2 to 5 years and
stock options have 10 year contractual terms.
The Company’s 2004 Restricted Stock Plan, which historically has been referred to as the Recognition and Retention Plan (“RRP”),
provides for the issuance of shares to directors and officers. RRP shares vest annually on the anniversary of the grant date over the vesting
period. There were no shares remaining that are authorized and available for future grant under the RRP at September 30, 2014.
In addition to the above plans, the Company provided awards under its 2011 Employment Inducement Stock Program which included
options to purchase 107,256 shares of common stock and restricted stock awards covering 29,550 shares of common stock, both of which
vest in four equal installments through July 2015, and performance-based restricted stock awards covering 11,820 shares which vest upon
attainment of designated performance conditions in combination with continued service through December 31, 2014. These awards are
governed by the terms of an award notice and the terms of the 2004 Plan.
In connection with the Merger, the Company granted 104,152 options at an exercise price of $14.25 per share pursuant to a Registration
Statement on Form S-8 under which the Company assumed all outstanding fully vested Legacy Sterling stock options. Substantially all
of these options expire March 15, 2017. During the fiscal year ended September 30, 2014, 37,873 of these awards were canceled or
forfeited. The Company also granted 95,991 shares under the Sterling Bancorp 2013 Employment Inducement Award Plan to certain
executive officers of Legacy Sterling. In addition, the Company issued 255,973 shares of restricted stock from shares available under the
Company’s 2012 Plan to certain executives of Legacy Sterling. The weighted average grant date fair value was $11.72 per share and the
restricted stock awards vest in equal annual installments on the anniversary date over a three-year period.
The following table summarizes the activity in the Company’s active stock-based compensation plans for September 30, 2014:
Balance at October 1, 2013
2014 Stock Incentive Plan
2012 Stock Incentive Plan termination
Grants associated with the Merger(1)
Granted (1)
Stock awards vested
Exercised
Forfeited
Canceled/expired
Balance at September 30, 2014
Exercisable at September 30, 2014
Non-vested stock
awards/stock units
outstanding
Stock options
outstanding
Shares
available
for grant
Number
of shares
Weighted
average
grant date
fair value
Weighted
average
exercise
price
Number of
shares
2,066,184
209,697
$
8.73
2,114,509
$
10.71
3,400,000
(566,554)
(921,503)
(719,674)
—
—
439,594
(347,286)
3,350,761
351,964
115,145
(69,211)
—
(18,841)
—
11.72
11.53
104,152
324,862
9.51
—
— (507,955)
(375,235)
—
(9.18)
—
14.25
11.45
—
11.29
12.24
588,754
$
10.99
1,660,333
951,492
$
$
10.55
11.11
(1) Reflects certain non-vested stock awards that count as 3.5 shares or 3.6 shares for each share granted.
106
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Other information regarding options outstanding at September 30, 2014 follows:
Range of exercise prices:
$6.71 to $9.00
$9.28 to $12.64
$12.84 to $13.92
Outstanding
Weighted average
Life
(in years)
Exercise
price
Number of
stock options
Exercisable
Weighted average
Life
(in years)
Exercise
price
Number of
stock options
$
689,711
787,243
183,379
1,660,333
8.38
11.73
13.68
10.55
7.57
5.02
2.69
5.82
$
322,148
445,965
183,379
951,492
8.36
12.05
13.68
11.11
7.57
5.10
2.69
5.82
The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $3.9
million and $1.8 million, at September 30, 2014.
Proceeds from stock option exercises were $2,980, $62 and $102 for fiscal 2014, 2013, and 2012, respectively.
The Company uses an option pricing model to estimate the grant date fair value of stock options granted. The weighted average estimated
value per option granted was $2.51 in 2014, $2.74 in 2013, and $2.31 in 2012.
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:
For the year ended September 30,
2013
2014
2012
Risk-free interest rate
Expected stock price volatility
Dividend yield (1)
Expected term in years
1.8%
26.4
2.0
5.67
1.0%
40.8
2.6
5.75
1.4%
40.0
3.0
5.82
(1) Represents the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date.
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 was as follows:
Stock options
Non-vested stock awards/performance units
Total
Income tax benefit
For the year ended September 30,
2014
2013
2012
$
$
$
$
901
2,508
3,409
914
$
$
695
1,047
1,742
542
521
276
797
188
Unrecognized stock-based compensation expense at September 30, 2014 was as follows:
Stock options
Non-vested stock awards/stock units
Total
September 30, 2014
$
$
962
4,013
4,975
The weighted average period over which unrecognized stock options was expected to be recognized was 1.66 years. The weighted
average period over which unrecognized non-vested awards/performance units was expected to be recognized was 1.82 years.
107
(12) Other Non-interest Expense
Other non-interest expense items are presented in the following table. Components exceeding 1% of the aggregate of total net interest
income and total non-interest income are presented separately.
Other non-interest expense:
Advertising and promotion
Professional fees
Data and check processing
ATM/debit card expense
Insurance & surety bond premium
Charge for asset write-downs, severance and retention
Charge for banking systems conversion
Other
Total other non-interest expense
For the year ended September 30,
2014
2013
2012
$
$
2,358
6,913
3,439
1,249
2,703
22,976
3,249
15,030
57,917
$
1,502
$
3,393
2,520
1,722
1,199
—
—
$
7,040
17,376
$
1,849
4,247
2,802
1,711
1,220
—
—
6,562
18,391
(13) Earnings Per Common Share
The following is a summary of the calculation of earnings per share (“EPS”):
For the year ended September 30,
2013
2014
2012
Net income
$
27,678
$
25,254
$
19,888
Weighted average common shares outstanding for computation of basic EPS (1)
Common-equivalent shares due to the dilutive effect of stock options (2)
Weighted average common shares for computation of diluted EPS
80,268,970
43,734,425
38,227,653
265,073
48,628
20,393
80,534,043
43,783,053
38,248,046
Earnings per common share:
Basic
Diluted
$
$
0.34
0.34
$
0.58
0.58
0.52
0.52
(1) Includes earned ESOP shares.
(2) Represents incremental shares computed using the treasury stock method.
As of September 30, 2014, 2013 and 2012 there were 697,475; 1,786,608; and 1,771,132 stock options, respectively, that were considered
anti-dilutive and were not included in common-equivalent shares.
(14) Stockholders’ Equity
(a) Regulatory Capital Requirements
In connection with the Merger, the Company became a bank holding company and a financial holding company as defined by the Bank
Holding Company Act of 1956, as amended. Effective in the quarter ended December 31, 2013, Sterling Bancorp is subject to capital
ratio requirements as discussed below.
Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies.
Capital adequacy guidelines, and additionally for banks, prompt corrective action regulations, involve quantitative measures of assets,
108
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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. Quantitative measures established
by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (as forth in the table below) of Total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average
assets (as defined).
The Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighed assets. Risk-weighted assets
are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk
weight category, and certain off-balance sheet items (mainly loan commitments). Tier 1 capital to average assets is calculated by dividing
Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.
Fiscal year end actual and required capital ratios for the Company and the Bank were as follows:
The Bank and the Company
Minimum capital
adequacy
Classification as well-
capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Regulatory requirements
September 30, 2014
Tier 1 leverage capital (to average assets):
Sterling National Bank
Sterling Bancorp
$
636,507
553,117
9.34% $
8.12
272,542
272,385
4.00% $
4.00
340,677
340,481
5.00%
5.00
Tier 1 capital (to risk-weighted assets):
Sterling National Bank
Sterling Bancorp
Total capital (to risk-weighted assets):
Sterling National Bank
Sterling Bancorp
September 30, 2013
Tier 1 leverage
Risk-based capital:
Tier 1
Total
636,507
553,117
677,514
594,124
11.94
10.33
12.71
11.10
213,176
214,102
426,351
428,204
4.00
4.00
8.00
8.00
319,763
321,153
6.00
6.00
532,939
535,254
10.00
10.00
Sterling National Bank only
$
363,274
9.33% $
155,670
4.00% $
194,587
5.00%
363,274
392,376
13.18
14.24
110,235
220,469
4.00
8.00
165,352
275,587
6.00
10.00
Management believes that as of September 30, 2014, Sterling Bancorp and Sterling National Bank were “well-capitalized”.
A reconciliation of the Company’s stockholders’ equity to its regulatory capital at September 30, 2014 and the Bank’s total stockholder’s
equity to the Bank’s regulatory capital at September 30, 2014 and 2013 is as follows:
109
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Total GAAP stockholders’ equity
Disallowed goodwill and other intangible assets
Net unrealized loss on available for sale securities
Disallowed servicing asset
Net actuarial loss on defined benefit pension plans
Tier 1 risk-based capital
Allowance for loan losses and off-balance sheet commitments
Total risk-based capital
The Company
September 30,
2014
$
$
961,138
(419,327)
7,815
(153)
3,644
553,117
41,007
594,124
$
$
The Bank
September 30,
2014
1,011,973
(386,766)
7,809
(153)
3,644
636,507
41,007
677,514
$
$
2013
516,281
(168,122)
11,455
(198)
3,858
363,274
29,102
392,376
(b) Dividend Restrictions
The Company is mainly dependent upon 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
September 30, 2014, the Bank had capacity to pay aggregate dividends of up to $47,879 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 has 776,713 shares that are
available to be purchased under an announced stock repurchase program. There were no shares repurchased under the repurchase programs
during the fiscal years ended September 30, 2014, 2013, or 2012.
(d) Liquidation Rights
Upon completion of the second-step conversion in January 2004, the Bank established a special “liquidation account” in accordance with
OCC regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders
(as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company’s ownership interest in the
retained earnings of the Bank as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank
at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible
Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation
of the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Holding Company. The
liquidation account is reduced annually on September 30 to the extent that Eligible Account Holders and Supplemental Eligible Account
Holders have reduced their qualifying deposits as of each anniversary date. At September 30, 2014, the liquidation account had a balance
of $13,300. Subsequent increases in deposits do not restore such account holder’s interest in the liquidation account. The Bank may not
pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder’s equity below the amount
of the liquidation account.
(15) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company enters into various transactions, which in accordance with generally accepted accounting
principles 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 loss 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 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
110
exposure assessment of standby letter of credit arrangements, the arrangements contain security and debt covenants similar to those
contained in loan agreements. As of September 30, 2014, the Company had $97,468 in outstanding letters of credit, of which $21,756
were secured by cash collateral and $34,687 were secured by other collateral. The carrying value of these obligations are not considered
material.
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:
Loan origination commitments
Unused lines of credit
Letters of credit
(16) Commitments and Contingencies
$
September 30,
2014
2013
$
213,793
306,482
97,468
171,032
207,201
35,052
Certain premises and equipment are leased under operating leases with terms expiring through 2033. The Company has the option to
renew certain of these leases for additional terms. Future minimum rental payments due under non-cancellable operating leases with
initial or remaining terms of more than one year at September 30, 2014 were as follows:
2014
2015
2016
2017
2018
2019 and thereafter
$
$
8,984
8,517
7,690
7,702
6,386
27,012
66,291
Occupancy and office operations expense includes net rent expense of $7,893, $3,340 and $2,952 for the years ended September 30,
2014, 2013 and 2012, respectively.
Litigation
The Company and the Bank are involved in a number of judicial proceedings concerning matters arising from conducting 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 were
involved. In addition, the Company and the Bank may be requested to provide information or otherwise cooperate with government
authorities in the conduct of investigations of other persons or industry groups. It is possible the Company will be named as a defendant
in shareholder litigation arising out of the announcement of the HVB Merger. The Company believes that any such claims would be
without merit.
There can be no assurance as to the ultimate outcome of a legal proceeding; however, the Company and the Bank have generally denied,
or believe they have meritorious defenses and will deny, liability in all significant litigation pending against us, and we intend to defend
vigorously each case, other than matters we determine are appropriate to be settled. We 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.
111
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 things, 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 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, and 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 generally 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.
The Company reports the fair value of private label collateralized mortgage obligations or “CMOs” with a rating from a nationally
recognized bond rating agency of below investment grade using Level 3 inputs. As of September 30, 2014, these securities have an
amortized cost $2,866 and fair value of $2,869, representing 17 basis points of our total investment portfolio. At September 30, 2014,
we do not anticipate further OTTI charges on these securities. These securities, along with all of the Company’s other securities, will be
reviewed on at least a quarterly basis to assess whether the 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 credit worthiness of the counterparty as of the measurement date (Level 2). The Company’s derivatives
consist of two interest rate caps and twelve interest rate swaps. See Note 9. “Derivatives.”
112
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Commitments to Sell Real Estate Loans
The Company enters into various commitments to sell real estate loans in the secondary market. Such commitments are considered to
be derivative financial instruments and therefore are carried at estimated fair value on the consolidated balance sheets. The estimated fair
values of these commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell to
certain government sponsored agencies. The fair values of these commitments generally result in a Level 2 classification. The fair value
of these commitments is not material.
A summary of assets and liabilities at September 30, 2014 measured at estimated fair value on a recurring basis is as follows:
Asset:
Investment securities available for sale:
Residential MBS:
Agency-backed
CMO/Other MBS
Privately issued CMOs
Total residential MBS
Federal agencies
Corporate bonds
State and municipal
Trust preferred
Total other securities
Total investment securities available for sale
Interest rate caps and swaps
Total assets
Swaps
Total liabilities
September 30, 2014
Fair value
Level 1
inputs
Level 2
inputs
Level 3
inputs
$
477,705
111,276
2,869
591,850
152,814
192,839
134,898
38,412
518,963
1,110,813
1,096
$ 1,111,909
1,096
$
1,096
$
$
$
$
$
477,705
— $
111,276
—
—
—
588,981
—
152,814
—
192,839
—
134,898
—
38,412
—
518,963
—
— 1,107,944
—
1,096
— $ 1,109,040
1,096
— $
1,096
— $
$
$
$
$
—
—
2,869
2,869
—
—
—
—
—
2,869
—
2,869
—
—
113
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A summary of assets and liabilities at September 30, 2013 measured at estimated fair value on a recurring basis is the follows:
Available for sale securities:
Residential MBS:
Agency-backed
CMO/Other MBS
Privately issued CMOs
Total residential MBS
Investment securities
Federal agencies
Corporate
State and municipal
Total investment securities available for sale
Total available for sale securities
Interest rate caps and swaps
Total assets
Swaps
Total liabilities
September 30, 2013
Fair value
Level 1
inputs
Level 2
inputs
Level 3
inputs
$
$
$
$
282,529
163,041
3,613
449,183
261,547
114,933
128,730
505,210
954,393
997
955,390
997
997
$
$
$
$
— $
—
—
—
—
—
—
—
—
—
— $
— $
— $
282,529
163,041
—
445,570
261,547
114,933
128,730
505,210
950,780
997
951,777
997
997
$
$
$
$
—
—
3,613
3,613
—
—
—
—
3,613
—
3,613
—
—
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.
Loans Held for Sale and Impaired Loans
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value as
determined by outstanding commitments from investors. Fair value of loans held for sale is determined using quoted prices for similar
assets (Level 2 inputs).
When mortgage loans held for sale are sold with servicing rights retained, the carrying value of mortgage loans sold is reduced by the
amount allocated to the value of the servicing rights, which is equal to its fair value. Gains and losses on sales of mortgage loans are
based on the difference between the selling price and the carrying value of the related loan sold.
The Company may record adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the
uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated
in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for loan losses. 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 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 evaluated on at
least a quarterly basis for additional impairment and their carrying values are adjusted as needed. Loans subject to non-recurring fair
value measurements were $36,208 and $35,228 (which equals the carrying value less the allowance for loan losses allocated to these
loans) at September 30, 2014 and 2013, respectively. Changes in fair value recognized in provisions on loans held by the Company were
$905 and $2,726 for the twelve months ended September 30, 2014 and 2013, respectively.
When valuing impaired loans that are collateral dependent, the Company charges-off the difference between the recorded investment in
the loan and the appraised value, which is generally less than 12 months old. A discount for estimated costs to dispose of the asset is
used when evaluating the impaired loans.
114
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A summary of impaired loans at September 30, 2014 measured at estimated fair value on a non-recurring basis is the following:
September 30, 2014
Commercial real estate
Acquisition, development and construction
Total impaired loans measured at fair value
Fair value
1,463
2,173
3,636
$
Level 1 inputs Level 2 inputs Level 3 inputs
1,463
2,173
3,636
—
—
— $
—
—
— $
$
A summary of impaired loans at September 30, 2013 measured at estimated fair value on a non-recurring basis is the following:
September 30, 2013
Fair value
Level 1 inputs Level 2 inputs Level 3 inputs
Commercial real estate
Commercial & industrial
Acquisition, development and construction
Consumer
3,672
500
1,839
2
—
—
—
—
—
—
—
—
Total impaired loans measured at fair value
$
6,013
$
— $
— $
3,672
500
1,839
2
6,013
Mortgage Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect
recorded in net gain on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available,
or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights. In accordance with
FASB ASC Topic 860 - Transfers and Servicing, the Company must record impairment charges on a non-recurring basis, when the
carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights, the Company utilizes a third-party, which
on a quarterly basis, considers the market prices for similar assets and the present value of expected future cash flows associated with
the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and
prepayment speeds. The determination of fair value of servicing rights relies upon Level 3 inputs. The fair value of mortgage servicing
rights at September 30, 2014 and 2013 were $1,526 and $1,978, respectively.
Assets Taken in Foreclosure of Defaulted Loans
Assets taken in foreclosure of defaulted loans are initially recorded at fair value less costs to sell when acquired, which establishes a new
cost basis. These assets are subsequently accounted for at the lower of cost or fair value less costs to sell and are primarily comprised of
commercial and residential real estate property and upon initial recognition, are re-measured and reported at fair value through a charge-
off to the allowance for loan losses based on the fair value of the foreclosed asset. The fair value is generally determined using appraisals
or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market
place. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable
sales and income data available. The fair value is derived using Level 3 inputs. Appraisals are reviewed by our credit department, our
external loan review consultant and verified by officers in our credit administration area. Assets taken in foreclosure of defaulted loans
subject to non-recurring fair value measurement were $7,580 and $6,022 at September 30, 2014 and 2013, respectively. There were write-
downs of $224 and $1,978 related to changes in fair value recognized through income for those foreclosed assets held by the Company
during the twelve months ending September 30, 2014 and 2013, respectively.
115
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Significant Unobservable Inputs to Level 3 Measurements
The following table presents quantitative information about significant unobservable inputs used in the fair value measurements for Level
3 assets at September 30, 2014:
Non-recurring fair value measurements
Fair
value
Valuation
technique
Unobservable input / assumptions
Range (1)
(weighted average)
Impaired loans:
Commercial real estate
Acquisition, development &
construction
Assets taken in foreclosure:
$ 1,463
Appraisal
Adjustments for comparable properties
2,173
Appraisal
Adjustments for comparable properties
Residential mortgage
1,301
Appraisal
Commercial real estate(2)
Acquisition, development &
construction
1,910
Appraisal
1,973
Appraisal
Adjustments by management to reflect
current conditions/selling costs
Adjustments by management to reflect
current conditions/selling costs
Adjustments by management to reflect
current conditions/selling costs
Mortgage servicing rights
1,526
Third-party Discount rates
Third-party
Prepayment speeds
15.0% - 36.0%
(22.0%)
10.0% - 30.0%
(13.5%)
16.0% - 59.0%
(21.6%)
20.0% - 37.0%
(24.8%)
25.0% - 70.0%
(30.2%)
9.3% - 12.8%
100 - 968
(224)
(1) Represents range of discount factors applied to the appraisal to determine fair value. The amounts used for mortgage servicing rights
are discounts applied by a third-party valuation provider which the Company believes are appropriate.
(2) Excludes $2,396 of commercial buildings that are former financial centers held for sale. These assets were not taken in foreclosure
and their fair value is determined by appraisal, and our internal assessment of the market for this type of real estate in these locations.
Fair Values of Financial Instruments
FASB Codification Topic 825 - Financial Instruments, requires disclosure of fair value information for those financial instruments for
which it is practicable to estimate fair value, whether or not such financial instruments are recognized in the consolidated statements of
financial condition for interim and annual periods. Fair value is the amount for which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair values when those prices are available, although active markets do not exist for many types
of financial instruments. Fair values for these 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 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.
116
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except 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 September 30, 2014:
Financial assets:
Cash and due from banks
Securities available for sale
Securities held to maturity
Loans, net
Loans held for sale
Accrued interest receivable on securities
Accrued interest receivable on loans
FHLB stock and Federal Reserve Bank stock
Interest rate caps and swaps
Financial liabilities:
Non-maturity deposits
Certificates of deposit
FHLB borrowings
Other borrowings
Senior notes
Mortgage escrow funds
Accrued interest payable on deposits
Accrued interest payable on borrowings
Interest rate caps and swaps
$
Carrying
amount
177,619
1,110,813
579,075
4,719,826
17,846
8,876
10,791
66,085
1,096
(4,860,783)
(437,871)
(795,028)
(45,639)
(98,402)
(4,494)
(320)
(2,942)
(1,096)
September 30, 2014
Level 1 inputs Level 2 inputs Level 3 inputs
$
177,619
—
—
—
—
—
—
—
—
(4,860,783)
—
—
—
—
—
—
—
—
$
— $
1,110,813
587,838
—
17,846
8,876
—
—
1,096
—
(438,088)
(813,490)
(45,640)
(100,482)
(4,494)
(320)
(2,942)
(1,096)
—
—
—
4,758,366
—
—
10,791
—
—
—
—
—
—
—
—
—
—
—
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 September 30, 2013:
117
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Financial assets:
Cash and due from banks
Securities available for sale
Securities held to maturity
Loans, net
Loans held for sale
Accrued interest receivable on securities
Accrued interest receivable on loans
FHLB stock
Interest rate caps and swaps
Financial liabilities:
Non-maturity deposits
Certificates of deposit
FHLB and other borrowings
Mortgage escrow funds
Accrued interest payable on deposits
Accrued interest payable on borrowings
Interest rate caps and swaps
$
Carrying
amount
113,090
954,393
253,999
2,384,021
1,011
4,892
6,805
24,312
997
(2,694,166)
(268,128)
(345,176)
(12,646)
(1,480)
(1,525)
(997)
September 30, 2013
Level 1 inputs Level 2 inputs Level 3 inputs
$
113,090
—
—
—
—
—
—
—
—
(2,694,166)
—
—
—
—
—
—
$
— $
950,780
250,896
—
1,011
4,892
—
—
997
—
(268,088)
(488,369)
(12,644)
(1,480)
(1,525)
(997)
—
3,613
—
2,422,824
—
—
6,805
—
—
—
—
—
—
—
—
—
The following paragraphs summarize the principal methods and assumptions used by the Company to estimate the fair value of the
Company’s financial instruments:
Loans
The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in
credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting
future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit
quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.
FHLB of New York Stock and Federal Reserve Bank Stock
The redeemable carrying amount of these securities with limited marketability approximates their fair value.
Deposits and Mortgage Escrow Funds
In accordance with FASB Codification Topic 825, deposits with no stated maturity (such as savings, demand and money market deposits)
are assigned fair values equal to the carrying amounts payable on demand. Certificates of deposit and mortgage escrow funds are segregated
by account type and original term, and fair values are estimated by discounting the contractual cash flows. The discount rate for each
account grouping is equivalent to the current market rates for deposits of similar type and maturity.
These fair values do not include the value of core deposit relationships that comprise a significant portion of the Company’s deposits.
We believe that the Company’s core deposit relationships provide a relatively stable, low-cost funding source that has a substantial value
separate from the deposit balances.
FHLB Borrowings, other borrowings and Senior notes
The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is
estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial
instruments.
Other Financial Instruments
Other financial assets and liabilities listed in the table above have estimated fair values that approximate the respective carrying amounts
because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.
118
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The fair values of the Company’s off-balance-sheet financial instruments described in Note 15. “Off-Balance Sheet Financial Instruments”
were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and
the credit worthiness of the counterparties. At September 30, 2014 and 2013, the estimated fair value of these instruments approximated
the related carrying amounts, which were not material.
Accrued interest receivable/payable
The carrying amounts of accrued interest approximate fair value and are classified as Level 2.
(18) Recently Issued Accounting Standards Not Yet Adopted
Accounting Standards Update (“ASU”) 2014-14 Classification of Certain Government-Guaranteed Residential Mortgage Loans Upon
Foreclosure. This standard provides guidance on how holders of certain government-guaranteed loans (e.g., mortgage loans guaranteed
by the FHA or VA) should present such loans upon foreclosure. Specifically, the ASU provides that, upon foreclosure, government-
guaranteed loans within the scope of the standard should be derecognized and re-recognized as a separate other receivable (i.e., a receivable
from the government entity guaranteeing the loan). The standard does not require any new disclosures about such loans. ASU 2014-14
is effective for the Company for annual and interim periods beginning after December 15, 2014, and is not expected to have a material
impact on our balance sheet or results of operations.
ASU 2014-11 Transfers and Servicing (topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This
standard amends the guidance in ASC 860 on accounting for certain repurchase agreements (“repos”). The standard (1) requires entities
to account for repurchase-to-maturity transactions as secured borrowings, (2) eliminates accounting guidance on linked repurchase
financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as
sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) that are accounted
for as secured borrowings. This standard is effective for annual periods beginning after December 15, 2014 and is not expected to have
a material impact on our balance sheet or results of operations.
ASU 2014-09 Revenue From Contracts With Customers. This standard outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016. The Company is currently
evaluating the impact this standard will have on its balance sheet and results of operations.
ASU 2014-04 Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate
Collateralized Consumer Mortgage loans upon Foreclosure was issued. This standard provides clarification when a creditor should be
considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that
the loan should be removed from the balance sheet and other real estate owned recognized. These amendments clarify that when an in-
substance foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property
collateralizing a consumer mortgage loan upon either: (1) the creditor obtaining legal title to the residential real estate property upon
completion of a foreclosure, or (2) the borrower is conveying all interest in the residential real estate property to the creditor to satisfy
that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. This standard was effective for the
Company on October 1, 2014 and is not expected to have a material impact on our balance sheet or results of operations.
See Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policy” for a discussion of the adoption
of new accounting standards.
(19) Accumulated Other Comprehensive (Loss) Income
Components of accumulated other comprehensive income (loss) (“AOCI”) were as follows at September 30:
119
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Net unrealized holding loss on available for sale securities
$
(4,645) $
(19,316)
September 30,
2014
2013
Related income tax benefit
Available for sale securities AOCI, net of tax
Net unrealized holding loss on securities transferred to held to maturity
Related income tax benefit
Securities transferred to held to maturity AOCI, net of tax
Net unrealized holding loss on retirement plans
Related income tax benefit
Retirement plan AOCI, net of tax
Accumulated other comprehensive loss
1,974
(2,671)
(8,947)
3,803
(5,144)
(6,336)
2,692
(3,644)
7,844
(11,472)
—
—
—
(6,496)
2,638
(3,858)
$
(11,459) $
(15,330)
The following table presents the changes in each component of accumulated other comprehensive income for the fiscal years ended
September 30, 2014, 2013 and 2012:
Net unrealized
holding gain
(loss) on AFS
securities
Net unrealized
holding (loss)
on securities
transferred to
held to maturity
Net unrealized
holding gain
(loss) on
retirement plans
Total
Fiscal year ended September 30, 2014
Balance beginning of the year
Other comprehensive gain (loss) before reclassification
Amounts reclassified from AOCI
Total other comprehensive income (loss)
Balance at end of period
Fiscal year ended September 30, 2013
Balance beginning of the year
Other comprehensive (loss) gain before reclassification
Amounts reclassified from AOCI
Total other comprehensive (loss) income
Balance at end of period
Fiscal year ended September 30, 2012
Balance beginning of the year
Other comprehensive gain before reclassification
Amounts reclassified from AOCI
Total other comprehensive income
Balance at end of period
$
$
$
$
$
$
(11,472) $
— $
(3,858) $
(15,330)
9,170
(369)
8,801
(5,144)
—
(5,144)
—
214
214
4,026
(155)
3,871
(2,671) $
(5,144) $
(3,644) $
(11,459)
15,066
$
— $
(8,167) $
(22,167)
(4,371)
(26,538)
—
—
—
3,041
1,268
4,309
(11,472) $
— $
(3,858) $
13,604
$
— $
(8,468) $
7,640
(6,178)
1,462
15,066
$
$
—
—
—
—
301
301
— $
(8,167) $
6,899
(19,126)
(3,103)
(22,229)
(15,330)
5,136
7,640
(5,877)
1,763
6,899
120
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(20) Condensed Parent Company Financial Statements
Set forth below are the condensed balance sheets of Sterling and the related condensed statements of income and cash flows:
Assets:
Cash
Loan receivable from ESOP
Investment in Sterling National Bank
Investment in non-bank subsidiaries
Goodwill
Trade name
Other intangible assets, net
Other assets
Total assets
Liabilities:
Senior Notes
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities & stockholders’ equity
The table below presents the condensed statement of income:
September 30,
2014
2013
$
$
$
$
23,369
—
1,011,973
3,587
18,970
20,500
917
528
1,079,844
98,402
20,304
118,706
961,138
1,079,844
$
$
$
$
56,230
6,437
517,907
3,271
—
—
—
1,184
585,029
98,033
4,130
102,163
482,866
585,029
For the year ended September 30,
2013
2012
2014
Interest income
Dividend income on equity securities
Dividends from Sterling National Bank
Dividends from non-bank subsidiaries
Other
Interest expense
Non-interest expense
Income tax benefit
Income (loss) before equity in undistributed earnings of subsidiaries
Equity in undistributed (excess distributed) earnings of:
Sterling National Bank
Non-bank subsidiaries
Net income
$
$
$
139
—
22,500
750
18
(6,265)
(5,841)
3,431
14,732
$
262
22
—
1,600
—
(1,431)
(2,700)
898
(1,349)
12,590
355
27,677
$
27,174
(571)
25,254
$
282
30
6,000
500
10
—
(1,838)
87
5,071
13,739
1,078
19,888
121
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The table below presents the condensed statement of cash flows:
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in (undistributed) excess distributed earnings of:
For the year ended September 30,
2013
2012
2014
$
27,677
$
25,254
$
19,888
Sterling National Bank
Non-bank subsidiaries
(Gain) on redemption of Subordinated Debentures
Other adjustments, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of securities
Sales of securities
Investment in subsidiaries
ESOP loan principal repayments
Net cash (used for) investing activities
Cash flows from financing activities:
Net change in other short-term borrowings
Redemption of Subordinated Debentures
Senior Notes offering
Equity capital raise
Cash dividends paid
Stock option transactions including RRP
Other equity transactions
Net cash (used for) provided by financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
$
(12,590)
(355)
(712)
22,066
36,086
—
1,112
(15,000)
6,437
(7,451)
(20,659)
(26,140)
—
—
(17,677)
2,980
—
(61,496)
(32,861)
56,230
23,369
$
(27,174)
571
—
5,259
3,910
—
818
(45,000)
459
(43,723)
—
—
97,946
—
(10,642)
1,758
265
89,327
49,514
6,716
56,230
$
(13,739)
(1,078)
—
380
5,451
(105)
103
(44,203)
441
(43,764)
—
—
—
46,000
(9,100)
910
527
38,337
24
6,692
6,716
122
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(21) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for the fiscal years ended September 30, 2014 and 2013:
Year ended September 30, 2014
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
(Loss) income before income tax
Income tax (benefit) expense
Net (loss) income
Earnings per common share:
Basic
Diluted
Year ended September 30, 2013
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income tax
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
$
$
$
$
$
$
$
52,711
6,835
45,876
3,000
9,148
72,974
(20,950)
(6,948)
(14,002) $
(0.20) $
(0.20)
$
$
$
33,145
5,222
27,923
2,950
7,659
22,546
10,086
3,066
7,020
0.16
0.16
$
$
$
$
$
$
61,325
7,297
54,028
4,800
12,415
46,723
14,920
4,588
10,332
0.12
0.12
32,420
4,601
27,819
2,600
6,852
23,339
8,732
2,203
6,529
0.15
0.15
$
$
$
$
$
$
65,761
7,310
58,451
5,950
13,471
44,904
21,068
6,057
15,011
0.18
0.18
32,593
4,276
28,317
3,900
6,581
21,789
9,209
2,833
6,376
0.15
0.15
67,109
7,476
59,633
5,350
12,286
43,780
22,789
6,452
16,337
0.20
0.19
33,903
5,795
28,108
2,700
6,600
23,367
8,641
3,312
5,329
0.12
0.12
The Company incurred a net loss in the first fiscal quarter of 2014 due mainly to charges and asset write-downs associated with the
Merger. The Company recognized charges of $22.2 million for asset write-downs, retention and severance compensation, a write-off of
the naming rights to remaining book value of the Provident Bank Ballpark, all of which are included in other non-interest income on the
income statement. The charge for asset write-downs was based on the Company’s intent to consolidate several office locations and
financial centers. The Company recognized $9.1 million of Merger-related expenses, which included professional advisory fees, legal
fees, a portion of change-in-control payments to Legacy Sterling executive officers, costs associated with changing signage at various
office and financial center locations and other Merger-related items. In addition, the Company incurred a $2.7 million charge for the
settlement of a portion of the Legacy Provident pension plan in December 2013.
(22) Subsequent Events (Unaudited)
On November 5, 2014, the Company announced it had entered into a definitive merger agreement with Hudson Valley Holding Corp.
(NYSE: HVB). In the merger, which is a stock-for-stock transaction valued at approximately $539,234 based on the closing price of
Sterling common stock on November 4, 2014, Hudson Valley Holding Corp. shareholders will receive a fixed ratio of 1.92 shares of
Sterling common stock for each share of Hudson Valley Holding Corp. common stock. Upon closing, Sterling shareholders will own
approximately 69% of stock in the combined company and Hudson Valley Holding Corp. shareholders will own approximately 31%. On
a pro forma combined basis, for the twelve months ended September 30, 2014, the companies had revenue of $363,217 and $21,962 in
123
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
net income. Upon completion of the merger the combined company is expected to have $10,703,764 in assets, $6,551,482 in gross loans,
and deposits of $8,071,799. The transaction, which has been approved by the boards of directors of both companies, is expected to close
in the second calendar quarter of 2015. The transaction is subject to approval by shareholders from both companies, regulatory approval
and other customary closing conditions.
The Company has engaged an independent third-party to assist management in estimating the fair value of the majority of the assets
acquired and liabilities to be assumed. The Company will file a Current Report on Form 8-K (or an amendment to a prior report) no later
than January 15, 2015 that will include historical and pro forma information regarding Hudson Valley Holding Corp. and the Company
which is required in connection with the Merger.
124
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
ITEM 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2014, under the supervision and with the participation of Sterling Bancorp’s Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure
controls and procedures. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures
were effective at the reasonable assurance level in timely alerting them to material information required to be recorded, processed,
summarized and reported in Sterling Bancorp’s periodic SEC reports.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the year ended September 30, 2014 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
The management of Sterling Bancorp (the “Company”) is responsible for establishing and maintaining effective internal control over financial
reporting. The Company’s system of internal controls is designed to provide reasonable assurance to the Company’s management and board of
directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting
principles. All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Management assessed the Company’s internal control over financial reporting as of September 30,
2014. This assessment was based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of September
30, 2014, the Company’s internal control over financial reporting is effective.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2014 has been audited by Crowe Horwath
LLP, as stated in their report which is included elsewhere herein.
ITEM 9B. Other Information
Not applicable.
125
ITEM 10. Directors, Executive Officers, and Corporate Governance
PART III
The Proposal I — “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” sections of Sterling Bancorp’s
Proxy Statement for the Annual Meeting of Stockholders to be held in February 2015 (the “Proxy Statement”) is incorporated herein by
reference.
ITEM 11. Executive Compensation
The Proposal I — “Election of Directors” section of the Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Sterling Bancorp does not have any equity compensation programs that were not approved by stockholders, other than its employee stock
ownership plan.
Set forth below is certain information as of September 30, 2014, regarding equity compensation that has been approved by stockholders.
Equity compensation plans
approved by stockholders
Stock Option Plans
Number of securities
to be issued upon
exercise of outstanding
options and rights
Weighted average
Exercise price (1)
1,660,333
$
10.55
Number of securities
remaining available
for issuance under plan
3,350,761
(1) Weighted average exercise price represents Stock Option Plans only, since restricted shares have no exercise price.
The Proposal I — “Election of Directors” section of the Proxy Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The “Transactions with Certain Related Persons” section of the Proxy Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
The Proposal III - “Ratification of Appointment of Independent Registered Public Accounting Firm” section of the Proxy Statement is
incorporated herein by reference.
126
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(1)
Financial Statements
The financial statements filed in Item 8 of this Form 10-K are as follows:
(A)
(B)
(C)
(D)
(E)
(F)
(G)
Report of Independent Registered Public Accounting Firm on Financial Statements
Consolidated Balance Sheets as of September 30, 2014 and 2013
Consolidated Statements of Income for the years ended September 30, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended September 30, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in
(2)
the Notes to Consolidated Financial Statements.
(3)
Exhibits
Agreement and Plan of Merger, dated as of November 4, 2014, by and between Sterling Bancorp and Hudson
Valley Holding Corp. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K
filed on November 7, 2014).
Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K filed on November 1, 2013).
Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 of the Company’s Current Report
on Form 8-K filed on November 1, 2013).
Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 of the Company’s
Current Report on Form 8-K filed on November 1, 2013).
Form of Corporate Governance Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed on August 7, 2012).
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, no instrument which defines the holders of long-term debt
of the Company or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the Company
hereby agrees to furnish a copy of any such instrument to the Commission upon request.
Employment Agreement, dated as of June 20, 2011, with Jack L. Kopnisky (incorporated by reference to Exhibit
10.1 of the Company’s Current Report on Form 8-K filed on June 21, 2011).*
Form of Amendment to Employment Agreement, dated as of November 26, 2012, with Jack L. Kopnisky
(incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on November 26,
2012).*
Amendment No. 2 to Employment Agreement, dated as of April 3, 2013, with Jack L. Kopnisky (incorporated by
reference to Exhibit 10.1 of the Company’s Amendment No. 1 to Current Report on Form 8-K filed on April 9,
2013).*
Employment Agreement, dated as of November 1, 2013, with Luis Massiani (incorporated by reference to Exhibit
10.2 of the Company’s Current Report on Form 8-K filed on November 4, 2013).*
Form of Employment Agreement, dated as of November 22, 2011, with Rodney Whitwell (incorporated by
reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K filed on December 14, 2012).*
Form of Reinstated Employment Agreement, dated as of November 26, 2012, with Rodney Whitwell
(incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on November
27, 2012).*
2.1
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
127
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
21
Employment Agreement, dated as of November 1, 2013, with David S. Bagatelle (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 4, 2013).*
Amendment No. 1 to Employment Agreement, dated as of September 23, 2014, with David S. Bagatelle
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 25,
2014).*
Employment Agreement, dated as of November 1, 2013, with James R. Peoples (incorporated by reference to
Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on November 4, 2013).*
Employment Agreement dated as of April 3, 2013, with Michael Bizenov* (filed herewith)
Employment Agreement dated as of April 3, 2013, with Howard M. Applebaum* (filed herewith)
Services and Covenant Agreement, dated as of April 3, 2013, by and between the Company and Louis J. Cappelli
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1,
2013).*
Services and Covenant Agreement, dated as of April 3, 2013, by and between the Company and John C. Millman
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 1,
2013).*
Retention Award Letter, dated as of May 13, 2013, with Daniel G. Rothstein (incorporated by reference to Exhibit
10.1 of the Company’s Current Report on Form 8-K filed on May 14, 2013).*
Provident Bank Amended and Restated 1995 Supplemental Executive Retirement Plan (incorporated by reference
to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 0-25233)).*
Provident Bank 2005 Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 of the
Company’s Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 0-25233)).*
Provident Bank 2000 Stock Option Plan (incorporated by reference to Appendix A to the Company’s Proxy
Statement filed on January 18, 2000 (File No. 0-25233)).*
Provident Bancorp, Inc. 2004 Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s
Proxy Statement filed on January 19, 2005 (File No. 0-25233)).*
Form of Stock Option Agreement, dated as of July 6, 2011, between the Company and Jack L. Kopnisky
(incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on August 9,
2011).*
Form of Restricted Stock Award Notice, dated as of July 6, 2011, between the Company and Jack L. Kopnisky
(incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed on August 9,
2011)).*
Form of Performance-Based Restricted Stock Award Notice, dated as of July 6, 2011, between the Company and
Jack L. Kopnisky (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q
filed on August 9, 2011).*
Provident Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed on November 1, 2011).*
Sterling Bancorp 2014 Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s Proxy
Statement for the 2014 Annual Meeting of Stockholders, filed on January 10, 2014).*
Sterling Bancorp Stock Incentive Plan (incorporated by reference to Exhibit 10 to Legacy Sterling’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-05273)).*
Form of Sterling Bancorp 2013 Employment Inducement Award Agreement (incorporated by reference to Exhibit
10.1 of the Company’s Post Effective Amendment on Form S-8 to Form S-4 filed on November 1, 2013).*
Form of Restricted Stock Unit Award Agreement Pursuant to the Provident New York Bancorp 2012 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
November 1, 2013).*
Form of Restricted Stock Award Agreement Pursuant to the Provident New York Bancorp 2012 Stock Incentive
Plan* (filed herewith)
Form of Stock Option Award Agreement Pursuant to the Provident New York Bancorp 2012 Stock Incentive Plan*
(filed herewith)
Form of Performance-Based Stock Award Agreement Pursuant to the Provident New York Bancorp 2012 Stock
Incentive Plan* (filed herewith)
Form of Restricted Stock Award Agreement Pursuant to the 2014 Stock Incentive Plan* (filed herewith)
Form of Stock Option Award Agreement Pursuant to the 2014 Stock Incentive Plan* (filed herewith)
Form of Performance-Based Stock Award Agreement Pursuant to the 2014 Stock Incentive Plan* (filed herewith)
Subsidiaries of Registrant (filed herewith)
128
23
31.1
31.2
Consent of Crowe Horwath LLP (filed herewith)
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification Pursuant to 18 U.S.C. Section 1350, as amended by Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
32
101.INS XBRL Instance Document (filed herewith)
101.SCH XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
*
Indicates management contract or compensatory plan or arrangement.
129
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Sterling Bancorp has duly caused this report to be
signed on its behalf by the undersigned, there unto duly authorized.
SIGNATURES
Date: November 28, 2014
By: /s/ Jack L. Kopnisky
Sterling Bancorp
Jack L. Kopnisky
President, Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
By:
/s/ Jack L. Kopnisky
Jack L. Kopnisky
President, Chief Executive Officer and
Director
Principal Executive Officer
Date: November 28, 2014
By:
/s/ Louis J. Cappelli
Louis J. Cappelli
Chairman of the Board of Directors
Date: November 28, 2014
By:
/s/ Luis Massiani
Luis Massiani
Executive Vice President
Chief Financial Officer
Principal Financial Officer
Principal Accounting Officer
Date: November 28, 2014
By:
/s/ Robert Abrams
Robert Abrams
Director
Date: November 28, 2014
By:
Date:
By:
Date:
By:
Date:
/s/ Fernando Ferrer
Fernando Ferrer
Director
November 28, 2014
/s/ James B. Klein
James B. Klein
Director
November 28, 2014
/s/ Richard O’Toole
Richard O’Toole
Director
November 28, 2014
By:
Date:
By:
Date:
By:
Date:
By:
Date:
/s/ James F. Deutsch
James F. Deutsch
Director
November 28, 2014
/s/ William F. Helmer
William F. Helmer
Director
November 28, 2014
/s/ Robert W. Lazar
Robert W. Lazar
Director
November 28, 2014
/s/ Burt Steinberg
Burt Steinberg
Director
November 28, 2014
130
By:
/s/ Navy E. Djonovic
Navy E. Djonovic
Director
Date: November 28, 2014
By:
Date:
By:
Date:
/s/ Thomas G. Kahn
Thomas G. Kahn
Director
November 28, 2014
/s/ John C. Millman
John C. Millman
Director
November 28, 2014
Sterling Bancorp and
Sterling National Bank
BOARD OF DIRECTORS
Louis J. Cappelli
Chairman of the Board
Jack L. Kopnisky
President and Chief Executive Officer,
Sterling Bancorp and Sterling
National Bank
Robert Abrams
Member, Stroock & Stroock &
Lavan LLP
James F. Deutsch
Managing Partner of Patriot Financial
Partners, L.P.
Navy Djonovic, CPA
Partner, Maier Markey & Justic LLP
Fernando Ferrer
Co-Chairman, Mercury Public
Affairs, LLC
William F. Helmer
President, Helmer-Cronin
Construction
Thomas G. Kahn
Registered Investment Advisor,
President, Kahn Brothers Group, Inc.,
Kahn Brothers LLC and Kahn Brothers
Advisors LLC
James B. Klein
President, Eastland Shoe Corp.
Robert W. Lazar, CPA
Senior Advisor, Teal, Becker &
Chiaramonte CPAs, P.C.
John C. Millman
Retired Banking Executive
Richard O’Toole
Executive Vice President,
The Related Companies
Burt Steinberg
President, BSRC Consulting
EXECUTIVE OFFICERS
Jack L. Kopnisky
President and Chief Executive Officer
Luis Massiani
Senior Executive Vice President and
Chief Financial Officer
James R. Peoples
Senior Executive Vice President,
Chief Banking Officer and President
of Banking Group
Rodney C. Whitwell
Senior Executive Vice President,
Chief Operating Officer and
Chief Risk Officer
Corporate Information
CORPORATE COUNSEL
Squire Patton Boggs (US) LLP
2550 M Street, NW
Washington, DC 20037
ANNUAL REPORT ON FORM 10-K
A printed copy of the Company’s Form 10-K for the fiscal year
ended September 30, 2014 will be furnished without charge to
shareholders upon written request to:
Manager of Shareholder Relations
Sterling Bancorp
400 Rella Boulevard, PO Box 600
Montebello, New York 10901
or call 845.369.8040
INDEPENDENT AUDITOR
Crowe Horwath LLP
488 Madison Avenue, Floor 3
New York, NY 10022-5722
TRANSFER AGENT
AND REGISTRAR
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
If you have any questions concerning your shareholder account, call
our transfer agent noted above, at 800.368.5948. This is the number
to call if you require a change of address, records or information
about lost certificates, dividend checks, or direct registration.
DIVIDEND REINVESTMENT PLAN (DRIP)
Sterling Bancorp offers shareholders of STL common stock a
Dividend Reinvestment Plan (DRIP). To receive a prospectus that
describes the DRIP or to register to participate, please contact
our DRIP plan admin istrator, Computershare, at 800.368.5948, or
online at www.computershare.com/investor.
FORWARD-LOOKING STATEMENTS
This annual report contains statements about the future that are
forward-looking statements for purposes of applicable securities
laws. Forward-looking statements are subject to numerous assump-
tions, risks and uncertainties. Certain risks that may affect our
forward-looking statements are discussed in this annual report
under “Item 1A, Risk Factors” of the attached Form 10-K and else-
where in the Form 10-K or in other filings with the SEC. Actual
results could differ materially from those anticipated in forward-
looking statements. Please refer to the section of the attached
Form 10-K relating to “Cautionary Statement Regarding Forward-
Looking State ments” for important informa tion relating to forward-
looking statements.
Sterling National Bank
Member FDIC
Sterling Bancorp
Corporate Office
400 Rella Boulevard
P.O. Box 600
Montebello, NY 10901
Phone: 845.369.8040
Fax: 845.369.8255
www.sterlingbancorp.com
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400 Rella Boulevard • Montebello, NY 10901
www.sterlingbancorp.com