S
T
E
R
L
I
N
G
B
A
N
C
O
R
P
2
0
1
6
A
N
N
U
A
L
R
E
P
O
R
T
ADVANCING OUR
HIGH PERFORMANCE
STRATEGY
2 0 1 6 A N N UA L R E P O R T
Sterling Bancorp, of which the principal subsidiary is Sterling National Bank, specializes
in the delivery of financial services and solutions for small to mid-size businesses and
consumers within the communities we serve through a distinctive team-based delivery
approach utilizing highly experienced, fully dedicated relationship managers. Sterling
National Bank offers a complete line of commercial, business, and consumer banking
products and services.
2016 Highlights
$14.2 Billion
Total Assets
$140.0 Million
Net Income (GAAP)
1.15%
Return on Average
Tangible Assets
14.34%
Return on Average
Tangible Equity
To Our Shareholders:
I am pleased to report that Sterling made strong progress on
virtually every front in 2016, as we advanced our strategy to
build a high performing regional bank. We completed the full
integration of Hudson Valley Holding Corp.; set records for
revenue, earnings, loans and deposits; strengthened our capital
base; and maintained strong asset quality. We achieved all of
this while continuing to provide exceptional service to our
customers and communities and creating value for our
stockholders. I want to thank our team members for their
tremendous efforts to make 2016 such a remarkable,
Jack L. Kopnisky
President and Chief Executive Officer
accomplishment-filled year.
New Jersey, Pennsylvania, and Connecticut. We also acquired the
30
$19.9 $16.4
$25.3 $22.4
$27.7
A YEAR OF SOLID PROGRESS
Our key strategic actions in the past year included several initiatives
to redeploy our resources into more profitable businesses, build and
expand our range of solutions and growth opportunities, strengthen
our financial and human capital to support growth, and rationalize our
branch network.
We divested our residential mortgage originations business in the third
Net Income (In $ Millions)1
quarter of 2016 and sold the trust group, acquired via the Hudson
Valley merger, in the fourth quarter. These divestitures allowed us to
150
exit activities that did not meet our ROI objectives and reallocate
120
capital and resources to business lines with the potential for higher
risk-adjusted returns. For example, we acquired from GE Capital a
90
portfolio of approximately $170 million of performing franchise
financing loans, primarily located in our core markets of New York,
asset-based lending business along with approximately $320 million
in loans outstanding of NewStar Business Credit, LLC, which offers
specialized, collateral-based direct lending and related services for
middle market companies.
Four new commercial banking teams joined Sterling in 2016 to expand
our asset and deposit generation capabilities. In addition, we also
added professionals to existing teams to further increase productivity.
Total Assets (In $ Billions)
At year-end, we had 30 commercial banking teams.
15
2016 Annual Report
12
9
6
3
0
60
0
Net Income1
$ in millions
Diluted Earnings per Share1
$145.5
$140.0
$105.4
$66.1
$57.8
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
Net Income (GAAP)
Adjusted Net Income (Non-GAAP)
Diluted EPS (GAAP)
Adjusted Diluted EPS (Non-GAAP)
1 See reconciliation of reported net income (GAAP) to adjusted
net income (non-GAAP) on page 23 of Form 10-K.
$14.18
$11.96
$7.34
1
$4.02
$4.05
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
1.2
1.0
0.8
0.6
0.4
0.2
0.0
10
8
6
4
2
0
12
10
8
6
4
2
0
Portfolio Loans (In $ Billions)
Total Deposits (In $ Billions)
$1.11
$1.07
$0.96
$0.72
$0.60
$0.58
$0.51
$0.52
$0.43
$0.34
$9.53
$7.86
$4.76
$2.12
$2.41
$10.07
$8.58
$5.3
$3.11
$2.96
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
150
120
90
60
30
0
15
12
9
6
3
0
$145.5
$140.0
$105.4
$66.1
$57.8
$19.9 $16.4
$25.3 $22.4
$27.7
$7.34
$4.02
$4.05
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
Total Assets (In $ Billions)
$14.18
$11.96
Portfolio Loans (In $ Billions)
Net Income (In $ Millions)1
1.2
1.0
0.8
0.6
0.4
0.2
0.0
10
8
150
6
120
4
90
2
60
0
30
0
12
10
15
8
12
6
4
9
2
0
6
3
0
Net Income (In $ Millions)1
Diluted Earnings per Share1
Diluted Earnings per Share1
During 2016 we continued to right-size our branch network, consolidating
$0.72
$0.60
$0.58
$0.51
$0.52
$0.43
$0.34
$1.11
$1.07
$0.96
a net of 10 financial centers and bringing the branch count to 42 at
year-end 2016. We constantly evaluate opportunities to further reduce
locations and are focused on maintaining a network in which all
financial centers meet our profitability and efficiency targets.
We strengthened Sterling’s capital foundation to support our growth
strategy. Capital raises included two offerings of subordinated notes
totaling $175 million, as well as a common stock offering that generated
net proceeds of $91 million. We are pleased with the investment
community’s favorable response to these offerings. As a result, we
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
ended the year with a strong base of capital and liquidity.
Net Income (GAAP)
Adjusted Net Income (Non-GAAP)
Diluted EPS (GAAP)
Adjusted Diluted EPS (Non-GAAP)
DELIVERING PROFITABLE GROWTH
1 See reconciliation of reported diluted earnings per share (GAAP)
to adjusted diluted earnings per share (non-GAAP) on page 23
of Form 10-K.
Our operating and financial performance in 2016 reflected record
profitability, positive operating leverage, and returns on equity and
assets that exceeded our targets. Net income for 2016 was $140.0 million,
$9.53
or $1.07 per diluted share. Adjusted net income was $145.5 million and
adjusted diluted earnings per share were $1.11, compared to $105.4
Diluted Earnings per Share1
$7.86
“ We advanced our high
$140.0
performance strategy, while
$4.76
$105.4
million and $0.96, respectively, for 2015. This represents growth in
$145.5
adjusted earnings and diluted earnings per share of 38.1% and 15.6%,
1.2
respectively.
1.0
continuing to provide exceptional
$2.12
$2.41
service to our customers and
$57.8
$66.1
At 9/30/12
communities, and creating value
$19.9 $16.4
At 9/30/13
$25.3 $22.4
At 9/30/14
$27.7
At 12/31/16
At 12/31/15
Return on average tangible assets (ROATA) for the year was 1.15% and
0.8
return on average tangible equity (ROATE) was 14.34%. Adjusted return
$0.58
0.6
$0.52
on average tangible assets for the year was 1.20% and adjusted return
$0.43
on average tangible equity was 14.90%, compared with 1.17% and 13.86%,
0.4
$0.34
respectively, for 2015. These results once again exceeded our stated
0.2
$1.11
$1.07
$0.96
$0.72
$0.60
$0.51
for our stockholders.”
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 9/30/12
FYE 12/31/16
performance goals.
0.0
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
Net Income (GAAP)
Adjusted Net Income (Non-GAAP)
at a faster pace than expenses continues to be a main driver of our
Diluted EPS (GAAP)
Adjusted Diluted EPS (Non-GAAP)
A focus on creating positive operating leverage by growing revenues
Total Deposits (In $ Billions)
Total Assets (In $ Billions)
Total Assets
$ in billions
$10.07
$14.18
$8.58
$11.96
$5.3
$7.34
$3.11
$2.96
$4.02
$4.05
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
performance. In 2016, we grew revenues by 27%, while expenses
increased 16%. Our adjusted efficiency ratio for 2016 was 46.2%, an
improvement relative to the 50.8% ratio a year earlier.
Portfolio Loans (In $ Billions)
The growth of our business in 2016 was evident across all of our
10
commercial asset classes. Total loans were a record $9.5 billion,
increasing 21.2% over the prior year due to strong organic growth and
8
portfolio acquisitions. We are especially pleased with our performance
6
in C&I, commercial finance and commercial real estate loans—all
categories that we have targeted for growth—which increased by
4
$2.12
24.8% in 2016. Among the contributors to our loan growth were
2
new or expanded business lines, such as public finance and
$2.41
$4.76
$9.53
$7.86
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
asset-based lending.
0
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
2
Sterling Bancorp
Total Deposits (In $ Billions)
12
10
8
6
4
2
0
$10.07
$8.58
$5.3
$3.11
$2.96
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
Net Income (In $ Millions)1
Diluted Earnings per Share1
$145.5
$140.0
$105.4
$66.1
$57.8
$19.9 $16.4
$25.3 $22.4
$27.7
1.2
1.0
0.8
0.6
0.4
0.2
0.0
$1.11
$1.07
$0.96
$0.72
$0.60
$0.58
$0.51
$0.52
$0.43
$0.34
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
Net Income (GAAP)
Adjusted Net Income (Non-GAAP)
Diluted EPS (GAAP)
Adjusted Diluted EPS (Non-GAAP)
Total deposits were $10.1 billion at 2016 year-end, an increase of 17.3%
year-over-year. Sterling maintains a stable and cost-efficient funding
Portfolio Loans (In $ Billions)
Portfolio Loans
$ in billions
base of core deposits, which totaled $8.8 billion (87.5% of total deposit
10
Diluted Earnings per Share1
$14.18
balances) and had a weighted average cost of 36 basis points during
Total Assets (In $ Billions)
Net Income (In $ Millions)1
$7.34
$4.02
$4.05
$11.96
the year.
$140.0
$145.5
Credit quality remained strong. Non-performing loans as a percentage
$105.4
of total loans were 0.83% at December 31, 2016, virtually unchanged
from a year earlier. The allowance for loan losses was 0.67% of total loans
$66.1
$57.8
and 80.7% of non-performing loans at 2016 year-end. We maintain a
0.6
2
At 9/30/12
$19.9 $16.4
$25.3 $22.4
At 9/30/13
$27.7
At 9/30/14
balanced mix between commercial and industrial (C&I) loans (43.8% of
0.4
0
the portfolio), commercial real estate loans (45.9%), and consumer loans
0.2
At 12/31/16
At 12/31/15
(10.3%), in what we believe is a prudent response to economic and
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
market conditions.
FYE 12/31/16
$9.53
$7.86
$1.11
$1.07
$0.96
$2.12
$0.52
$0.43
$2.41
$0.58
$0.51
$4.76
$0.72
$0.60
$0.34
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
FYE 9/30/12
FYE 9/30/13 FYE 9/30/14 FYE 12/31/15
FYE 12/31/16
Net Income (GAAP)
Adjusted Net Income (Non-GAAP)
Our capital is robust, as noted earlier, with ample capital and liquidity
Diluted EPS (GAAP)
Adjusted Diluted EPS (Non-GAAP)
to support our organic growth and execute our strategy. Reflecting our
earnings growth, as well as the subordinated debt and equity offerings,
Total Deposits (In $ Billions)
150
120
90
60
30
0
15
12
150
9
120
6
90
3
60
0
30
0
15
12
9
6
3
0
FYE 9/30/12
Total Assets (In $ Billions)
8
1.2
6
1.0
4
0.8
0.0
12
10
10
8
8
6
6
4
4
2
$7.34
$4.02
$4.05
At 9/30/12
At 9/30/13
At 9/30/14
Sterling Bancorp’s tangible equity to tangible assets ratio was 8.14%
and Tier 1 leverage ratio was 8.95% at December 31, 2016. At Sterling
Portfolio Loans (In $ Billions)
National Bank, the Tier 1 leverage ratio was 9.08%.
$14.18
$11.96
TRANSFORMING—AND PERFORMING
In our continuing drive to transform Sterling into a premier high
performing regional bank, we believe it is important to constantly
re-invent our company. We continually challenge everything we do to
create an organization with the scale, talent, resources and financial
0
2
discipline to deliver consistent, strong performance in a rapidly changing
“ It’s important for us to
continually re-invent the
$8.58
$10.07
$9.53
company to deliver consistent,
$5.3
$7.86
solid performance and build
$3.11
$4.76
$2.96
value in a rapidly changing
$2.12
business environment.”
At 9/30/14
At 9/30/13
At 12/31/15
At 9/30/12
$2.41
At 12/31/16
business environment.
At 12/31/16
At 12/31/15
0
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
Early in 2017, we took the most significant step yet in this ongoing
transformation. We announced a definitive merger agreement with
Astoria Financial Corporation in a stock-for-stock transaction valued
at approximately $2.2 billion. This strategic combination will create a
top-tier regional bank which will serve the needs of businesses and
Total Deposits (In $ Billions)
consumers in the New York metropolitan area. The resulting institution,
12
to be known as Sterling Bancorp, will be the sixth largest regional bank
in our market in terms of deposits. Upon completion of the merger,
10
which is expected in the 2017 fourth quarter, the “new” Sterling will have
8
approximately $29 billion in assets, $20 billion in loans and $19 billion in
6
deposits, with a diversified lending focus, solid capital foundation, and
broad footprint in a dynamic and growing marketplace. We expect the
4
merger to be accretive to Sterling’s earnings and book value immediately.
2
Total Deposits
$ in billions
$5.3
$3.11
$2.96
$10.07
$8.58
0
At 9/30/12
At 9/30/13
At 9/30/14
At 12/31/15
At 12/31/16
2016 Annual Report
3
Sterling Bancorp—Total Return Performance
l
e
u
a
V
x
e
d
n
I
450
400
350
300
250
200
150
100
9/30/11
9/30/12
9/30/13
9/30/14
12/31/14
12/31/15
12/31/16
Sterling Bancorp
SNL Mid-Atlantic Bank Index
S&P 500 Index
We are excited by the transformative possibilities of the merger. In a single step, it will create one of the premier banking
enterprises in the NYC area—positioning Sterling to deliver exceptional performance and value for our customers,
shareholders, employees and communities. The strengths of our two institutions are highly complementary, providing
a platform to extend Sterling’s business banking solutions across a much larger market area, while introducing Astoria’s
retail products to a wider financial center network. We are committed to building on our collective strengths to
provide exceptional solutions to an expanded customer base, while driving best-in-class financial performance by
taking advantage of our enhanced scale, opportunities for growth and operating efficiency.
THE JOURNEY TO EXTRAORDINARY
The Astoria transaction continues a strategic process that began when our team joined Provident New York Bancorp
in late 2011. Since that time, we have been guided by a clear vision of what it means to be a high performing regional
bank. We have worked to make that vision a reality through three previous bank acquisitions, several commercial
finance acquisitions, consistent strong organic growth and now, a game-changing merger.
The positive impact of this transformation is clear from the significant growth in assets, loans and deposits, and our
expanded range of financial solutions and market opportunities, since our team joined Provident in 2011. Since that
time, adjusted earnings have risen over 1,700%, and we have achieved ROATA, ROATE and efficiency ratios that
are among the best in our industry. Market capitalization has increased from $220 million to $3.16 billion as of 2016
year-end, while the company’s stock price has appreciated by over 300%.
This progress would not have been possible without the loyalty of our clients, the commitment of our colleagues, the
sound guidance of our directors, and the confidence of our investors. We look forward to rewarding that support
through our continued growth and performance—so that customers, shareholders, team members and our
communities can always “Expect Extraordinary”.
Jack L. Kopnisky
President and Chief Executive Officer
4
Sterling Bancorp
2016
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 December 31, 2016
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 Each 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 definitions of “large
accelerated filer” and “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 June 30, 2016 was $2,050,741,269.
NO
As of February 23, 2017 there were 135,584,023 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 year ended December
31, 2016.
STERLING BANCORP
FORM 10-K TABLE OF CONTENTS
December 31, 2016
PART I
Business
ITEM 1.
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
ITEM 3.
ITEM 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
ITEM 5.
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
ITEM 6.
ITEM 7.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
ITEM 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9.
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers, and Corporate Governance
ITEM 11.
ITEM 12.
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
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
SIGNATURES
1
11
17
17
17
17
17
19
25
67
68
138
138
138
139
139
139
139
139
140
143
Table of Contents
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 (“we,” “our,” “ours,” or “us”) is a Delaware corporation, bank holding company and financial holding company that
owns all of the outstanding shares of common stock of its principal subsidiary, Sterling National Bank (the “Bank”). At December 31,
2016, we had, on a consolidated basis, $14.2 billion in assets, $10.1 billion in deposits, stockholders’ equity of $1.9 billion and
135,257,570 shares of common stock outstanding. Our financial condition and results of operations are discussed herein on a
consolidated basis with the Bank.
As you review the following disclosures about our business you should be aware of the following recent significant transactions and
events, which are discussed below:
November 2016 Common Equity Capital Raise
On November 22, 2016, we issued 4,370,000 shares of our common stock in a public offering at $20.95 per share. We received
proceeds net of underwriting discounts, commissions and expenses of $91.0 million. The net proceeds were used for general
corporate purposes and to support growth in earning assets, including loan originations and purchases of investment securities.
Subordinated Notes Issuance
On March 29, 2016, the Bank issued $110.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due
2026 (the “Subordinated Notes”) through a private placement at a discount of 1.25%. On September 2, 2016, the Bank reopened the
Subordinated Notes offering and issued an additional $65.0 million principal amount of Subordinated Notes. The Subordinated Notes
issued September 2, 2016 are fully fungible with, rank equally in right of payment with, and form a single series with the
Subordinated Notes issued on March 29, 2016. The Subordinated Notes are unsecured, subordinated obligations of the Bank and are
subordinated in right of payment to all of the Bank’s existing and future senior indebtedness, including claims of depositors and
general creditors. The Subordinated Notes qualify as Tier 2 capital for regulatory purposes.
Acquisition of Restaurant Franchise Financing Loan Portfolio
On September 9, 2016, the Bank acquired a restaurant franchise financing loan portfolio from GE Capital with an unpaid principal
balance of approximately $169.8 million. Total cash paid for the portfolio was $163.3 million, which included a discount to the
balance of gross loans receivable of 4.00%, or $6.8 million, plus accrued interest receivable. As the acquired assets did not constitute a
business, the transaction was accounted for as an asset purchase. These loans are included in traditional commercial and industrial
loans. See Note 4. “Portfolio Loans” in the notes to consolidated financial statements for additional information.
Acquisition of NewStar Business Credit LLC
On March 31, 2016, we acquired 100% of the outstanding equity interests of NewStar Business Credit LLC (“NSBC” and the “NSBC
Acquisition”). NSBC’s loans had a fair value of $320.4 million on the acquisition date. We paid a premium on the balance of gross
loans receivable acquired of 5.90%, or $18.9 million. The NSBC Acquisition was an all cash transaction with a value of $346.7
million; the transaction doubled the size of our asset-based lending portfolio and expanded the geographic footprint of our asset-based
lending business.
Acquisition of Hudson Valley Holding Corp.
On June 30, 2015, we completed the acquisition of Hudson Valley Holding Corp. (“HVHC”), which we refer to as the “HVB Merger.”
The HVB Merger was a stock-for-stock transaction valued at $566.3 million based on the closing price of our common stock on June
29, 2015, $14.63 per share. Under the terms of the HVB Merger, HVHC shareholders received 1.92 shares of our common stock for
each share of HVHC common stock. The HVB Merger has furthered our strategy of expanding in the greater New York metropolitan
region by providing us with a significant presence and deposit market share in Westchester County, New York, and created an
opportunity to realize significant operating expense savings. See additional disclosure regarding the HVB Merger in Note 2.
“Acquisitions” in the notes to consolidated financial statements.
1
Table of Contents
February 2015 Common Equity Capital Raise
On February 11, 2015, we issued 6,900,000 shares of our common stock to institutional investors at $13.00 per share. We received
proceeds net of underwriting discounts, commissions and expenses of $85.1 million. The net proceeds were used for general corporate
purposes and the funding of acquisitions of specialty commercial lending businesses, such as the acquisition of Damian Services
Corporation, a payroll finance services provider (the “Damian Acquisition”), which closed on February 27, 2015 and the acquisition of
a factoring portfolio (the “FCC Acquisition”) from FCC, LLC, a subsidiary of First Capital Holdings, Inc. which closed on May 7,
2015. See additional disclosure regarding these acquisitions in Note 2. “Acquisitions” included in the notes to consolidated financial
statements.
Change in Fiscal Year End
On January 27, 2015, the Board of Directors (the “Board”) amended our bylaws to change our fiscal year end from September 30 to
December 31. Accordingly, this annual report on Form 10-K includes financial statements as of and for (i) the calendar years ended
December 31, 2016 and 2015; (ii) the three month period October 1, 2014 through December 31, 2014; (iii) the three month period
October 1, 2013 through December 31, 2013; (iv) and the fiscal year ended September 30, 2014.
Acquisition of Sterling Bancorp (“Provident Merger”)
We were formerly known as Provident New York Bancorp (“Legacy Provident”), a Delaware Corporation founded in 1888, and the
parent company of the Bank, formerly called Provident Bank. On October 31, 2013, we acquired Sterling Bancorp (“Legacy
Sterling”) through a merger with Legacy Provident as the accounting acquirer and surviving entity. At that time, we became a bank
holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended, or the BHC
Act. In addition, Legacy Sterling’s principal subsidiary, Sterling National Bank, merged into our principal subsidiary, the Bank, which
was then called Provident Bank. We changed our name to “Sterling Bancorp” and the Bank changed its legal entity name to “Sterling
National Bank.” We refer to the transactions detailed above collectively as the “Provident Merger.”
The Provident Merger was a stock-for-stock transaction valued at $457.8 million based on the closing price of our common stock on
October 31, 2013. Under the terms of the Provident Merger, each share of Legacy Sterling was converted into the right to receive
1.2625 shares of our common stock. Consistent with our strategy of expanding in the greater New York metropolitan region, the
Provident Merger 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 Provident Merger in Note 2.
“Acquisitions” in the notes to consolidated financial statements.
Sterling National Bank
The Bank is a 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. The Bank offers a complete line of commercial, business, and consumer banking
products and services. As of December 31, 2016, the Bank had $14.1 billion in assets, $10.1 billion in deposits and 970 full-time
equivalent employees.
Subsidiaries
We conduct substantially all of our operations through the Bank. The Bank maintains a number of wholly-owned subsidiaries,
including a company that originates loans to municipalities and governmental entities and acquires securities issued by state and local
governments, a real estate investment trust that holds real estate mortgage loans, several subsidiaries that hold foreclosed properties
acquired by the Bank, and other subsidiaries that have an immaterial impact on our financial condition or results of operations.
Additional Information
Our website (www.sterlingbancorp.com) contains a direct link to our filings with the Securities and Exchange Commission (the
“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-3 and Form S-4, as well as ownership reports on Forms 3, 4 and 5 filed
by our 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. Our website is not part of this Annual Report on
Form 10-K.
Strategy
Through the Bank, we operate as a regional bank providing a broad offering of deposit, lending and wealth management products to
commercial, consumer and municipal clients in our market area. We focus mainly on delivering products and services to small and
2
Table of Contents
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.
Our primary strategic objective is to generate sustainable growth in revenues and earnings. To achieve this goal, we focus on the
following initiatives:
• Target specific “high value” customer segments and geographic markets.
• Deploy a single point of contact, relationship-based distribution strategy through our commercial banking teams and financial
centers.
• Continuously expand our delivery and distribution channels by recruiting new commercial teams.
• Maximize efficiency through a technology enabled, low-cost operating platform and by controlling operating costs.
• Create a high productivity culture through differentiated compensation programs based on a pay-for-performance philosophy.
• Maintain strong risk management systems and proactively manage enterprise risk.
The Bank targets the following geographic markets: (i) the New York Metro Market, which includes Manhattan and Long Island; and
(ii) the New York Suburban Market, which includes Rockland, Orange, Sullivan, Ulster, Putnam and Westchester counties in New
York and Bergen County in New Jersey. The Bank also originates loans and deposits in select markets nationally through our asset-
based lending, payroll finance, factored receivables, equipment finance, public sector finance and warehouse lending businesses. We
believe the Bank operates in an attractive footprint that presents us with significant opportunities to execute our strategy of targeting
small and middle market commercial clients and affluent consumers.
We deploy a team-based distribution strategy in which clients are served by a focused and experienced group of relationship managers
that are responsible for all aspects of the client relationship and delivery of our products and services. The Bank’s growth in 2016 was
mainly through organic originations of loans and deposits through our commercial banking teams and was supplemented with the two
commercial finance acquisitions described above. As of December 31, 2016, the Bank had 30 commercial banking teams and we
expect to continue to grow deposits and loan balances through the growth of existing teams and the addition of new teams.
Since 2012, we have deemphasized our retail banking operations, which has included the consolidation of under productive financial
centers and other consumer businesses, such as wealth management and title insurance, in which we did not have economies of scale
or competitive advantages. For the year ended December 31, 2016, we consolidated 12 financial center locations and reduced our
total number of financial centers to 42. In addition, we divested our residential mortgage originations business and our trust division,
which were not part of our core business plan and strategy. We anticipate we will continue to consolidate additional under productive
financial centers in 2017 and focus on maintaining a network of financial centers in which all locations meet our productivity and
profitability goals and which we can use to generate meaningful deposit growth. We will reallocate a portion of the operating expense
savings from these divestitures into the recruitment of new commercial teams and into growing our commercial finance businesses.
We focus on building client relationships that allow us to gather low cost, core deposits and originate high quality loans. We maintain
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. We have
continued to emphasize growth in our commercial loan balances and, as a result, we believe that we have a high quality, diversified
loan portfolio with a favorable mix of loan types, maturities and yields.
We augment organic growth with opportunistic acquisitions of banks and other financial services businesses. For the periods
presented, we completed the following acquisitions: the Provident Merger on October 31, 2013; the Damian Acquisition on February
27, 2015; the FCC Acquisition on May 7, 2015; the HVB Merger on June 30, 2015; the NSBC Acquisition on March 31, 2016; and the
restaurant franchise financing loan portfolio from GE Capital on September 9, 2016. These acquisitions have supported our expansion
into attractive markets and have diversified our business lines. See additional disclosure of our acquisitions in Note 2. “Acquisitions”
in the notes to consolidated financial statements.
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
3
Table of Contents
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 December 31, 2016, we had 970 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
We and the Bank are subject to extensive regulation under federal and state laws, significant elements of which are described below.
This 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 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 us and our subsidiaries could have a material effect on
the business, financial condition and results of operations. As the Bank’s total assets exceed $10 billion, it is subject to additional
supervision and regulation, including by the Consumer Financial Protection Bureau (“CFPB”), with such additional supervision and
regulation discussed throughout this section.
Regulatory Agencies
We are a legal entity separate and distinct from the Bank and its other subsidiaries. As a bank and a financial holding company, we are
regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and our subsidiaries are subject to inspection,
examination and supervision by the Federal Reserve Board (“FRB”) as our 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”). Further, because the Bank’s total assets exceed $10 billion, it is also subject to the CFPB’s supervision. 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 us, 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 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.
4
Table of Contents
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 us 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
We are required to comply with applicable capital adequacy standards established by the FRB, and the Bank is required to comply
with applicable capital adequacy standards established by the OCC. The current risk-based capital standards applicable to us and the
Bank, parts of which are in the process of being phased-in, are based on the December 2010 capital standards, known as Basel III, of
the Basel Committee on Banking Supervision.
Under the Basel III Capital Rules, the minimum capital ratios effective as of January 1, 2015 are:
•
•
•
•
4.5% Common Equity Tier 1 (“CET1”) to risk-weighted assets;
6.0% Tier 1 capital that is CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total Capital that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage
ratio”).
The Basel III Capital Rules also introduced a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum
risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and
will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. Banking institutions with a ratio of
CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on
dividends, equity repurchases and compensation based on the amount of the shortfall.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require us and the Bank to maintain an additional capital
conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii)
Tier 1 capital to risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%;
and (iv) a minimum leverage ratio of 4%.
In addition, under the general risk-based capital rules, the effects of accumulated other comprehensive income items included in
capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, we and the Bank
were able to make a one-time permanent election to continue to exclude these items and did so. Under the Basel III Capital Rules,
trust preferred securities no longer included in our Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a
permanent basis without phase-out.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the
general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets,
generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher
risk weights for a variety of asset categories.
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, as discussed below under “Prompt Corrective Action.”
Management believes that, as of December 31, 2016, we and the Bank would meet all capital adequacy requirements under the Basel
III Capital Rules on a fully phased-in basis as if such requirements had been in effect.
5
Table of Contents
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (“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, which reflect changes
under the Basel III Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1
capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of
6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any
order or written directive by any such regulatory authority 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 CET1 capital ratio of 4.5% or greater,
a Tier 1 risk-based capital ratio of 6.0% 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 CET1 capital ratio less than 4.5%, a Tier
1 risk-based capital ratio of less than 6.0% 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 CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than
4.0% 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 average quarterly tangible 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 aggregate
liability of the parent holding company in such a situation 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.
We believe that as of December 31, 2016, the Bank was “well capitalized” based on the aforementioned ratios. For further information
regarding the capital ratios and leverage ratio of us and the Bank, please see the discussion under the section captioned “Liquidity and
Capital Resources” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and Note 16. “Stockholders’ Equity - Regulatory Capital Requirements” in the notes to consolidated financial statements.
Dividend Restrictions
We depend on funds maintained or generated by our subsidiaries, principally the Bank, for our cash requirements. Various legal
restrictions limit the extent to which the Bank can pay dividends or make other distributions to us. 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 December 31, 2016, the Bank could pay dividends of approximately $155.7 million to us, without
obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future
periods.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution, such as the Bank,
may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of
dividends by us and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital.
The appropriate federal regulatory authorities have indicated that paying dividends that deplete a banking organization’s capital base
6
Table of Contents
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, we are expected to commit resources to support the Bank, including at times when we 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. The deposit insurance provided by the FDIC per account
owner was permanently raised to $250,000 for all types of accounts 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 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. The
range of current assessment rates is now 1.5 to 40 basis points. As the DIF reserve ratio grows, the rate schedule will be adjusted
downward. 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% DIF ratio by September 30, 2020. Insured institutions with
assets of $10 billion or more, which includes the Bank, are required to fund the increase.
FDIC deposit insurance expense totaled $6.4 million for the year ended December 31, 2016, $5.9 million for the year ended December
31, 2015, $1.2 million for the three months ended December 31, 2014 and $5.0 million for the fiscal year ended September 30, 2014.
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.
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 the 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 monetary penalties.
Incentive Compensation
The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting
incentive-based payment arrangements at specified regulated entities, such as us 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 were required to
establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The
agencies proposed an initial version of such regulations in April 2011 and a revised version in May 2016, which largely retained the
7
Table of Contents
provisions from the April 2011 version, but the regulations have not been finalized. If the regulations are adopted in the revised form
proposed in May 2016, they will impose limitations on the manner in which we may structure compensation for our 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 ours, 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 December 31, 2016, 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 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 on 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
8
Table of Contents
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 apply to FDIC-insured state non-member banks and bank holding companies with total consolidated
assets of more than $10 billion (“covered institutions”). Upon the filing of the June 30, 2016 Call Report, the Bank’s average assets
for the prior four quarters were in excess of $10 billion, subjecting the Bank and us to stress testing beginning January 1, 2017. 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 is required to conduct annual stress tests
using the bank’s and the bank holding company’s financial data as of December 31 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. As a result, the Bank and
Company’s first required annual stress test will occur for 2017, using its financial data as of December 31, 2016. On or before July 31
of the year following the stress tests, each covered institution, including the Bank and us, are 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 conduct an analysis of the quality of the covered institution’s
stress test processes and related results. Consistent with the requirements of the Dodd-Frank Act, the rule requires 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, including us and the Bank, to implement certain compliance programs, and the complexity and rigor of such programs is
determined based on the asset size and complexity of the business of the covered company. We are subject to heightened compliance
requirements as a covered banking entity with over $10 billion in assets.
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 includes the Bank. Accordingly, under the Durbin Amendment, since the Bank held more than $10 billion
in assets as of December 31, 2015, the Bank began complying with such interchange fee restrictions effective July 1, 2016. The
impact of the implementation on the Durbin Amendment on the Bank was to reduce deposit fees and service charges by over $1.0
million for the six months ended December 31, 2016. The Durbin Amendment will impact the Bank for the full year in 2017.
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 us and our 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
9
Table of Contents
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. As of December 31, 2016, 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 interest-bearing
demand deposit accounts and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts
between $15.2 million and $110.2 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 $110.2 million. The first $15.2 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.
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.
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, including the Bank, 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. 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.
10
Table of Contents
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 and the Dodd-Frank Act, 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.
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 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 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). The
Bank’s total assets exceed $10 billion, thus making it subject to the CFPB’s supervision. Therefore, in addition to a variety of
consumer protection laws, rules and regulations that we may be subject to, the Bank is also subject to the CFPB’s evolving regulations
and practices.
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.
In addition, as a result of the Volcker Rule, banking entities are prohibited 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 “covered funds,” including hedge funds or private equity funds. The Volcker Rule also
requires covered banking entities, including us and the Bank, to implement certain compliance programs, policies and procedures. We
have implemented compliance programs, policies and procedures to assist us in our compliance with the Volcker Rule.
Compliance with the requirements of the Dodd-Frank Act, including the Volcker Rule, 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. We are supervised and regulated by the Federal Reserve
and the Bank is supervised and regulated by the OCC, as its primary federal regulator, by the FDIC, as the insurer of its deposits, and
the CFPB, which has broad authority to regulate financial service providers and financial products. The application of laws, rules and
11
Table of Contents
regulations may vary as administered primarily by the Federal Reserve and the OCC. In addition, we are 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, including the replacement of senior executive
officers and directors; and capital distributions; and, if we became “critically undercapitalized,” to the appointment of a conservator or
receiver.
In addition, and as mentioned above in “Risk Factors - 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, which shall apply to the Company and the Bank for the
first time in 2017, 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. Further, we may incur compliance-related costs and our regulators may also consider our level of 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.
Basel III capital rules generally require insured depository institutions and their holding companies to hold more capital, which
could limit our ability to pay dividends, engage in share repurchases and pay discretionary bonuses.
The Federal Reserve, the FDIC and the OCC adopted final rules for the Basel III capital framework which substantially amended the
regulatory risk-based capital rules applicable to us. The rules phase in over time becoming fully effective in 2019. The rules apply to
us as well as to the Bank. 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. Several years ago, 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 the economic conditions have improved, real estate prices have rebounded and consumer
confidence has shown improvement, the economy remains in a slow-growth mode in many respects. A return to elevated levels of
unemployment, declines in the values of real estate, or other events that affect household and/or corporate incomes could impair the
ability of our borrowers to repay their loans in accordance with their terms and reduce demand for our products and services and
increase our problem assets, foreclosures and loan losses. Future economic conditions in our market will depend on factors outside of
12
Table of Contents
our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes
in government, monetary 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 U.S. generally accepted accounting principles
(“GAAP”), 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 December 31, 2016, 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 (as defined below) 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 December 31, 2016, our portfolio of commercial real estate
loans, including multi-family loans, totaled $4.1 billion, or 43.5% of total loans, our portfolio of commercial & industrial loans
(including traditional C&I, asset-based lending, payroll finance, warehouse lending, factored receivables, equipment finance and
public sector finance) totaled $4.2 billion, or 43.8% of total loans, and our portfolio of ADC loans totaled $230.1 million, or 2.4% of
total loans. We plan to continue to emphasize the origination of these types of loans, other than acquisition and development loans. We
originate vertical construction loans to well qualified builders, generally in our market area. Since 2011, we deemphasized acquisition
and development lending activity.
Commercial mortgage 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
13
Table of Contents
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. In addition, many of our borrowers also have more than one commercial
real estate 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.
While this portfolio may cause us to incur additional bad debt expense even if losses are not realized, such ADC loans only comprise
2.4% of our loan portfolio.
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 Metro Market, which includes Manhattan, the
boroughs and Long Island, and certain portions of the New York Suburban Market including Rockland, Westchester and Orange
Counties in New York. We also have a presence in Ulster, Sullivan and Putnam Counties in New York and in Bergen County, New
Jersey, as well as other counties in northern 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.
Environmental liability associated with our lending activities could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans originated or purchased that are in default.
Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered on these
properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The
cost of remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the
prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have
an adverse effect on our financial condition and results of operations.
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.
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. As of December 31, 2016, our available for sale securities
portfolio totaled $1.7 billion. Decreases in the fair value of securities available for sale could have an adverse effect on stockholders’
equity and comprehensive income.
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.
We are a separate legal entity from our subsidiary, the Bank, and we do not have significant operations of our 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, we are subjected to consolidated capital requirements and must serve as a
source of strength to the Bank. If the Bank is unable to pay dividends to us or we are 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.
14
Table of Contents
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. We may be required to spend significant
capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by
security breaches or viruses. 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 we have, if any, which would
adversely affect our earnings. If significant, sustained or repeated, a system breach, failure or service disruption could compromise our
ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory
scrutiny and possible financial liability, any of which could have a material adverse effect on our business and therefore on our
financial condition and results of operations.
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.
In addition, financial products and services have become increasingly technology-driven. Our ability to meet the needs of our
customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to
invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do
and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological
change is important, and the failure to do so could have a material adverse effect on our business and therefore on our financial
condition and results of operations.
Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not provide the
requisite approvals.
We continue to evaluate potential acquisitions and 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 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.
The success of the Company’s and the Bank’s mergers and acquisitions may depend, in part, on our ability to realize the estimated cost
savings from combining the acquired businesses with the Company’s and the Bank’s existing operations. It is possible that the
potential cost savings could turn out to be more difficult to achieve than anticipated. The cost savings estimates also depend on our
ability to combine the businesses in a manner that permits those cost savings to be realized. If the estimates turn out to be incorrect or
if we are unable to successfully execute our strategy for combining businesses, our anticipated cost savings may not be realized fully
or at all, or may take longer to realize than expected.
15
Table of Contents
Moreover, although we have successfully integrated business acquisitions in recent years, difficulty or failure in successfully
integrating, subsequent to the completion of, any future acquisitions could delay or prevent the anticipated benefits of such
acquisitions from being realized fully or at all. In addition, acquisitions typically involve the payment of a premium over book and
trading value and thus may result in the dilution of our book value per share.
Various factors may make takeover attempts more difficult to achieve.
The Board has no current intention to sell control of the Company. 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 us
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 our certificate of incorporation and bylaws 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, supermajority 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 us or the Bank. We have issued stock grants and stock
options in accordance with the 2004 Provident Bancorp Inc. Stock Incentive Plan, the Sterling Bancorp 2014 Stock Incentive
Plan and the Sterling Bancorp 2015 Omnibus Equity and 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 us.
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 generally 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, were 7.3% of
our total loan portfolio as of December 31, 2016, but constituted 19.2% of our non-accrual loans on the same date. Collateral for many
of our residential loans is located within the States of New York and New Jersey, where there may continue to be foreclosure process
and timeline issues.
We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and
could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our management team and our
ability to motivate and retain these individuals and other key personnel. In particular, we rely on the leadership of our Chief Executive
Officer, Jack Kopnisky. The loss of service of Mr. Kopnisky or one or more of our other executive officers or key personnel could
reduce our ability to successfully implement our long-term business strategy, our business could suffer, and the value of our common
stock could be materially adversely affected. Leadership changes will occur from time to time, and we cannot predict whether
significant resignations will occur or whether we will be able to recruit additional qualified personnel. We believe our management
team possesses valuable knowledge about the banking industry and our 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 us, it is possible that they may not complete the term of their employment agreements or renew them
upon expiration. Our success also depends on the experience of our financial center managers and lending officers and on their
relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our 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 our business, financial condition or operating results.
16
Table of Contents
ITEM 1B. Unresolved Staff Comments
Not Applicable.
Item 2. Properties
We maintain our executive offices, commercial banking division and wealth management and back office operations departments
at a leased facility located at 400 Rella Boulevard, Montebello, New York consisting of 58,534 square feet. At December 31, 2016,
we conducted our business through 42 full-service retail and commercial financial centers which serve the New York Metro
Market and the New York Suburban Market. Of these financial centers, 13 are located in Westchester County, New York, eight in
New York City, New York, nine in Rockland County, New York, six in Orange County, New York and two in Long Island, New
York. We also operate one office in each of Sullivan, Ulster, and Putnam Counties in New York and one office in Bergen County,
New Jersey. Additionally, 16 of our financial centers are owned and 26 are leased.
In addition to our financial center network and corporate headquarters, we lease five additional properties which are used for
general corporate purposes and are located in Putnam, Orange, Rockland, Sullivan and Ulster counties. See Note 6. “Premises and
Equipment, Net” in the notes to consolidated financial statements for further detail on our premises and equipment.
Item 3. Legal Proceedings
Note 18. “Commitments and Contingencies - Litigation” in the notes to consolidated financial statements is incorporated herein by
reference. We do not anticipate that the aggregate liability arising out of litigation pending against us and our subsidiaries will be
material to our consolidated financial statements.
ITEM 4. Mine Safety Disclosures
Not Applicable.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Prices and Dividends
Our 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 our common stock and the cash dividends declared per share for the past two calendar
years. For a discussion of when the dividends were paid, see “Liquidity and Capital Resources - Capital” and “Liquidity and Capital
Resources - Dividends” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Quarter ended
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
High
Low
Cash dividends
declared
$
$
24.65
17.90
16.97
16.19
17.75
15.26
15.04
14.40
$
16.75
15.14
14.55
13.44
14.24
13.20
12.82
13.00
0.07
0.07
0.07
0.07
0.07
0.07
0.07
0.07
As of December 31, 2016, there were 135,257,570 shares of our common stock outstanding held by 5,190 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 December 31, 2016, the last trading day of our fiscal year, was $23.40.
17
Table of Contents
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 our future earnings, capital requirements and financial condition.
See the section captioned “Supervision and Regulation” included in Item 1. “Business”, the section captioned “Liquidity and Capital
Resources” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
Note 16. “Stockholders’ Equity” in the notes to 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.
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, 2011 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.
Performance at
Index
Sterling Bancorp
S&P 500 Index
SNL Mid-Atlantic Bank Index
September 30,
2011
100.00
100.00
100.00
2012
161.68
127.33
130.30
2013
187.11
148.62
171.86
2014
219.76
174.32
193.61
December 31,
2015
278.69
180.65
206.96
2014
247.08
181.98
203.10
2016
402.06
197.88
257.39
This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this
annual report on Form 10-K under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except
to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such Acts.
18
Table of Contents
Issuer Purchases of Equity Securities
The following table reports information regarding purchases of our common stock during the fourth quarter of 2016 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 (2016)
October 1 — October 31
November 1 — November 30
December 1 — December 31
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.
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 annual report on Form 10-K. The information at/for: (i) the calendar year ended December 31, 2016; (ii)
the calendar year ended December 31, 2015; (iii) the three months ended December 31, 2014; (iv) the three months ended December
31, 2013; and (v) the fiscal year ended September 30, 2014 is derived in part from, and should be read together with, the audited
consolidated financial statements and notes thereto that appear in this annual report on Form 10-K. The accompanying selected
financial data as of December 31, 2013 and for the three months then ended is unaudited. The unaudited information, in the opinion
of management, includes all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial
position and results of its operations.
For additional information regarding the significant changes in the financial data presented below, see the discussion of the Provident
Merger and the HVB Merger in Item 1. “Business”, in Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and in Note 2. “Acquisitions” in the notes to consolidated financial statements. Additional information is
provided in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and related notes.
19
Table of Contents
Dollar amounts in tables are stated in thousands, except for share and per share amounts.
At or for the year ended
December 31,
At or for the three months
ended December 31,
At or for the fiscal year ended September 30,
2016
2015
2014
2013
2014
2013
2012
Selected balance sheet data:
End of period balances:
Total securities
Portfolio loans
Total assets
Non-interest bearing deposits
Interest bearing deposits
Total deposits
Borrowings
Stockholders’ equity
Tangible equity1
Average balances:
Total securities
Total loans
Total assets
Non-interest bearing deposits
Interest bearing deposits
Total deposits
Borrowings
Stockholders’ equity
Tangible equity1
Selected operating data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Total non-interest income
Total non-interest expense
Income (loss) before income tax
expense (benefit)
Income tax expense (benefit)
Net income (loss)
Per share data:
Basic earnings (loss) per share
Diluted earnings (loss) per share
Adjusted diluted earnings per
share, non-GAAP1
Dividends declared per share
Book value per share
Tangible book value per share1
_________________________
See legend on next page.
$ 3,118,838
$ 2,643,823
$ 1,713,183
$ 1,640,215
$ 1,689,888
$ 1,208,392
$ 1,153,248
9,527,230
7,859,360
14,178,447
11,955,952
3,087,832
6,980,427
10,068,259
2,056,612
1,855,183
1,092,230
2,936,980
5,643,027
8,580,007
1,525,344
1,665,073
917,007
4,815,641
7,424,822
1,481,870
3,730,455
5,212,325
1,111,553
975,200
542,942
4,127,141
6,667,437
1,575,174
3,345,390
4,920,564
696,270
925,109
484,572
4,760,438
7,337,387
1,799,685
3,498,969
5,298,654
939,069
961,138
526,934
2,412,898
4,049,172
943,934
2,018,360
2,962,294
560,986
482,866
313,858
2,119,472
4,022,982
947,304
2,163,847
3,111,151
345,176
491,122
320,711
$ 2,878,944
$ 2,156,056
$ 1,721,121
$ 1,581,166
$ 1,692,888
$ 1,123,270
$
967,514
8,520,367
12,883,226
3,088,678
6,519,993
9,608,671
1,355,491
1,739,073
976,394
6,261,470
9,604,256
2,332,814
4,806,521
7,139,335
987,522
1,360,859
760,254
4,756,015
7,340,332
1,626,341
3,716,446
5,342,787
902,299
973,089
539,693
3,516,129
6,013,816
1,361,622
2,990,596
4,352,218
709,126
780,241
611,077
4,120,749
6,757,094
1,580,108
3,341,822
4,921,930
814,409
906,134
450,551
2,216,871
3,815,609
646,373
2,210,267
2,856,640
446,916
489,412
319,048
1,806,136
3,195,299
520,265
1,845,998
2,366,263
356,296
447,065
281,366
$
461,551
$
348,141
$
68,087
$
52,711
$
246,906
$
132,061
$
115,037
6,835
45,876
3,000
42,876
9,148
72,974
(20,950)
(6,948)
(14,002)
(0.20)
(0.20)
0.14
—
11.02
5.77
28,918
217,988
19,100
198,888
47,370
208,428
37,830
10,152
27,678
0.34
0.34
0.72
0.21
11.49
6.30
$
$
19,894
112,167
12,150
100,017
27,692
91,041
36,668
11,414
25,254
0.58
0.58
0.51
0.30
10.89
7.08
$
$
$
$
$
$
18,573
96,464
10,612
85,852
32,152
91,957
26,047
6,159
19,888
0.52
0.52
0.43
0.24
11.12
7.26
57,282
404,269
20,000
384,269
70,987
247,902
207,354
67,382
139,972
1.07
1.07
1.11
0.28
13.72
8.08
$
$
36,925
311,216
15,700
295,516
62,751
260,318
97,949
31,835
66,114
0.60
0.60
0.96
0.28
12.81
7.05
$
$
$
$
7,850
60,237
3,000
57,237
13,957
45,814
25,380
8,376
17,004
0.20
0.20
0.23
0.07
11.62
6.47
20
Table of Contents
Common shares outstanding:
Shares outstanding at period end
Weighted average shares basic
Weighted average shares diluted
Other data:
FTE period end
Financial centers period end
Performance ratios:
Return on average assets
Return on average equity
Reported return on average
tangible assets1
Adjusted return on average
tangible assets1
Reported return on average
tangible equity1
Adjusted return on average
tangible equity1
Efficiency ratio, as reported
Efficiency ratio, as adjusted1
Net interest margin - GAAP
Net interest margin - tax
equivalent basis2
Capital ratios (Company):3
Tier 1 leverage ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tangible equity to tangible assets
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 (“NPLs”)
Non-performing assets (“NPAs”)
Net charge-offs
NPAs to total assets
NPLs to total loans4
Allowance for loan losses to
non-performing loans
Allowance for loan losses to total
loans4
Net charge-offs to average loans
At or for the year ended
December 31,
2016
2015
At or for the three months
ended December 31,
2013
2014
At or for the fiscal year ended September 30,
2013
2012
2014
135,257,570
130,006,926
83,927,572
83,955,647
83,628,267
44,351,046
44,173,470
130,607,994
109,907,645
83,831,380
70,493,305
80,268,970
43,734,425
38,227,653
131,234,462
110,329,353
84,194,916
70,493,305
80,534,043
43,783,053
38,248,046
970
42
1.09%
8.05
1.15
1.20
14.34
14.90
52.2
46.2
3.44
3.55
1,089
52
0.69%
4.86
0.73
1.17
8.70
13.86
69.6
50.8
3.60
3.67
829
32
0.92%
6.93
0.98
1.13
12.50
14.42
61.7
54.0
3.61
3.70
977
46
(0.92)%
(7.12)
(0.95)
0.67
(9.09)
6.37
132.6
65.4
3.50
3.58
836
32
0.41%
3.05
0.44
0.92
6.14
12.84
78.5
59.4
3.65
3.74
477
34
0.66%
5.16
0.69
0.62
7.92
7.03
65.1
63.7
3.28
3.37
493
35
0.62%
4.45
0.66
0.54
7.07
5.84
71.5
69.7
3.39
3.51
8.95%
9.03%
8.21%
9.44 %
8.12%
—%
—%
10.73
12.73
8.14
10.74
11.29
8.18
10.43
11.22
7.76
11.01
11.66
7.78
10.33
11.10
7.63
—
—
8.09
—
—
8.32
9.08%
9.65%
9.39%
10.58 %
9.34%
9.33%
7.56%
10.87
13.06
63,622
78,853
92,472
6,523
$
11.45
12.00
50,145
66,411
81,025
7,929
$
12.00
12.79
42,374
46,642
52,509
1,238
0.65%
0.83
0.68%
0.84
0.71%
0.97
12.48
13.13
$
30,612
$
38,442
50,193
1,265
0.75 %
0.93
11.94
12.71
40,612
50,963
58,543
7,365
$
13.18
14.24
28,877
26,906
32,928
11,555
$
12.16
13.36
28,282
39,814
46,217
10,247
0.80%
1.07
0.81%
1.12
1.15%
1.88
80.68
75.50
90.80
79.60
79.69
107.00
71.00
0.67
0.08
0.64
0.13
0.88
0.10
0.74
0.14
0.85
0.24
1.20
0.52
1.47
0.56
_________________________
1
See a reconciliation of as reported financial measures to as adjusted (non-GAAP) financial measures below under the caption
“Non-GAAP Financial Measures.”
21
Table of Contents
2 Net interest margin represents net interest income as a percent of average interest-earning assets for the period. Net interest
margin - is net interest income directly from our consolidated tatements of operations as a percent of average interest-earning
assets for the period. Net interest margin - tax equivalent basis is net interest income adjusted for a portion of our net interest
income will be exempt from taxation (e.g., was received as a result of 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.
3
4
Prior to the Provident Merger, we were a unitary savings and loan holding company and as a result were not required to maintain
or report regulatory capital ratios. We became a bank holding company in connection with the Provident Merger and have
maintained and reported regulatory capital ratios since December 31, 2013.
Total loans excludes loans held for sale.
We incurred a net loss in the three months ended December 31, 2013 due mainly to merger-related expense, restructuring charges and
asset write-downs associated with the Provident Merger, which were in aggregate $22.2 million pre-tax. these charges included asset
write-downs, retention and severance compensation, and a write-off of the remaining book value to the naming rights to Provident
Bank Ballpark, all of which were included in other non-interest expense on the consolidated statement of operations. The charge for
asset write-downs was due mainly to the consolidation of several office locations and financial centers. We also recorded $9.1 million
of merger-related expense, 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, we incurred a $2.7 million charge for the settlement of a portion of the Legacy Provident defined benefit
pension plan in December 2013.
Non-GAAP Financial Measures
The non-GAAP financial measures presented below are used by management and our Board of Directors on a regular basis in addition
to our GAAP results to facilitate the assessment of our financial performance and to assess our performance compared to our annual
budget and strategic plans. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide
investors, analysts, regulators and others information that we use to manage our business. Because not all companies use identical
calculations, the presentation of the non-GAAP financial measures may not be comparable to other similarly titled measures used by
other companies. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a
substitute for, our GAAP results. Accordingly, this non-GAAP financial information should be read in conjunction with our
consolidated financial statements, and notes thereto, for the year ended December 31, 2016, included elsewhere in this Annual Report.
The following non-GAAP financial measures reconcile our GAAP reported results to our as adjusted non-GAAP reported results and
metrics presented in the Selected Financial Data table above in this Item. 6.
At December 31,
At December 31,
At September 30,
2012
The following table shows the reconciliation of stockholders’ equity to tangible equity (non-GAAP) and the tangible equity ratio (non-GAAP)1:
7,424,822
Total assets
11,955,952
14,178,447
4,049,172
6,667,437
7,337,387
2014
2013
2013
2014
2016
2015
$
$
$
$
$
$
$
4,022,982
Goodwill and other
intangibles
Tangible assets
Stockholders’ equity
Goodwill and other
intangibles
Tangible stockholders’
equity
Common stock
outstanding at
period end
(762,953)
(748,066)
13,415,494
1,855,183
11,207,886
1,665,073
(432,258)
6,992,564
975,200
(440,537)
6,226,900
925,109
(434,204)
6,903,183
961,138
(169,008)
3,880,164
482,866
(170,411)
3,852,571
491,122
(762,953)
(748,066)
(432,258)
(440,537)
(434,204)
(169,008)
(170,411)
1,092,230
917,007
542,942
484,572
526,934
313,858
320,711
135,257,570
130,006,926
83,927,572
83,955,647
83,628,267
44,351,046
44,173,470
Stockholders’ equity as
a % of total assets
Book value per share
$
13.08%
13.72
$
13.93%
13.13%
13.88%
13.10%
11.93%
12.81
$
11.62
$
11.02
$
11.49
$
10.89
$
12.21%
11.12
Tangible equity as a %
of tangible assets
Tangible book value
per share
8.14%
8.18%
7.76%
7.78%
7.63%
8.09%
8.32%
$
8.08
$
7.05
$
6.47
$
5.77
$
6.30
$
7.08
$
7.26
________________________
22
Table of Contents
See legend on page 24.
At or for the year ended
December 31,
2016
2015
At or for the three months
ended December 31,
2013
2014
At or for the fiscal year ended September 30,
2013
2014
2012
The following table shows the reconciliation of reported net income (GAAP) to adjusted net income (non-GAAP) and adjusted diluted earnings per
share (non-GAAP) 2:
$
207,354
$
97,949
$
25,380
$
(20,950) $
37,830
$
36,668
$
8,376
17,004
(6,948)
(14,002)
10,152
27,678
11,414
25,254
26,047
6,159
19,888
Income (loss) before income tax
expense
Income tax expense (benefit)
Net income (loss) (GAAP)
Adjustments:
Net (gain) loss on sale of
securities
Net (gain) on sale of trust division
(Gain) on sale of financial center
and redemption of TRUPs
Merger-related expense
Charge for asset write-downs,
banking systems conversion,
retention and severance
Loss on extinguishment of
borrowings
Charge on benefit plan settlement
Amortization of non-compete
agreements and acquired
customer list intangibles
Total adjustments
Income tax (benefit) expense
Total adjustments net of tax
67,382
139,972
(7,522)
(2,255)
—
265
4,485
9,729
—
3,514
8,216
(2,670)
5,546
31,835
66,114
(4,837)
—
—
17,079
29,046
—
13,384
3,526
58,198
(18,914)
39,284
43
—
—
502
645
—
—
9,068
(641)
—
(1,637)
9,455
(7,391)
(10,452)
—
—
—
—
2,772
5,925
2,493
22,167
26,591
—
—
859
3,897
(1,286)
2,611
—
2,743
998
35,621
(11,814)
23,807
—
4,095
5,489
43,352
(13,188)
30,164
564
—
—
—
(4,055)
1,245
(2,810)
—
—
—
—
(4,527)
1,070
(3,457)
Adjusted net income (non-GAAP)
$
145,518
$
105,398
$
19,615
$
9,805
$
57,842
$
22,444
$
16,431
Weighted average diluted shares
131,234,462
110,329,353
84,194,916
70,493,305
80,534,043
43,783,053
38,248,046
Diluted EPS as reported (GAAP)
$
1.07
$
0.60
$
0.20
$
(0.20) $
0.34
$
0.58
$
Adjusted diluted EPS (non-GAAP)
1.11
0.96
0.23
0.14
0.72
0.51
0.52
0.43
At or for the year ended
December 31,
At or for the three months
ended December 31,
At or for the fiscal year ended September 30,
2013
The following table shows the reconciliation of return on tangible equity and adjusted return on tangible equity (non-GAAP) 4:
2014
2013
2016
2015
2014
2012
Average stockholders’ equity
$ 1,739,073
$ 1,360,859
$
973,089
$
780,241
$
906,134
$
489,412
$
447,065
Average goodwill and other
intangibles
Average tangible stockholders’
equity
Net income (loss)
Net income (loss), if annualized
Reported return on average tangible
equity
(762,679)
(600,605)
(433,396)
(169,164)
(455,583)
(170,364)
(165,699)
976,394
139,972
139,972
760,254
539,693
611,077
450,551
319,048
281,366
66,114
66,114
17,004
67,462
(14,002)
(55,551)
27,678
27,678
25,254
25,254
19,888
19,888
14.34%
8.70%
12.50%
(9.09)%
6.14%
7.92%
7.07%
Adjusted net income
$
145,518
$
105,398
$
Annualized adjusted net income
145,518
105,398
$
19,615
77,820
9,805
38,900
$
$
57,842
57,842
$
22,444
22,444
16,431
16,431
Adjusted return on average tangible
equity
________________________
14.90%
13.86%
14.42%
6.37 %
12.84%
7.03%
5.84%
23
Table of Contents
See legend on page 24.
At or for the year ended
December 31,
2015
The following table shows the reconciliation of the reported efficiency ratio and adjusted efficiency ratio (non-GAAP) 3:
$
Net interest income
404,269
311,216
217,988
45,876
60,237
2016
2014
$
$
$
$
$
At or for the three months
ended December 31,
2013
2014
At or for the fiscal year ended September 30,
2013
2012
Non-interest income
Total net revenue
Tax equivalent adjustment on
securities
Net (gain) loss on sale of securities
Net (gain) on sale of trust division
Other than temporary loss on
securities
Other (other gains and fair value
loss on interest rate caps)
Adjusted total revenue (non-GAAP)
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
Loss on extinguishment of
borrowings
Charge on benefit plan settlement
Amortization of intangible assets
Adjusted non-interest expense (non-
62,751
373,967
6,503
(4,837)
—
—
—
70,987
475,256
12,745
(7,522)
(2,255)
—
—
478,224
247,902
(265)
13,957
74,194
9,148
55,024
47,370
265,358
1,546
1,164
43
—
—
—
645
—
—
(93)
56,740
72,974
(9,068)
5,628
(641)
—
—
(93)
270,252
208,428
(9,455)
375,633
260,318
(17,079)
75,783
45,814
(502)
112,167
$
27,692
139,859
3,060
(7,391)
—
32
77
135,637
91,041
(2,772)
96,464
32,152
128,616
3,498
(10,452)
—
47
(12)
121,697
91,957
(5,925)
—
—
—
—
(4,485)
(29,046)
(2,493)
(22,167)
(26,591)
(564)
—
(9,729)
—
(12,416)
—
—
(13,384)
(10,043)
—
—
—
(1,873)
—
—
(2,743)
(1,875)
1,637
—
(4,095)
(9,408)
—
—
—
(1,296)
(1,245)
GAAP)
$
221,007
$
190,766
$
40,946
$
37,121
$
160,516
$
86,409
$
84,787
Efficiency ratio, as reported
Efficiency ratio, as adjusted (non-
GAAP)
52.2%
46.2%
69.6%
50.8%
61.7%
132.6%
54.0%
65.4%
78.5%
59.4%
65.1%
63.7%
71.5%
69.7%
2012
The following table shows the reconciliation of return on average tangible assets and adjusted return on average tangible assets (non-GAAP)5:
2016
2015
2014
2014
2013
At or for the fiscal year ended September 30,
2013
At or for the year ended
December 31,
At or for the three months ended
December 31,
Average assets
$ 12,883,226
$
9,604,256
$
7,340,332
$
6,013,816
$
6,757,094
$
3,815,609
$
3,195,299
Average goodwill and
other intangibles
(762,679)
Average tangible assets
12,120,547
139,972
(600,605)
9,003,651
66,114
(433,396)
6,906,936
17,004
(169,164)
5,844,652
(14,002)
(455,583)
6,301,511
27,678
(170,364)
3,645,245
25,254
(165,699)
3,029,600
19,888
Net income (loss)
Net income (loss), if
annualized
Reported return on
average tangible assets
(non-GAAP
Adjusted net income
(non-GAAP)
Annualized adjusted net
income (non-GAAP)
Adjusted return on
average tangible assets
(non-GAAP)
139,972
66,114
67,462
(55,551)
27,678
25,254
19,888
1.15%
0.73%
0.98%
(0.95)%
0.44%
0.69%
0.66%
$
145,518
$
105,398
$
19,615
$
9,805
$
57,842
$
22,444
$
16,431
145,518
105,398
77,820
38,900
57,842
22,444
16,431
1.20%
1.17%
1.13%
0.67 %
0.92%
0.62%
0.54%
24
Table of Contents
1 Stockholders’ equity as a percentage of total assets, book value per share, tangible equity as a percentage of tangible assets and
tangible book value per share provides information to help assess our capital position and financial strength. We believe tangible
book value measures improve comparability to other banking organizations that have not engaged in acquisitions that have
resulted in the accumulation of goodwill and other intangible assets.
2 Adjusted net income and adjusted earnings per share present a summary of our earnings to exclude certain revenues and expenses
(generally associated with discrete merger transactions and non-recurring strategic plans) to help in assessing our recurring
profitability.
3 The reported efficiency ratio is a non-GAAP measure calculated by dividing our GAAP non-interest expense by the sum of our
GAAP net interest income plus GAAP non-interest income. The adjusted efficiency ratio is a non-GAAP measure calculated by
dividing non-interest expense adjusted for intangible asset amortization and certain expenses generally associated with discrete
merger transactions and non-recurring strategic plans by the sum of net interest income plus non-interest income plus
tax equivalent adjustment on securities income and elimination of the the impact of gain or loss on sale of securities. The adjusted
efficiency ratio is a measure we use to assess our operating performance.
4 Reported return on tangible equity and the adjusted return on tangible equity measures provide information to evaluate our use of
tangible equity
5 Reported return on average tangible assets and the adjusted return on average tangible assets measures provide information to
help assess our profitability.
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 us that are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are
typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “target,” “estimate,” “forecast,” “project,”
by future conditional verbs such as “will,” “should,” “would,” “could” or “may,” or by variations of such words or by similar
expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based
on the beliefs and assumptions of 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 forward-looking statements:
•
•
•
•
•
•
our ability to successfully implement growth and other strategic initiatives, reduce expenses and to integrate and fully
realize cost savings and other benefits we estimate in connection with acquisitions;
a deterioration in general economic conditions, either nationally, internationally, or in our market areas, including extended
declines in the real estate market and constrained financial markets;
oversight of the Bank by the Consumer Financial Protection Bureau and impact of the Durbin Amendment on the Bank’s
debit and interchange fees, both as a result of the Bank’s total assets exceeding $10 billion;
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, respectively;
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
25
Table of Contents
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 the fair value of certain of our assets, which may prove to be incorrect and result in
significant declines in valuation;
Our ability to manage changes in market interest rates;
our ability to capitalize on our substantial investments in our information technology and operational infrastructure and
systems;
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 annual 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 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 business
combinations, accounting for goodwill, trade names and other intangible assets, accounting for deferred income taxes and the
recognition of interest income. For additional information on our significant accounting policies see Note 1. “Basis of Financial
Statement Presentation and Summary of Significant Accounting Policies” in the notes to consolidated financial statements.
Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by us 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, including a review of their risk components and their carrying value, 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” in the notes to consolidated
financial statements for a discussion of the risk components. We consistently review the risk components to identify any changes in
trends.
Business Combinations. We account 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. We account 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. We assess 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, we assess 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, we determine that it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then further 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.
26
Table of Contents
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. 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 we consider 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 we acquired in
mergers are initially 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. We continue
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
On January 27, 2015, the Board amended our bylaws to change our fiscal year end from September 30 to December 31. As a result of
the change in year end, we filed a Transition Report on Form 10-KT with the SEC on March 6, 2015, which included audited financial
statements as of December 31, 2014 and for the three months then ended. For comparative purposes we presented financial statements
as of December 31, 2013 and for the three months then ended, which were unaudited. In this report, in accordance with guidance that
is applicable to a financial reporting period that follows a transition period, our discussion and analysis will present the more
significant factors affecting our financial condition at December 31, 2016 and December 31, 2015. For the results of operations, our
discussion and analysis will present the more significant factors affecting the periods presented as follows:
•
•
•
the calendar year ended December 31, 2016 (“calendar 2016”) compared to the calendar year ended December 31, 2015
(“calendar 2015”);
the transition periods from October 1, 2014 through December 31, 2014 (the “transition period”) compared to the year earlier
period October 1, 2013 through December 31, 2013 (the “2013 transition period”); and
calendar 2015 compared to the fiscal year ended September 30, 2014 (“fiscal 2014”).
The HVB Merger, the Provident Merger, and the other acquisitions discussed in Note 2. “Acquisitions” in the notes to consolidated
financial statements were accounted for as business combinations, and accordingly, their related results of operations are included
from the date of acquisition. The discussion and analysis should be read in conjunction with the consolidated financial statements,
notes to consolidated financial statements and other information contained in this report.
On June 30, 2015, we completed the HVB Merger. The HVB Merger was consistent with our strategy of expanding in the greater New
York metropolitan region and beyond, and building a diversified company with significant commercial and consumer banking
capabilities. We believe the HVB Merger created a larger, more efficient and more profitable bank by combining our differentiated
team-based distribution channels with HVHC’s strong presence and deposit base in Westchester County. The HVB Merger accelerated
organic loan growth, increased our ability to gather low cost core deposits and generated substantial cost savings and revenue
enhancement opportunities.
27
Table of Contents
Results of Operations
We reported net income of $140.0 million, or $1.07 per diluted common share for calendar 2016, compared to net income of $66.1
million, or $0.60 per diluted common share for calendar 2015, and net income of $27.7 million, or $0.34 per diluted common share, in
fiscal 2014. Results for calendar 2016 reflect the continuing successful integration of the HVB Merger as well as organic growth
generated from our commercial banking teams. Results for calendar 2015 included merger-related expense and restructuring charges
incurred in connection with the HVB Merger. Results for fiscal 2014 included merger-related expense and restructuring charges
incurred in connection with the Provident Merger.
We reported net income of $17.0 million, or $0.20 per diluted common share for the transition period, compared to a net loss of $14.0
million, or $0.20 per common share in the 2013 transition period. The net loss incurred in the 2013 transition period was mainly the
result of merger-related expense and restructuring charges incurred in connection with the Provident Merger.
The table below summarizes our 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.
Dollar amounts in tables and the accompanying discussion that follows are stated in thousands, except for share, per share amounts
and ratios.
Selected operating data, return on average assets, return on average common equity and dividends per common share for the
comparable periods follow:
Year ended
December 31,
Three months ended
Fiscal year
ended
December 31,
September 30,
2016
2015
2014
2013
2014
Tax equivalent net interest income
$
417,014
$
317,719
$
61,783
$
47,040
$
223,616
Less tax equivalent adjustment
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per common share - basic
Earnings (loss) per common share - diluted
Dividends per common share
Return on average assets
Return on average equity
$
$
(12,745)
404,269
20,000
70,987
247,902
207,354
67,382
139,972
1.07
1.07
0.28
1.09%
8.05
$
$
(6,503)
311,216
15,700
62,751
260,318
97,949
31,835
66,114
0.60
0.60
0.28
0.69%
4.86
$
$
(1,546)
60,237
3,000
13,957
45,814
25,380
8,376
17,004
0.20
0.20
0.07
0.92%
6.93
$
$
(1,164)
45,876
3,000
9,148
72,974
(20,950)
(6,948)
(14,002)
(0.20)
(0.20)
—
(0.92)%
(7.12)
$
$
(5,628)
217,988
19,100
47,370
208,428
37,830
10,152
27,678
0.34
0.34
0.21
0.41%
3.05
Net Income (Loss)
For calendar 2016, net income was $139,972 compared to net income of $66,114 for calendar 2015. Results for calendar 2016 include
the impact of the following items: net gain on sale of securities of $7,522, net gain on sale of the trust division of $2,255, a pre-tax
merger-related expense of $265 incurred in connection with the NSBC Acquisition; a pre-tax charge for asset write-downs, retention
and severance of $4,485, which included charges incurred in connection with the divestiture of our residential mortgage originations
business, charges incurred in connection with the NSBC Acquisition and the continued consolidation of financial centers and other
locations; a pre-tax charge of $9,729 in connection with the early extinguishment of a portion of our outstanding $100,000 principal
amount of 5.50% fixed rate senior notes (the “Senior Notes”) and Federal Home Loan Bank of New York (“FHLB”) borrowings; and
28
Table of Contents
pre-tax amortization of non-compete agreements and acquired customer list of $3,514. Excluding the impact of these items, adjusted
net income (non-GAAP) was $145,518, and adjusted diluted earnings per share (non-GAAP) were $1.11 for calendar 2016. Please
refer to Item 6. “Selected Financial Data” for a reconciliation of this non-GAAP financial measure.
Results for calendar 2015 include the impact of the HVB Merger since the effective date of June 30, 2015. In connection with the
HVB Merger, the Damian Acquisition and the FCC Acquisition, we incurred pre-tax merger-related expense of $17,079, pre-tax
charges for asset write-downs, retention and severance of $29,046; a pre-tax charge to terminate our defined benefit pension plan of
$13,384; and pre-tax amortization of non-compete agreements and customer list intangible assets of $3,526. Excluding the impact of
these items, adjusted net income (non-GAAP) was $105,398, and adjusted diluted earnings (non-GAAP) per share was $0.96 for
calendar 2015. Please refer to Item 6. “Selected Financial Data” for a reconciliation of this non-GAAP financial measure.
For the 2014 transition period, net income was $17,004 compared to a net loss of $14,002 for the 2013 transition period. Results for
the transition period reflected the continued execution of our strategy since the Provident Merger, as we focused on growing total
revenues through organic earning assets growth and increasing fee income, while maintaining strong controls over operating expenses.
As the effective date of the Provident Merger was October 31, 2013, results for the 2013 transition period include Legacy Sterling
only beginning on November 1, 2013. Results in the 2013 transition period were significantly impacted by pre-tax merger-related
expense of $9,068, a charge for settlement of defined benefit pension plan obligations of $2,743 and charges for asset write-downs,
banking systems conversion, retention and severance, and other charges of $22,167.
Net income increased $38,436 to $66,114 for calendar 2015 compared to $27,678 for fiscal 2014. Results in calendar 2015 were
positively impacted by the HVB Merger and organic growth generated through our commercial banking teams. This resulted in a
$94,103 increase in tax equivalent net interest income and a $15,381 increase in non-interest income between the periods. Results in
fiscal 2014 were also impacted by pre-tax merger-related expense associated with the Provident Merger of $9,455, and charges for
asset write-downs, banking systems conversion, retention and severance of $26,591, the settlement of benefit plan obligations, and
other charges, which totaled $45,630. These charges were partially offset by a gain on sale of a financial center and a gain on
redemption of trust preferred securities (“TRUPs”), which totaled $1,637. Excluding the impact of these items, net income was
$57,842, and diluted earnings per share was $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 our largest source of
revenue, representing 85.1% and 83.2% of total revenue in calendar 2016 and calendar 2015, respectively. Net interest margin is the
ratio of taxable equivalent net interest income to average interest-earning assets for the period. The level of interest rates and the
volume and mix of earning assets and interest bearing liabilities impact net interest income and net interest margin.
We are primarily funded by core deposits, and non-interest bearing demand deposits represent a significant portion of our funding.
Our low cost funding base has had a positive impact on our net interest income and net interest margin and we expect this positive
impact to be more significant in a rising interest rate environment.
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated.
All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have
been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of purchase accounting
adjustments, deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
29
Table of Contents
Interest earning assets:
Commercial loans (1)
Consumer loans
Residential mortgage loans
Total net loans (2)
Securities taxable
Securities tax exempt
Interest earning deposits
FRB and FHLB Stock
Total securities and other earning
assets
Total interest earnings assets
Non-interest earning assets
Total assets
Interest bearing liabilities:
Demand deposits
Savings deposits (3)
Money market deposits
Certificates of deposit
Senior Notes
Other borrowings
Subordinated Notes
Total borrowings
Total interest bearing liabilities
Non-interest bearing deposits
Other non-interest bearing
liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest rate spread (4)
Net interest earning assets (5)
Net interest margin
For the year ended December 31,
2016
2015
For the fiscal year ended
September 30, 2014
Average
balance
Interest
Yield/
Rate
Average
balance
Interest
Yield/
Rate
Average
balance
Interest
Yield/
Rate
$ 7,484,309
$ 348,292
4.65% $5,357,214
$ 257,217
4.80% $ 3,378,538
$ 173,494
292,994
743,064
13,142
29,412
4.49%
3.96%
244,515
659,741
12,060
23,219
4.93%
3.52%
200,767
541,444
8,288
21,200
8,520,367
390,846
4.59% 6,261,470
292,496
4.67% 4,120,749
202,982
1,933,588
945,356
253,505
105,338
42,541
36,414
935
3,560
2.20% 1,742,907
3.85%
0.37%
3.38%
413,149
152,116
80,675
39,369
18,578
297
3,903
2.26% 1,371,703
4.50%
0.20%
4.84%
321,185
109,626
56,104
30,067
16,081
292
3,112
3,237,787
83,450
2.58% 2,388,847
62,147
2.60% 1,858,618
49,552
11,758,154
474,296
4.03% 8,650,317
354,643
4.10% 5,979,367
252,534
1,125,072
$ 12,883,226
953,939
$9,604,256
777,727
$ 6,757,094
$ 1,962,813
$
6,291
0.32% $1,128,667
$
2,159
0.19% $ 706,160
$
812,339
4,572
0.56%
871,339
3,124,117
16,874
0.54% 2,286,376
620,724
5,452
0.88%
520,139
2,315
9,845
3,158
0.27%
622,414
0.43% 1,458,852
0.61%
554,396
Total interest bearing deposits
6,519,993
33,189
0.51% 4,806,521
17,477
0.36% 3,341,822
716,207
14,082
91,291
1,160,780
103,420
1,355,491
7,875,484
3,120,973
147,696
11,144,153
1,739,073
5,398
13,065
5,630
24,093
57,282
5.91%
1.13%
5.44%
1.78%
98,679
888,843
—
987,522
0.73% 5,794,043
5,894
13,553
—
19,447
36,924
2,332,814
116,540
8,243,397
1,360,859
5.97%
1.52%
—%
98,202
—
1.97%
814,409
0.64% 4,156,231
1,580,108
114,621
5,850,960
906,134
$ 12,883,226
$9,604,256
$ 6,757,094
3.30%
3.46%
3.52%
$ 3,882,670
$2,856,274
$ 1,823,136
417,014
3.55%
317,719
3.67%
223,616
3.74%
Less tax equivalent adjustment
Net interest income
Ratio of interest earning assets to
interest bearing liabilities
_________________________
See legend on the following page.
(12,745)
$ 404,269
149.3%
(6,503)
$ 311,216
149.3%
(5,628)
$ 217,988
143.9%
30
5.14%
4.13%
3.92%
4.93%
2.19%
5.01%
0.27%
5.55%
2.67%
4.22%
0.08%
0.14%
0.35%
0.44%
0.27%
5.98%
1.97%
—%
2.45%
0.70%
571
876
5,096
2,421
8,964
5,872
—
19,954
28,918
Table of Contents
Interest earning assets:
Commercial loans (1)
Consumer loans
Residential mortgage loans
Total net loans (2)
Securities taxable
Securities tax exempt
Interest earning deposits
FRB and FHLB Stock
Total securities and other earning assets
Total interest earning assets
Non-interest earning assets
Total assets
Interest bearing liabilities:
Demand deposits
Savings deposits (3)
Money market deposits
Certificates of deposit
Total interest bearing deposits
Senior Notes
Other borrowings
Subordinated Notes
Total borrowings
Total interest bearing liabilities
Non-interest bearing deposits
Other non-interest bearing liabilities
Total liabilities
Stockholders’ equity
For the three months ended December 31,
2014 (the transition period)
2013 (the 2013 transition period)
Average
balance
Interest
Yield/
Rate
Average
balance
Interest
Yield/
Rate
$ 3,984,678
$ 48,766
4.86% $ 2,795,455
$ 35,773
206,990
513,684
2,065
5,450
3,516,129
43,288
204,631
566,706
2,371
5,732
4,756,015
56,869
1,355,104
366,017
86,415
65,564
1,873,100
6,629,115
711,217
7,413
4,411
41
899
12,764
69,633
4.60%
4.05%
4.74%
2.17%
4.78%
0.19%
5.44%
2.70%
4.17%
1,330,646
250,520
75,076
35,065
1,691,307
5,207,436
806,380
$ 7,340,332
$ 6,013,816
163
423
1,605
627
2,818
1,471
3,561
—
5,032
7,850
$
756,217
$
685,142
1,817,091
457,996
3,716,446
98,435
803,864
—
902,299
4,618,745
1,626,341
122,157
6,367,243
973,089
0.09% $
619,746
$
0.24%
0.35%
0.54%
0.30%
5.98%
1.76%
—%
2.21%
0.67%
622,530
1,182,858
565,462
2,990,596
98,064
593,186
17,875
709,126
3,699,722
1,361,622
172,232
5,233,576
780,241
6,903
3,325
69
290
10,587
53,875
98
258
914
564
1,834
1,465
3,194
342
5,001
6,835
5.08%
3.96%
4.24%
4.88%
2.06%
5.27%
0.36%
3.28%
2.48%
4.10%
0.06%
0.16%
0.31%
0.40%
0.24%
5.93%
2.14%
7.59%
2.80%
0.73%
3.37%
3.58%
Total liabilities and stockholders’ equity
$ 7,340,332
$ 6,013,817
Net interest rate spread (4)
Net interest earning assets (5)
Net interest margin
Less tax equivalent adjustment
Net interest income
Ratio of interest earning assets to interest bearing liabilities
_________________________________________________
$ 2,010,370
61,783
(1,546)
$ 60,237
143.5%
3.50%
3.70%
$ 1,507,714
47,040
(1,164)
$ 45,876
140.8%
(1) Commercial loans include all commercial & industrial, commercial real estate (including multi-family) and acquisition, development and
construction loans.
(2) Includes the effect of net deferred loan origination fees and costs, accretion of net purchase accounting adjustments, prepayment fees and late
charges and non-accrual loans.
(3) Includes interest bearing mortgage escrow balances.
31
Table of Contents
(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.
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.
32
Table of Contents
Calendar 2016 vs.
calendar 2015
Calendar 2015 vs.
fiscal 2014
Transition period vs.
2013 transition period
Increase (Decrease)
due to
Volume
Rate
Total
increase
(decrease)
Increase (Decrease)
due to
Volume
Rate
Total
increase
(decrease)
Increase (Decrease)
due to
Volume
Rate
Total
increase
(decrease)
Interest earning assets:
Loans
Securities taxable
Securities tax exempt
Interest earning deposits
FRB and FHLB Stock
Total interest earning assets
Interest bearing liabilities:
Demand deposits
Savings deposits
Money market deposits
Certificates of deposit
Senior Notes
Subordinated Notes
Other borrowings
Total interest bearing liabilities
Less tax equivalent adjustment
$
104,671
$
4,235
20,867
280
1,013
131,066
2,146
(166)
4,139
698
(437)
5,630
3,250
15,260
7,269
Change in net interest income
$
108,537
$
(6,321) $
(1,063)
(3,031)
358
(1,356)
(11,413)
1,986
2,423
2,890
1,596
(59)
—
(3,738)
5,098
(1,027)
(15,484) $
98,350
$
101,940
$
3,172
17,836
638
(343)
119,653
4,132
2,257
7,029
2,294
(496)
5,630
(488)
20,358
6,242
8,320
4,259
95
1,229
115,843
481
433
3,385
(158)
31
—
3,038
7,210
1,494
93,053
$
107,139
$
(12,426) $
982
(1,762)
(90)
(438)
(13,734)
1,107
1,006
1,364
895
(9)
—
(3,567)
796
(619)
(13,911) $
89,514
$
15,106
$
(1,525) $
13,581
9,302
2,497
5
791
131
1,415
9
347
379
(329)
(37)
262
510
1,086
(28)
609
102,109
17,008
(1,250)
15,758
1,588
1,439
4,749
737
22
—
(529)
8,006
875
20
28
557
(117)
2
(342)
1,348
1,496
490
45
137
134
180
4
—
(981)
(481)
(108)
65
165
691
63
6
(342)
367
1,015
382
93,228
$
15,022
$
(661) $
14,361
33
Table of Contents
Calendar 2016 compared to calendar 2015
Tax equivalent net interest income increased $99,295 to $417,014 for calendar 2016 compared to $317,719 for calendar 2015. The
increase was mainly the result of an increase in average balances due to the HVB Merger and organic loan growth from our commercial
banking teams. The increase was also due to an increase in average loan balances due to the NSBC Acquisition and the acquisition of the
restaurant franchise financing portfolio from GE Capital. The average volume of interest earning assets increased $3,107,837, or 35.9%,
for calendar 2016 relative to calendar 2015. The tax equivalent net interest margin decreased 12 basis points to 3.55% for calendar 2016
from 3.67% in calendar 2015. The decrease in the net interest margin was mainly due to a decline in the yield on loans as a result of the
continuing low interest rate environment. Interest earning assets yielded 4.03% for calendar 2016 compared to 4.10% for calendar 2015
and the cost of interest bearing liabilities was 0.73% in the year ended December 31, 2016 compared to 0.64% for calendar 2015.
The average balance of loans outstanding increased $2,258,897, or 36.1%, in calendar 2016 compared to calendar 2015. Loans
accounted for 72.5% of average interest earning assets in calendar 2016 compared to 72.4% in calendar 2015. The average yield on
loans was 4.59% in calendar 2016 compared to 4.67% in calendar 2015. Included in yield on loans is the accretion of purchase
accounting discounts from our prior acquisitions. Accretion on loans was $18,586 for calendar 2016 and contributed 22 basis points to
the yield on loans. Accretion on loans was $14,880 for calendar 2015 and contributed 24 basis points to the yield on loans. At
December 31, 2016, remaining loan purchase accounting discounts totaled $37,012.
Tax equivalent interest income on securities increased $21,008 to $78,955 in calendar 2016 compared to $57,947 for calendar 2015.
This was mainly the result of an increase of $722,888 in the average balance of securities. The average balance of tax-exempt securities
increased $532,207 between calendar 2016 and calendar 2015 from $413,149 to $945,356, respectively, as we believe the risk adjusted
return on municipal securities is more attractive than other securities that are suitable for our investment portfolio. The tax equivalent
yield on securities was 2.74% in calendar 2016 compared to 2.69% in calendar 2015. The increase in tax equivalent yield on securities in
calendar 2016 was primarily due to a higher percentage of tax exempt securities to total securities in calendar 2016 relative to calendar
2015. The proportion of average tax exempt securities was 32.8% of average securities in calendar 2016 compared to 19.2% in calendar
2015. We expect to maintain our current proportion of average tax exempt securities in 2017.
Average deposits increased $2,501,631 in calendar 2016 and were $9,640,966 compared to $7,139,335 for calendar 2015. Average
interest bearing deposits increased $1,713,472 in calendar 2016 compared to calendar 2015 from $4,806,521 to $6,519,993, respectively.
Average non-interest bearing deposits increased $788,159 and were $3,120,973 for calendar 2016 compared to $2,332,814 for calendar
2015. The growth in average deposits was mainly due to organic growth generated by our commercial banking teams and the HVB
Merger. The average cost of interest bearing deposits was 0.51% in calendar 2016 compared to 0.36% in calendar 2015. The increase in
the cost of deposits was mainly due to a change in the composition of our deposits, specifically an increase in the proportion of
commercial deposits relative to consumer deposits. Commercial deposits usually have higher interest rates paid and are more sensitive
to changes in interest rates than consumer deposits.
Average borrowings increased $367,969 to $1,355,491 in calendar 2016 compared to $987,522 in calendar 2015. The increase in
average borrowings in calendar 2016 was mainly utilized to fund growth in loans and other earning assets. The average cost of
borrowings was 1.78% for calendar 2016 compared to 1.97% in calendar 2015. The decline in the average cost of borrowings between
the periods was mainly due to the extinguishment of higher cost FHLB advances, which occurred in March 2016, and the partial
extinguishment of Senior Notes, which occurred in the third quarter of calendar 2016. This was partially offset by the Bank’s issuance
of $175,000 in Subordinated Notes during calendar 2016. See Note 9. “Borrowings” in the notes to consolidated financial statements.
Calendar 2015 compared to fiscal 2014
Tax equivalent net interest income increased $94,103 to $317,719 for calendar 2015 compared to $223,616 for fiscal 2014. The increase
was the result of an increase in average balances due to the HVB Merger and organic loan growth generated by our commercial banking
teams. The average balance of interest earning assets increased $2,670,950, or 44.7%, in calendar 2015 in relation to fiscal 2014 from
$5,979,367 to $8,650,317, respectively. Tax equivalent net interest margin declined seven basis points to 3.67% in calendar 2015 from
3.74% in fiscal 2014. The decrease in net interest margin was mainly due to a decline in the yield on loans as a result of the continuing
low interest rate environment. Interest earning assets yielded 4.10% in calendar 2015 compared to 4.22% in fiscal 2014 and the cost of
interest bearing liabilities was 0.64% for calendar 2015 compared to 0.70% for fiscal 2014.
The average balance of loans outstanding increased $2,140,721, or 51.9%, from $4,120,749 to $6,261,470. Approximately $900,000 of
the growth in loans was associated with the HVB Merger and approximately $1,240,721 represented organic growth generated mainly
by our commercial banking teams. Loans accounted for 72.4% of average interest earning assets in calendar 2015 compared to 68.9% in
fiscal 2014. The average yield on loans was 4.67% in calendar 2015 compared to 4.93% in fiscal 2014. Included in yield on loans was
the accretion of purchase accounting discounts from our prior acquisitions. Accretion on loans was $14,880 for calendar 2015 and
34
Table of Contents
contributed 24 basis points to the yield on loans. Accretion on loans was $8,870 for fiscal 2014 and contributed 22 basis points to the
yield on loans.
Tax equivalent interest income on securities increased $11,799 to $57,947 in calendar 2015 compared to $46,148 for fiscal 2014. This
was mainly the result of an increase of $463,168 in the average balance of securities. In connection with the HVB Merger, we
acquired $713,842 of securities on June 30, 2015, which, on average, contributed $356,921 of the increase in the average balance of
securities for calendar 2015. The tax equivalent yield on securities was 2.69% in calendar 2015 compared to 2.73% in fiscal 2014. The
decrease in tax equivalent yield on securities in calendar 2015 was mainly the result of cash flows from existing securities being
reinvested at lower interest rates due to the low interest rate environment. The proportion of tax exempt securities was 19.2% of average
securities in calendar 2015 compared to 19.0% in fiscal 2014.
Average deposits increased $2,217,405 in calendar 2015 and were $7,139,335 compared to $4,921,930 for fiscal 2014. Average interest
bearing deposits increased $1,464,699 in calendar 2015 compared to fiscal 2014. Average non-interest bearing deposits
increased $752,706 and were $2,332,814 for calendar 2015 compared to $1,580,108 for fiscal 2014. The growth in average deposits was
due to the HVB Merger and organic growth mainly generated by our commercial banking teams. The average cost of interest bearing
deposits was 0.36% in calendar 2015 compared to 0.27% in fiscal 2014
Average borrowings increased $173,113 to $987,522 in calendar 2015 compared to $814,409 in fiscal 2014. The increase in average
borrowings in calendar 2015 was mainly utilized to fund growth in loans and other earning assets. The average cost of borrowings
was 1.97% for calendar 2015 compared to 2.45% in fiscal 2014. 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.
The transition period compared to the 2013 transition period
Tax equivalent net interest income increased $14,743 to $61,783 for the transition period compared to $47,040 for the 2013 transition
period. The increase was the result of an increase in average balances due to the Provident Merger and organic growth generated by our
commercial banking teams. The average volume of interest earning assets increased $1,421,679, or 27.3%, for the transition period
relative to the 2013 transition period as a full three months of Legacy Sterling operations was included in the transition period vs. only
two months in the 2013 transition period. The tax equivalent net interest margin increased 12 basis points to 3.70% for the transition
period from 3.58% in the 2013 transition period. The increase in net interest margin was due to an increase in the yield on interest
earning assets, which was 4.17% in the transition period compared to 4.10% in the 2013 transition period, and a decrease in the cost of
interest bearing liabilities to 0.67% for the transition period compared to 0.73% for 2013 transition period.
The average balance of loans outstanding increased $1,239,886 in the transition period compared to 2013 transition period.
Approximately $550,000 of the growth in loans was due to the Provident Merger and approximately $690,000 represented organic
growth generated by our commercial banking teams. Loans accounted for 71.7% of average interest earning assets in the transition
period compared to 67.5% in the 2013 transition period. The average yield on loans was 4.74% in the transition period compared to
4.88% in the 2013 transition period.
Tax equivalent interest income on securities increased $1,597, to $11,825 in the transition period compared to $10,228 for the 2013
transition period. This was mainly the result of an increase of approximately $139,955 in the average balance of securities. In
connection with the Provident Merger, we acquired $607,911 of securities on October 31, 2013, a portion of which were sold after the
closing date as these securities did not meet our investment portfolio strategy and guidelines. The tax equivalent yield on securities was
2.73% in the transition period compared to 2.57% in the 2013 transition period. The higher tax equivalent yield on securities in the
transition period was mainly due to the proportion of tax exempt securities, which comprised 21.3% of average securities in the
transition period compared to 15.8% in the 2013 transition period.
Average deposits increased $990,569 in the transition period and were $5,342,787 compared to $4,352,218 for the 2013 transition
period. Average interest bearing deposits increased $725,850 in the transition period compared to the 2013 transition period. The
increase was mainly due to the timing of the Provident Merger in the 2013 transition period and organic growth generated by our
commercial banking teams. Average non-interest bearing deposits increased $264,719 and were $1,626,341 for the transition period
compared to $1,361,622 for the 2013 transition period. The average cost of interest bearing deposits was 0.30% in the transition period
compared to 0.24% in the 2013 transition period.
Average borrowings increased $193,174 to $902,299 in the transition period compared to $709,125 in the 2013 transition period. The
increase in average borrowings was mainly utilized to fund loan growth. The average cost of borrowings was 2.21% for the transition
period compared to 2.80% in the 2013 transition period. 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.
35
Table of Contents
Provision for Loan Losses. The provision for loan losses is determined by us as the amount to be added to the allowance for loan losses
after net charge-offs have been deducted in order to bring the allowance to a level that is our best estimate of probable incurred credit
losses inherent in the outstanding loan portfolio. In calendar 2016 and 2015, the transition period, the 2013 transition period; and fiscal
2014 the provision for loan losses totaled (i) $20,000; (ii) $15,700; (iii) $3,000; (iv) $3,000; and (v) $19,100, respectively. 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:
Year ended
December 31,
Three months ended
Fiscal year
ended
December 31,
September 30,
2016
2015
2014
2013
2014
Accounts receivable management / factoring
commissions and other related fees
$
17,695
$
17,088
$
4,134
$
2,226
$
Mortgage banking income
Deposit fees and service charges
Net gain (loss) on sale of securities
Bank owned life insurance
Investment management fees
Other
Total non-interest income
Total non-interest income
Net gain (loss) on sale of securities
Net gain on sale of trust division
Non-interest income net of gain or loss on sale of
securities and sale of trust division
$
$
$
6,173
15,166
7,522
5,832
3,710
14,889
70,987
70,987
7,522
2,255
$
$
11,405
15,871
4,837
5,235
2,397
5,918
62,751
62,751
4,837
—
$
$
2,858
4,221
(43)
1,024
403
1,360
13,957
13,957
(43)
—
$
$
1,616
3,942
(645)
740
540
729
9,148
9,148
(645)
—
$
$
13,146
8,086
15,595
641
3,080
2,209
4,613
47,370
47,370
641
—
61,210
$
57,914
$
14,000
$
9,793
$
46,729
As presented in Item 6. “Selected Financial Data - Non-GAAP Financial Measures” we eliminate net gain on sale of securities in
calculating our adjusted total revenues and adjusted net income. Net gain (loss) on sale of securities is impacted significantly by changes
in market interest rates and strategies we use to manage liquidity and interest rate risk. As a result, net gain (loss) on sale of securities is
not part of our corporate budgeting or business planning process. When we analyze non-interest income performance, we eliminate the
impact of these gains and losses in evaluating our results. Additionally, in calendar 2016 we realized a gain on sale of our trust division
of $2,255, which is included in other non-interest income. This income is non-recurring and is therefore excluded from our adjusted
results.
The main driver of growth in our non-interest income net of gain or loss on sale of securities and sale of trust division between calendar
2016 and calendar 2015 was higher letter of credit fees, higher other commissions and loan fees and higher swap fees. The growth
between calendar 2015 and fiscal 2014 was mainly due to the HVB Merger. The growth in the transition period compared to the 2013
transition period, was mainly due to fees generated in accounts receivable management and mortgage banking income as a result of the
Provident Merger. We regularly evaluate potential acquisitions of commercial lending businesses that are also fee income generators and,
consistent with this strategy, during calendar 2016 we completed the NSBC Acquisition and in calendar 2015 we completed the Damian
Acquisition and the FCC Acquisition. In calendar 2016 we also expanded our commercial banking capabilities by recruiting teams
focused on health care asset-based lending, middle market loan syndication, swaps and cash management businesses. We expect these
businesses will also contribute to non-interest income growth over time.
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, which 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. These business lines were acquired in connection with the
36
Table of Contents
Provident Merger. The increase in calendar 2016 of $607, or 3.55%, compared to calendar 2015, was due to an increase in factoring
commissions and fee income resulting from increased factoring volumes from clients acquired in the FCC Acquisition. The increase in
such fees for calendar 2015 of $3,942, or 30.0% compared to fiscal 2014 was due to a combination of organic growth, the Damian
Acquisition and the FCC Acquisition. Fee revenue was $4,134 for the transition period compared to $2,226 for the 2013 transition
period. The increase between the periods was due to organic growth plus the impact of the timing of the Provident Merger, which
included these revenues for only two of the months in the 2013 transition period.
Mortgage banking income represents residential mortgage banking and mortgage brokerage business conducted through loan production
offices that were located principally in Brooklyn, Great Neck and New York City and through our financial centers. Mortgage banking
revenue was $6,173 for calendar 2016, $11,405 for calendar 2015 and $8,086 in fiscal 2014. Mortgage banking revenues were $2,858 in
the transition period compared to $1,616 for the 2013 transition period. In calendar 2016, we sold $43,380 of residential mortgage loans
acquired in the HVB Merger that were previously held as portfolio loans. In calendar 2015 we sold $44,020 of residential mortgage
loans that were previously held as portfolio loans with the objective of rebalancing our interest earnings assets prior to the HVB Merger.
We realized a gain on sale of these loans of $607 in calendar 2016 and $390 in calendar 2015, which were included in mortgage banking
income. In the third quarter of calendar 2016 we sold our residential mortgage originations business, which was the main driver of the
decline in mortgage banking income between calendar 2016 and calendar 2015. We continuously evaluate the performance of our
business lines to determine where we should allocate our capital and resources. Management determined the risk adjusted returns we
achieved in the mortgage banking originations business were below our targets; therefore, we will reallocate capital and resources from
the sale to other businesses that are more in-line with our diversified commercial banking strategy and where we can achieve risk-
adjusted returns that exceed our targets.
Deposit fees and service charges were $15,166 for calendar 2016 compared to $15,871 for calendar 2015 and $15,595 for fiscal 2014.
Revenues from deposit fees has lagged the growth rate in average deposit balances from the HVB Merger, Provident Merger and organic
deposit growth. This is the result of a shift in the mix of our deposit balances to a greater proportion of commercial deposits versus retail
deposits, as deposits gathered by our commercial banking teams are generally higher balance deposits that generate lower levels of fees
and service charges than retail deposits. In addition, effective July 1, 2016, the Bank became subject to specific provisions of the Dodd-
Frank Act, including the Durbin Amendment. As a result, the Bank’s interchange fee earned on debit card transactions, which is part of
deposit fees and services charges, was reduced to comply with provisions of the Durbin Amendment. Deposit fees and service charges
were $6,575 for the third and fourth quarter of calendar 2016, compared to $8,690 for the second half of calendar 2015. Deposit fees
and service charges were $4,221 for the transition period, compared to $3,942 for the 2013 transition period. The increase was mainly a
result of the Provident Merger.
Bank owned life insurance (“BOLI”) income mainly represents the change in the cash surrender value of life insurance policies owned
by the Bank. BOLI income was $5,832 for calendar 2016 compared to $5,235 for calendar 2015 and $3,080 for fiscal 2014. The
increase in BOLI income between calendar 2016 and calendar 2015 was mainly due to the HVB Merger. The increase in BOLI income
between calendar 2015 and fiscal 2014 was mainly due to the HVB Merger and a $30,000 BOLI purchase completed in October 2014.
BOLI income was $1,024 for the transition period compared to $740 in the 2013 transition period. The increase was mainly the result of
the October 2014 BOLI purchase referenced above.
Investment management fees principally represent fees from the sale of mutual funds and annuities, and since the HVB Merger, also
includes trust fees. These revenues were $3,710 for calendar 2016 compared to $2,397 for calendar 2015 and $2,209 in fiscal 2014.
Investment management fees were $403 in the transition period compared to $540 in the 2013 transition period. The trust business
generated fees of $2,458 in calendar 2016 and $1,148 for calendar 2015. In the fourth quarter of calendar 2016 we sold our trust
division for a net gain of $2,255, which was included in other non-interest income. As a result we will not continue to generate trust fee
income in 2017 and beyond.
37
Table of Contents
Other non-interest income principally includes loan servicing revenues, miscellaneous loan fees earned, letter of credit fees, swap fees
and safe deposit box rentals. In calendar 2016, other non-interest income also included gain on sale of our trust division of $2,255.
Other non-interest income was $14,889 for calendar 2016 compared to $5,918 for calendar 2015 and $4,613 in fiscal 2014. The increase
in calendar 2016 compared to calendar 2015 was mainly due to an increase of $1,816 in swap fees and an increase of $4,347 in
miscellaneous loan fees and other commissions earned. The increase in swap fees was mainly the result of marketing efforts by our
commercial banking teams and a greater focus on this product offering due to the current interest rate environment. The increase in
miscellaneous loan fees was mainly the result of fees generated as a result of the NSBC Acquisition, other fees from our specialty
finance teams and the gain on sale of commercial loans, mainly public sector finance loans. The increase in other non-interest income in
calendar 2015 compared to fiscal 2014 was due to an increase in miscellaneous loan fees earned of $1,300, which was mainly the result
of organic growth in loan volumes and the HVB Merger. Other non-interest income increased $631 to $1,360 for the transition period
compared to $729 for the 2013 transition period. This increase was mainly due to an increase in title insurance revenues of $391 and
loan swap fees of $127.
Non-interest expense. The components of non-interest expense were as follows:
Year ended
December 31,
Three months ended
Fiscal year
ended
December 31,
September 30,
2016
2015
2014
2013
2014
Compensation and employee benefits
$
125,916
$
104,939
$
22,410
$
20,811
$
Stock-based compensation plans
Occupancy and office operations
Amortization of intangible assets
FDIC insurance and regulatory assessments
Other real estate owned expense (income), net
Merger-related expense
Defined benefit plan termination charge
Loss on extinguishment of borrowings
Charge for asset write-downs, severance and
retention and banking system conversion
Other
6,518
34,486
12,416
8,240
2,051
265
—
9,729
4,485
43,796
4,581
32,915
10,043
7,380
274
17,079
13,384
—
29,046
40,677
1,146
7,245
1,873
1,568
(81)
502
—
—
2,493
8,658
991
6,333
1,875
1,164
368
9,068
2,743
—
22,167
7,454
90,215
3,703
27,726
9,408
6,146
(237)
9,455
4,095
—
26,591
31,326
Total non-interest expense
$
247,902
$
260,318
$
45,814
$
72,974
$
208,428
Non-interest expense for calendar 2016 was $247,902 compared to $260,318 in calendar 2015 and $208,428 in fiscal 2014. Non-interest
expense for the transition period was $45,814 compared to $72,974 for the 2013 transition period. The main cause of the fluctuations
between the periods was due to merger transactions as well as the following expense items: merger-related expense, defined benefit plan
termination charge, loss on extinguishment of borrowings, and charge for asset write-downs, severance and retention and banking
systems conversion. We incurred charges in the periods presented above that were associated with merger transactions and non-
recurring strategic initiatives such as early retirement of debt, facilities consolidation and workforce restructuring plans. (These expense
components are segregated in our adjusted performance, non-GAAP financial measures, presented in Item 6. “Selected Financial Data”
included elsewhere in this Report.) We continue to focus on improving our operating efficiency (our operating expenses divided by our
operating revenues) and becoming a more efficient and profitable company.
Compensation and employee benefits expense and full time equivalent employees (“FTEs”) are presented in the following table:
Calendar 2016
Calendar 2015
Transition period
2013 transition period
Fiscal 2014
Compensation
expense
FTEs at period end
$
125,916
104,939
22,410
20,811
90,215
970
1,089
829
977
836
38
Table of Contents
Compensation expense for calendar 2016 increased $20,977 compared to calendar 2015. Compensation expense increased due to the
HVB Merger, as compensation expense associated with former HVB employees was included for only six months in calendar 2015. Our
FTEs declined by 119 in the twelve months ended December 31, 2016. The decline in personnel was due to the successful integration of
the HVB Merger, the divestitures of our residential mortgage origination business and trust division and was partially offset by personnel
hired in the NSBC Acquisition and other new commercial banking teams. Compensation expense for calendar 2015 increased $14,724
compared to fiscal 2014. The increase in compensation expense for calendar 2015 was mainly due to the HVB Merger. At
December 31, 2015, our FTEs increased by 253 employees between calendar 2015 and fiscal 2014, mainly due to the HVB Merger. For
the transition period compensation was $22,410 compared to $20,811 for the 2013 transition period. Between the periods, our FTEs
declined by 148 due to the successful integration of the Provident Merger; the increase in compensation expense was mainly due to the
Provident Merger which occurred on October 31, 2013. Therefore, our results included compensation for Legacy Sterling employees for
only two months of the 2013 transition period.
In calendar 2015, we terminated and settled our remaining defined benefit pension plan obligations through lump sum distributions and
purchases of annuities. In fiscal 2014, we terminated our Employee Stock Ownership Plan. Although we continue to sponsor several
post retirement benefit plans including a Supplemental Executive Retirement Plan to certain of our former directors and officers, life
insurance benefits to certain directors, officers and former officers and a defined contribution plan established under Section 401(k) of
the IRS Code, we have simplified our compensation structure by reducing and terminating several benefit plans. For additional
information related to our benefit plans, see Note 13. “Pension and Other Post Retirement Plans” in the notes to consolidated financial
statements.
Stock-based compensation plans expense was $6,518 for calendar 2016 compared to $4,581 for calendar 2015 and $3,703 in fiscal 2014.
Stock-based compensation plan expense was $1,146 in the transition period compared to $991 in the 2013 transition period. The
increase for calendar 2016 compared to calendar 2015, and the increase in calendar 2015 compared to fiscal 2014, was due to the HVB
Merger, and the resulting increase in personnel included in the stock-based compensation plan. For additional information related to our
stock-based compensation, see Note 12. “Stock-Based Compensation Plans” in the notes to consolidated financial statements.
Occupancy and office operations expense was $34,486 for calendar 2016, an increase of $1,571 compared to $32,915 in calendar 2015,
while fiscal 2014 had expense of $27,726. The increase in occupancy and office operations expense during the periods presented was
due mainly to the HVB Merger. Occupancy and office operations expense was $7,245 in the transition period compared to $6,333 in the
2013 transition period. The increase between periods was mainly due to the timing of the Provident Merger. We had 42 financial centers
at December 31, 2016 compared to 52 financial centers at December 31, 2015 and 32 financial centers at September 30, 2014. The
continued consolidation of financial centers in calendar 2016 was consistent with our strategic plan to reduce our real estate footprint
and control expenses. We anticipate a modest continued reduction in financial centers and in occupancy and office operations expense
going forward.
Amortization of intangible assets mainly includes amortization of core deposit intangible assets, non-compete agreements and customer
lists. Amortization of intangible assets was $12,416 for calendar 2016 compared to $10,043 for calendar 2015 and $9,408 for fiscal
2014. The increase that occurred between the full year periods was mainly due to the HVB Merger. In calendar 2016 we added $1,500 to
customer lists intangible assets as a result of the NSBC Acquisition. In connection with the HVB Merger, in calendar 2015 we added
$33,839 to our core deposit intangible, and the Damian Acquisition, we recorded an $8,950 customer list intangible asset. Amortization
of intangible assets was $1,873 for the transition period, a decrease of $2 compared to $1,875 in the 2013 transition period. During the
transition period, several non-compete agreements that were recorded in connection with the Provident Merger expired, decreasing
amortization expense. Amortization of intangible assets is expected to decline to $8,838 in 2017 as shown in Note 7. “Goodwill and
Other Intangible Assets” in the notes to consolidated financial statements.
FDIC insurance and regulatory assessments expense was $8,240 for calendar 2016 compared to $7,380 for calendar 2015 and $6,146
for fiscal 2014. The FDIC insurance assessment is primarily based on quarterly average assets less quarterly average eligible capital.
OCC assessments are based on total assets at June 30 and December 31. The increase in FDIC insurance and regulatory assessments
between the periods was due to an increase in assets as a result of organic growth and our recent mergers. FDIC insurance and regulatory
assessments was $1,568 for the transition period compared to $1,164 for the 2013 transition period; the increase was mainly due to the
Provident Merger.
Other real estate owned (“OREO”) expense (income) net includes maintenance costs, taxes, insurance, write-downs (subsequent to any
write-down at the time of foreclosure or transfer to OREO), and gains and losses from the disposition of OREO. OREO includes real
estate assets foreclosed and financial center locations that are held for sale. OREO expense (income), net included the following:
39
Table of Contents
Year ended
December 31,
Three months ended
Fiscal year
ended
December 31,
September 30,
2016
2015
2014
2013
2014
(Gain) loss on sale
Direct property write-downs
$
Rental income
Property tax
Other expenses
(288) $
582
(68)
1,229
596
OREO expense (income), net
$
2,051
$
(1,066) $
—
(77)
798
619
274
$
(83) $
—
(21)
—
23
(81) $
108
$
(1,432)
224
(17)
11
42
368
$
224
(77)
586
462
(237)
Merger-related expense was $265 for calendar 2016 compared to $17,079 in calendar 2015 and $9,455 for fiscal 2014. Merger-related
expense in calendar 2016 represented professional fees associated with the NSBC Acquisition. Merger-related expense in calendar 2015
was mainly related to the HVB Merger and included change in control payments and financial and legal advisory fees. Merger-related
expense in calendar 2015 also included costs of approximately $2,000 incurred in connection with the Damian Acquisition and the FCC
Acquisition. These costs included retention and severance to certain employees, and due diligence and legal fees for both transactions.
Merger-related expense of $9,455 in fiscal 2014 was incurred in connection with the Provident Merger and included change in control
payments, legal advisory fees and a portion of the financial advisory fees. Merger-related expense was $502 in the transition period
compared to $9,068 in the 2013 transition period. In the transition period, we mainly incurred investment banking fees associated with
the then pending HVB Merger. In the 2013 transition period, we incurred the majority of the merger-related costs for the Provident
Merger.
Defined benefit plan termination charge was $0 for calendar 2016 compared to $13,384 for calendar 2015 and $4,095 in fiscal 2014. The
charge incurred in calendar 2015 represented a full termination of the $58,171 remaining defined benefit pension plan liabilities. The
termination charge consisted mainly of the change for the year in the fair value of plan assets in calendar 2015 and the elimination of the
accumulated other comprehensive benefit maintained in the equity accounts on the consolidated balance sheet until termination. The
charge in fiscal 2014 represented the settlement of $44,774 of defined benefit pension plan liabilities. There was no pension plan
termination charge incurred in the transition period and a termination charge of $2,743 was incurred in the 2013 transition period, which
represented the charge incurred in connection with the settlement of $13,698 of plan liabilities.
Loss on extinguishment of borrowings was $9,729 in calendar 2016. We incurred a loss of $8,716 on the extinguishment of $220,000 of
high cost FHLB borrowings. We also reacquired $23,000 of the Senior Notes during calendar 2016 and incurred a loss on
extinguishment of $1,013. For additional information see Note 9. “Borrowings, Senior Notes and Subordinated Notes” in the notes to
consolidated financial statements.
Charge for asset write-downs, severance and retention and banking system conversion expense was $4,485 for calendar 2016 compared
to $29,046 for calendar 2015 and $26,591 in fiscal 2014. Asset write-downs are mainly charges we incur to consolidate financial centers
that we acquired in mergers and those we have previously leased or owned. Severance and retention represents compensation payments
we have made in connection with prior mergers and acquisitions. Banking systems conversion expense represented the cost of
conversion and contract termination charges associated with changing our core bank processing system. In calendar 2016, these charges
were associated with the NSBC Acquisition, the sale of the residential mortgage origination business, and the continued consolidation of
financial centers and other locations. In calendar 2015, these charges were mainly associated with the HVB Merger. In fiscal 2014, these
charges were mainly associated with the Provident Merger. In the transition period, we incurred charges of $1,418 for the core banking
system conversion and charges of $1,075 for asset write-downs. In the 2013 transition period, we incurred charges for asset write-
downs, and severance and retention of $22,167 associated with the Provident Merger.
Other non-interest expense was $43,796 for calendar 2016 compared to $40,677 for calendar 2015 and $31,326 for fiscal 2014. Other
non-interest expense mainly includes professional fees, data processing, insurance, and advertising and promotion. Additional details
regarding these expenses is included in Note 14. “Other Non-interest Expense” in the notes to our consolidated financial statements
included elsewhere in this Report. Also included in other non-interest expense is postage, communication, supplies and loan processing.
The increases in other non-interest expense is mainly due to a combination of organic growth and our prior mergers. Other non-interest
expense was $8,658 for the transition period compared to $7,454 for the 2013 transition period and the increase was mainly due to the
timing of the Provident Merger, which closed October 31, 2013.
40
Table of Contents
Income Tax was $67,382 for calendar 2016 compared to $31,835 for calendar 2015 and $10,152 in fiscal 2014, which represented an
effective income tax rate of 32.5% for calendar 2016 and calendar 2015 and 26.8% for fiscal 2014. 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 calendar 2016 was unchanged compared to calendar 2015 as we continued to invest in tax
exempt securities and growing our portfolio of public sector finance commercial loans. Our effective tax rate increased in calendar 2015
compared to fiscal 2014 due to an increase in pre-tax earnings and an increase in our proportion of taxable income. We estimate our
effective tax rate will be between 32.0% to 33.0% for 2017. Income tax expense was $8,376 for the transition period compared to a
benefit of $6,948 for the 2013 transition period, which represented an effective income tax rate of 33.0% and 33.2%, respectively. The
income tax benefit recorded in the 2013 transition period was due to a pre-tax loss generated by merger-related expense and other
charges recorded in connection with the Provident Merger. For more information see Note 11. “Income Taxes” in the notes to
consolidated financial statements.
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 average assets for the period indicated. Average assets totaled $12,883,226 in calendar 2016
compared to $9,604,256 in calendar 2015 and $6,757,094 in fiscal 2014. Average assets totaled $7,340,332 in the transition period
compared to $6,013,816 in the 2013 transition period.
Sources of Funds:
Non-interest bearing deposits
Interest bearing deposits
FHLB and other borrowings
Subordinated Notes
Senior Notes
Other non-interest bearing liabilities
Stockholders’ equity
Total
Uses of Funds:
Loans
Securities
Interest bearing deposits
FRB and FHLB stock
Other non-interest earning assets
For the year ended
December 31,
For the three months ended
December 31,
2016
2015
2014
2013
Fiscal year
ended
September 30,
2014
24.2%
50.7
9.0
0.8
0.7
1.1
13.5
100.0%
66.1%
22.4
2.0
0.8
8.7
24.3%
50.0
9.3
—
1.0
1.2
14.2
100.0%
65.2%
22.5
1.6
0.8
9.9
22.2%
50.6
10.9
—
1.3
1.7
13.3
100.0%
64.8%
23.4
1.2
0.9
9.7
22.6%
49.7
9.9
0.3
1.6
2.9
13.0
100.0%
58.5%
26.3
1.2
0.6
13.4
23.4%
49.5
10.4
0.2
1.4
1.7
13.4
100.0%
61.0%
25.1
1.6
0.8
11.5
Total
100.0%
100.0%
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. Non-interest bearing deposits and low cost interest bearing deposits comprise over 70% of our sources
of funds for all periods, show above. Growing and maintaining these deposits through our commercial banking teams and financial
centers is key to our strategy. We primarily use funds to originate loans and purchase securities.
Average deposits were $9,640,966 for calendar 2016 compared to $7,139,335 for calendar 2015 and $4,921,930 for fiscal 2014. The
growth in deposits was due to the HVB Merger and organic growth generated by our commercial banking teams. For the transition
period average deposits were $5,342,787 compared to $4,352,218 for the 2013 transition period; primarily due to the Provident Merger
and organic growth generated by our commercial banking teams.
41
Table of Contents
Average loans were $8,520,367 for calendar 2016 compared to $6,261,470 for calendar 2015 and $4,120,749 for fiscal 2014. The
growth in average loan balances was due to the HVB Merger, organic growth generated by our commercial banking teams, the NSBC
Acquisition, the GE restaurant franchise financing portfolio acquisition, the Damian Acquisition and the FCC Acquisition. Average
loans represented 72.5%, 72.4% and 68.9% of average earning assets for calendar 2016, calendar 2015 and fiscal 2014, respectively.
Average loans were 88.4%, 87.7% and 83.7% of average deposits for calendar 2016, calendar 2015 and fiscal 2014, respectively. Our
goal is to maintain a loans to deposits ratio between 90% to 95%. For the transition period, average loans were $4,756,015 compared to
$3,516,129 for the 2013 transition period, which was due to the Provident Merger and organic growth.
Average securities were $2,878,944 for calendar 2016 compared to $2,156,056 for calendar 2015 and $1,692,888 for fiscal 2014. The
increase in securities in calendar 2016 was mainly due to an increase in tax exempt securities as management determined the after-tax
risk adjusted return of this asset class given current market conditions was more attractive relative to other earning assets. The increase
in securities in calendar 2015 compared to fiscal 2014 was mainly due to the HVB Merger. Average securities were $1,721,121 in the
transition period compared to $1,581,166 in the 2013 transition period, mainly due to the Provident Merger.
Portfolio Loans
The following table sets forth the composition of our portfolio loans, which excludes loans held for sale, by type of loan at the periods
indicated.
2016
December 31,
2015
2014
2014
2013
September 30,
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Commercial:
Commercial and Industrial
(“C&I”):
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
Total C&I
Commercial mortgage:
Commercial real estate
Multi-family
Acquisition, development &
construction
Total commercial mortgage
Total commercial
Residential mortgage
Consumer
Total loans
$ 1,404,774
14.7% $ 1,189,154
15.1% $
917,048
19.0% $
851,192
17.9% $
434,932
18.0%
741,942
255,549
616,946
214,242
589,315
349,182
7.8
2.7
6.5
2.3
6.2
3.7
310,214
221,831
387,808
208,382
631,303
182,336
4.0
2.8
4.9
2.7
8.0
2.3
327,507
154,229
173,786
161,625
411,449
—
6.8
3.2
3.6
3.4
8.5
—
313,345
145,474
192,003
181,433
393,027
—
6.6
3.1
4.0
3.8
8.3
—
—
—
4,855
—
—
—
—
0.2
—
—
—
4,171,950
43.8
3,131,028
39.8
2,145,644
44.5
2,076,474
43.7
439,787
18.2
3,162,942
981,076
230,086
4,374,104
8,546,054
697,108
284,068
33.2
10.3
2.4
45.9
89.7
7.3
3.0
2,733,351
796,030
186,398
3,715,779
6,846,807
713,036
299,517
34.8
10.1
2.4
47.3
87.1
9.1
3.8
1,458,277
384,544
96,995
1,939,816
4,085,460
529,766
200,415
30.3
8.0
2.0
40.3
84.8
11.0
4.2
1,449,052
368,524
92,149
1,909,725
3,986,199
570,431
203,808
30.4
7.7
1.9
40.0
83.7
12.0
4.3
969,490
307,547
102,494
1,379,531
1,819,318
400,009
193,571
40.2
12.7
4.2
57.1
75.3
16.6
8.1
9,527,230
100.0%
7,859,360
100.0%
4,815,641
100.0% 4,760,438
100.0% 2,412,898
100.0%
Allowance for loan losses
(63,622)
Total portfolio loans, net
$ 9,463,608
(50,145)
$ 7,809,215
(42,374)
$ 4,773,267
(40,612)
$ 4,719,826
(28,877)
$ 2,384,021
Overview. Total portfolio loans, net increased $1,654,393, or 21.2%, to $9,463,608 at December 31, 2016 compared to $7,809,215 at
December 31, 2015 and $4,773,267 at December 31, 2014. The growth in total portfolio loans, net for calendar 2016 of 21.2% was
higher than our targeted loan growth range of 10% to 15%, as organic growth was augmented by the acquisitions of NSBC and the
restaurant franchise financing loans. Total portfolio loans, net grew in calendar 2015 due to organic growth and the HVB Merger. At
September 30, 2014, the balance of total portfolio loans, net was $4,719,826 compared to $2,384,021 at September 30, 2013; due to the
Provident Merger and organic growth. At December 31, 2016, 89.7% of our portfolio loans were commercial loans and the percentage of
our portfolio in commercial loans has increased in each of the periods presented above. Through our commercial banking teams, we
have a diversified asset origination engine that allows us to generate various types of commercial loans. At December 31, 2016, C&I
loans comprised 43.8% of the loan portfolio compared to 39.8% at December 31, 2015 and 44.5% at December 31, 2014. Total
commercial mortgage loans comprised 45.9%, 47.3% and 40.3% of the loan portfolio at December 31, 2016, 2015 and 2014,
42
Table of Contents
respectively. The change at December 31, 2015 compared to December 31, 2014, reflected the impact of the HVB Merger, as HVHC
was more heavily concentrated in commercial real estate collateralized loans than the Bank.
General. Our commercial banking teams focus on the origination of C&I 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 sold our residential mortgage originations business in August 2016; however, we continue to sell existing loans held for sale
that were in the pipeline as of the closing of the +business. For the periods presented in the table above, we sold the majority of the
residential mortgage loans we originated. In addition, 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 and assists in the development of strategic initiatives to enhance portfolio performance.
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 authority is for credit scored small business loans up to $350 and an individually underwritten
loan to $500.
We have established a risk rating system for all of our commercial loans (all types of C&I and commercial mortgage loans) other than
our small business loans, which are subject to a scoring process. 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.
Underwriting of a commercial loan is based on an assessment of the willingness and ability of the principal to repay in accordance with
the proposed terms, as well as an overall assessment of the risks involved. This includes an evaluation of the principal to determine
character and capacity to manage. Personal guarantees of the principals are generally required, with exceptions primarily in the case of
certain factored receivables the Bank accepts on a non-recourse basis, as well as in the case of loans made to publicly owned and not-
for-profit entities. In addition to an evaluation of the financial statements of the principal and/or potential borrower, we analyze the
adequacy of the primary and secondary sources of repayment to be relied upon in the transaction. Credit agency reports of the credit
history of the principal supplement our analysis of creditworthiness. Checking with other banks and trade investigations may also be
conducted. Collateral supporting a secured transaction also is analyzed to determine its marketability.
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 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 $250, such as home equity lines of credit.
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
$10,000, prior to any portion being sold. Large relationships also include loan participations purchased if the credit relationship is equal
to, or in excess of, $10,000. In addition to the Company’s normal policies and procedures related to the origination of large credits, the
SCC must approve all new and renewed credit facilities which are part of large credit relationships. The SCC meets regularly, and
reviews large credit relationship activity and discusses the current loan pipeline, among other things. The following table provides
43
Table of Contents
additional information on the Company’s large credit relationships outstanding:
Number of
Relationships
Period end balances
Average loan balances
Committed
Outstanding
Committed
Outstanding
Committed amount at:
December 31, 2016
$20.0 million and greater
$10.0 million to $19.9 million
December 31, 2015
$20.0 million and greater
$10.0 million to $19.9 million
109
171
$
3,563,459
$
2,623,226
$
32,509
$
2,317,353
1,875,300
13,669
81
$
2,452,488
$
1,799,143
$
30,278
$
118
1,641,117
1,400,932
13,908
24,168
11,043
22,212
11,872
We review large credit relationships on a regular basis. As part of our allowance for loan loss methodology we consider concentration
risk and review the amount of loans in our portfolio that are over $10,000.
Industry concentrations. As of December 31, 2016 and 2015, there were no concentrations of loans within any single industry in excess
of 10% of total loans, as segregated by Standard Industrial Classification code (“SIC code”). The SIC code is a federally designed
standard industrial numbering system used by us 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.
Traditional C&I Lending. We make various types of secured and unsecured traditional C&I 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. Growth in traditional C&I loans in 2016 was mainly due to organic growth generated by our commercial
banking teams and the restaurant franchise financing portfolio acquired from GE Capital in September 2016.
Asset Based Lending. The Bank provides asset-based loans (“ABL”) to small and medium sized businesses on a national basis. These
loans are secured by certain business assets, which typically includes accounts receivable, inventory, machinery and equipment. The
terms of these loans generally range from less than one year to three years. The loans carry adjustable interest rates indexed to a lending
rate that is determined internally, or a short-term market rate index. We began to report ABL loans separately, effective March 31, 2016
when we completed the NSBC Acquisition. Previously, ABL loans were reported with traditional C&I loans. For comparative purposes,
we have reported ABL loans separately in the table above for all periods presented. We initially entered the ABL lending business in
connection with the Provident Merger.
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 employee 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 between 15 to 30 days. The Bank provides warehouse lines ranging from
$5,000 to $100,000. 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, which 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
44
Table of Contents
advances by the collection of receivables. Accounts receivable factoring is primarily for our 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 term loans and secured loans for various types of business equipment,
with terms generally ranging from 24 to 60 months. We acquired $71,219 of equipment finance loans in the HVB Merger in 2015.
Public Sector Finance. In 2015, we hired a commercial banking team with expertise in public sector finance. This team generates loans
to state, municipal and local governmental entities nationally. At December 31, 2016, outstanding balances were $349,182. Effective for
calendar 2016 and calendar 2015 we are presenting these loans separately within our C&I portfolio. Previously we included public
sector finance loans with traditional C&I loans. We have reclassified the balance from calendar 2015 in the tables above for comparative
purposes. Public sector finance loans are either secured via UCC filings against equipment financed, or obligations related to the ability
to levy taxes, either generally or associated with a specific project. All loans in this portfolio are fixed rate, tax exempt and fully
amortizing over the life of the loan. Public sector finance loans have terms of three to 20 years, with a weighted average term of 14.1
years and a weighted average expected duration of 7.38 at December 31, 2016.
Asset-based lending, payroll finance, warehouse lending, factored receivables, equipment finance and public sector finance are
sometimes referred to as our commercial finance business. These categories plus our traditional C&I loans are referred to as C&I in the
discussion below.
Commercial Real Estate (“CRE”) 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 and other categories. We may, from time to time, purchase commercial real estate loan participations.
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 terms that range from five to ten years and are structured as (i) five-year fixed rate
loans with a rate adjustment for the second five-year period; or (ii) 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 may 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 (“ADC”) Lending. We did not originate any land acquisition and development loans in
2016. At December 31, 2016 there were 17 outstanding land loans totaling $25,178 in outstanding balances. In connection with the
HVB Merger, we acquired $73,415 of ADC loans. We currently originate construction loans to well qualified borrowers in our
immediate footprint 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. 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 have
funded 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
45
Table of Contents
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, including multi-family 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.
Residential Mortgage Lending. We offer conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage (“ARM”)
loans with maturities up to 30 years and maximum loan amounts generally up to $4,000 that are fully amortizing with monthly or bi-
weekly loan payments.
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 in
many locations in the continental U.S. and are $625.5 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 sold its residential mortgage
banking origination business in August 2016. Prior to that date, the Bank operated residential mortgage banking and brokerage business
through our financial centers located in the greater New York metropolitan area. In order to manage our exposure to rising interest rates,
we sold 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. We generally originate these loans with the intent to sell, but, in some cases they may 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.
The majority of loans sold were sold with servicing rights released. As of December 31, 2016, residential mortgage loans serviced for
others, excluding loan participations, totaled approximately $179,082.
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 FRB 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 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 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. We offer fixed-rate,
46
Table of Contents
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.
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31,
2016. 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 December 31, 2016.
Commercial loans:
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
Total C&I
Commercial mortgage:
CRE
Multi-family
ADC
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
$
623,007
292,724
255,549
616,948
214,242
31,699
—
2,034,169
385,788
66,475
148,206
600,469
87,022
220,556
4.22% $
4.48
9.22
3.20
4.17
4.94
—
4.58
4.52
4.05
4.93
4.57
3.92
4.15
607,657
418,136
—
—
—
405,405
18,054
1,449,252
1,405,828
557,783
71,612
2,035,223
171,747
9,254
4.01% $
174,108
4.10% $
1,404,772
4.11%
4.66
—
—
—
4.22
2.67
4.24
4.02
3.52
3.69
3.87
3.95
5.66
31,082
6.56
—
—
—
152,211
331,128
688,529
1,371,326
356,818
10,268
1,738,412
438,339
54,258
—
—
—
5.64
2.86
3.96
4.08
3.62
4.14
3.99
3.85
4.10
741,942
255,549
616,948
214,242
589,315
349,182
4,171,950
3,162,942
981,076
230,086
4,374,104
697,108
284,068
4.67
9.22
3.20
4.17
4.63
2.85
4.36
4.11
3.59
4.51
4.01
3.88
4.19
$
2,942,216
4.53% $
3,665,476
3.96% $
2,919,538
3.96% $
9,527,230
4.16%
The following table sets forth the composition of fixed-rate and adjustable-rate loans at December 31, 2016 that are contractually due
after December 31, 2017:
Traditional C&I
Asset-based lending
Equipment financing
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total loans
Fixed
Adjustable
Total
$
247,134
$
534,631
$
—
557,616
349,182
449,218
—
—
781,765
449,218
557,616
349,182
1,493,783
1,283,371
2,777,154
444,410
2,937
214,901
3,974
470,191
78,943
395,185
59,538
914,601
81,880
610,086
63,512
$
3,313,937
$
3,271,077
$
6,585,014
All payroll finance, warehouse lending and factored receivables are contractually due within 12 months and are mainly adjustable rate.
47
Table of Contents
Delinquent Loans, Troubled Debt Restructuring (“TDRs”), Impaired Loans, OREO and Classified Assets
Loan Portfolio Delinquencies. The following table sets forth certain information on our loan portfolio delinquencies at the dates
indicated:
At December 31, 2016:
Traditional C&I
Payroll finance
Factored receivables
Equipment finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
At December 31, 2015:
Traditional C&I
Payroll finance
Factored receivables
Equipment finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
At December 31, 2014:
Traditional C&I
Payroll finance
Factored receivables
Equipment finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
At September 30, 2014:
Traditional C&I
Payroll finance
Factored receivables
Equipment finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total
At September 30, 2013:
C&I
CRE
ADC
Residential Mortgage
Consumer
Total
Loans delinquent for
30-89 Days
Number
Amount
90 days or more still
accruing & non-accrual
Amount
Number
Total
Number
Amount
27
1
—
20
3
—
—
33
41
125
76
2
—
17
15
1
—
28
64
203
56
—
—
2
32
1
7
28
50
176
15
1
—
2
6
—
1
41
48
114
5
8
2
6
14
35
$
$
$
$
$
$
$
$
$
$
1,652
14
—
3,234
967
—
—
6,460
2,773
15,100
40,440
349
—
2,603
9,938
2,485
—
6,911
5,270
67,996
7,156
—
—
726
13,306
317
851
3,910
2,717
28,983
9,359
99
—
851
4,281
—
56
6,059
4,574
25,279
180
4,335
768
621
566
6,470
51
6
4
20
48
1
6
81
89
306
37
2
2
16
46
5
7
91
93
299
15
3
2
4
46
3
7
94
77
251
8
2
2
1
36
2
21
97
61
230
8
26
11
52
28
125
$
$
$
$
$
$
$
$
$
$
26,941
820
618
2,246
21,414
71
5,269
14,898
6,576
78,853
10,629
88
220
1,644
20,742
1,717
3,783
19,680
7,908
66,411
5,035
115
244
240
11,738
428
6,413
16,259
6,170
46,642
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
78
7
4
40
51
1
6
114
130
431
113
4
2
33
61
6
7
119
157
502
71
3
2
6
78
4
14
122
127
427
23
3
2
3
42
2
22
138
109
344
13
34
13
58
42
160
$
$
$
$
$
$
28,593
834
618
5,480
22,381
71
5,269
21,358
9,349
93,953
51,069
437
220
4,247
30,680
4,202
3,783
26,591
13,178
134,407
12,191
115
244
966
25,044
745
7,264
20,169
8,887
75,625
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
There were no ABL, warehouse lending or public sector finance delinquent loans for any period presented.
48
Table of Contents
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 90 days after 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:
Traditional C&I
Payroll finance
Factored receivables
Equipment finance
CRE
Multi-family
ADC
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
2016
December 31,
2015
2014
2014
2013
September 30,
$
$
$
26,386
199
618
2,246
21,008
71
5,269
14,790
6,576
1,690
78,853
13,619
92,472
11,285
$
$
$
10,142
—
220
1,644
20,742
1,717
3,700
19,680
7,892
674
66,411
14,614
81,025
13,701
$
$
$
4,975
—
244
240
11,286
272
6,413
16,259
6,170
783
46,642
5,867
52,509
17,261
$
$
$
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
0.83%
0.65
0.84%
0.68
0.97%
0.71
1.07%
0.80
1.12%
0.81
There were no non-accrual ABL, mortgage warehouse, or public sector finance loans for any periods presented.
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 December 31, 2016, our non-accrual loans totaled $77,163 and there were $1,690 of loans 90 days past due and still accruing interest.
Such loans were considered well secured and in the process of collection. At December 31, 2015, we had non-accrual loans of $65,737,
and we had $674 of loans 90 days past due and still accruing interest. At December 31, 2014 non-accrual loans were $45,859 and we had
$783 of loans 90 days past due and still accruing interest. At September 30, 2014, we had non-accrual loans of $49,562 and $1,401 of
loans 90 days past due and still accruing interest.
Non-performing loans (“NPLs”) increased $12,442 at December 31, 2016 to $78,853 compared to $66,411 at December 31, 2015. The
increase was due mainly to one taxi medallion relationship (which is included in traditional C&I loans) with a balance of $23,716 at
December 31, 2016 that was placed on non-accrual during the first quarter of 2016. Included in NPLs at December 31, 2016 were
purchase credit impaired loans acquired in the HVB Merger and the Provident Merger, which totaled $12,241. NPLs increased $19,769
at December 31, 2015 to $66,411 compared to $46,642 at December 31, 2014. The increase was mainly due to the HVB Merger. At
December 31, 2015, purchase credit impaired loans acquired in the HVB Merger and Provident Merger included in the non-performing
totals above were $20,025. This was the primary factor contributing to the increase in C&I, CRE and residential mortgage NPLs
between the periods. See additional information regarding purchase credit impaired loans below.
49
Table of Contents
At December 31, 2014 NPLs declined $4,321 to $46,642 from $50,963 at September 30, 2014. The decline was mainly due to the
resolution of an ADC loan that had shown sustained performance for an extended period of time and was returned to accrual status
during the transition period.
At September 30, 2014, NPLs increased $24,057 to $50,963 compared to $26,906 at September 30, 2013 mainly due to non-performing
loans acquired in the Provident Merger. Included in this increase were $3,763 of loans that were identified as purchased credit impaired
loans, of which $1,523 were commercial & industrial loans, $2,101 were residential mortgage loans and $139 were CRE loans. NPLs in
the ADC portfolio increased by $6,941 in fiscal 2014 to $12,361 as compared to the 2013 transition period. This increase consisted of
three loans which are well secured and one loan which performed as expected in fiscal 2014 and was returned to accrual status.
Residential mortgage NPLs represent a disproportionate percentage of total NPLs relative to the size of the residential mortgage loan
portfolio in all periods presented. The level of our residential mortgage NPLs is mainly attributed to the extended period of time
necessary to foreclose on residential mortgages in New York state, which is a judicial foreclosure state. Residential mortgage NPLs
declined $4,890 in calendar 2016 to $14,790 compared to $19,680 at December 31, 2015 and $16,259 at December 31, 2014. The
decline in 2016 was the mainly due to several residential mortgage loans that went through the judicial foreclosure process and were
transferred to OREO. The increase in calendar 2015 was mainly due to residential mortgage NPLs acquired in the HVB Merger.
Residential mortgage NPLs increased $333 in the transition period after increasing $8,442 from fiscal 2013 to fiscal 2014 to $15,926. In
fiscal 2014, we outsourced all residential mortgage servicing activities to a third-party vendor. This outsourcing relationship has allowed
us to better service our residential mortgage portfolio and manager our loan servicing operating expenses.
TDR. We have 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 TDR, and is also considered an impaired loan. Nearly all of these
loans are secured by real estate. Total TDRs were $13,274 at December 31, 2016, of which $1,989 were non-accrual, $11,032 were
current and performing according to terms and accruing interest income, and $253 were 30 to 89 days past due. At December 31, 2015
total TDRs were $22,292, of which $8,591 were non-accrual, $13,047 were current and performing, and $654 were 30 to 89 days past
due. A TDR accruing interest income is a loan that, at the time of modification, was not in non-accrual status and is continuing to
perform in accordance with the terms of the modification, or a loan that had been placed on non-accrual that has demonstrated a period
of satisfactory performance after modification, generally at least six months. Loan modifications include actions such as extension of
maturity date or the lowering of interest rates and monthly payments. As of December 31, 2016, there were no commitments to lend
additional funds to borrowers with loans that have been modified.
OREO. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO until such time as it is sold.
In addition, financial centers that were closed or consolidated that are held for sale are also classified as OREO. When real estate is
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 December 31, 2016, we had OREO properties with a recorded
balance of $13,619. 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
December 31, 2016, we had $104,569 of assets designated as “special mention” compared to $68,003 at December 31, 2015. The
increase was mainly due to “special mention” loans acquired in the NSBC Acquisition and also due to loans upgraded from substandard.
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
December 31, 2016, classified assets consisted of loans of $95,594 and OREO of $13,619 compared to $130,378 and $14,614,
respectively, a year earlier. The decline in classified assets at December 31, 2016 was due to loans upgraded to “special mention” based
50
Table of Contents
on improved performance, and the payoff and settlement of several loans as a result of successful resolution efforts by our credit
administration team.
For the year ended December 31, 2016, gross interest income that would have been recorded had the non-accrual loans at the end of
calendar 2016 remained on accrual status throughout the period amounted to approximately $3,526. Interest income actually recognized
on such loans totaled $186.
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 are 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 we believe 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 CRE 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,
when measured for impairment, if impairment is found that portion is charged-off against the allowance for loan losses. We calculate an
average historical loss experience by loan type that is a twelve quarter average for commercial loans and residential 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;
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. We analyze 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; CRE loans; multi-family loans; ADC loans; home equity lines of credit;
and certain consumer loans. The segments or classes considered unsecured or secured by other than real estate collateral are: C&I loans,
which includes traditional C&I loans, asset based loans; payroll finance loans; warehouse lending; factored receivables; equipment
finance loans; public sector finance loans and certain consumer loans. In all segments or classes, significant loans are reviewed for
impairment once they are placed in a non-accrual status or are assessed as a TDR. Generally we consider a homogeneous residential
mortgage loan or home equity line of credit to be significant if our investment in the loan is greater than $500. 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 value of the collateral and the book value of the loan. In addition, included in impairment losses are amounts recognized for
estimated costs to hold and to liquidate the collateral. These costs to hold and liquidate are generally in the range of 22% and are applied
to all loans collateralized by real estate.
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 C&I loans
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 may recognize an additional charge-off amount to account for the imprecision
of our estimates.
51
Table of Contents
ADC lending exposes us to greater credit risk than permanent mortgage financing. The repayment of ADC loans often 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 acquisition and development loans, and attempt to make construction loans
only to well qualified borrowers.
CRE 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.
C&I 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 liquidating, which we cannot be assured of doing, and the value in
liquidation may be uncertain.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.
52
Table of Contents
For the year ended
December 31,
For the three
months ended
December 31,
For the fiscal year ended
September 30,
2016
2015
2014
2014
2013
Balance at beginning of period
$
50,145
$
42,374
$
40,612
$
28,877
$
28,282
Charge-offs:
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total charge-offs
Recoveries:
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Ratios:
(1,707)
—
(28)
—
(1,200)
(1,982)
—
(959)
(417)
—
(1,045)
(1,615)
(8,953)
999
62
32
—
61
560
—
353
2
104
30
227
(1,575)
—
(406)
—
(291)
(3,423)
—
(1,695)
(17)
—
(1,251)
(2,360)
(11,018)
(733)
—
—
—
—
—
—
(172)
—
(488)
(310)
(203)
(1,906)
(2,901)
—
(758)
—
(211)
(1,074)
—
(741)
(418)
(1,479)
(963)
(786)
(9,331)
1,720
638
1,073
—
35
—
60
825
—
148
9
52
92
148
—
—
—
—
—
—
1
—
—
2
27
—
—
—
9
194
—
161
92
—
323
114
(1,354)
—
—
—
—
—
—
(3,285)
(440)
(3,422)
(2,547)
(2,009)
(13,057)
410
—
—
—
—
—
—
567
10
182
101
232
2,430
(6,523)
20,000
63,622
$
3,089
(7,929)
15,700
668
(1,238)
3,000
1,966
(7,365)
19,100
$
50,145
$
42,374
$
40,612
$
1,502
(11,555)
12,150
28,877
Net charge-offs to average loans
outstanding
Allowance for loan losses to NPLs
Allowance for loan losses to total loans
0.08%
80.7
0.67
0.13%
75.5
0.64
0.10%
90.8
0.88
0.18%
79.7
0.85
0.52%
107.0
1.20
Loans acquired through a merger or acquisition were recorded at fair value with no allowance for loan losses at the acquisition date.
Since the date of acquisition, as these acquired loans amortize, are renewed, or replaced through organic loan growth, they become loans
subject to our allowance for loan loss. See Note 5. “Allowance for Loan Losses - table “Total Valuation Balances Recorded Against
Portfolio Loans” in the notes to consolidated financial statements, which presents our acquired portfolio loans that continue to be subject
to purchase accounting adjustments.
53
Table of Contents
The allowance for loan losses increased $13,477 for calendar 2016 to $63,622 compared to $50,145 at December 31, 2015. The increase
in the allowance for loan losses was mainly due to growth in the loan portfolio as a result of organic growth and recent acquisitions. The
allowance for loan losses increased $7,771 in calendar 2015; mainly due to organic loan growth as the loans acquired in the HVB
Merger were subject to a purchase accounting adjustment. The allowance for loan losses increased $1,762 in the transition period, and
increased $11,735 to $40,612 in fiscal 2014 compared to fiscal 2013. The increase in the allowance in fiscal 2014 was due to organic
loan growth and also reflected that many of the short-term loans acquired in the Provident Merger were incorporated into our allowance
for loan loss calculation within one year of acquisition date.
Net charge-offs in calendar 2016 were $6,523, or 0.08%, of average loans outstanding compared to net charge-offs of $7,929, or 0.13%,
of average loans outstanding in calendar 2015. Net charge-offs in fiscal 2014 were $7,365, or 0.18%, of average loans outstanding
compared to net charge-offs of $11,555, or 0.52% of average outstanding loans outstanding in fiscal 2013. The decline in net charge-
offs in fiscal 2014 was mostly due to improved collateral values and performance in our CRE and ADC loan portfolios.
The allowance for loan losses at December 31, 2016 represented 80.7% of NPLs and 0.67% of the total loan portfolio compared to
75.5% of NPLs and 0.64% of the total loan portfolio at December 31, 2015 and 90.8% of NPLs and 0.88% of the total loan portfolio at
December 31, 2014. In the first quarter of 2016, we placed one taxi medallion relationship on non-accrual, which increased NPLs;
however, given the low level of net charge-offs and our recorded provision for loan losses, we increased our allowance for loan losses to
NPL coverage ratio during the year. The decline in the allowance to NPLs ratio and allowance for loan losses to total loans in calendar
2015 was due to NPLs and portfolio loans acquired in the HVB Merger. The allowance for loan losses at December 31, 2014
represented 90.8% of NPLs and 0.88% of the total loan portfolio compared to 79.7% of NPLs and 0.85% of the total loan portfolio at
September 30, 2014. The increase in the ratios in the transition period was mainly due to the continued satisfactory performance of an
ADC loan that was restored to accruing status during the period. The allowance for loan losses was 107.0% of NPLs and 1.20% of the
total loan portfolio at September 30, 2013, which does not include the impact of NPLs and portfolio loans acquired in the Provident
Merger as the transaction closed in October 2013.
Provision for Loan Losses. We recorded $20,000 in loan loss provision for calendar 2016 compared to $15,700 in calendar 2015,
$19,100 in fiscal 2014 and $12,150 in fiscal 2013. Provision for loan loss expense in 2016 and 2015 mainly reflected the amount of
provision required to offset net charge-offs, organic loan growth and loans acquired in the HVB Merger that were initially recorded at
fair value and in accordance with GAAP that did not carry an allowance for loan losses at the acquisition date, but have since been
renewed or otherwise transitioned into our allowance for loan loss analysis. The decline in provision expense in calendar 2015 compared
to fiscal 2014 was due to the loans acquired in the Provident Merger. The loans acquired in the Provident Merger included short-term
specialty finance loans, the majority of which were incorporated into our allowance for loan loss analysis within a 12 month period. The
loans acquired in the HVB Merger were more concentrated long-term in real estate loans and are being incorporated into our allowance
for loan losses analysis over a longer period of time. The increase of $6,950 in fiscal 2014 compared to fiscal 2013 reflected loans
acquired in the Provident Merger that were initially recorded at fair value and in accordance with GAAP, did not carry an allowance for
loan losses at the acquisition date. In the transition period and in fiscal 2014, we recorded provision for loan losses as a result of organic
loan growth and loans acquired in the Provident Merger that had been renewed since the merger date.
Our historical loan loss experience indicates classified loans, which are those rated substandard or worse, require higher levels of
provision and allowance for loan losses than loans that are not classified. Classified loans declined to $95,594 in calendar 2016 from
$130,378 at December 31, 2015. This decrease was primarily comprised of improvements in CRE loans and transfer to OREO of
residential mortgage loans.
Taxi Medallion Loans. At December 31, 2016, we had $51,680, or 0.54%, of total portfolio loans collateralized by taxi medallions.
Taxi medallion loans declined by $10,270 in calendar 2016 due to repayments. There is one taxi medallion relationship in the aggregate
amount of $23,716 at December 31, 2016 that is classified substandard and on non-accrual. We are closely monitoring the collateral
values, cash flows and performance of these taxi medallion loans.
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 December 31, 2016, we had $55,391 of impaired
loans compared to $28,372 at December 31, 2015, $31,023 at December 31, 2014, $36,208 at September 30, 2014 and $36,821 at
September 30, 2013. The increase in calendar 2016 was mainly due to the taxi medallion loan that was placed on non-accrual. The
54
Table of Contents
decline in calendar 2015 was principally due to a decline of $2,955 in impaired ADC loans. This decline in impaired ADC loans was
mainly due to one relationship which we charged-off and transferred a portion of the collateral to OREO. The decline of $5,185 between
December 31, 2014 and September 30, 2014 was mainly due to a decline in impaired ADC loans, which was the result of the return to
accrual status of a previously impaired loan relationship. The balance of impaired loans was relatively unchanged between September
30, 2014 and September 30, 2013 as impaired loans acquired in the Provident Merger were offset by the resolution of existing impaired
loans.
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. We now evaluate 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.
Purchased Credit Impaired (“PCI”) Loans. A PCI loan is an acquired loan that has demonstrated evidence of deterioration in credit
quality subsequent to origination. As of December 31, 2016, the balance of PCI loans was $88,908 and included PCI loans acquired in
the HVB Merger and Provident Merger of $12,241, which are accounted for under the cost-recovery method and were included in our
non-accrual loan totals above. The remaining $76,667 of PCI loans are accounted for under applicable guidance which results in an
accretable yield that represents the amount of expected cash flows that exceeds the initial investment in the loan. At December 31,
2015, the balance of PCI loans was $85,293 and included PCI loans accounted for under the cost-recovery method of $20,025, were
included in our non-accrual loan totals above. The increase in PCI loans in 2016 was the result of the NSBC Acquisition. Excluding the
impact of the NSBC Acquisition, PCI loans declined mainly due to repayments. The PCI loans under the cost recovery method declined
due to repayment and transfer to OREO. The balance of PCI loans was $3,415 at December 31, 2014 all of which were accounted for
under the cost-recovery method and were acquired in the Provident Merger. The increase in calendar 2015 was the result the the HVB
Merger. See the tables of loans evaluated for impairment by segment and changes in accretable yield for PCI loans in Note 4. “Portfolio
Loans” in the notes to consolidated financial statements for additional information.
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.
55
Table of Contents
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment finance
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total
2016
December 31,
2015
2014
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
$
12,864
$ 1,404,774
14.7% $
9,953
$ 1,189,154
15.1% $
6,966
$ 917,048
19.0%
3,316
951
1,563
1,669
5,039
1,062
741,942
255,549
616,946
214,242
589,315
349,182
20,466
3,162,942
4,991
1,931
5,864
3,906
981,076
230,086
697,108
284,068
7.8
2.7
6.5
2.3
6.2
3.7
33.2
10.3
2.4
7.3
3.0
2,762
1,936
589
1,457
4,925
547
310,214
221,831
387,808
208,382
631,303
182,336
11,461
2,733,351
5,141
2,009
5,007
4,358
796,030
186,398
713,036
299,517
4.0
2.8
4.9
2.7
8.0
2.3
34.8
10.1
2.4
9.1
3.8
4,061
1,506
608
1,205
2,569
—
7,721
4,511
2,987
5,843
4,397
327,507
154,229
173,786
161,625
411,449
—
1,458,277
384,544
96,995
529,766
200,415
6.8
3.2
3.6
3.4
8.5
—
30.3
8.0
2.0
11.0
4.2
$
63,622
$ 9,527,230
100.0% $
50,145
$ 7,859,360
100.0% $
42,374
$ 4,815,641
100.0%
September 30,
2014
2013
Allowance
for loan
losses
Loan
balance
% of total
loans
Allowance
for loan
losses
Loan
balance
% of total
loans
$
5,450
$
851,192
17.9% $
5,302
$
434,932
18.0%
4,086
1,379
630
1,294
2,621
—
8,444
4,267
2,120
5,837
4,484
313,345
145,474
192,003
181,433
393,027
—
1,449,052
368,524
92,149
570,431
203,808
6.6
3.1
4.0
—
—
—
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
$
40,612
$ 4,760,438
100.0% $
28,877
2,412,898
100.0%
For all periods presented the allowance for loan losses has increased compared to the earlier period. This is mainly the result of the
significant increase in the volume of loans due to the organic loan growth and the transition of loans acquired in mergers and
acquisitions that are now part of our allowance for loan loss calculation.
The allowance for traditional C&I loans was $12,864, or 0.92% of traditional C&I loans at December 31, 2016, compared to $9,953, or
0.84%, at December 31, 2015, $6,966, or 0.76%, at December 31, 2014 , $5,450, or 0.64%, at September 30, 2014 and $5,302, or
1.22%, at September 30, 2013 . The increase in the allowance for traditional C&I loans in calendar 2016 compared to calendar 2015 was
mainly due to growth of the portfolio, higher concentration in loans over $10,000 within the portfolio and deteriorating performance in
taxi medallion loans. The increase in the allowance for traditional C&I loans in calendar 2015 was mainly due to the initial deterioration
of the taxi medallion portfolio, as one significant relationship was classified substandard in the second half of 2015. The allowance as a
percentage of traditional C&I loans was 0.76%, 0.64% and 1.22% at December 31, 2014, September 31, 2014 and September 31, 2013,
respectively. The increase in the transition period was due to loans that moved to criticized and classified status in the period and the
decline in fiscal 2014 was due to the Provident Merger, which caused criticized and classified loans to comprise a lesser portion of the
traditional C&I loan portfolio.
56
Table of Contents
The allowance for ABL loans was $3,316, or 0.45%, of ABL loans at December 31, 2016, compared to $2,762, or 0.89%, at
December 31, 2015, $4,061, or 1.24%, at December 31, 2014 and $4,086, or 1.30%, at September 30, 2014. The decline in calendar
2016 was due to the NSBC Acquisition, as a substantial portion of this portfolio is still subject to purchase accounting adjustments and is
therefore not subject to the allowance for loan losses. The declines in the other periods presented is mainly due to improved historical
charge-off experience of ABL loans.
The allowance for loan losses for payroll finance loans as a percentage of payroll finance loans has declined in each successive period
presented above, which was mainly due to improved historical charge-off experience of payroll finance loans.
The allowance for loan losses for the warehouse lending portfolio is based solely on qualitative allowance factors, as there have been no
delinquencies or historical loss experience in this portfolio. The increase in the allowance for loan losses for warehouse lending as a
percentage of warehouse lending loans in calendar 2016 to 0.25% from 0.15% represents an adjustment related to the facility size in
warehouse lending relationships, since most facilities are over $10,000 in size.
The allowance for loan losses for factored receivables as a percentage of factored receivables was 0.78%, 0.70%, 0.75% and 0.71%, at
December 31, 2016, 2015, 2014, and September 30, 2014, respectively. The increase in calendar 2016 reflected an increase in historical
charge-off experience and higher delinquencies in the factored receivables portfolio.
The allowance for loan losses for equipment finance as a percentage of equipment finance loans was 0.86%, 0.78%, 0.62% and 0.67% at
December 31, 2016, 2015, 2014, and September 30, 2014, respectively. The increase in calendar 2016 was mainly due to an increase in
delinquencies in this portfolio. The increase in calendar 2015 was mainly due to a deterioration in loan trends as a result of certain loan
relationships that were exposed to the oil and gas sector.
The allowance for loan losses for public sector finance is based solely on qualitative factors, as there have been no delinquencies or
historical charge-offs in this portfolio since its inception in 2015. Our current loss factor of 0.30% mainly reflects the concentration
exposure of these loans, as several relationships have a balance over $10,000.
The allowance for loan losses for CRE loans was $20,466, or 0.65% of CRE loans, at December 31, 2016, compared to $11,461, or
0.42% of CRE loans, at December 31, 2015, $7,721, or 0.53%, at December 31, 2014, $8,444, or 0.58%, at September 30, 2014 and
$7,567, or 0.78% at September 30, 2013. The increase in the allowance for CRE loans as a percentage of CRE loans in calendar 2016
was mainly due to an increase in the average term the loans have been outstanding. Our loan loss methodology applies a lower
percentage of the total loss factor allocable to CRE loans in the first two years after origination as our loss history indicates a much
lower likelihood of loss in those initial periods. Beginning in the 25th month after origination, a CRE loan is allocated the full CRE loss
factor. The decline in calendar 2015 compared to December 31, 2014 was mainly due to improvements in our historical loss experience.
The decline in fiscal 2014 compared to fiscal 2013 was due to the Provident Merger, causing the criticized and classified loans to
comprise a much smaller portion of the CRE loan population.
The allowance for loan losses for multi-family loans was $4,991, or 0.51% of multi-family loans, at December 31, 2016, compared to
$5,141, or 0.65% at December 31, 2015, $4,511, or 1.17%, at December 31, 2014, $4,267, or 1.16% at September 30, 2014 and $2,400,
or 0.78% at September 30, 2013 . The decline in the allowance for loan losses for multi-family loans as a percentage of multi-family
loans at December 31, 2016 was mainly due to lower historical charge-off experience. The decline in the allowance for loan losses for
multi-family loans was due to the HVB Merger, as many of those loans continue to be subject to a purchase accounting adjustment. The
increase in fiscal 2014 was mainly due to an increase in loan concentrations, as a greater portion of the portfolio consisted of loans with
balances over $10,000.
The allowance for loan losses for ADC loans as a percentage of ADC loans was 0.84%, 1.08%, 3.08%, 2.30% and 5.66% at
December 31, 2016, 2015, 2014, September 30, 2014 and 2013, respectively. The declining trend in the allowance for loan losses for
ADC loans reflects the continued improvement in our historical loss experience. The increase at December 31, 2014 compared to
September 30, 2014 was due to an increase in charge-offs in the transition period and an increase in criticized and classified ADC loans.
The allowance loan losses for residential loans and consumer loans reflects our historical loss experience and qualitative factors that
consider overall delinquencies and trends and conditions in the portfolio. At December 31, 2016, residential mortgage and consumer
loans comprisd 10.3% of our portfolio loans and 15.4% of our allowance for loan losses, as generally, when these types of loans become
delinquent, the loss content tends to increase.
57
Table of Contents
There are purchase accounting valuation allowances that reduce the carrying value of loans acquired in prior mergers and acquisitions in
the amounts of $37,012, $41,383, $6,034 and $7,299 at December 31, 2016, 2015, 2014 and September 30, 2014, respectively. See Note
5. “Allowance for Loan Losses” in the notes to consolidated financial statements for additional information regarding total valuation
allowances held against our portfolio loans.
Investment Securities
Available for Sale Portfolio. The following table sets forth the composition of our available for sale securities portfolio at the dates
indicated.
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Mutual funds
Federal agencies
Corporate bonds
State and municipal
Trust preferred
Total other securities
December 31, 2016
December 31, 2015
December 31, 2014
Amortized
cost
Fair value
Amortized
cost
Fair value
Amortized
cost
Fair value
$ 1,213,733
57,563
1,271,296
$ 1,193,481
56,681
1,250,162
$ 1,222,912
79,430
1,302,342
$ 1,217,862
78,373
1,296,235
$
$
528,818
85,619
614,437
—
204,770
43,464
245,304
—
493,538
—
193,979
42,506
240,770
—
477,255
8,781
85,124
321,630
187,399
27,928
630,862
8,790
84,267
314,188
189,035
28,517
624,797
—
150,623
206,267
129,576
37,687
524,153
533,663
84,838
618,501
—
147,156
204,831
132,065
38,293
522,345
Total available for sale securities
$ 1,764,834
$ 1,727,417
$ 1,933,204
$ 1,921,032
$ 1,138,590
$ 1,140,846
Held to Maturity Portfolio. The following table sets forth the composition of our held to maturity securities portfolio at the dates
indicated.
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
State and municipal
Corporate bonds
Other
Total other securities
Total held to maturity securities
December 31, 2016
December 31, 2015
December 31, 2014
Amortized
cost
Fair value
Amortized
cost
Fair value
Amortized
cost
Fair value
$
$
277,539
40,594
318,133
$
275,267
40,096
315,363
$
252,760
49,842
302,602
$
253,403
49,310
302,713
$
138,589
60,166
198,755
58,200
974,290
35,048
5,750
1,073,288
$ 1,391,421
59,592
941,629
35,468
5,945
1,042,634
$ 1,357,997
$
104,135
285,813
25,241
5,000
420,189
722,791
$
105,958
295,006
25,052
5,350
431,366
734,079
$
136,618
231,964
—
5,000
373,582
572,337
$
141,350
59,660
201,010
140,398
239,588
—
5,350
385,336
586,346
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 Board at least quarterly.
Our objective for the investment securities is to maintain a high quality, liquid investment securities with a structure and duration profile
designed to limit the impact of a rising interest rate environment on the fair value of the portfolio. The investment portfolio provides for
flexibility in interest rate risk management and additional liquidity, in addition to contributing to our overall earnings. Investment
58
Table of Contents
securities are also utilized for pledging purposes as collateral for borrowings from FHLB, municipal deposits, and other borrowings. We
regularly evaluate the portfolio within the context of our balance sheet optimization strategy of maintaining a prudent liquidity position,
while producing growth in earnings and attractive returns on equity and assets. We evaluate the portfolio’s size, risk and duration on a
daily basis. At December 31, 2016, investment securities represented 22.0% of total assets compared to 22.1% at December 31, 2015
and 23.1% at December 31, 2014. Our goal is to increase commercial loans and reduce investment portfolio to a range of 18.0% to
20.0% of total assets over time.
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 as available for sale are reported at fair value, while securities designated as 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 December 31, 2016, the carrying value of investment securities was $3,118,838, an increase of
$475,015, or 18.0%, compared to December 31, 2015. Investment securities increased $930,640, or 54.3%, at December 31, 2015
compared to $1,713,183 at December 31, 2014. The increase was mainly due to the investment securities acquired in the HVB Merger.
Tax exempt securities represent $1,215,060, or 39.0%, of our investment portfolio at December 31, 2016, compared to $474,848, or
18.0% at December 31, 2015 and $364,029, or 21.2%, at December 31, 2014. We believe that, given current market conditions and
interest rate environment, tax exempt securities provide better risk adjusted returns relative to other securities. Therefore, management
focused on purchasing a diversified portfolio of state and local municipal securities in 2016.
Portfolio Maturities and Yields. The following table summarizes the composition, maturities and weighted average yield of our
investment securities portfolio at December 31, 2016. 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
Available for sale:
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Federal agencies
Corporate
State and municipal
Trust preferred
Other
Total
Held to maturity:
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Federal agencies
Corporate
State and municipal
Other
Total
$
—
—
—
3,469
—
8,136
—
—
—% $
9,103
0.87% $
44,297
2.29% $1,160,333
2.61% $1,213,733
$1,193,481
2.54%
—
—
0.92
—
2.73
—
—
610
9,713
19,990
10,126
58,678
—
—
3.20
1.02
1.45
2.26
2.31
—
—
6,947
51,244
111,211
33,338
106,695
—
—
2.01
2.26
1.85
4.11
2.06
—
—
50,006
1,210,339
70,100
—
71,795
—
—
2.30
2.60
2.46
—
2.06
—
—
57,563
56,681
1,271,296
1,250,162
204,770
193,979
43,464
42,506
245,304
240,770
—
—
—
—
2.27
2.53
2.00
3.68
2.14
—
—
$
11,605
2.19% $
98,507
2.00% $ 302,488
2.24% $1,352,234
2.57% $1,764,834
$1,727,417
2.48%
$
—
—
—
—
5,048
19,767
—% $
19,551
2.61% $
20,894
2.73% $ 237,094
2.74% $ 277,539
$ 275,267
2.73%
—
—
—
1.98
1.84
—
19,551
48,716
—
10,534
5,500
—
2.61
2.53
—
1.88
3.03
—
20,894
9,484
30,000
164,670
250
—
2.73
2.99
5.16
2.85
3.79
40,594
277,688
—
—
1.96
2.63
—
—
40,594
40,096
318,133
315,363
58,200
35,048
59,592
35,468
779,319
2.43
974,290
941,629
—
5,750
5,945
1.96
2.63
2.60
4.70
2.48
3.06
$
24,815
1.87% $
84,301
2.46% $ 225,298
3.15% $1,057,007
2.48% $1,391,421
$1,357,997
2.58%
MBS. MBS 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
59
Table of Contents
the payment of principal and interest to these investors. Investments in MBS 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 MBS 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 MBS 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 MBS portfolio is invested in collateralized mortgage obligations (“CMOs”), including Real Estate Mortgage Investment
Conduits (“REMICs”), backed by Fannie Mae, Freddie Mac and Ginnie Mae. CMOs and REMICs are types of debt securities issued by
special-purpose entities that aggregate pools of mortgages and MBS 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 “BBB-” or better by at least one nationally recognized rating agency at time of purchase, and to a transaction size of no more than
$20,000 per issuer. When transactions are not rated by a nationally recognized rating agency, we submit the details of potential
investments in such instruments to our credit department to determine if the securities are appropriate from a credit risk perspective for
our investment securities portfolio. Our total corporate bond portfolio limit is the lesser of 5% of total assets or 25% of Tier 1 capital.
We sold a significant portion of our available for sale corporate bonds in 2016 due to a change in our investment criteria, as management
determined these securities are not as liquid as other types of securities and do not qualify as acceptable collateral.
State and Municipal Bonds. Our 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 a transaction limit of $10,000 per municipal issuer and a total
municipal bond portfolio limit to the lesser of 15% of assets or 150% of Tier 1 capital. At December 31, 2016, we did not hold any
obligations that were rated less than “A-” as available for sale.
Trust preferred securities. We owned securities of single-issuer bank trust preferred securities, all of which were paying in accordance
with their terms and had no deferrals of interest or other deferrals. Management analyzed the credit risk and the probability of
impairment on the contractual cash flows of applicable securities. Based upon our analysis, all of the issuers maintained performance
levels adequate to support the contractual cash flows of the securities. During 2016, we sold our remaining trust preferred securities due
to the same reasons applicable to the sale of our corporate bonds, as discussed above.
60
Table of Contents
Deposits
The following table sets forth the distribution of average deposit accounts by account category and the average rates paid at the dates
indicated.
For the year ended December 31,
2016
2015
Average
balance
Rate
Average
balance
Rate
For the three months
ended
December 31, 2014
Average
balance
Rate
For the fiscal year
ended
September 30, 2014
Average
balance
Rate
$3,120,973
—% $2,332,814
—% $1,626,341
—% $1,580,108
—%
1,962,813
0.32
1,128,667
0.19
756,217
0.09
706,160
0.08
812,339
3,124,117
620,724
6,519,993
$9,640,966
871,339
0.56
2,286,376
0.54
520,139
0.88
0.51
4,806,521
0.34% $7,139,335
685,142
0.27
1,817,091
0.43
457,996
0.61
0.36
3,716,446
0.24% $5,342,787
622,414
0.24
1,458,852
0.35
554,396
0.54
0.30
3,341,822
0.21% $4,921,930
0.14
0.35
0.44
0.27
0.18%
Non-interest bearing demand
Interest bearing demand
Savings
Money market
Certificates of deposit
Total interest bearing deposits
Total deposits
Average deposits for calendar 2016 were $9,640,966 and increased $2,501,631 compared to calendar 2015. The increase was due to
organic growth generated by our commercial banking teams and the HVB Merger. The increase of $1,796,548 in average deposits in
calendar 2015 relative to the transition period was mainly the result of the HVB Merger. Average deposits for the transition period were
$5,342,787, an increase of $420,857 compared to $4,921,930 in fiscal 2014. The increase was mainly a result of the timing of the
Provident Merger, seasonality in our municipal deposits, and organic growth generated by our commercial banking teams. The average
cost of interest bearing deposits was 0.51% for calendar 2016, 0.36% for calendar 2015, 0.30% in the transition period and 0.27% in
fiscal 2014. The average cost of total deposits was 0.34% for calendar 2016, 0.24% for calendar 2015, 0.21% in the transition period
and 0.18% in fiscal 2014. A large portion of our deposits are commercial deposits, which usually have higher interest rates paid and are
more sensitive to changes in interest rates. We anticipate the recent increases in short-term interest rates experienced in late 2016 may
result in slightly higher interest expense in 2017.
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
December 31, 2016
Amount
$ 3,239,332
%
32.2% $ 2,936,980
December 31, 2015
Amount
%
34.1% $ 1,481,870
December 31, 2014
Amount
%
28.4%
2,220,456
747,031
3,277,686
9,484,505
583,754
$10,068,259
22.1
7.4
32.6
94.3
5.8
1,274,417
943,632
2,819,788
7,974,817
605,190
100.0% $ 8,580,007
14.9
11.0
32.9
92.9
7.1
747,667
711,509
1,790,435
4,731,481
480,844
100.0% $ 5,212,325
14.3
13.7
34.4
90.8
9.2
100.0%
The following table presents the proportion by business type of each component of total deposits for the periods presented:
Retail and commercial deposits
Municipal deposits
Wholesale deposits
December 31,
2016
2015
2014
73.6%
12.4
14.0
76.1%
13.3
10.6
77.6%
16.9
5.5
100.0%
100.0%
100.0%
61
Table of Contents
As of December 31, 2016, December 31, 2015, and December 31, 2014, we had $1,270,921, $1,140,206,000, and $883,350 respectively,
in municipal deposits. Municipal deposits experience seasonal flows associated with school district tax collections and typically peak in
September or October each year and gradually return to more normalized levels over the fourth calendar quarter. The increases in
municipal deposits in the periods presented is primarily due to the HVB Merger, and organic growth in deposits generated by our
municipal banking and public sector finance teams. Wholesale deposits consist of brokered deposits, except for reciprocal certificate of
deposit account registry service (“CDARs”), and certificates of deposit. Wholesale deposits were $1,413,268, $910,092, and $547,513
at December 31, 2016, December 31, 2015, and December 31, 2014, respectively. Wholesale deposits increased based on growth of
loans and investment securities. We increased the number of sources that we utilize to attract wholesale deposits to diversify our funding
providers.
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 December 31, 2016 - Period to maturity
December 31,
1 year or
less
1-2 years
2-3 years
3 years or
more
Total
% of
total
2015
2014
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%
Total
$ 188,761
291,401
—
—
—
$ 480,162
$
$
10,803
36,965
—
—
—
47,768
$
$
5,262
37,230
—
—
—
42,492
$
$
3,984
9,348
—
—
—
13,332
$ 208,810
$ 374,944
—
—
—
$ 583,754
35.8% $
64.2
—
—
—
100.0% $
483,711
121,196
283
—
—
605,190
$
$
403,242
72,332
4,412
857
1
480,844
Certificates of Deposit by Time to Maturity. The following table sets forth certificates of deposit by time remaining until maturity as of
December 31, 2016.
Certificates of deposit less than $100,000
Certificates of deposit $100,000 or more
3 months or
less
Period to maturity
6-12
months
3-6
months
Over 12
months
Total
Rate
$
$
43,949
$
33,399
$
30,047
$
27,877
$ 135,272
187,393
231,342
99,478
$ 132,877
85,896
$ 115,943
75,715
$ 103,592
448,482
$ 583,754
0.79%
1.04
0.98%
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 has a maturity that coincides with the
anticipated inflows of deposits in our municipal banking business.
Listed below are our brokered deposits:
Non-interest bearing demand
Interest bearing demand
Money market
Savings
Reciprocal CDARs 1
CDARs one way 1
Total brokered deposits
December 31,
2016
2015
2014
— $
426,437
5,560
246,572
153,060
—
831,629
$
— $
—
152,180
—
169,958
106,647
428,785
$
—
—
75,462
—
6,666
86,530
168,658
$
$
1
Reciprocal CDARs represent deposits in which our core deposit clients have elected to diversify their deposits among us and other
financial institutions for purposes of obtaining FDIC insurance coverage on their total deposit amount. However, we maintain full
control over the client relationship and deposit pricing. We consider reciprocal CDARs core deposits.
62
Table of Contents
Short-term Borrowings. Our 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 period
Average balance during period
Maximum amount outstanding at any month end
Weighted average interest rate at end of period
Weighted average interest rate during period
2016
$ 1,397,642
995,693
1,397,642
$
December 31,
2015
999,222
572,009
999,222
$
2014
532,835
427,750
532,835
0.87%
0.73
0.69%
0.47
0.39%
0.43
Short-term borrowings are mainly used to fund loan growth. On a daily basis, the amount of short-term borrowings will fluctuate based
on the inflows and outflows of deposits and other sources and uses of funds.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of our operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not
recorded in our financial statements. We enter into these transactions to meet the financing needs of our clients and for general
corporate purposes. These transactions include commitments to extend credit and letters of credit and involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. We minimize our exposure to loss under these commitments by subjecting them to
credit approval and monitoring procedures.
Our off-balance sheet arrangements 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 December 31, 2016, these commitments totaled $811,172. For our real estate businesses,
loan commitments are generally for residential, multi-family and commercial construction projects, which totaled $164,805 at
December 31, 2016. Loan commitments for our retail customers are generally home equity lines of credit secured by residential
property and totaled $80,514 at December 31, 2016. In addition, loan commitments for overdrafts were $16,991. Letters of credit
issued by us generally are standby letters of credit. Standby letters of credit are commitments issued by us on behalf of our customer/
obligor in favor of a beneficiary that specify an amount we can be called upon to pay upon the beneficiary’s compliance 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 us to the third-party.
Letters of credit as of December 31, 2016 totaled $114,582.
See Note 17. “Off-Balance-Sheet Financial Instruments” in the notes to 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. The following table summarizes our significant fixed and determinable
contractual obligations and other funding needs by payment date at December 31, 2016. Payments for borrowings do not include
interest. Payments for operating leases are based on payments specified in the underlying contracts. Loan commitments, including
letters of credit and undrawn lines of credit, are presented at contractual amounts; however, since many of these commitments have
historically expired unused or partially used, the total amounts of these commitments do not necessarily reflect future cash
requirements.
63
Table of Contents
Contractual obligations:
FHLB borrowings
Other borrowings
Senior Notes
Subordinated Notes
Time deposits
Operating leases
Other commitments:
Letters of credit
Undrawn lines of credit
Total
1 year or less
1-3 years
3-5 years
5 years or
more
Payments due by period
$
$
1,381,000
16,642
—
—
480,162
10,549
1,888,353
$
310,000
—
76,469
—
90,260
18,930
495,659
$
100,000
—
—
—
13,332
14,145
127,477
— $
—
—
172,501
—
21,501
194,002
Total
1,791,000
16,642
76,469
172,501
583,754
65,125
2,705,491
95,655
743,823
2,727,831
$
$
18,927
251,379
765,965
$
—
82,217
209,694
$
—
136,188
330,190
$
114,582
1,213,607
4,033,680
See Note 17. “Off-Balance-Sheet Financial Instruments” in the notes to consolidated financial statements for additional information
regarding our contractual obligations.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes 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 primary impact of inflation is reflected in increased operating costs. Our
assets and liabilities are primarily monetary in nature and, as a result, changes in market interest rates have a greater impact on
performance than the effects of inflation.
64
Table of Contents
Liquidity and Capital Resources
Capital. At December 31, 2016, stockholders’ equity totaled $1,855,183 compared to $1,665,073 at December 31, 2015. The factors
that contributed to the change in stockholders’ equity for the periods is presented in the following table:
For the calendar year ended December 31,
2016
2015
Beginning of period
Net income
Stock-based compensation
Common stock issuance
Common stock issued in merger transactions
Other comprehensive (loss) gain
Dividends
Balance at end of period
$
1,665,073
$
139,972
10,105
90,995
—
(14,511)
(36,451)
1,855,183
$
975,200
66,114
7,344
85,059
563,613
(1,873)
(30,384)
$
1,665,073
The increase in stockholders’ equity for calendar 2016 was mainly due to net income of $139,972 and the November 22, 2016
common equity issuance in which we issued 4,370,000 common shares and received proceeds, net of costs of issuance of $90,995.
The increase was also a result of stock-based compensation. These increases, were partially offset by dividends of $36,451.
The increase in stockholders’ equity for calendar 2015 was mainly due to the following three items: (i) the HVB Merger on June 30,
2015, in which we issued 38,525,154 common shares at the June 29, 2015 closing price of $14.63 which increased stockholders’
equity by $563,613; (ii) the February 11, 2015 common equity issuance, in which we issued 6,900,000 common shares and received
proceeds, net of costs of issuance of $85,059; and (iii) net income of $66,114. These increases were partially offset by dividends of
$30,384.
The accumulated other comprehensive loss (“AOCI”) component of stockholders’ equity totaled a net, after-tax unrealized loss of
$26,635 at December 31, 2016 compared to a net, after-tax unrealized loss of $12,124 at December 31, 2015. The $14,511 decline in
calendar 2016 was the result of a $15,638 decrease in the net after-tax value of available for sale securities due to changes in market
interest rates and was partially offset by increases in AOCI of $891 related to accretion of the unrealized holding loss on securities
transferred to held to maturity in connection with the Provident Merger, and $236 related to accretion of the unrealized holding loss on
retirement plan obligations. The $1,873 decline in calendar 2015 was the result of a $8,296 decrease in the net after-tax value of
available for sale securities due to changes in market interest rates and was substantially offset by increases in AOCI of $812 related to
accretion of the unrealized holding loss on securities transferred to held to maturity in connection with the Provident Merger and
$5,611 related to accretion of the unrealized holding loss on retirement plan obligations, which was mainly due to the pension plan
termination.
Under current regulatory requirements, amounts reported as AOCI 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 16. “Stockholders’ Equity” in the notes to consolidated financial statements.
At December 31, 2016 we held 5,785,579 shares in treasury compared to 6,666,223 at December 31, 2015. We generally use treasury
shares for stock-based compensation purposes.
Stock repurchase plans. Our Board has authorized the repurchase of our common stock. At December 31, 2016, there were 776,713
shares available for repurchase. No shares were repurchased under this plan during calendar 2016, calendar 2015 or fiscal 2014. See
Part II, Item 5. “Market for Registrants Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities”,
included elsewhere in this Report.
65
Table of Contents
Dividends. We paid a quarterly dividend of $0.07 per common share in each quarter of calendar 2016 and calendar 2015. We paid a
dividend of $0.06 per common share in the first fiscal quarter of 2014 and a dividend of $0.07 per common share in the second, third
and fourth fiscal quarters of fiscal 2014.
Basel III Capital Rules. The Basel III Capital Rules became effective for us and the Bank on January 1, 2015 (subject to a phase-in
period for certain provisions). In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement
to include most components of AOCI in regulatory capital. Accordingly, amounts reported as AOCI related to securities available for
sale, securities transferred to held-to-maturity in connection with the Provident Merger and our remaining post-retirement benefit
plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios.
Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into
consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 16. “Stockholders’ Equity - (a)
Regulatory Capital Requirements” in the notes to consolidated financial statements.
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 our liquidity management is to
manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other
commitments on a timely basis and at a reasonable cost. We seek 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 our balance sheet. Our 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, cash flow from securities held to maturity and
maturities of securities held to maturity.
Our ability to access liabilities in a timely fashion is provided by access to funding sources which include core deposits, federal funds
purchased and repurchase agreements. Our liquidity position 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 our asset/liability
management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting
from economic activity, volatility in the financial markets, unexpected credit events or other significant occurrences. These scenarios
are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of
December 31, 2016, management is not aware of any events that are reasonably likely to have a material adverse effect on our
liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity
that would have a material adverse effect on us.
At December 31, 2016, the Bank had $293,646 in cash on hand and unused borrowing capacity at the FHLB of $611,331. In addition,
the Bank may purchase additional federal funds from other institutions, enter into additional repurchase agreements, and acquire
deposits from wholesale and other sources.
We are a bank holding company and do not conduct operations. Our primary sources of liquidity are dividends received from the
Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. At
December 31, 2016, the Bank had capacity to pay up to $155,724 of dividends to us and maintain its “well capitalized” status under
regulatory guidelines. However, the Bank also has developed internal capital management policies and procedures; and under these
policies and procedures, the Bank could pay dividends to us of approximately $91,000 at December 31, 2016. We had cash of
$48,705, and $25,000 available under a revolving line of credit facility at December 31, 2016.
In September 2016, we renewed our $25,000 revolving line of credit facility with a third-party financial institution that matures on
September 4, 2017. The use of proceeds are for general corporate purposes. The facility has not been used and requires us and the
Bank to maintain certain ratios related to capital, nonperforming assets to capital, reserves to nonperforming loans and debt service
coverage. We and the Bank were in compliance with all requirements of the line of credit facility at December 31, 2016.
We have an effective shelf registration statement filed with the Commission on Form S-3 dated February 4, 2015. Our shelf
registration statement allows us to issue a variety of debt and equity instruments which are subject to Board authorization and market
66
Table of Contents
conditions. 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.
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
CRE loans, C&I loans and 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 our and the
Bank’s economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The model assumes estimated loan prepayment rates, reinvestment rates and deposit
decay rates that seem reasonable, based on historical experience during prior interest rate changes.
Estimated Changes in EVE and NII. The table below sets forth, as of December 31, 2016, the estimated changes in our (i) EVE that
would result from the designated instantaneous changes in the forward rate curves, and (ii) NII that would result from the designated
instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be
relied on as indicative of actual results.
Interest rates
(basis points)
+300
+200
+100
0
-100
Estimated
EVE
1,737,645
$
$
1,811,982
1,889,421
1,949,648
1,943,572
Estimated change in EVE
Percent
Amount
Estimated
NII
Estimated change in NII
Amount
Percent
(212,003)
(137,666)
(60,227)
—
(6,076)
(10.9)% $
519,621
$
(7.1)
(3.1)
—
(0.3)
501,486
484,225
465,915
441,067
53,706
35,571
18,310
—
(24,848)
11.5%
7.6
3.9
—
(5.3)
The table above indicates that at December 31, 2016, in the event of an immediate 200 basis point increase in interest rates, we would
expect to experience a 7.1% decrease in EVE and a 7.6% increase in NII. Due to the current level of interest rates, management is unable
to reasonably model the impact of decreases in interest rates on EVE and NII beyond -100 basis points.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and
NII require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in
market interest rates. The EVE and NII table presented above assumes that the composition of our interest-rate sensitive assets and
liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not
reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the re-pricing characteristics of
67
Table of Contents
specific assets and liabilities. Accordingly, although the EVE and NII table provides an indication of our sensitivity to interest rate
changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of
changes that market interest rates may have on our net interest income. Actual results will likely differ.
During the fourth quarter of 2016, the federal funds target rate increased a quarter point to 0.50 - 0.75%. U.S. Treasury yields in the two
year maturities increased 14 basis points from 1.06% to 1.20% over the 12-months December 31, 2016 while the yield on U.S. Treasury
10-year notes increased 18 basis points from 2.27% to 2.45% over the same twelve month period. The greater increase in rates on
longer-term maturities relative to the increase in rates to short-term maturities resulted in a slightly steeper 2-10 year treasury yield curve
at the end of 2016 relative to December 31, 2015. At its December 2016 meeting, the Federal Open Market Committee (the “FOMC”)
stated its stance of monetary policy remains accommodative. The FOMC further stated that it expects that economic conditions will
evolve in a manner that will warrant only gradual increases in the federal funds rate and the actual path of the federal funds rate will
depend on the economic outlook as informed by incoming data. However, should economic conditions improve at a faster pace than
anticipated, the FOMC could increase the federal funds target rate quicker. This could cause the shorter end of the yield curve to rise
disproportionately relative to the longer end, thereby resulting in a flatter yield curve and greater margin compression.
ITEM 8. Financial Statements and Supplementary Data
The following are included in this item:
(A)
(B)
(C)
(D)
(E)
(F)
(G)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, for the three months ended
December 31, 2014 and 2013 (2013 Unaudited) and for the fiscal year ended September 30, 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016 and 2015, for the three
months ended December 31, 2014 and 2013 (2013 Unaudited) and for the fiscal year ended September 30, 2014
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015, for the three
months ended December 31, 2014 and for the fiscal year ended September 30, 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015, for the three months ended
December 31, 2014 and 2013 (2013 Unaudited) and for the fiscal year ended September 30, 2014
Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly financial data) is provided in Note 22. “Quarterly Results of
Operations (Unaudited)” in the notes to consolidated financial statements.
68
Table of Contents
Board of Directors and Stockholders
Sterling Bancorp and Subsidiaries
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Sterling Bancorp and Subsidiaries as of December 31, 2016 and 2015,
and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity and cash flows for the
years ended December 31, 2016 and 2015, the three months ended December 31, 2014 and the year ended September 30, 2014. We also
have audited Sterling Bancorp and Subsidiaries’ internal control over financial reporting as of December 31, 2016, 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 and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years ended December
31, 2016 and 2015, the 3 months ended December 31, 2014 and the year ended September 30, 2014, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, Sterling Bancorp and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Crowe Horwath LLP
New York, New York
February 24, 2017
69
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2016 and 2015
(Dollars in thousands, except share and per share data)
Table of Contents
ASSETS:
Cash and due from banks
Securities:
Available for sale, at fair value
Held to maturity, at amortized cost (fair value of $1,357,997, and $734,079 at December 31,
2016 and 2015, respectively)
Total securities
Loans held for sale
Portfolio loans
Allowance for loan losses
Portfolio loans, net
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank 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 (repurchase agreements)
Senior notes
Subordinated notes
Mortgage escrow funds
Other liabilities
Total liabilities
Commitments and Contingent liabilities (See Note 18.)
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; 141,043,149 and
136,673,149 shares issued at 2016 and 2015, respectively; 135,257,570 and 130,006,926,
outstanding at 2016 and 2015, respectively)
Additional paid-in capital
Treasury stock, at cost (5,785,579 shares and 6,666,223 shares at December 31, 2016 and 2015,
respectively)
Retained earnings
Accumulated other comprehensive loss, net of tax (benefit) of ($17,390) at December 31, 2016 and
($8,961) at December 31, 2015
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
70
December 31,
2016
2015
$
293,646
$
229,513
1,727,417
1,921,032
1,391,421
3,118,838
41,889
9,527,230
(63,622)
9,463,608
135,098
43,319
57,318
696,600
66,353
199,889
13,619
48,270
$ 14,178,447
722,791
2,643,823
34,110
7,859,360
(50,145)
7,809,215
116,758
31,531
63,362
670,699
77,367
196,288
14,614
68,672
$ 11,955,952
$ 10,068,259
1,791,000
16,642
76,469
172,501
13,572
184,821
12,323,264
—
$
8,580,007
1,409,885
16,566
98,893
—
13,778
171,750
10,290,879
—
—
—
1,411
1,597,287
1,367
1,506,612
(66,188)
349,308
(76,190)
245,408
(26,635)
1,855,183
$ 14,178,447
(12,124)
1,665,073
$ 11,955,952
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (2013 unaudited) and fiscal
year ended September 30, 2014
(Dollars in thousands, except share and per share data)
Year ended
December 31,
Three months ended
December 31,
2016
2015
2014
2013
Fiscal year ended
September 30,
2014
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 (loss) 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, net
Merger-related expense
Defined benefit plan termination charge
Loss on extinguishment of borrowings
Other
Total non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Weighted average common shares:
Basic
Diluted
Earnings per common share:
Basic
Diluted
$
$
390,847
42,540
23,669
4,495
461,551
33,189
24,093
57,282
404,269
20,000
384,269
17,695
6,173
15,166
7,522
5,832
3,710
14,889
70,987
125,916
6,518
34,486
12,416
8,240
2,051
265
—
9,729
48,281
247,902
207,354
67,382
139,972
$
$
292,496
39,369
12,076
4,200
348,141
17,478
19,447
36,925
311,216
15,700
295,516
17,088
11,405
15,871
4,837
5,235
2,397
5,918
62,751
104,939
4,581
32,915
10,043
7,380
274
17,079
13,384
—
69,723
260,318
97,949
31,835
66,114
130,607,994
131,234,462
109,907,645
110,329,353
$
$
1.07
1.07
0.60
0.60
$
$
$
See accompanying notes to consolidated financial statements.
56,869
7,413
2,865
940
68,087
2,818
5,032
7,850
60,237
3,000
57,237
4,134
2,858
4,221
(43)
1,024
403
1,360
13,957
22,410
1,146
7,245
1,873
1,568
(81)
502
—
—
11,151
45,814
25,380
8,376
17,004
83,831,380
84,194,916
0.20
0.20
$
$
$
$
43,288
6,903
2,161
359
52,711
1,834
5,001
6,835
45,876
3,000
42,876
2,226
1,616
3,942
(645)
740
540
729
9,148
20,811
991
6,333
1,875
1,164
368
9,068
2,743
—
29,621
72,974
(20,950)
(6,948)
(14,002) $
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
90,215
3,703
27,726
9,408
6,146
(237)
9,455
4,095
—
57,917
208,428
37,830
10,152
27,678
70,493,305
70,493,305
80,268,970
80,534,043
(0.20) $
(0.20)
0.34
0.34
71
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (2013 unaudited) and fiscal
year ended September 30, 2014
(Dollars in thousands, except share and per share data)
Net income (loss)
Other comprehensive (loss) income:
Change in unrealized holding (losses) gains on
securities available for sale
Change in net unrealized gain (loss) on securities
transferred to held to maturity
Reclassification adjustment for net realized (gains)
losses included in net income
Change in funded status of defined benefit plans and
acceleration of future amortization of accumulated
other comprehensive loss on defined benefit
pension plan
Total other comprehensive (loss) income items
Related income tax benefit (expense)
Other comprehensive (loss) income
Total comprehensive income (loss)
Year ended
December 31,
Three months ended
December 31,
2016
$ 139,972
2015
2014
$
66,114
$
17,004
$
2013
(14,002) $
Fiscal year ended
September 30,
2014
27,678
(17,723)
(9,591)
6,858
(615)
15,948
1,473
1,412
(7,522)
(4,837)
310
43
(9,841)
(8,947)
645
(641)
390
(23,382)
8,871
(14,511)
$ 125,461
$
9,758
(3,258)
1,385
(1,873)
64,241
(5,108)
2,103
(895)
1,208
$
18,212
$
2,336
(7,475)
3,340
(4,135)
(18,137) $
372
6,732
(2,861)
3,871
31,549
See accompanying notes to consolidated financial statements.
72
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2016 and 2015, the three months ended December 31, 2014 and the fiscal year ended September 30, 2014
(Dollars in thousands, except share and per share data)
Common
stock
Additional
paid-in
capital
Unallocated
ESOP
shares
Balance at October 1, 2013
Net income
Other comprehensive income
Common stock issued in Provident Merger transaction
Stock option & other stock transactions, net
ESOP shares allocated and ESOP termination
Restricted stock awards, net
Cash dividends declared ($0.21 per common share)
Balance at September 30, 2014
Net income
Other comprehensive income
Stock option & other stock transactions, net
Restricted stock awards, net
Cash dividends declared ($0.07 per common share)
Balance at December 31, 2014
Net income
Other comprehensive loss
Common stock issued in HVB Merger transaction
Stock option & other stock transactions, net
Restricted stock awards, net
Common equity issued, net of costs of issuance
Cash dividends declared ($0.28 per common share)
Balance at December 31, 2015
Net income
Other comprehensive loss
Stock option & other stock transactions, net
Restricted stock awards, net
Common equity issued, net of costs of issuance
Cash dividends declared ($0.28 per common share)
Balance at December 31, 2016
Number of
shares
44,351,046
—
—
39,057,968
267,188
(488,403)
440,468
—
83,628,267
—
—
95,033
204,272
—
83,927,572
—
—
38,525,154
322,132
332,068
6,900,000
—
130,006,926
—
—
499,659
380,985
4,370,000
—
135,257,570
See accompanying notes to consolidated financial statements.
$
$
522
—
—
390
—
—
—
—
912
—
—
—
—
—
912
—
—
386
—
—
69
—
1,367
—
—
—
—
44
—
1,411
$
$
403,816
—
—
457,362
880
1,280
(2,774)
—
860,564
—
—
328
(2,403)
—
858,489
—
—
563,227
940
(1,034)
84,990
—
1,506,612
—
—
486
(762)
90,951
—
1,597,287
73
$
(5,493) $
—
—
Retained
Treasury
stock
earnings
(88,538) $ 187,889
27,678
—
—
—
—
—
5,493
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
3,333
—
(430)
(5,983)
4,849
—
(86,339)
—
—
1,132
2,299
—
(82,908)
—
—
—
3,502
3,216
—
—
(76,190)
—
—
5,894
4,108
—
—
—
—
(17,677)
197,460
17,004
—
364
—
(5,870)
208,958
66,114
—
—
720
—
—
(30,384)
245,408
139,972
—
(1,198)
1,577
—
(36,451)
(66,188) $ 349,308
$
Accumulated
other
comprehensive
(loss) income
Total
stockholders’
equity
$
$
(15,330) $
—
3,871
—
—
—
—
—
(11,459)
—
1,208
—
—
—
(10,251)
—
(1,873)
—
—
—
—
—
(12,124)
—
(14,511)
—
—
—
—
(26,635) $
482,866
27,678
3,871
457,752
3,783
790
2,075
(17,677)
961,138
17,004
1,208
1,824
(104)
(5,870)
975,200
66,114
(1,873)
563,613
5,162
2,182
85,059
(30,384)
1,665,073
139,972
(14,511)
5,182
4,923
90,995
(36,451)
1,855,183
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (2013 unaudited) and fiscal
year ended September 30, 2014
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided
by operating activities:
Provisions for loan losses
Asset impairments and other restructuring charges
Charge for termination of defined benefit pension
plans
Loss (gain) on extinguishment of debt
Loss (gain) and write-downs on other real estate
owned
Loss (gain) on sale of premises and equipment
Depreciation and amortization of premises and
equipment
Amortization of intangibles
Net gains on loans held for sale
Net (gains) losses on sales of securities
Net (gain) on sale of trust division
Net (accretion) amortization on loans
Net amortization of premiums on securities
Accretion of discount, amortization of premium on
borrowings, net
Restricted stock and ESOP 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 BOLI
Deferred income tax expense (benefit)
Other adjustments (principally net changes in other
assets and other liabilities)
Net cash provided by (used in) 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
Loan originations, net
Portfolio loans purchased
Proceeds from sale of loans held for investment
Year ended
December 31,
Three months ended
Fiscal year ended
December 31,
September 30,
2016
2015
2014
2013
2014
$ 139,972
$
66,114
$
17,004
$
(14,002) $
27,678
20,000
4,485
—
9,729
294
—
8,375
12,416
(7,591)
(7,522)
(2,255)
(18,093)
16,024
1,053
6,114
404
(447,950)
447,762
(5,832)
(890)
15,700
40,350
13,384
—
(1,066)
116
7,476
10,043
(11,405)
(4,837)
—
(10,555)
5,916
(81)
3,671
909
(599,853)
623,747
(5,235)
339
3,000
610
—
—
(83)
—
1,456
1,873
(2,858)
43
—
435
694
(69)
830
3,000
9,302
2,743
—
332
(93)
1,617
1,875
(1,616)
645
—
364
511
87
772
316
(138,542)
112,013
(1,024)
(12,080)
219
(113,572)
122,020
(742)
1,857
22,404
198,899
(62,977)
91,756
(5,359)
(21,741)
(6,281)
9,038
19,100
11,043
4,095
(712)
(1,208)
(93)
6,507
9,408
(8,086)
(641)
—
2,330
3,176
(446)
2,803
901
(462,030)
483,622
(3,198)
(3,059)
36,474
127,664
(976,383)
(751,206)
(1,113,952)
(193,282)
(292,554)
(4,347)
(67,044)
(54,315)
(407,438)
(172,899)
286,371
73,925
135,978
45,340
858,531
(1,298,341)
(163,320)
121,028
893,610
(1,266,519)
—
44,020
23,739
11,153
244,835
(98,699)
—
42,863
42,972
5,258
247,650
(9,780)
—
—
163,199
31,227
529,107
(659,013)
—
—
74
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (2013 unaudited) and fiscal
year ended September 30, 2014
(Dollars in thousands)
Year ended
December 31,
Three months ended
Fiscal year ended
December 31,
September 30,
2016
2015
2014
2013
2014
Proceeds from sales of other real estate owned
Purchase of FHLB and FRB stock, net
Purchase of low income housing tax credit
Redemption of and benefits received on bank owned
life insurance
Purchase of bank owned life insurance
Purchases of premises and equipment
Proceeds from the sale of premises and equipment
Cash (paid for) received from acquisitions
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in transaction, savings and
money market deposits
Net increase (decrease) in time deposits
Net increase (decrease) in short-term FHLB
borrowings
Advances of term FHLB borrowings
Repayments of term FHLB borrowings
Net increase (decrease) in other borrowings
Repayment of Senior Notes
Repayment of debt assumed in acquisition
Issuance of Bank Subordinated Notes
Redemption of Subordinated Debentures
Net increase (decrease) in mortgage escrow funds
Proceeds from stock option exercises
Proceeds from issuance of common equity
Cash dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
6,205
(18,340)
—
2,231
—
(4,155)
—
(346,690)
(2,210,144)
3,566
(35,491)
—
3,700
—
(8,047)
—
1,825
(9,352)
—
—
(30,000)
(4,326)
—
—
(11,338)
—
—
—
(8,572)
627
854,318
(636,759)
—
(114,863)
277,798
423,256
1,509,054
(20,802)
186,431
20,505
(129,302)
42,973
(289,376)
(49,544)
331,000
127,000
128,309
1,050,000
(999,896)
76
(23,793)
—
171,813
—
(206)
3,588
90,995
(36,451)
2,075,378
605,000
(325,243)
(18,646)
—
(4,485)
—
—
4,995
2,764
85,059
(30,384)
652,996
90,000
(10,059)
(35,793)
—
—
—
—
(327)
574
—
(5,870)
80,505
(103,378)
49,944
—
—
—
—
—
—
814
1,479
—
(2,661)
(392,722)
64,133
229,513
107,993
121,520
(56,099)
177,619
39,572
113,090
Cash and cash equivalents at end of period
$ 293,646
$ 229,513
$ 121,520
$ 152,662
Supplemental cash flow information:
Interest payments
Income tax payments
Real estate acquired in settlement of loans
Securities purchased pending settlement
Loans transfered from held for investment to held
for sale
Securities available for sale transferred to held to
maturity
Securities held to maturity transferred to available
for sale
$
57,971
$
37,198
$
6,429
$
64,904
4,780
24,720
39,315
11,025
—
12,473
29
—
121,028
44,020
42,229
6,061
4,651
873
—
—
—
—
—
—
221,904
165,230
—
—
75
$
$
9,645
(34,093)
(1,966)
—
—
(2,584)
310
277,798
(266,707)
301,028
(261,858)
112,383
375,000
(236,877)
(37,177)
—
—
—
(26,140)
(8,152)
3,042
—
(17,677)
203,572
64,529
113,090
177,619
29,419
12,473
2,542
—
—
—
—
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (2013 unaudited) and fiscal
year ended September 30, 2014
(Dollars in thousands)
Acquisitions:
Non-cash assets acquired:
Securities available for sale
Securities held to maturity
Loans held for sale
Total loans, net
FRB stock
Accrued interest receivable
Goodwill
Core deposit and other intangibles
Trade name
Bank owned life insurance
Premises and equipment, net
Other real estate owned
Other assets
Total non-cash assets acquired
Liabilities assumed:
Deposits
Escrow deposits
FHLB and other borrowings
Other borrowings
Subordinated debentures
Other liabilities
Total liabilities assumed
Net non-cash asset (liabilities) acquired (assumed)
Cash and cash equivalents acquired in acquisitions
Year ended
December 31,
Three months ended
Fiscal year ended
December 31,
September 30,
2016
2015
2014
2013
2014
$
— $ 710,230
$
— $ 233,244
$
—
—
3,611
—
—
—
374,721
30,341
233,190
374,721
30,341
320,447
1,814,826
— 1,698,108
1,698,108
—
1,443
25,698
1,500
—
—
176
—
2,265
5,830
7,392
281,773
42,789
—
44,231
17,063
222
25,871
—
—
—
—
—
—
—
—
—
7,680
6,590
224,400
20,089
20,500
55,374
23,594
5,815
22,266
7,680
6,590
224,208
20,089
20,500
55,374
23,594
5,815
22,534
351,529
2,953,838
— 2,722,722
2,722,744
— 3,160,746
— 2,297,190
2,297,190
—
—
—
—
4,839
4,839
346,690
4,762
4,616
—
25,366
—
50,181
3,240,909
(287,071)
879,240
—
—
—
—
—
—
100,619
62,465
26,527
55,960
—
100,619
62,465
26,527
55,960
— 2,542,761
2,542,761
—
—
179,961
277,798
179,983
277,798
457,781
Total consideration paid
$ 351,452
$ 592,169
$
— $ 457,759
$
The Company completed the following acquisitions which are included in the “Acquisitions” portion of the statement of cash flows
for the following periods: (i) NewStar Business Credit for the year ended December 31, 2016; (ii) Hudson Valley Holding Corp. and
Damian Services Corporation for the year ended December 31, 2015; and legacy Sterling Bancorp for the three months ended
December 31, 2013 The differences between the acquired balances in the three months ended December 31, 2013 and the fiscal year
ended September 30, 2014 were principally related to updates to the fair value adjustments on securities available for sale, associated
deferred taxes (included in other assets acquired) and goodwill recorded in the acquisition of Provident Merger.
See accompanying notes to consolidated financial statements.
76
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation
The consolidated financial statements include the accounts of Sterling Bancorp (the “Company”), Sterling National Bank (the
“Bank”) and the Bank’s wholly-owned subsidiaries. The Bank’s subsidiaries included at December 31, 2016: (i) Sterling National
Funding Corp, a company that originates loans to municipalities and governmental entities and acquires securities issued by state
and local governments; (ii) Sterling REIT, Inc., a real estate investment trust that hold a portion of the Company’s real estate loans;
(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 (“GAAP”). Certain amounts from prior periods have been reclassified to conform to the current period
presentation. Reclassifications had no affect on prior period net income or stockholders’ equity. The financial statements include
audited balance sheets as of December 31, 2016 and 2015. As a result of the change in the Company’s fiscal year end, financial
statements include: results of operations, changes in stockholders’ equity, accumulated other comprehensive income (loss) and cash
flows for the years ended December 31, 2016 (“calendar 2016”) and December 31, 2015 (“calendar 2015); for the three months
ended December 31, 2014 (the “transition period”); and for the fiscal year ended September 30, 2014 (“fiscal 2014”). For
comparative purposes, we have also presented financial statements and accompanying footnotes for the three months ended
December 31, 2013 (the “2013 transition period”), which are unaudited. The unaudited information, in the opinion of
management, includes all adjustments consisting of normal recurring accruals, necessary for a fair presentation of the Company’s
financial position and results of its operations.
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
subsidiary of Sterling. The Bank accounts for substantially all of Sterling’s consolidated assets and results of operations. 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, the boroughs 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 also operates its commercial finance businesses, which include
asset-based lending, payroll financing, factoring, warehouse lending, equipment financing, public sector financing and restaurant
franchise financing loans (which are included with traditional commercial and industrial loans), which target markets across the
U.S.
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 Provident 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.
Merger with Hudson Valley Holding Corp.
On June 30, 2015, Hudson Valley Holding Corp. (“HVHC”) merged with and into Sterling Bancorp (the “HVB Merger”). In
connection with the merger, Hudson Valley Bank, the principal subsidiary of HVHC, also merged with and into Sterling National
Bank.
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.
77
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
• 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 “Provident Merger.”
Change in Fiscal Year End
On January 27, 2015, the Board of Directors amended the Company’s bylaws to change the fiscal year end from September 30 to
December 31.
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 based on available information 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.
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 with an original maturity of 90 days or less. Net cash flows are
reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds
purchased and repurchase agreements.
Restrictions on Cash
The Bank was required to have $99,594 and $25,070 of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve and clearing requirements at December 31, 2016 and 2015, respectively.
Securities
Securities include U.S. government agency and government sponsored agencies, municipal and corporate bonds, mortgage-backed
securities, collateralized mortgage obligations and trust preferred securities. The Company classifies its securities among two
categories: held to maturity 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. The Company does not engage in trading activities. All
other debt and marketable equity securities are classified as available for sale.
Available for sale 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, and 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
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 other-than-temporary-impairment (“OTTI”) at least quarterly, and more frequently when economic and
market conditions warrant such an evaluation. For securities in an unrealized loss position, the Company considers 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 (i) the Company does not expect to recover the entire amortized cost basis of the security; (ii) the
Company does not intend to sell the security; (iii) and it is not more likely than not that the Company will be required to sell the
78
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
security before recovery of its amortized cost basis, the OTTI is separated into (a) the amount representing the credit loss and (b)
the amount related to all other factors. The amount of OTTI 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 December 31, 2016, the Company did 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. (See Note 3. “Securities”).
Loans Held For Sale
Mortgage loans and commercial 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.
Prior to October 2013, mortgage loans held for sale were generally sold with the servicing rights retained. Since that time, we have
generally sold mortgage loans with the servicing rights released. 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.
Portfolio 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. 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 operations at that time. Interest and fees on loans include prepayment fees
and late charges collected.
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. (See Note 4. “Portfolio Loans”).
Acquired Loans, Including Purchased Credit Impaired Loans
Loans the Company acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for loan
losses. Determining the fair value of the loans 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. Acquired
loans are included with portfolio loans in the consolidated balance sheets.
Loans for which there is, at acquisition, both evidence of deterioration of credit quality since origination and probability, at
acquisition, that all contractually required payments would not be collected represent purchase credit impaired loans (“PCI loans”).
For PCI loans, the Company initially determines which loans will be treated under the cost recovery method (similar to a non-
accrual loan) from loans that will be subject to accretion. The Company recognizes the accretable yield, which is defined as the
excess of all cash flows expected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over
the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to
be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss
accrual, or a valuation allowance. Going forward, the Company continues to evaluate whether the timing and the amount of cash to
be collected are reasonably expected. Subsequent significant increases in cash flows the Company expects to collect will first
reduce any previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield.
Subsequent decreases in expected cash flows may result in the loan being considered impaired. Interest income is not recognized to
the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount.
79
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
For PCI loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan basis according to the
anticipated collection plan of these loans. The expected prepayments used to determine the accretable yield are consistent between
the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference.
Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected.
For loans for which there was no clear evidence of deterioration of credit quality since origination nor evidence that all
contractually required payments would not be collected, the Company accretes interest income based on the contractually required
cash flows. Loans that do not meet the PCI loan criteria are collectively evaluated for an allowance for loan loss.
Acquired loans that met the criteria for non-accrual of interest prior to an acquisition were generally considered non-performing
upon acquisition, as the Company was unable to reasonably estimate the timing and amount of the expected cash flows on such
loans.
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 310-10-35-2, “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, multi-family
loans; acquisition, development and construction (“ADC”) loans, home equity lines of credit and certain consumer loans. The
classes considered unsecured or secured by other than real estate collateral are: commercial & industrial (“C&I”) loans, which
includes traditional C&I, asset-based lending; payroll finance loans; warehouse lending; factored receivables; equipment finance
loans; public sector finance; 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 segments, 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 discount to the appraisal value, which is generally 22% for all
loans collateralized by real estate. Impaired loans in the real estate secured segments are generally re-appraised using a summary or
drive-by appraisal report every six to nine months.
For smaller balance C&I loans 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, the Company prepares a cash flow projection, and charges-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 its estimates. However, in 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,
charge-offs are recognized once the loan is 90 days 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 the Company establishes an allowance for loan losses for loans that are
known to be non-performing, criticized or classified, it calculates 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 its 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;
80
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
•
•
•
•
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 borrowers; and
for commercial loans, trends in risk ratings.
CRE loans subject the Company 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.
Commercial 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 the Company must gain control of assets used in the borrower’s business before foreclosing, which it cannot be
assured of doing, and the value in a foreclosure sale or other means of liquidation is uncertain.
ADC lending is considered higher risk and exposes the Company 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 the Company makes 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 the Company 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. The Company has deemphasized originations of land acquisition and land development loans; however, it
does originate construction loans on an exception basis but only to select clients principally within our immediate footprint.
When the Company evaluates residential mortgage loans and consumer - home equity loans it weighs 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 its risk. Similarly, as the Company obtains a mortgage on the property, if
home prices decline, it is exposed to risk in both its first mortgage and equity lending programs due to declines in the value of its
collateral. The Company is also exposed to risk because the time to foreclose is significant and has become longer under current
market conditions. (See Note 5 “Allowance for Loan Losses”).
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. (See Note
4. “Portfolio Loans”).
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.
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 to its premises and equipment, generally in connection with a decision to consolidate or close a financial center.
Impairment is based on the excess of the carrying amount of assets over the fair value of the assets. Fair value is determined by
third-party valuations or appraisals and evaluations prepared by management. (See Note 6. “Premises and Equipment, Net”).
81
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
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 (which are included with core deposits and other intangible assets in the
consolidated balance sheet) acquired in a purchase business combination that have an indefinite useful life are not amortized, but
are tested for impairment at least annually. Goodwill and trade names are the only intangible assets with an indefinite life on the
Company’s 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 operates as one reporting unit. 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:
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 December 31, 2016, 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 ten years. Non-compete agreements are amortized on a straight line basis over their estimated life. Impairment losses on
intangible assets and other long-term assets are charged to expense, if and when they occur, with the assets recorded at fair value.
(See Note 7. “Goodwill and Other Intangible Assets”).
Bank Owned Life Insurance (BOLI)
The Company owns life insurance policies (purchased and acquired) on certain officers and key executives. Bank owned life
insurance (“BOLI”) is recorded at its cash surrender value (or the amount that can be realized).
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 (“OREO”) 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 OREO is included as a charge to other non-interest expense in the consolidated statement of operations.
Subsequent valuations of OREO 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 OREO properties are recognized upon disposition.
Other Borrowings - 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. (See Note 9. “Borrowings, Senior Notes and Subordinated Notes”).
82
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
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
other non-interest 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
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 December 31, 2016. (See Note 11. “Income Taxes”).
Derivatives
Derivatives are recognized as assets and liabilities in the consolidated balance sheets and measured at fair value. For exchange-
traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer
quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may
require management judgment or estimation relating to future rates and credit activities.
For asset/liability management purposes, the Bank uses interest rate swap agreements to modify interest rate risk characteristics of
certain portfolio loans as an accommodation to our borrowers. Interest rate swaps are contracts in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. These swap
agreements are derivative instruments and these instruments effectively convert a portion of the Bank’s fixed-rate borrowings to
variable rate borrowings. (See Note 10. “Derivatives”).
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed
in Note 19. “Fair Value Measurements” 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.
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 consolidated financial statements. (See Note 18. “Commitments and
Contingencies”).
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
83
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. (See Note 18.
“Commitments and Contingencies”).
Stock-Based Compensation Plans
Compensation expense for stock options and 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. (See Note 12 “Stock-Based Compensation”).
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted EPS is computed in a similar manner to basic EPS, 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 included earned ESOP (as defined below) shares. (See
Note 15. “Earnings Per Common Share”).
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.
(2) Acquisitions
Restaurant Franchise Financing Loan Portfolio
On September 9, 2016, the Bank acquired a restaurant franchise financing loan portfolio from GE Capital with an unpaid principal
balance of $169,760. Total cash paid for the portfolio was $163,282, which included a discount to the balance of gross loans
receivable of 4.00%, or $6,790, plus accrued interest receivable. As the acquired assets did not constitute a business, the transaction
was accounted for as an asset purchase. These loans are classified as traditional C&I loans. (See Note 4. “Portfolio Loans” for
additional
Acquisition of NewStar Business Credit LLC (“NSBC”)
On March 31, 2016, the Bank acquired 100% of the outstanding equity interests of NSBC (the “NSBC Acquisition”). NSBC was a
provider of asset-based lending solutions to middle market commercial clients. NSBC’s loans had a fair value of $320,447 on the
acquisition date and consisted of 100% floating-rate assets. The Bank paid a premium on the balance of gross loans receivable
acquired of 5.90%, or $18,906. The Bank assumed $4,839 of liabilities, which consisted mainly of cash collateral on loans
outstanding. The Bank recognized a customer list intangible asset of $1,500 that is being amortized over its 24-month estimated life
and $25,698 of goodwill. The Bank recorded a $1,500 restructuring charge consisting mainly of retention and severance
compensation, IT contract terminations and professional fees.
HVB Merger
On June 30, 2015, the Company completed the HVB Merger. Under the terms of the HVB Merger agreement, HVHC shareholders
received 1.92 shares of the Company’s common stock for each share of HVHC common stock, which resulted in the issuance of
38,525,154 shares. Based on the Company’s closing stock price of $14.63 per share on June 29, 2015, the aggregate consideration
paid to HVHC shareholders was $566,307, which, in accordance with the HVB Merger agreement, also included the in-the-money
cash value of outstanding HVHC stock options, the fair value of outstanding HVHC restricted stock awards and cash in lieu of
fractional shares. Consistent with the Company’s strategy, the primary reason for the HVB Merger was the expansion of the
Company’s geographic footprint in the greater New York metropolitan region and beyond.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and
liabilities, both tangible and intangible, were recorded at their fair values as of June 30, 2015 based on management’s best estimate
using the information available as of the HVB Merger date. The application of the acquisition method of accounting resulted in the
recognition of goodwill of $269,757 and a core deposit intangible of $33,839. As of June 30, 2015, HVHC had assets with a net book
84
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
value of approximately $288,208, including loans with a net book value of approximately $1,816,767, and deposits with a net book
value of approximately $3,160,746. The table below summarizes the amounts recognized as of the HVB 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 HVB Merger date:
Consideration paid through Sterling Bancorp common stock issued to HVHC shareholders
$
566,307
HVHC net book
value
Fair value
adjustments
As recorded at
acquisition
$
878,988
$
—
$
Cash and cash equivalents
Investment securities
Loans
Federal Reserve Bank stock
Bank owned life insurance
Premises and equipment
Accrued interest receivable
Core deposits and other intangibles
Other real estate owned
Other assets
Deposits
Other borrowings
Other liabilities
713,625
1,816,767
5,830
44,231
11,918
7,392
—
222
32,639
(3,160,746)
(25,366)
(37,292)
288,208
$
217 (a)
(24,248) (b)
—
—
4,925 (c)
—
33,839 (d)
—
(7,931) (e)
—
—
1,540 (f)
8,342
$
$
878,988
713,842
1,792,519
5,830
44,231
16,843
7,392
33,839
222
24,708
(3,160,746)
(25,366)
(35,752)
296,550
269,757
Total identifiable net assets
Goodwill recorded in the HVB Merger
$
Explanation of certain fair value related adjustments:
(a) Represents the fair value adjustment on investment securities held to maturity.
(b) Represents the elimination of HVHC’s allowance for loan losses and an adjustment of the net book value of loans to
estimated fair value, which includes an interest rate mark and credit mark adjustment.
(c) Represents an adjustment to reflect the fair value of HVHC owned real estate as determined by independent appraisals, which
will be amortized on a straight-line basis over the estimated useful lives of the individual assets.
(d) Represents intangible assets recorded to reflect the fair value of core deposits. 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.
(e) Represents an adjustment in net deferred tax assets resulting from the fair value adjustments related to the acquired assets,
liabilities assumed and identifiable intangibles recorded.
(f) Represents the elimination of HVHC’s deferred rent liability.
The fair values for loans acquired from HVHC 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 HVHC’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 HVB Merger.
Acquired loan portfolio data in the HVB Merger is presented below:
85
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Fair value of
acquired loans at
acquisition date
Gross contractual
amounts
receivable at
acquisition date
Best estimate at
acquisition date of
contractual cash
flows not expected
to be collected
Acquired loans with evidence of deterioration since origination
$
96,973
$
122,104
$
Acquired loans with no evidence of deterioration since origination
1,695,546
1,974,740
12,604
NA
The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the
sum-of-the-years digits 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 land, buildings and equipment was estimated using appraisals. Buildings are amortized over their estimated useful
lives of approximately 30 years. Improvements and equipment are amortized or depreciated over their estimated useful lives ranging
from one to five years.
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. Management concluded the carrying
value was an appropriate estimate of fair value for these deposits.
Direct acquisition and other charges incurred in connection with the HVB Merger were expensed as incurred and totaled $14,381 for
calendar 2015 and $502 for the transition period. These expenses were recorded in Merger-related expense on the consolidated
statements of operations. Results of operations for calendar 2015 included a charge for asset write-downs, severance and retention
compensation, information technology services and other contract terminations, and impairment of leases which totaled $28,055 and
was recorded in other non-interest expense in the consolidated statements of operations. The results of operations were not impacted
by the HVB Merger for the other periods presented on the consolidated statements of operations.
The following table presents selected unaudited pro forma financial information reflecting the HVB Merger assuming it was
completed as of October 1, 2013. 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 HVB 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 EPS were calculated using the Company’s actual weighted average shares outstanding for the periods presented, plus the
incremental shares issued, assuming the HVB 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 HVHC for fiscal 2014 and in 2015 until the date of the HVB Merger, at which time HVHC’s results of operations were
included in the Company’s financial statements.
The unaudited pro forma information for calendar 2015, the transition period and fiscal 2014 set forth below 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 calendar 2015 and the 2014 transition period and costs incurred to write-down assets and accrue for retention and
severance compensation are assumed to have occurred prior to October 1, 2013. Furthermore, the unaudited pro forma information
does not reflect management’s estimate of any revenue enhancement opportunities or anticipated potential cost savings for periods that
include data as of June 30, 2015 or earlier.
86
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Net interest income
Non-interest income
Non-interest expense
Net income
Pro forma earnings per share from continuing operations:
Basic
Diluted
Pro forma information
For the year
ended
December 31,
2015
For the three
months ended
December 31,
2014
For the fiscal
year ended
September 30,
2014
$
360,271
$
82,540
$
66,686
261,453
100,086
17,214
73,263
16,971
$
$
0.78
0.78
$
0.14
0.14
306,401
60,356
318,804
23,596
0.20
0.20
Damian Acquisition
On February 27, 2015, the Bank acquired 100% of the outstanding common stock of Damian Services Corporation (“Damian”) for
total consideration of $24,670 in cash. Damian was a payroll services provider located in Chicago, Illinois. In connection with the
acquisition, the Bank acquired $22,307 of outstanding payroll finance loans and assumed $14,560 of liabilities. The Bank recognized
a customer list intangible asset of $8,950 that is being amortized over its 16 year estimated life, and $11,930 of goodwill. The Bank
also recognized a $1,500 restructuring charge, consisting mainly of retention and severance compensation and asset write-downs
related to the consolidation of Damian’s operations, and approximately $300 of legal fees.
FCC Acquisition
On May 7, 2015, the Bank acquired a factoring portfolio from FCC, LLC, a subsidiary of First Capital Holdings, Inc., with an
outstanding factoring receivables balance of approximately $44,500. The total consideration was $45,500 and included a premium of
$1,000 in addition to the outstanding receivables balance. As the acquired assets did not constitute a business, the transaction was
accounted for as an asset purchase.
Provident Merger
On October 31, 2013, the Company completed the Provident Merger. Under the terms of the Agreement and Plan of Merger, Legacy
Sterling shareholders received 1.2625 shares of Legacy Provident’s common stock 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
for outstanding vested stock options. Consistent with the Company’s strategy, the primary reason for the Provident 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 Provident 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 Provident 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 Provident Merger date:
87
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Consideration paid through Legacy Provident New York 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 Provident Merger
Explanation of certain fair value related adjustments:
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
(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; and of the
acquired loans, $1,699,271 were not considered PCI loans. The Company 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
fiscal 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 Provident 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 Provident Merger.
(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 Provident Merger.
88
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(k) Represents the fair value of other liabilities assumed at the Provident 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 Provident
Merger.
The impaired loans acquired in the Provident 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 OREO 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. OREO 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 Provident Merger were expensed as incurred and totaled $9,455 for fiscal 2014, of
which $9,068 was incurred during the 2013 transition period. These items were recorded as Merger-related expense in the
consolidated statement of operations. Other direct integration costs of the Provident Merger for fiscal 2014 totaled $26,590, of which
$22,167 was incurred during the three months ended December 31, 2013, and included charges for asset write-downs, severance and
retention compensation, and banking systems conversion. These items were recorded in other non-interest expense in the consolidated
statement of operations.
89
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(3) Securities
A summary of amortized cost and estimated fair value of our securities is presented below:
Available for Sale
Gross
Gross
unrealized
unrealized
losses
gains
Amortized
cost
December 31, 2016
Fair
value
Amortized
cost
Held to Maturity
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Residential MBS:
Agency-backed
$ 1,213,733
$
569
$ (20,821) $1,193,481
$ 277,539
$
1,353
$
CMO/Other MBS
57,563
(926)
56,681
40,594
74
(3,625) $
(572)
275,267
40,096
Total residential
MBS
Other securities:
Federal agencies
Corporate
State and
municipal
Other
Total other securities
Total securities
1,271,296
204,770
43,464
44
613
2
150
(21,747)
1,250,162
318,133
1,427
(4,197)
315,363
(10,793)
(1,108)
193,979
42,506
58,200
35,048
245,304
—
493,538
$ 1,764,834
$
739
—
891
1,504
(5,273)
—
(17,174)
240,770
—
477,255
$ (38,921) $1,727,417
974,290
5,750
1,073,288
$ 1,391,421
$
1,392
431
3,571
195
5,589
7,016
—
(11)
59,592
35,468
(36,232)
—
(36,243)
941,629
5,945
1,042,634
$ (40,440) $ 1,357,997
Available for Sale
Gross
Gross
unrealized
unrealized
losses
gains
Amortized
cost
December 31, 2015
Fair
value
Amortized
cost
Held to Maturity
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Residential MBS:
Agency-backed
$ 1,222,912
$
2,039
$
(7,089) $1,217,862
$ 252,760
$
1,857
$
CMO/Other MBS
79,430
76
(1,133)
78,373
49,842
87
(1,214) $
(619)
253,403
49,310
Total residential
MBS
Other securities:
Federal agencies
Corporate
State and
municipal
Trust preferred
Other
Total other securities
Total securities
1,302,342
2,115
(8,222)
1,296,235
302,602
1,944
(1,833)
302,713
85,124
321,630
187,399
27,928
8,781
630,862
$ 1,933,204
$
7
522
2,187
589
9
3,314
5,429
(864)
(7,964)
84,267
314,188
104,135
25,241
(551)
189,035
285,813
—
—
(9,379)
28,517
8,790
624,797
$ (17,601) $1,921,032
—
5,000
420,189
$ 722,791
$
2,458
11
9,327
—
350
12,146
14,090
$
(635)
(200)
(134)
—
—
(969)
(2,802) $
105,958
25,052
295,006
—
5,350
431,366
734,079
90
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The amortized cost and estimated fair value of securities at December 31, 2016 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
December 31, 2016
Available for sale
Held to maturity
Amortized
cost
Fair
value
Amortized
cost
Fair
value
$
11,605
$
11,632
$
24,815
$
88,794
251,244
141,895
493,538
88,424
242,184
135,015
477,255
1,271,296
1,764,834
$
1,250,162
1,727,417
$
$
64,750
204,404
779,319
1,073,288
318,133
1,391,421
$
24,916
65,931
205,629
746,158
1,042,634
315,363
1,357,997
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 (benefit) on realized net gains
(losses)
Year ended
December 31,
Three months ended
Fiscal year ended
December 31,
September 30,
2016
2015
2014
2013
2014
$ 858,531
$ 893,610
$ 244,835
$ 247,650
$
529,107
10,665
(3,143)
6,018
(1,181)
2,445
1,572
409
(452)
(14)
211
(856)
(214)
1,964
(1,323)
172
At December 31, 2016 and 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its
agencies, in an amount greater than 10% of stockholders’ equity.
91
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or 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
December 31, 2016
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
Corporate
State and municipal
Total other securities
Total
December 31, 2015
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
Corporate
State and municipal
Total other securities
Total
$ 1,101,641
$
38,841
1,140,482
185,504
10,399
173,062
368,965
$ 1,509,447
$
(20,816) $
(506)
(21,322)
(10,793)
(137)
(5,196)
(16,126)
(37,448) $
686
$
15,239
15,925
4
14,942
3,733
18,679
34,604
$
(5) $ 1,102,327
54,080
$
(20,821)
(926)
1,156,407
(21,747)
(420)
(425)
25,341
185,508
—
(971)
(77)
(1,048)
387,644
(1,473) $ 1,544,051
176,795
(10,793)
(1,108)
(5,273)
(17,174)
$
(38,921)
$
18,983
$
23,682
42,665
14,933
19,257
3,439
37,629
$
80,294
$
(7,089)
(1,133)
(8,222)
(864)
(7,964)
(551)
(9,379)
$
(17,601)
(528) $
(717)
(1,245)
854,491
$
41,946
896,437
(6,561) $
(416)
(6,977)
873,474
$
65,628
939,102
57,886
236,048
(260)
(715)
(27)
(1,002)
336,858
(2,247) $ 1,233,295
42,924
72,819
255,305
(604)
(7,249)
(524)
(8,377)
374,487
(15,354) $ 1,313,589
46,363
$
92
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or 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
December 31, 2016
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Corporate
State and municipal
Total other securities
Total
December 31, 2015
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Other securities:
Federal agencies
Corporate
State and municipal
Total other securities
Total
$
$
$
$
185,116
34,786
219,902
—
758,690
758,690
978,592
$
$
(3,623) $
(572)
(4,195)
—
(36,169)
(36,169)
(40,364) $
— $
— $
5,960
5,960
14,642
—
2,562
17,204
23,164
$
(156)
(156)
(358)
—
(48)
(406)
(562) $
213
—
213
5,037
2,816
7,853
8,066
132,585
40,033
172,618
9,723
20,039
12,989
42,751
215,369
$
$
$
$
(2) $
—
(2)
185,329
34,786
220,115
(11)
(63)
(74)
(76) $
5,037
761,506
766,543
986,658
(1,214) $
(463)
(1,677)
132,585
45,993
178,578
(277)
(200)
(86)
(563)
(2,240) $
24,365
20,039
15,551
59,955
238,533
$
$
$
$
(3,625)
(572)
(4,197)
(11)
(36,232)
(36,243)
(40,440)
(1,214)
(619)
(1,833)
(635)
(200)
(134)
(969)
(2,802)
At December 31, 2016, a total of 336 available for sale securities were in a continuous unrealized loss position for less than 12 months
and 42 securities were in an unrealized loss position for 12 months or longer. Declines in the fair value of held to maturity and
available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to
the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other
comprehensive income. In estimating other than temporary impairment (“OTTI”) losses, management considers, among other things,
(i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition and near-term prospects
of the issuer; and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in cost.
Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which
time the Company will receive full value for the securities. Furthermore, as of December 31, 2016, management did not have the
intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that the
Company will not have to sell any such securities before a recovery of cost. Any unrealized losses are largely due to increases in
market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to
recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management
does not believe any of the securities are impaired due to reasons related to credit quality. As of December 31, 2016, management
believes the impairments detailed in the table above are temporary.
93
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or 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
$
67,599
$
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
398,961
126
55,343
958,246
101,994
849,186
1,839
206,337
327,589
December 31,
2016
2015
Total securities pledged
(4) Portfolio Loans
The composition of the Company’s loan portfolio, excluding loans held for sale, was the following:
Commercial:
Commercial & industrial (“C&I”):
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
Total C&I
Commercial mortgage:
Commercial real estate
Multi-family
Acquisition, development & construction (“ADC”)
Total commercial mortgage
Total commercial
Residential mortgage
Consumer
Total portfolio loans
Allowance for loan losses
Total portfolio loans, net
$
1,480,275
$
1,486,945
December 31,
2016
2015
$
1,404,774
$
1,189,154
741,942
255,549
616,946
214,242
589,315
349,182
310,214
221,831
387,808
208,382
631,303
182,336
4,171,950
3,131,028
3,162,942
981,076
230,086
4,374,104
8,546,054
697,108
284,068
9,527,230
(63,622)
9,463,608
$
2,733,351
796,030
186,398
3,715,779
6,846,807
713,036
299,517
7,859,360
(50,145)
$
7,809,215
Total portfolio loans include net deferred loan origination fees of $1,788 at December 31, 2016 and costs of $2,029 at December 31,
2015.
At December 31, 2016, the Company pledged loans totaling $2,349,604 to the FHLB as collateral for certain borrowing arrangements.
See Note 9. “Borrowings, Senior Notes and Subordinated Notes”.
94
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The following tables set forth the amounts and status of the Company’s loans and TDRs at December 31, 2016 and 2015:
December 31, 2016
30-59
days
past due
60-89
days
past due
90+
days
past due
Current
Non-
accrual
Total
$ 1,376,181
$
835
$
817
$
555
$
26,386
$ 1,404,774
741,942
254,715
616,946
213,624
583,835
349,182
3,140,561
981,005
224,817
675,750
274,719
—
—
—
—
—
14
—
—
2,142
1,092
—
967
—
—
5,509
2,423
—
—
—
—
951
350
—
621
—
—
—
—
406
—
—
108
—
—
199
—
618
2,246
—
741,942
255,549
616,946
214,242
589,315
349,182
21,008
3,162,942
71
5,269
14,790
6,576
981,076
230,086
697,108
284,068
$ 9,433,277
$
11,032
$
$
11,876
253
$
$
3,224
$
1,690
$
77,163
$ 9,527,230
— $
— $
1,989
$
13,274
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
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
$
$
1,690
77,163
78,853
95
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
30-59
days
past due
Current
December 31, 2015
60-89
days
past due
90+
days
past due
Non-
accrual
Total
$ 1,138,085
$
9,380
$
31,060
$
487
$
10,142
$ 1,189,154
310,214
221,394
387,808
208,162
627,056
182,336
2,702,671
791,828
182,615
686,445
286,339
—
—
—
—
1,088
—
7,417
2,485
—
6,014
4,950
—
349
—
—
1,515
—
2,521
—
—
897
320
—
88
—
—
—
—
—
—
83
—
16
—
—
—
220
1,644
—
310,214
221,831
387,808
208,382
631,303
182,336
20,742
2,733,351
1,717
3,700
19,680
7,892
796,030
186,398
713,036
299,517
$ 7,724,953
$
13,047
$
$
31,334
654
$
$
36,662
$
674
$
65,737
$ 7,859,360
— $
— $
8,591
$
22,292
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
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
$
$
674
65,737
66,411
The following table provides additional analysis of the Company’s non-accrual loans at December 31, 2016 and 2015:
December 31, 2016
December 31, 2015
Recorded
investment
non-
accrual
loans
Recorded
investment
PCI non-
accrual
loans
Recorded
investment
total non-
accrual
loans
Unpaid
principal
balance
non-
accrual
loans
Recorded
investment
non-
accrual
loans
Recorded
investment
PCI non-
accrual
loans
Recorded
investment
total non-
accrual
loans
Unpaid
principal
balance
non-
accrual
loans
Traditional C&I
$
22,338
$
4,048
$
26,386
$
26,386
$
4,314
$
5,828
$
10,142
$
10,503
Payroll finance
Factored receivables
Equipment financing
CRE
Multi-family
ADC
Residential mortgage
Consumer
199
618
2,246
15,063
71
5,269
13,399
5,719
—
—
—
5,945
—
—
1,391
857
199
618
2,246
21,008
71
5,269
14,790
6,576
199
618
2,246
25,619
71
5,398
18,190
7,865
—
220
1,644
13,119
1,717
3,700
13,683
7,315
—
—
—
7,623
—
—
5,997
577
—
220
1,644
20,742
1,717
3,700
19,680
7,892
—
220
1,644
23,678
1,837
3,829
24,386
9,404
$
64,922
$
12,241
$
77,163
$
86,592
$
45,712
$
20,025
$
65,737
$
75,501
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.
96
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
At December 31, 2016 and 2015, the recorded investment of residential mortgage loans that were formally in process of foreclosure
was $9,263 and $9,638, respectively, which are included in non-accrual residential mortgage loans above.
The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at December 31,
2016:
Loans evaluated by segment
Allowance evaluated by segment
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Purchased
credit
impaired
loans
Total
loans
Individually
evaluated for
impairment
Collectively
evaluated
for
impairment
Total
allowance
for loan
losses
Traditional C&I
$
25,221
$ 1,365,466
$
14,087
$ 1,404,774
$
— $
12,864
$ 12,864
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total loans
—
570
—
—
1,413
—
724,247
254,979
616,946
214,242
587,902
349,182
17,695
—
—
—
—
—
741,942
255,549
616,946
214,242
589,315
349,182
14,853
3,104,057
44,032
3,162,942
—
9,025
2,545
1,764
976,710
216,094
692,396
280,710
4,366
4,967
2,167
1,594
981,076
230,086
697,108
284,068
—
—
—
—
—
—
—
—
—
—
—
3,316
951
1,563
1,669
5,039
1,062
3,316
951
1,563
1,669
5,039
1,062
20,466
20,466
4,991
1,931
5,864
3,906
4,991
1,931
5,864
3,906
$
55,391
$ 9,382,931
$
88,908
$ 9,527,230
$
— $
63,622
$ 63,622
There was $685 and $272 included in the allowance for loan losses associated with PCI loans at December 31, 2016 and 2015,
respectively.
The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at December 31,
2015:
97
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
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
Traditional C&I
$
3,138
$ 1,168,613
$
17,403
$ 1,189,154
$
— $
9,953
$
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total loans
—
—
—
—
1,017
—
310,214
221,831
387,808
208,382
630,286
182,336
—
—
—
—
—
—
310,214
221,831
387,808
208,382
631,303
182,336
13,492
2,669,673
50,186
2,733,351
1,541
8,669
515
—
790,017
173,065
705,245
298,225
4,472
4,664
7,276
1,292
796,030
186,398
713,036
299,517
—
—
—
—
—
—
—
—
—
—
—
2,762
1,936
589
1,457
4,925
547
9,953
2,762
1,936
589
1,457
4,925
547
11,461
11,461
5,141
2,009
5,007
4,358
5,141
2,009
5,007
4,358
$
28,372
$ 7,745,695
$
85,293
$ 7,859,360
$
— $
50,145
$ 50,145
The Company acquired PCI loans in the NSBC Acquisition, the HVB Merger and the Provident Merger. The carrying value of these
loans is presented in the tables above. At December 31, 2016 and 2015 the net recorded amount of PCI loans was $88,908 and
$85,293, respectively. The increase from December 31, 2015 was due to PCI loans acquired in the NSBC Acquisition.
The following table presents the changes in the balance of the accretable yield discount for PCI loans for calendar 2016, calendar
2015; the transition period; the 2013 transition period (unaudited); and fiscal 2014:
Year ended
December 31,
Three months ended
Fiscal year ended
December 31,
September 30,
2016
2015
2014
2013
2014
Balance at beginning of period
$
11,211
724
$
724
$
— $
Acquisition
Accretion
Disposals
Reclassification from non-accretable difference
2,200
(4,937)
—
2,643
12,527
(2,229)
(50)
239
—
—
—
—
10,927
—
(8,086)
—
Balance at end of period
$
11,117
$
11,211
$
724
$
2,841
$
—
10,927
—
(10,203)
—
724
98
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Income is not recognized on PCI loans unless the Company can reasonably estimate the cash flows that are expected to be collected
over the life of the loan. The following table presents the carrying value of the Company’s PCI loans segregated by those PCI loans
subject to accretion, and those PCI loans under the cost recovery method at December 31, 2016 and 2015:
December 31, 2016
December 31, 2015
PCI loans
subject to
accretion
PCI loans
under cost
recovery
method (non-
accrual)
Total PCI
loans
PCI loans
subject to
accretion
PCI loans
under cost
recovery
method (non-
accrual)
Total PCI
loans
Traditional C&I
$
10,039
$
4,048
$
14,087
$
11,575
$
5,828
$
17,403
Asset-based lending
CRE
Multi-family
ADC
Residential
Consumer
17,695
38,087
4,366
4,967
776
737
—
5,945
—
—
1,391
857
17,695
44,032
4,366
4,967
2,167
1,594
—
42,563
4,472
4,664
1,279
715
—
7,623
—
—
5,997
577
—
50,186
4,472
4,664
7,276
1,292
$
76,667
$
12,241
$
88,908
$
65,268
$
20,025
$
85,293
The following table presents loans individually evaluated for impairment by segment of loans at December 31, 2016 and 2015:
Loans with no related allowance recorded:
Traditional C&I
Payroll finance
Equipment financing
CRE
Multi-family
ADC
Residential
Consumer
December 31, 2016
December 31, 2015
Unpaid
principal
balance
Recorded
investment
Unpaid
principal
balance
Recorded
investment
$
25,221
$
25,221
$
3,145
$
570
1,413
16,365
—
9,025
2,545
570
1,413
14,853
—
9,025
2,545
—
1,017
15,092
1,541
8,669
515
1,764
56,903
$
1,764
55,391
$
—
29,979
$
$
3,138
—
1,017
13,492
1,541
8,669
515
—
28,372
During fiscal 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. As a result, there were
no impaired loans with an allowance recorded at December 31, 2016 or December 31, 2015.
99
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The following tables present the average recorded investment and interest income recognized related to loans individually evaluated
for impairment by segment for calendar 2016 and 2015; the transition period; the 2013 transition period (unaudited); and fiscal 2014:
With no related allowance recorded:
Traditional C&I
Payroll finance
Equipment Financing
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total
For the year ended
December 31, 2016
December 31, 2015
YTD
average
recorded
investment
Interest
income
recognized
YTD
average
recorded
investment
Interest
income
recognized
$
25,508
$
71
1,275
13,625
—
6,132
768
1,530
22
—
—
133
—
31
—
—
$
2,718
$
—
757
12,155
1,078
8,819
515
—
$
48,909
$
186
$
26,042
$
—
—
—
102
—
234
—
—
336
There was no cash-basis interest income recognized from impaired loans during the years ended December 31, 2016 and 2015. There
were no impaired loans with a related allowance recorded at December 31, 2016 and 2015.
For the three months ended
December 31, 2014
December 31, 2013
QTD
average
recorded
investment
Interest
income
recognized
Cash-basis
interest
income
recognized
QTD
average
recorded
investment
Interest
income
recognized
Cash-basis
interest
income
recognized
$
4,482
$
— $
— $
3,759
$
14,503
11,897
515
31,397
$
$
44
62
—
106
$
42
62
—
104
$
19,318
17,108
4,890
45,075
$
20
52
148
—
220
$
$
2
—
—
—
2
With no related allowance recorded:
Traditional C&I
CRE
ADC
Residential mortgage
Total
There were no impaired loans with an allowance recorded at December 31, 2014. At December 31, 2013, there were traditional C&I
loans with a balance of $314 and ADC loans with a balance of $1,932 with an allowance recorded. There was no income recognized
on these loans during the period.
100
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
With no related allowance recorded:
Traditional C&I
CRE
ADC
Residential mortgage
Total
For the fiscal year ended
September 30, 2014
YTD
average
recorded
investment
Interest
income
recognized
Cash-basis
interest
income
recognized
$
4,180
$
— $
14,016
20,525
515
186
239
—
$
39,236
$
425
$
—
180
239
—
419
Troubled Debt Restructuring
The following tables set forth the amounts and past due status of the Company’s TDRs at December 31, 2016 and December 31, 2015:
Traditional C&I
Equipment financing
CRE
ADC
Residential mortgage
Total
Traditional C&I
Equipment financing
CRE
ADC
Residential mortgage
Total
Current
loans
30-59
days
past due
December 31, 2016
60-89
days
past due
90+
days
past due
Non-
accrual
Total
$
572
$
— $
— $
— $
128
$
—
2,443
5,962
2,055
—
253
—
—
—
—
—
—
—
—
—
—
29
—
458
1,374
700
29
2,696
6,420
3,429
$
11,032
$
253
$
— $
— $
1,989
$
13,274
December 31, 2015
Current
loans
30-59
days
past due
60-89
days
past due
90+
days
past due
Non-
accrual
Total
$
154
338
2,787
5,107
4,661
$
— $
—
—
—
654
654
— $
—
—
—
—
— $
—
—
—
—
$
2,052
—
—
3,700
2,839
2,206
338
2,787
8,807
8,154
$
13,047
$
$
— $
— $
8,591
$
22,292
The Company had no outstanding commitments to lend additional amounts to customers with loans classified as TDRs as of
December 31, 2016 and 2015, respectively.
During calendar 2016 the Company modified one residential loan as a TDR, with a pre-modification balance of $469 and a post-
modification balance of $347 at December 31, 2016; the decline in balance was mainly due to a partial charge-off. There were no
loans modified as TDRs that occurred during calendar 2015 or the transition period. In fiscal 2014, there were two ADC loans that
were modified with a combined pre and post-modification balance of $1,060.
The amount of TDRs charged-off against the allowance for loan losses was $286 in calendar 2016, $74 in calendar 2015, $0 in the
transition period, and $110 in fiscal 2014.
101
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(5) Allowance for Loan Losses
Activity in the allowance for loan losses for calendar 2016 and 2015, the transition period, the 2013 transition period (unaudited), and
fiscal 2014 is summarized below:
For the year ended December 31, 2016
Beginning
balance
Charge-offs
Recoveries
Net
charge-offs
Provision
Ending
balance
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
$
9,953
$
2,762
1,936
589
1,457
4,925
547
11,461
5,141
2,009
5,007
4,358
Total allowance for loan losses
$
50,145
$
Annualized net charge-offs to average loans outstanding
(1,707) $
—
(28)
—
(1,200)
(1,982)
—
(959)
(417)
—
(1,045)
(1,615)
(8,953) $
999
$
62
32
—
61
560
—
353
2
104
30
227
2,430
$
(708) $
62
4
—
(1,139)
(1,422)
—
(606)
(415)
104
(1,015)
(1,388)
(6,523) $
3,619
$
12,864
492
(989)
974
1,351
1,536
515
9,611
265
(182)
1,872
936
3,316
951
1,563
1,669
5,039
1,062
20,466
4,991
1,931
5,864
3,906
20,000
$
63,622
0.08%
For the year ended December 31, 2015
Beginning
balance
Charge-offs
Recoveries
Net
charge-offs
Provision
Ending
balance
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
$
6,966
$
4,061
1,506
608
1,205
2,569
—
7,721
4,511
2,987
5,843
4,397
Total allowance for loan losses
$
42,374
$
Annualized net charge-offs to average loans outstanding
(1,575) $
—
(406)
—
(291)
(3,423)
—
(1,695)
(17)
—
(1,251)
(2,360)
(11,018) $
102
1,720
$
145
$
—
35
—
60
825
—
148
9
52
92
148
3,089
$
—
(371)
—
(231)
(2,598)
—
(1,547)
(8)
52
(1,159)
(2,212)
(7,929)
$
2,842
(1,299)
801
(19)
483
4,954
547
5,287
638
(1,030)
323
2,173
9,953
2,762
1,936
589
1,457
4,925
547
11,461
5,141
2,009
5,007
4,358
$
15,700
$
50,145
0.13%
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
For the three months ended December 31, 2014
Beginning
balance
Charge-offs
Recoveries
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
CRE
Multi-family
ADC
Residential mortgage
Consumer
$
5,450
$
4,086
1,379
630
1,294
2,621
8,444
4,267
2,120
5,837
4,484
Total allowance for loan losses
$
40,612
$
Annualized net charge-offs to average loans outstanding
(733) $
—
—
—
—
—
(172)
—
(488)
(310)
(203)
(1,906) $
Net
charge-offs
(95)
—
$
$
—
—
—
—
(171)
—
(488)
(308)
(176)
(1,238)
Provision
Ending
balance
$
1,611
(25)
127
(22)
(89)
(52)
(552)
244
1,355
314
89
6,966
4,061
1,506
608
1,205
2,569
7,721
4,511
2,987
5,843
4,397
638
—
—
—
—
—
1
—
—
2
27
668
$
$
3,000
$
42,374
0.10%
For the three months ended December 31, 2013 (Unaudited)
Beginning
balance
Charge-offs
Recoveries
C&I
CRE
Multi-family
ADC
Residential mortgage
Consumer
$
5,302
$
7,567
2,400
5,806
4,474
3,328
Total allowance for loan losses
$
28,877
$
Annualized net charge-offs to average loans outstanding
(528) $
(253)
(418)
(218)
(270)
(147)
(1,834) $
501
37
—
—
7
24
569
$
Net
charge-offs
(27)
(216)
(418)
(218)
(263)
(123)
(1,265)
$
Provision
$
1,611
$
659
—
269
389
72
Ending
balance
6,886
8,010
1,982
5,857
4,600
3,277
$
3,000
$
30,612
0.14%
For the fiscal year ended September 30, 2014
Beginning
balance
Charge-offs
Recoveries
C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
$
5,302
$
—
—
—
—
—
—
7,567
2,400
5,806
4,474
3,328
Total allowance for loan losses
$
28,877
$
Annualized net charge-offs to average loans outstanding
1,073
—
—
—
9
194
—
161
92
—
323
114
1,966
(2,901) $
—
(758)
—
(211)
(1,074)
—
(741)
(418)
(1,479)
(963)
(786)
(9,331) $
103
$
Net
charge-offs
(1,828)
—
(758)
—
(202)
(880)
—
(580)
(326)
(1,479)
(640)
(672)
(7,365)
$
Provision
$
1,976
$
4,086
2,137
630
1,496
3,501
—
1,457
2,193
(2,207)
2,003
1,828
Ending
balance
5,450
4,086
1,379
630
1,294
2,621
—
8,444
4,267
2,120
5,837
4,484
$
19,100
$
40,612
0.18%
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Total Valuation Balances Recorded Against Portfolio Loans
The following analysis presents the allowance for loan losses to originated loans, remaining purchase accounting marks to acquired loan
portfolios at December 31, 2016 and 2015:
Originated:
Traditional C&I
Asset-based lending
Payroll finance
Factored receivables
Equipment financing
Warehouse lending
Public sector finance
CRE
Multi-family
ADC
Residential
Consumer
Total originated loans
Allowance for loan losses
As a % of originated loans
Acquired loans:
Traditional C&I
Asset-based lending
Equipment finance
CRE
Multi-family
Residential
Consumer
December 31, 2016
Pass
Special
mention
Substandard
Doubtful
Loss
Total
$ 1,009,605
$
5,104
$
28,496
$
442
$
— $ 1,043,647
545,220
254,729
213,624
556,522
616,946
349,182
2,869,306
866,825
214,317
505,803
191,961
17,678
—
185
2,128
—
—
12,492
1,497
6,899
951
646
$ 8,194,040
$
58,217
$
$
47,580
1,423
$
$
—
820
433
3,397
—
—
19,130
658
8,870
14,578
6,738
83,120
3,650
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
562,898
255,549
214,242
562,047
616,946
349,182
2,900,928
868,980
230,086
521,332
199,345
$
$
442
332
$
$
— $ 8,325,182
— $
63,622
0.71%
2.99%
4.39%
75.11%
—%
0.76%
December 31, 2016
Pass
Special
mention
Substandard
Doubtful
Loss
Total
$
353,625
$
7,021
$
481
$
— $
— $
361,127
161,349
27,268
224,983
106,521
174,558
84,723
17,695
—
26,698
5,575
—
—
—
—
10,333
—
1,218
—
12,032
965
8.02%
—
—
—
—
—
—
—
—
—
—
—
—
179,044
27,268
262,014
112,096
175,776
84,723
$
$
— $
— $
—%
— $ 1,202,048
— $
37,012
—%
3.08%
Total loans subject to purchase
accounting marks
$ 1,133,027
Remaining purchase accounting mark
$
34,322
$
$
56,989
1,725
$
$
As a % of acquired loans
3.03%
3.03%
Total portfolio loans
$ 9,327,067
$
104,569
$
95,152
$
442
$
— $ 9,527,230
104
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Originated:
Traditional C&I
Asset-based lending
Payroll finance
Factoring
Equipment financing
Warehouse lending
Public sector finance
CRE
Multi-family
ADC
Residential
Consumer
Pass
$
872,173
$
302,176
221,735
206,814
512,314
387,808
182,336
2,002,638
550,438
118,552
419,534
195,684
Special
mention
3,003
8,038
—
—
460
—
—
9,361
—
1,575
897
407
Total portfolio loans in allowance
calculation
Allowance for loan losses
As a % of originated loans
$ 5,972,202
$
43,925
$
$
0.74%
23,741
884
3.72%
December 31, 2015
Substandard
Doubtful
Loss
Total
$
29,621
$
445
$
— $
905,242
—
96
1,568
1,644
—
—
24,104
1,717
7,236
13,497
7,167
$
$
86,650
4,801
$
$
—
—
—
—
—
—
—
—
—
—
268
713
535
—
—
—
—
—
—
—
—
—
—
—
310,214
221,831
208,382
514,418
387,808
182,336
2,036,103
552,155
127,363
433,928
203,526
$
$
— $ 6,083,306
— $
50,145
5.54%
75.04%
—%
0.82%
Acquired loans:
Traditional C&I
Equipment finance
CRE
Multi-family
ADC
Residential
Consumer
December 31, 2015
Pass
Special
mention
Substandard
Doubtful
Loss
Total
$
267,541
$
9,724
$
6,647
$
— $
— $
283,912
116,885
645,951
237,948
52,775
272,336
95,341
—
23,111
5,927
5,500
—
—
—
28,186
—
760
6,772
650
—
—
—
—
—
—
—
—
—
—
—
—
116,885
697,248
243,875
59,035
279,108
95,991
Total loans subject to purchase
accounting marks
$ 1,688,777
Remaining purchase accounting mark
$
37,351
$
$
44,262
1,649
$
$
43,015
2,383
$
$
As a % of acquired loans
2.21%
3.73%
5.54%
— $
— $
—%
— $ 1,776,054
— $
41,383
—%
2.33%
Total portfolio loans
$ 7,660,979
$
68,003
$
129,665
$
713
$
— $ 7,859,360
Purchase accounting marks accreted into interest income on loans was $18,586 for calendar 2016; $14,880 for calendar 2015; $1,260 for
the transition period; $1,875 for the 2013 transition period (unaudited); and $8,870 for fiscal 2014.
105
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
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 residential mortgage loans and consumer loans; (iv) net charge-offs; (v) non-performing loans (see
details above); and (vi) the general economic conditions in the greater New York metropolitan region. The 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 credit. Management has a reasonable amount of experience and depth,
and owners are willing to invest available outside capital as necessary.
6 - This grade includes loans to borrowers where there is evidence of some strain, earnings are inconsistent and volatile, and the
borrowers’ outlook is uncertain. Generally such borrowers have higher leverage than those with a better risk rating. These borrowers
typically have limited access to alternative sources of bank debt and may be dependent upon debt funding for working capital support.
7 - Special Mention (OCC definition) - Other Assets Especially Mentioned (OAEM) are loans that have potential weaknesses which
may, if not reversed or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. Such assets
constitute an undue and unwarranted credit risk but not to the point of justifying a classification of “Substandard.” The credit risk may be
relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific asset.
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
injections, 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.
106
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Loans that are risk-rated 1 through 6 as defined above are considered to be pass-rated loans. As of December 31, 2016 and 2015 the risk
category of gross loans by segment was as follows:
Traditional C&I
Asset-based lending
Payroll finance
Warehouse lending
Factored receivables
Equipment financing
Public sector finance
CRE
Multi-family
ADC
Residential mortgage
Consumer
Total
December 31, 2016
December 31, 2015
Special
mention
Substandard
Doubtful
Special
mention
Substandard
Doubtful
$
12,125
$
28,977
$
442
$
12,727
$
36,268
$
445
35,373
—
—
185
2,128
—
39,190
7,072
6,899
951
646
—
820
—
433
3,397
—
29,463
658
8,870
15,796
6,738
—
—
—
—
—
—
—
—
—
—
—
8,038
—
—
—
460
—
32,472
5,927
7,075
897
407
—
96
—
1,568
1,644
—
52,290
1,717
7,996
20,269
7,817
$
104,569
$
95,152
$
442
$
68,003
$
129,665
$
—
—
—
—
—
—
—
—
—
—
268
713
There were no loans rated loss at December 31, 2016 and 2015.
(6) 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
December 31,
2016
2015
11,679
29,785
33,070
63,877
138,411
(81,093)
57,318
$
$
12,460
27,803
32,576
66,478
139,317
(75,955)
63,362
$
$
For calendar 2016 and calendar 2015, the Company recorded impairment charges on premises and equipment of $729 and $7,575,
respectively, that were mainly related to the sale of the mortgage origination business and financial center consolidations associated
with the HVB Merger. In calendar 2016, the Company transfered $724 of net premises and equipment to foreclosed real estate upon
the closure of two facilities. For the 2014 transition period, the 2013 transition period, and fiscal 2014, the Company recorded
impairment charges on premises and equipment of $610, $9,302 and $11,043, respectively, related to financial center consolidations
associated with the Provident Merger. These charges were included in other non-interest expense in the consolidated statement of
operations.
Depreciation and amortization of premises and equipment totaled $8,375 and $7,476 for the year ended calendar 2016 and calendar
2015; $1,456 for the 2014 transition period; $1,617 for the 2013 transition period; and $6,507 for fiscal 2014.
107
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(7) Goodwill and Other Intangible Assets
Goodwill and other intangible assets are presented in the tables below. The increase in goodwill and certain other intangible assets in
calendar 2016 was related to the NSBC Acquisition, the increase in calendar 2015 was primarily related to the HVB Merger and the
Damian Acquisition (See Note 2. “Acquisitions”).
Goodwill
The change in goodwill for the periods presented was as follows:
Beginning of period balance
Acquired goodwill
End of period balance
Other intangible assets
The balance of other intangible assets for the periods presented was as follows:
December 31, 2016
Core deposits
Customer lists
Non-compete agreements
Trade name
Fair value of below market leases
December 31, 2015
Core deposits
Customer lists
Non-compete agreements
Trade name
Fair value of below market leases
For the year ended
December 31,
2016
2015
$
$
670,699
25,901
696,600
$
$
388,926
281,773
670,699
Gross
intangible
assets
Accumulated
amortization
Net intangible
assets
$
58,021
$
$
$
10,450
11,808
20,500
725
101,504
$
58,021
$
8,950
11,808
20,500
725
$
100,004
$
(20,566) $
(2,767)
(11,183)
—
(635)
(35,151) $
(12,227) $
(991)
(8,883)
—
(536)
(22,637) $
37,455
7,683
625
20,500
90
66,353
45,794
7,959
2,925
20,500
189
77,367
Other intangible assets, except the trade name intangible asset, are amortized on a straight-line or accelerated bases over their
estimated useful lives, which range from one to 10 years. Other intangible asset amortization expense totaled $12,416 in calendar
2016; $10,043 in calendar 2015; $1,873 in the transition period; $1,875 in the 2013 transition period; and $9,408 in fiscal 2014. The
amortization of the fair value of below market leases was included in rent expense for all periods. The estimated aggregate future
amortization expense for other intangible assets remaining as of December 31, 2016 was as follows:
108
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
2017
2018
2019
2020
2021
Thereafter
Total
(8) Deposits
Deposit balances at December 31, 2016 and 2015 are summarized as follows:
Non-interest bearing demand
Interest bearing demand
Savings
Money market
Certificates of deposit
Total deposits
Amortization
expense
$
$
8,838
7,285
6,074
5,428
5,022
13,206
45,853
December 31,
$
2016
3,239,332
2,220,456
747,031
3,277,686
583,754
$ 10,068,259
$
$
2015
2,936,980
1,274,417
943,632
2,819,788
605,190
8,580,007
Municipal deposits totaled $1,270,921 and $1,140,206 at December 31, 2016 and December 31, 2015, 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
December 31,
2016
2015
$
$
480,162
47,768
42,492
7,210
6,122
583,754
$
$
494,242
75,724
20,469
9,573
5,182
605,190
Certificate of deposit accounts that exceed the FDIC Insurance limit of $250 or more totaled $132,406 and $98,324 at December 31,
2016 and 2015, respectively.
Listed below are the Company’s brokered deposits:
109
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Interest bearing demand
Money market
Savings
Reciprocal CDARs 1
CDARs one way
Total brokered deposits
1 Certificate of deposit account registry service
(9) Borrowings, Senior Notes and Subordinated Notes
The Company’s borrowings and weighted average interest rates are summarized as follows:
December 31,
2016
2015
$
$
426,437
5,560
246,572
153,060
—
831,629
$
$
—
152,180
—
169,958
106,647
428,785
By type of borrowing:
FHLB advances and overnight
Repurchase agreements
Senior Notes
Subordinated 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
December 31,
2016
2015
Amount
Rate
Amount
Rate
$ 1,791,000
16,642
76,469
172,501
$ 2,056,612
$ 1,397,642
311,469
75,000
50,000
50,000
172,501
$ 2,056,612
1.01% $ 1,409,885
16,566
0.75
98,893
5.98
5.45
—
1.56% $ 1,525,344
999,222
0.87% $
295,000
2.53
228,893
1.50
—
1.38
—
1.68
2,229
5.45
1.56% $ 1,525,344
1.32%
0.55
5.98
—
1.61%
0.69%
3.19
3.57
—
—
4.92
1.61%
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 December 31, 2016 and 2015, the Bank had
pledged residential mortgage and commercial real estate loans with eligible collateral values of $2,349,604 and $2,050,982,
respectively. The Bank had also pledged securities to secure borrowings, which are disclosed in Note 3. “Securities.” As of
December 31, 2016, the Bank may increase its borrowing capacity by pledging unencumbered securities and mortgage loans that are
not required to be pledged for other purposes with an estimated collateral value of $1,552,923.
FHLB borrowings included $200,000 at December 31, 2015 that were putable quarterly at the discretion of the FHLB. These
borrowings had a weighted average remaining term to the contractual maturity dates of approximately 1.31 years at December 31,
2015, and a weighted average interest rate of 4.23%. The Company redeemed these borrowings on March 31, 2016, together with
$20,000 of other borrowings with an interest rate of 3.57%. The Company incurred a loss on extinguishment of debt associated with
these repayments of $8,716, which is included in non-interest expense in the consolidated statement of operations.
Repurchase agreements. Securities sold under repurchase agreements are utilized to facilitate the needs of our clients and are secured
short-term borrowings that mature in one to 30 days. Repurchase agreements are stated at the amount of cash received in connection
with these transactions. The Bank monitors collateral levels on a continuous basis. The Bank may be required to provide additional
collateral based on the fair value of the underlying securities. Securities pledged as collateral are maintained with our safekeeping
agents.
110
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Senior Notes. On July 2, 2013, the Company issued $100,000 principal amount of 5.50% fixed rate senior notes (the “Senior Notes”)
through a private placement at a discount of 1.75%. The cost of issuance was $303, and at December 31, 2016 and 2015 the
unamortized discount was $531 and $1,107, 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.
During the third quarter of 2016, the Company reacquired $23,000 of the Senior Notes and incurred a loss on extinguishment of debt
associated with this redemption of $1,013, which is included in non-interest expense in the consolidated statements of operations.
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 Senior Notes were issued under an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as
trustee. 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 are not registered under the Securities Act of 1933, as amended, and may not be offered or sold in the U.S. absent
registration or an applicable exemption from registration requirements.
Subordinated Notes. On March 29, 2016, the Bank issued $110,000 aggregate principal amount of 5.25% fixed-to-floating rate
subordinated notes (the “Subordinated Notes”) through a private placement at a discount of 1.25%. The cost of issuance was $500. On
September 2, 2016, the Bank reopened the Subordinated Notes offering and issued an additional $65,000 principal amount of
Subordinated Notes. The Subordinated Notes issued September 2, 2016 are fully fungible with, rank equally in right of payment with,
and form a single series with the Subordinated Notes issued March 29, 2016. Such notes were issued to the purchasers at a premium of
0.50% and an underwriters discount of 1.25%. The cost of issuance was $275. At December 31, 2016, the net unamortized discount of
all Subordinated Notes was $2,499, which will be accreted to interest expense over the life of the Subordinated Notes, resulting in an
effective yield of 5.45%. Interest is due semi-annually in arrears on April 1 and October 1 of each year, until April 1, 2021. From and
including April 1, 2021, the Subordinated Notes will bear interest at a floating rate per annum equal to three-month LIBOR plus
3.937%, payable quarterly on January 1, April 1, July 1 and October 1 of each year, beginning on July 1, 2021, through maturity on
April 1, 2026 or earlier redemption. The Subordinated Notes are also redeemable by the Bank, in whole or in part, on April 1, 2021
and each interest payment date thereafter. The Subordinated Notes are redeemable in whole at any time upon the occurrence of certain
specified events. The Subordinated Notes are unsecured, subordinated obligations of the Bank and are subordinated in right of
payment to all of the Bank’s existing and future senior indebtedness, including claims of depositors and general creditors. The
Subordinated Notes qualify as Tier 2 capital for regulatory purposes. See Note 16. “Stockholders’ Equity”, for additional information.
Revolving line of credit. On September 5, 2016, the Company amended and renewed its existing revolving line of credit agreement for
a new 12-month term. The loan agreement is for a $25,000 revolving line of credit facility (the “Credit Facility”) with a financial
institution that matures on September 4, 2017. The balance was zero at December 31, 2016 and December 31, 2015. 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 Credit
Facility, the Company and the Bank must maintain certain ratios related to capital, non-performing assets to capital, reserves to non-
performing loans and debt service coverage. The Company and the Bank were in compliance with all requirements of the Credit
Facility at December 31, 2016.
(10) Derivatives
The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative
contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering
into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees
to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar
notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed
interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction
allows the Company’s customers to effectively convert a variable rate loan to a fixed rate loan. Because the Company acts as an
intermediary for its customers, changes in the fair value of the underlying derivative contracts largely offset each other and do not
materially impact results of operations.
111
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The Company pledged cash of $1,962 and investment securities with a fair value of $126 as of December 31, 2016 as collateral for the
swaps with another financial institution. The Company may need to post additional collateral to swap counterparties in the future in
proportion to potential increases in unrealized loss positions.
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.
Summary information as of December 31, 2016 and 2015 regarding these derivatives is presented below:
December 31, 2016
3rd party interest rate swap
Customer interest rate swap
December 31, 2015
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
$
296,282
(296,282)
87,094
(87,094)
5.63
5.63
5.44
5.44
3.94% 1 m Libor + 2.29
1 m Libor + 2.29
3.94
$
4.09
4.09
1 m Libor + 2.15
1 m Libor + 2.15
(2,088)
2,088
1,839
(1,839)
The Company regularly 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.
(11) Income Taxes
Income tax expense (benefit) for the periods indicated consisted of the following:
Current tax expense (benefit):
Federal
State
Total current tax expense (benefit)
Deferred tax expense (benefit):
Federal
State
Total deferred tax (benefit) expense
Total income tax expense (benefit)
For the year ended
For the three months ended
December 31,
December 31,
For the fiscal
year ended
September 30,
2016
2015
2014
2013
2014
$
55,418
$
25,634
$
17,134
$
12,854
68,272
(1,069)
179
(890)
5,862
31,496
(1,406)
1,745
339
$
67,382
$
31,835
$
3,322
20,456
(10,954)
(1,126)
(12,080)
8,376
$
(8,205) $
(600)
(8,805)
2,229
(372)
1,857
(6,948) $
11,613
1,598
13,211
(2,745)
(314)
(3,059)
10,152
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:
112
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
For the year ended
December 31,
For the three months ended
December 31,
Tax at federal statutory rate of 35%
$
72,574
$
34,282
$
8,884
$
2016
2015
2014
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
8,472
4,945
683
(11,094)
(1,933)
—
(469)
(168)
$
67,382
$
(5,218)
(1,853)
700
(215)
(806)
31,835
(1,029)
(341)
53
(220)
346
For the fiscal
year ended
September 30,
2014
$
13,241
834
(3,824)
(1,110)
712
(165)
464
2013
(7,335)
(632)
(768)
(259)
712
—
1,334
$
8,376
$
(6,948)
$
10,152
32.5%
32.5%
33.0%
(33.2)%
26.8%
The following table presents the Company’s deferred tax position at December 31, 2016 and 2015:
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Other accrued compensation and benefits
Accrued post retirement expense
Deferred rent
Intangible assets
Other comprehensive loss (securities)
Other comprehensive loss (defined benefit plans)
Depreciation of premises and equipment
State NOL carryforward
Other
Total deferred tax assets
Deferred tax liabilities:
Prepaid pension costs
Acquisition fair value adjustments
Depreciation of premises and equipment
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2016
2015
$
$
25,039
656
9,920
2,060
3,268
3,108
16,911
479
—
—
3,971
65,412
3,798
18,948
809
1,309
24,864
40,548
$
$
19,684
736
8,229
1,967
3,849
2,676
8,245
566
2,738
379
3,738
52,807
4,492
15,503
—
1,733
21,728
31,079
Based on the Company’s consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items
giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at either
December 31, 2016 or 2015.
Retained earnings at December 31, 2016 and 2015, included approximately $9,313 for which no provision for federal income taxes
has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end of the Bank’s base year for
purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any
113
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
purposes other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability
on the above amount at both December 31, 2016 and 2015, was approximately $3,260.
At December 31, 2015, the Company had state and local net operating loss (“NOL”) carryforwards that were acquired from Legacy
Sterling as part of the Provident Merger on October 31, 2013. These NOL carryforwards were fully utilized in 2016.
At December 31, 2016 and 2015, the Company had no unrecognized tax benefits or accrued interest and penalties recorded. The
Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The
Company records interest and penalties as a component of other non-interest expense.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of New York and various
other states. The Company is generally no longer subject to examination by federal, state and local taxing authorities for fiscal tax
years prior to September 30, 2013.
(12) Stock-Based Compensation
The Company has active stock-based compensation plans, as described below.
The Company’s stockholders approved the 2015 Omnibus Equity and Incentive Plan (the “2015 Plan”) on May 28, 2015. The 2015
Plan permits the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted
stock units, deferred stock and other stock-based awards. The total number of shares that may be awarded under the 2015 Plan
is 2,800,000 shares plus the remaining shares available for grant under the 2014 Stock Incentive Plan (the “2014 Plan”).
At December 31, 2016, there were 3,639,838 shares available for future grant under the 2015 Plan.
The Company’s stockholders approved the 2014 Plan on February 20, 2014. The approval of the 2015 Plan resulted in the termination
of the 2014 Plan. Awards outstanding as of May 28, 2015 will continue to be governed by the 2014 Plan document; however, no
future grants will be made under the 2014 Plan.
Under the 2015 Plan, one share is deducted from the 2015 Plan for every share that is awarded and delivered under the 2015 Plan.
Restricted stock awards are granted with a fair value equal to the market price of the Company’s common stock at the date of grant.
Stock option awards are granted with a strike price that is equal to the market price of the Company’s 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 1 to 5 years
and stock options have 10 year contractual terms.
In addition to the 2015 Plan and the 2014 Plan, the Company previously granted 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, all of which vested in July 2015.
In connection with the Provident 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. At
December 31, 2016 there are 6,312 of these options outstanding, which expire March 15, 2017. The Company also
granted 95,991 shares under the Legacy Sterling 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 a prior plan to certain
executives of Legacy Sterling. The weighted average grant date fair value was $11.72 per share and the restricted stock awards vested
in October 2016.
114
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The following table summarizes the activity in the Company’s active stock-based compensation plans for the periods presented:
Balance at October 1, 2013
2014 Plan
2012 Stock Incentive Plan termination
Grants associated with the Provident Merger(1)
Granted (1)
Stock awards vested
Exercised
Forfeited
Canceled/expired
Balance at September 30, 2014
Granted (1)
Stock awards vested
Exercised
Forfeited
Canceled/expired
2015 Plan
Granted (1)
Stock awards vested
Exercised
Forfeited
Canceled/expired
Balance at December 31, 2015
Granted
Stock awards vested
Exercised
Forfeited
Canceled/expired
Balance at December 31, 2016
Exercisable at December 31, 2016
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
(1,360,006)
—
—
351,964
115,145
(69,211)
—
(18,841)
—
588,754
$
250,624
— (193,129)
—
—
(2,362)
—
—
8,267
2,800,000
(732,023)
—
447,807
— (330,384)
—
—
(34,510)
—
515,869
— (261,989)
—
—
(48,457)
—
192,970
(134,304)
4,125,665
(515,869)
130,758
(100,716)
3,639,838
—
—
11.72
11.53
—
—
104,152
324,862
9.51
—
— (507,955)
(375,235)
—
—
9.18
1,660,333
$
482,811
—
(95,033)
—
(7,812)
2,040,299
—
24,566
$
10.99
12.96
10.84
—
13.23
—
—
14.02
11.23
12.92
—
— (406,422)
(71,871)
—
—
14.60
13.09
—
—
— (503,893)
(78,560)
—
—
13.88
—
—
14.25
11.45
—
11.29
12.24
—
10.55
13.29
—
12.31
—
14.09
11.10
—
14.22
—
11.58
12.90
—
—
—
10.47
13.41
—
11.00
10.69
932,223
$
14.09
1,004,119
887,199
$
$
726,800
$
13.36
1,586,572
$
10.95
Balance at December 31, 2014
1,999,022
643,887
$
11.79
(1) Reflects certain non-vested stock awards that counted as either 3.5 shares or 3.6 shares (depending on under which stock plan the
awards were granted) for each share award granted.
115
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Other information regarding options outstanding at December 31, 2016 follows:
Range of exercise prices:
$6.71 to $8.73
9.00 to 10.03
11.36 to 13.18
13.23 to 15.01
Outstanding
Exercisable
Number of
stock options
Weighted average
Life
(in years)
Exercise
price
Number of
stock options
Weighted
average
exercise
price
$
169,001
224,500
305,241
305,377
1,004,119
7.90
9.24
11.67
13.33
11.00
5.17
5.42
6.12
7.69
6.28
$
169,001
224,500
305,241
188,457
887,199
7.90
9.24
11.67
13.23
10.69
The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was
$12,454 and $11,278, respectively, at December 31, 2016.
Proceeds from stock option exercises were $3,588 and $2,764 for calendar 2016 and calendar 2015, respectively; $574 and $1,479 for
the 2014 transition period and 2013 transition period, respectively; and $3,042 for fiscal 2014.
The Company uses an option pricing model to estimate the grant date fair value of stock options granted. There were no stock options
granted in calendar 2016. The weighted average estimated value per option granted was $2.14 for the calendar 2015; $1.89 and $2.49
for the 2014 transition period and the 2013 transition period, respectively, and $2.51 for the fiscal 2014.
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:
Risk-free interest rate
Expected stock price volatility
Dividend yield (1)
Expected term in years
For the year
ended
December 31,
2015
For the three months ended
December 31,
2014
2013
For the fiscal
year ended
September 30,
2014
1.8%
21.2
3.1
5.76
1.9%
20.3
3.2
5.73
1.7%
26.5
2.1
5.75
1.8%
26.4
2.0
5.67
(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
For the three months ended
December 31,
December 31,
For the fiscal
year ended
September 30,
2016
2015
2014
2013
2014
$
$
$
$
404
6,113
6,517
2,118
$
$
909
3,451
4,360
1,417
$
$
316
828
1,144
378
$
$
219
620
839
279
901
2,508
3,409
914
Unrecognized stock-based compensation expense at December 31, 2016 was as follows:
116
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Stock options
Non-vested stock awards/performance units
Total
December 31, 2016
$
$
100
8,213
8,313
The weighted average period over which unrecognized stock options is expected to be recognized is 0.88 years. The weighted average
period over which unrecognized non-vested awards/performance units is expected to be recognized is 1.84 years.
(13) Pension and Other Post Retirement Benefits
(a) Pension Plans
On May 31, 2014, the Company merged the Provident Bank Benefit Pension Plan (the “Legacy Provident Plan”) and the Legacy
Sterling/Sterling National Bank Employees’ Retirement Plan (the “Legacy Sterling Plan”) and formed the Sterling National Bank
Defined Benefit Pension Plan (the “Plan”). The Legacy Provident Plan covered employees that were eligible as of September 30, 2006.
The Board of Directors approved a curtailment to the Legacy Provident Plan effective September 30, 2006. At that time, all benefit
accruals for future service ceased and no new participants were allowed to enter the Legacy Provident Plan. The purpose of the Legacy
Provident Plan curtailment was to afford flexibility in the retirement benefits the Company provides, while preserving all retirement plan
participants’ earned and vested benefits, and to manage the increasing costs associated with the Plan. The Legacy Sterling Plan was a
defined benefit plan that covered eligible employees of Legacy Sterling and Legacy Sterling National Bank and certain of its subsidiaries
who were hired prior to January 3, 2006 and who attained age 21 prior to January 3, 2007. Effective October 31, 2013, the Legacy
Sterling Plan was amended and the accrued benefit of each eligible actively employed participant that had not yet commenced benefits
was increased by approximately 4.4% and the accrual of future service benefits ceased.
On October 15, 2015, the Company terminated the Plan and satisfied all obligations owed to Plan participants through the purchase of
annuities from a third-party insurance carrier and lump sum distributions as elected by Plan participants in an aggregate amount
of $58,171. In connection with the Plan termination, the Company incurred a settlement charge of $13,384, which was comprised of the
change in fair value of Plan assets of $4,068, the recognition of the remaining balance of accumulated other comprehensive loss through
earnings of $7,936, and a charge representing the difference between the Company’s effective tax rate and its marginal tax rate
of $1,380. The balance of the pension reversion asset is $9,650 (which is recorded in other assets in the consolidated balance sheet) at
December 31, 2016. This asset will be held in custody by the Company’s 401(k) plan custodian and is expected to be charged to earnings
over the next four to six years as it is distributed to employees under qualified compensation and benefit programs.
The following is a summary of changes in the projected benefit obligation and fair value of Plan assets. The measurement date used by
the Company for its pension plans was October 15, 2015, which is the date of the Plan termination, and December 31, 2014.
Changes in projected benefit obligation:
Beginning of year balance
Interest cost
Plan termination / Partial settlement
End of year balance
Changes in fair value of plan assets:
Beginning of year balance
Actual (loss) gain on plan assets
Plan termination / Partial settlement
End of year balance
Reversion asset / Funded status at end of year
117
December 31,
2015
$
$
57,877
1,766
(58,171)
1,472
72,170
(1,085)
(58,171)
12,914
11,442
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The components of net periodic pension expense were as follows:
Interest cost
Expected return on plan assets
Amortization of unrecognized actuarial loss
Plan termination / Partial settlement charge
Net periodic pension expense (benefit)
Year ended
December 31,
2015
Three months ended
December 31,
2014
2013
Fiscal year ended
September 30,
2014
$
$
1,766
(2,187)
272
13,384
13,235
$
$
$
555
(682)
—
—
(127) $
402
(672)
97
2,743
2,570
$
$
2,779
(3,380)
236
3,922
3,557
Net periodic pension expense (benefit) is included in compensation and benefits in the consolidated statements of operations; however,
the termination and settlement charge for the defined benefit pension plan was presented as a separate line item due to its significance.
There were no amounts recognized in accumulated other comprehensive (loss) at December 31, 2016 or 2015 due to the Plan
termination.
(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
Supplemental Executive Retirement Plans (“SERP”) to certain former directors and officers of the Company, life insurance benefits to
certain directors and officers of the Company and former Legacy Sterling officers and directors and the Company’s optional medical,
dental and life insurance benefits to retirees plan, which was terminated on December 31, 2014.
Data relating to other post retirement benefit plans is the following:
Changes in accumulated post retirement benefit
obligation:
Beginning of year
Obligations assumed in acquisitions
Plan amendment
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
Year ended
December 31,
Three months ended
December 31,
2016
2015
2014
2013
Fiscal year ended
September 30,
2014
$
$
$
$
11,733
—
—
—
417
64
—
(89)
12,125
— $
89
—
(89)
—
(12,125) $
$
11,096
16,059
—
6
373
364
—
(16,165)
11,733
— $
16,165
—
(16,165)
—
(11,733) $
$
10,990
—
45
3
59
72
—
(73)
11,096
— $
73
—
(73)
—
(11,096) $
$
3,302
9,644
—
12
34
18
—
(71)
12,939
— $
71
—
(71)
—
(12,939) $
3,302
9,644
—
51
683
79
(2,485)
(284)
10,990
—
284
—
(284)
—
(10,990)
In connection with the purchase of $30,000 of BOLI during the three months ended December 31, 2014, the Company provided a post
retirement benefit to employees, which is reflected above as the plan amendment for the period.
118
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
In connection with the HVB Merger, the Company assumed SERP liabilities of $16,059. The Company terminated the HVHC SERP as
of the acquisition date. Plan participants received a lump-sum cash payment in July 2015 and all plan obligations were
Components of net periodic (benefit) expense for other post retirement benefit plans was the following:
Service cost
Interest cost
Amortization of transition obligation
Amortization of prior service cost
Amortization of net actuarial (gain) loss
Curtailment (gain)
Total
Year ended
December 31,
2016
2015
Three months ended
December 31,
2014
2013
Fiscal year ended
September 30,
2014
$
$
— $
417
—
64
—
—
481
$
6
373
—
161
—
—
540
$
$
3
59
3
—
6
—
71
$
$
12
34
6
12
—
—
64
$
$
51
683
34
270
(45)
(2,485)
(1,492)
The Company terminated the optional medical, dental and life insurance benefits plan to retirees effective September 30, 2014 and all
payments under this plan ceased on December 31, 2014. Net periodic benefit expense for other post retirement benefit plans is included
in non-interest expense - compensation and employee benefits in the consolidated statements of operations for the periods presented
above. The Company’s liability under its other post retirement benefit plans is included in other liabilities in the balance sheets.
Estimated future benefit payments are the following for the years ending December 31:
2017
2018
2019
2020
2021
Thereafter
$
204
243
285
329
367
1,662
Plan assumptions for the other post retirement medical, dental and vision plans include the following:
Discount rate
Discount rate used to value periodic cost
(c) Employee Savings Plan
December 31,
2016
2015
2.78% to 4.00% 3.00% to 4.00%
2.78% to 4.00% 3.00% to 4.00%
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. In fiscal 2014, the 2014 transition period, the 2013 transition period and
calendar 2015, the Company made 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. There was no profit sharing component for any period presented in the consolidated statements of operations.
Effective January 1, 2016, the Company implemented a profit sharing contribution equal to 3.0% of eligible compensation of all
employees, which is funded by the pension reversion asset described above. The contribution is made to all eligible employees
regardless of their 401(k) elective deferral percentage. 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 $3,210 for calendar 2016, $1,769 for
calendar 2015; $381 for the transition period; $278 for the 2013 transition period; and $1,614 for fiscal 2014.
119
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(14) Other Non-interest Expense
Other non-interest expense items are presented in the following table. Significant components of the aggregate of total net interest
income and total non-interest income are presented separately.
For the year ended
December 31,
For the three months ended
December 31,
2016
2015
2014
2013
Fiscal year
ended
September 30,
2014
Other non-interest expense:
Advertising and promotion
Professional fees
Data and check processing
Insurance & surety bond premium
Charge for asset write-downs, severance,
retention and change in fiscal year end
Charge for banking systems conversion
Other
$
2,948
$
2,522
$
782
$
309
$
10,276
8,866
3,150
4,485
—
18,556
8,308
8,825
3,186
29,046
—
17,836
1,314
1,424
595
1,075
1,418
4,543
1,818
595
675
22,167
—
4,057
Total other non-interest expense
$
48,281
$
69,723
$
11,151
$
29,621
$
2,358
6,913
3,439
2,703
22,976
3,249
16,279
57,917
(15) Earnings Per Common Share
The following is a summary of the calculation of earnings per share (“EPS”):
For the year ended
For the three months ended
December 31,
December 31,
For the fiscal
year ended
September 30,
2016
2015
2014
2013
2014
Net income (loss)
$
139,972
$
66,114
$
17,004
$
(14,002) $
27,678
Weighted average common shares
outstanding for computation of
basic EPS
Common-equivalent shares due to the
dilutive effect of stock options (1)
Weighted average common shares for
computation of diluted EPS
Earnings per common share:
130,607,994
109,907,645
83,831,380
70,493,305
80,268,970
626,468
421,708
363,536
—
265,073
131,234,462
110,329,353
84,194,916
70,493,305
80,534,043
Basic
Diluted
$
$
1.07
1.07
$
0.60
0.60
$
0.20
0.20
(0.20) $
(0.20)
0.34
0.34
Weighted average common shares
that could be exercised that were
anti-dilutive for the period(2)
—
2,394
82,625
2,025,501
697,475
(1) Represents incremental shares computed using the treasury stock method.
(2) Anti-dilutive shares are not included in determining diluted earnings per share.
(16) Stockholders’ Equity
(a) Regulatory Capital Requirements
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
120
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about components, risk-weighting, and other
The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for
certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the
maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital (as defined in the
regulations), Tier 1 capital (as defined in the regulations) and Total capital (as defined in the regulations) to risk-weighted assets (as
defined, “RWA”), and of Tier 1 capital to adjusted quarterly average assets (as defined) (the “Tier 1 leverage
The Company’s and the Bank’s Common Equity Tier 1 capital consists of common stock and related paid-in capital, net of treasury
stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to
include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1
capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities
and subject to transition
Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. Total capital includes Tier 1 capital and Tier 2
capital. Tier 2 capital (as defined in the regulations) for both the Bank and the Company includes a permissible portion of the
allowance for loan losses and $172,501 and $152,641 of the Subordinated Notes, respectively. During the final five years of the term
of the Subordinated Notes the permissible portion eligible for inclusion in Tier 2 capital decreases by 20% annually. See Note 9.
“Borrowings, Senior Notes, and Subordinated Notes.”
The Common Equity Tier 1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by RWA. RWA is
calculated based on regulatory requirements and includes total assets, excluding goodwill and other intangible assets, allocated by risk
weight category, and certain off-balance-sheet items, among other
The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and
other intangible assets, among other things. When fully phased-in on January 1, 2019, the Basel III Capital Rules will require the
Company and the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 capital to RWA of at least 4.5%, plus a 2.5%
“capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively
resulting in a minimum ratio of Common Equity Tier 1 capital to RWA of at least 7.0% upon full implementation); (ii) a minimum
ratio of Tier 1 capital to RWA of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as
that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); (iii) a minimum
ratio of Total capital to RWA of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that
buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (iv) a minimum Tier
1 leverage ratio
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and is being phased in over
a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III
Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not
have any current applicability to the Company or the
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions
with a ratio of Common Equity Tier 1 capital to RWA above the minimum but below the conservation buffer (or below the combined
capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity
repurchases and compensation based on the amount of the
The following table presents actual and required capital ratios as of December 31, 2016 and December 31, 2015 for the Company and
the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital
levels as of December 31, 2016 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital
levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well
capitalized are based upon prompt corrective action regulations, as amended, to reflect the changes under the Basel III Capital Rules.
121
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Actual
Capital
amount
Ratio
Minimum capital
required - Basel III
phase-in schedule
Capital
amount
Ratio
Minimum capital
required - Basel III
fully phased-in
Capital
amount
Ratio
Required to be
considered well
capitalized
Capital
amount
Ratio
$1,176,497
1,160,739
10.87% $ 554,663
554,474
10.73
5.125% $ 757,588
757,330
5.125
7.00% $ 703,475
N/A
7.00
6.50%
N/A
December 31, 2016
Common equity tier 1 to RWA:
Sterling National Bank
Sterling Bancorp
Tier 1 capital RWA:
Sterling National Bank
Sterling Bancorp
1,176,497
1,160,739
10.87%
10.73
717,003
716,759
6.625%
6.625
919,928
919,615
8.50%
8.50
865,815
N/A
8.00%
N/A
Total capital to RWA:
Sterling National Bank
Sterling Bancorp
1,413,165
1,377,547
13.06%
12.73
933,457
933,139
8.625% 1,136,382
1,135,995
8.625
10.50% 1,082,269
N/A
10.50
10.00%
N/A
Tier 1 leverage ratio:
Sterling National Bank
Sterling Bancorp
1,176,497
1,160,739
9.08%
8.95
Actual
4.00%
4.00
518,308
518,733
Minimum capital
required - Basel III
phase-in schedule
4.00%
4.00
518,308
518,733
Minimum capital
required - Basel III
fully phased-in
647,885
N/A
5.00%
N/A
Required to be
considered well
capitalized
Capital
amount
Ratio
Capital
amount
Ratio
Capital
amount
Ratio
Capital
amount
Ratio
December 31, 2015
Common equity tier 1 to RWA:
Sterling National Bank
Sterling Bancorp
Tier 1 capital RWA:
$1,053,527
988,174
11.45% $ 413,951
414,047
10.74%
4.50% $ 643,923
644,073
4.50%
7.00% $ 597,929
N/A
7.00%
6.50%
N/A
Sterling National Bank
Sterling Bancorp
1,053,527
988,174
11.45%
10.74%
551,934
552,063
6.00%
6.00%
781,907
782,089
8.50%
8.50%
735,912
N/A
8.00%
N/A
Total capital to RWA:
Sterling National Bank
Sterling Bancorp
1,104,221
1,038,868
12.00%
11.29%
735,912
736,084
8.00%
8.00%
965,885
966,110
10.50%
10.50%
919,891
N/A
10.00%
N/A
Tier 1 leverage ratio:
Sterling National Bank
Sterling Bancorp
1,053,527
988,174
9.65%
9.03%
436,678
437,629
4.00%
4.00%
436,678
437,629
4.00%
4.00%
545,848
N/A
5.00%
N/A
Management believes that as of December 31, 2016, the Bank was “well-capitalized”. At December 31, 2016, and December 31,
2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s
category.
122
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
A reconciliation of the Company’s and the Bank’s stockholders’ equity to their respective regulatory capital at December 31, 2016 and
2015 is as follows:
Total U.S. GAAP stockholders’ equity
Disallowed goodwill and other intangible assets
Net unrealized loss on available for sale securities
Net accumulated other comprehensive income components
Tier 1 risk-based capital
Tier 2 capital
Allowance for loan losses and off-balance sheet commitments
Total risk-based capital
The Company
December 31,
2016
1,855,183
(721,079)
22,637
3,998
1,160,739
152,641
64,167
1,377,547
$
$
2015
1,665,073
(689,023)
6,999
5,125
988,174
—
50,694
1,038,868
$
$
The Bank
December 31,
2016
1,843,476
(693,614)
22,637
3,998
1,176,497
172,501
64,167
1,413,165
$
$
2015
1,705,841
(664,225)
6,992
4,919
1,053,527
—
50,694
1,104,221
$
$
(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 year combined with the
retained net profits for the preceding two years. Under the foregoing dividend restrictions, and while maintaining its “well-
capitalized” status, at December 31, 2016, the Bank had capacity to pay aggregate dividends of up to $155,724 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 calendar 2016 and calendar 2015, the 2014 transition period, the 2013 transition period or fiscal 2014.
(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 (as defined in the plan of conversion). 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 December 31, 2016, 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.
(17) Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in
its consolidated balance sheets. 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
123
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
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 exposure assessment of standby letter of credit arrangements, the arrangements contain security and debt
covenants similar to those contained in loan agreements. As of December 31, 2016, the Company had $114,582 in outstanding letters
of credit, of which $33,987 were secured by cash collateral and $30,518 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
(18) Commitments and Contingencies
$
December 31,
2016
2015
$
245,319
968,288
114,582
269,636
660,915
102,930
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 December 31, 2016 were as follows:
2017
2018
2019
2020
2021
2022 and thereafter
$
$
10,549
10,237
8,693
7,790
6,355
21,501
65,125
Occupancy and office operations expense includes net rent expense of $10,430 and $9,566, respectively, for calendar 2016 and
calendar 2015; $2,450 for the 2014 transition period; $2,157 for the 2013 transition period; and $7,893 for fiscal 2014.
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.
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 them and intend to
defend vigorously each case, other than matters determined appropriate to be settled. The Company accrues 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.
124
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(19) 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 an orderly transaction
occurring in the principal or most advantageous market for such asset or liability in an orderly transaction between market participants
on the measurement date. In estimating fair value, we use valuation techniques that are consistent with the market approach, the
income approach and/or the cost approach. Such valuation techniques are consistently applied. GAAP establishes a fair value
hierarchy comprised of three levels of inputs that may be used to measure fair values.
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the
ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for
the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risk, etc.) or inputs that are derived
principally from, or corroborated by, market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for determining the fair value of assets or liabilities that reflect an entity’s own
assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
In general, fair value is based on quoted market prices, when available. If quoted market prices in active markets are not available,
fair value is based on internally developed models that primarily use, as inputs, observable market-based parameters. Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to
reflect counterparty credit quality and the Company’s creditworthiness, among other 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 as quoted
market prices are generally not available. For these securities, the Company obtains fair value measurements from an independent
pricing service. The fair value measurements are calculated based on market prices of similar securities and 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 generally 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.
At December 31, 2016, we do not believe any of our securities are OTTI; however, we review all of our securities on at least a
quarterly basis to assess whether impairments, if any, are OTTI.
Derivatives
The fair values of derivatives are based on valuation models using current observable market data (including interest rates and fees),
the remaining terms of the agreements and the credit worthiness of the counterparty as of the measurement date, which are considered
125
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Level 2 inputs. Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. The
Company’s derivatives at December 31, 2016, consist of interest rate swaps. (See Note 10. “Derivatives.”)
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 are carried at estimated fair value on the consolidated balance sheets. The estimated fair values
of these commitments are generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate
loans 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 December 31, 2016 measured at estimated fair value on a recurring basis is as follows:
Assets:
Investment securities available for sale:
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Federal agencies
Corporate bonds
State and municipal
Trust preferred
Other
Total other securities
Total investment securities available for sale
Swaps
Total assets
Liabilities:
Swaps
Total liabilities
December 31, 2016
Fair value
Level 1
inputs
Level 2
inputs
Level 3
inputs
$ 1,193,481
$
— $ 1,193,481
$
56,681
1,250,162
193,979
42,506
240,770
—
—
477,255
1,727,417
2,088
—
56,681
— 1,250,162
—
—
—
—
—
—
193,979
42,506
240,770
—
—
477,255
— 1,727,417
—
2,088
$ 1,729,505
$
— $ 1,729,505
$
$
$
(2,088) $
(2,088) $
— $
— $
(2,088) $
(2,088) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
126
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
A summary of assets and liabilities at December 31, 2015 measured at estimated fair value on a recurring basis is as follows:
Assets:
Investment securities available for sale:
Residential MBS:
Agency-backed
CMO/Other MBS
Total residential MBS
Federal agencies
Corporate bonds
State and municipal
Trust preferred
Other
Total investment securities available for sale
Total available for sale securities
Interest rate caps and swaps
Total assets
Liabilities:
Swaps
Total liabilities
December 31, 2015
Fair value
Level 1
inputs
Level 2
inputs
Level 3
inputs
$ 1,217,862
$
— $ 1,217,862
$
78,373
1,296,235
84,267
314,188
189,035
28,517
8,790
624,797
1,921,032
1,839
$ 1,922,871
$
$
1,839
1,839
$
$
$
—
78,373
— 1,296,235
—
—
—
—
—
—
84,267
314,188
189,035
28,517
8,790
624,797
— 1,921,032
—
1,839
— $ 1,922,871
— $
— $
1,839
1,839
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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 (for example, when there is evidence of impairment).
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, adjusted for specific attributes of that loan which are 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, generally as 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 GAAP. 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 $55,391
and $28,372 at December 31, 2016, and 2015, respectively. Changes in fair value recognized as a charge-off on loans held by the
Company were $513 for calendar 2016 and $0 for calendar 2015; $567 for the 2014 transition period; and $905 for fiscal 2014.
127
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
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.
A summary of impaired loans at December 31, 2016 measured at estimated fair value on a non-recurring basis is the following:
December 31, 2016
CRE
Total impaired loans measured at fair value
Fair value
$
$
6,786
6,786
Level 1 inputs Level 2 inputs Level 3 inputs
6,786
$
6,786
$
— $
— $
— $
— $
A summary of impaired loans at December 31, 2015 measured at estimated fair value on a non-recurring basis is the following:
CRE
Total impaired loans measured at fair value
December 31, 2015
Fair value
Level 1 inputs Level 2 inputs Level 3 inputs
$
$
3,218
3,218
$
$
— $
— $
— $
— $
3,218
3,218
Mortgage Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the effect recorded in
net gain on sales of loans in the consolidated statements of operations. 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
GAAP, 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 December 31,
2016 and 2015 were $1,024 and $1,204, 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 and facilities held for sale subject to non-recurring fair value measurement were $13,619
and $14,614 at December 31, 2016 and 2015, respectively. There were write-downs of $582 in calendar 2016, $0 in calendar 2015; $0
in the 2014 transition period; and $224 in fiscal 2014, related to changes in fair value recognized through income for those foreclosed
assets held by the Company.
128
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or 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 December 31, 2016:
Non-recurring fair value measurements
Fair
value
Valuation
technique
Unobservable input / assumptions
Discount rate/
prepayment speeds(1)
(weighted average)
Impaired loans:
CRE
Assets taken in foreclosure:
$ 6,786
Appraisal
Adjustments for comparable properties
22.0%
Residential mortgage
4,929
Appraisal
CRE(2)
ADC
3,919
Appraisal
3,737
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
22.0%
22.0%
22.0%
Mortgage servicing rights
1,024
Third-party Discount rates
8.5% - 11.5% (9.7%)
100 - 555 (174)
(1) For loans collateralized by real estate and real estate assets taken in foreclosure the discount rate represents the discount factors
applied to the appraisal to determine fair value, which includes a general discount to the appraised value, and estimated costs to carry
and costs of sale. The amounts used for mortgage servicing rights are discounts applied by a third-party valuation provider which the
Company believes are appropriate.
Prepayment speeds
Third-party
(2) Excludes $1,034 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.
The following table presents quantitative information about significant unobservable inputs used in the fair value measurements for
Level 3 assets at December 31, 2015:
Non-recurring fair value measurements
Fair
value
Valuation
technique
Unobservable input / assumptions
Range (1)
(weighted average)
Impaired loans:
CRE
Assets taken in foreclosure:
$ 3,218
Appraisal
Adjustments for comparable properties
22.0%
Residential mortgage
2,334
Appraisal
CRE(2)
ADC
7,805
Appraisal
3,990
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
1,204
Third-party Discount rates
(1) See (1) above.
Third-party
Prepayment speeds
(2) Excludes $486 of commercial buildings that are former financial centers held for sale.
129
22.0%
22.0%
22.0%
8.3% - 11.3%
(9.5%)
100 - 480
(183)
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
Fair Values of Financial Instruments
GAAP 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 financial statements for interim and annual periods.
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 GAAP 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.
The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were
held for trading purposes) as of December 31, 2016:
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 FRB stock
Swaps
Financial liabilities:
Non-maturity deposits
Certificates of deposit
FHLB borrowings
Other borrowings
Senior Notes
Subordinated Notes
Mortgage escrow funds
Accrued interest payable on deposits
Accrued interest payable on borrowings
Swaps
$
Carrying
amount
293,646
1,727,417
1,391,421
9,463,608
41,889
16,495
26,824
135,098
2,088
(9,484,505)
(583,754)
(1,791,000)
(16,642)
(76,469)
(172,501)
(13,572)
(663)
(3,621)
(2,088)
December 31, 2016
Level 1 inputs Level 2 inputs Level 3 inputs
$
293,646
—
—
—
—
—
—
—
—
(9,484,505)
—
—
—
—
—
—
—
—
—
$
— $
1,727,417
1,357,997
—
41,889
16,495
—
—
2,088
—
(582,811)
(1,788,676)
(16,642)
(79,283)
(169,813)
(13,572)
(663)
(3,621)
(2,088)
—
—
—
9,461,469
—
—
26,824
—
—
—
—
—
—
—
—
—
—
—
—
130
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were
held for trading purposes) as of December 31, 2015:
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 FRB stock
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
Swaps
$
Carrying
amount
229,513
1,921,032
722,791
7,809,215
34,110
11,329
20,202
116,758
1,839
(7,974,817)
(605,190)
(1,409,885)
(16,566)
(98,893)
(13,778)
(483)
(4,490)
(1,839)
December 31, 2015
Level 1 inputs Level 2 inputs Level 3 inputs
$
229,513
—
—
—
—
—
—
—
—
(7,974,817)
—
—
—
—
—
—
—
—
$
— $
1,921,032
734,079
—
34,110
11,329
—
—
1,839
—
(603,634)
(1,418,155)
(16,430)
(105,088)
(13,775)
(483)
(4,490)
(1,839)
—
—
—
7,876,064
—
—
20,202
—
—
—
—
—
—
—
—
—
—
—
The following paragraphs summarize the principal methods and assumptions used by the Company to estimate the fair value of certain
the Company’s financial instruments noted above:
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. Impaired loans
are valued at the lower of cost or fair value, as described above. The methods utilized to estimate the fair value of loans do not
necessarily result in the fair value representing an exit price.
FHLB of New York Stock and FRB Stock
Due to restrictions placed on transferability, it is not practical to determine the fair value of these securities.
Deposits and Mortgage Escrow Funds
The fair values disclosed for non-maturity deposits (e.g., interest and non-interest checking, savings, and money market accounts) are
by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1
classification. The carrying amounts of certificates of deposit and mortgage escrow funds are segregated by account type and original
term, and fair values are estimated by using a discounted cash flows calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.
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.
131
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
FHLB Borrowings, Other borrowings, Senior Notes and Subordinated Notes
The carrying amounts of FHLB short-term borrowings, and borrowings under repurchase agreements, generally maturing within
ninety days, approximate their fair values, resulting in a Level 2 classification. The fair value of long-term FHLB borrowings, Senior
Notes, and Subordinated Notes are estimated using discounted cash flow analyzes based on current borrowing rates for similar types
of borrowing arrangements, resulting in a Level 2 classification.
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.
The fair values of the Company’s off-balance-sheet financial instruments described in Note 17. “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 December 31, 2016 and 2015, 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 in accordance with the related instrument.
(20) Accumulated Other Comprehensive (Loss) Income
Components of accumulated other comprehensive income (loss) (“AOCI”) were as follows as of the dates shown below:
Net unrealized holding (loss) gain on available for sale securities
$
(37,417) $
(12,172)
December 31,
2016
2015
Related income tax benefit (expense)
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
14,780
(22,637)
(5,395)
2,131
(3,264)
(1,213)
479
(734)
5,173
(6,999)
(7,226)
3,071
(4,155)
(1,687)
717
(970)
$
(26,635) $
(12,124)
132
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The following table presents the changes in each component of AOCI for calendar 2016 and 2015, the transition period and fiscal
2014:
Year ended December 31, 2016
Balance at beginning of the period
Other comprehensive (loss) before reclassification
Amounts reclassified from AOCI
Total other comprehensive (loss) income
Balance at end of period
Year ended December 31, 2015
Balance at beginning of the period
Other comprehensive (loss) gain before reclassification
Amounts reclassified from AOCI
Total other comprehensive (loss) income
Balance at end of period
Three months ended December 31, 2014
Balance at beginning of the period
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, 2014
Balance at beginning of the period
Other comprehensive gain (loss) before reclassification
Amounts reclassified from AOCI
Total other comprehensive income (loss)
Balance at end of period
Location in statement of operations where reclassification
from AOCI is included
Net unrealized
holding gain
(loss) on AFS
securities
Net unrealized
holding gain
(loss) on
securities
transferred to
held to maturity
Net unrealized
holding gain
(loss) on
retirement plans
Total
$
$
$
$
$
$
$
(6,999) $
(4,155) $
(970) $
(11,087)
(4,551)
(15,638)
—
891
891
—
236
236
(22,637) $
(3,264) $
(734) $
(12,124)
(11,087)
(3,424)
(14,511)
(26,635)
1,297
$
(4,967) $
(6,581) $
(10,251)
(5,515)
(2,781)
(8,296)
—
812
812
435
5,176
5,611
(5,080)
3,207
(1,873)
(6,999) $
(4,155) $
(970) $
(12,124)
(2,671) $
(5,144) $
(3,644) $
(11,459)
3,943
25
3,968
—
177
177
(2,940)
3
(2,937)
1,003
205
1,208
1,297
$
(4,967) $
(6,581) $
(10,251)
(11,472) $
— $
(3,858) $
(15,330)
9,170
(369)
8,801
(5,659)
515
(5,144)
—
214
214
3,511
360
3,871
(2,671) $
(5,144) $
(3,644) $
(11,459)
$
Net gain (loss)
on sale of
securities
Interest income
on securities
Compensation
and benefits
expense
133
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(21) Condensed Parent Company Financial Statements
Set forth below is the condensed balance sheets of Sterling:
Assets:
Cash
Securities available for sale at fair value
Investment in the 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 operations:
December 31,
2016
2015
$
48,765
$
19,529
—
3
1,843,476
1,705,558
—
20,023
20,500
—
3,258
1,936,022
76,469
4,370
80,839
1,855,183
$
$
3,942
19,054
20,500
360
1,418
1,770,364
98,893
6,398
105,291
1,665,073
$
$
$
1,936,022
$
1,770,364
Interest income
Dividends from the Bank
Dividends from non-bank subsidiaries
Net gain on sale of trust division
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:
The Bank
Non-bank subsidiaries
Net income (loss)
For the year ended
For the three months ended
December 31,
December 31,
For the fiscal
year ended
September 30,
2016
2015
2014
2013
2014
$
14
$
15
$
2
$
60,000
5,026
2,255
—
(5,398)
(12,989)
3,700
42,500
500
—
—
(5,894)
(7,031)
4,154
7,500
—
—
—
(1,471)
(1,692)
820
$
80
—
—
—
4
(1,819)
(1,214)
1,117
139
22,500
750
—
18
(6,265)
(5,840)
3,431
52,608
34,244
5,159
(1,832)
14,733
87,364
—
$
139,972
$
32,230
(360)
66,114
11,171
674
$
17,004
$
(12,376)
206
(14,002) $
12,590
355
27,678
134
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
The table below presents the condensed statement of cash flows:
For the year ended
For the three months ended
December 31,
December 31,
For the fiscal
year ended
September 30,
2016
2015
2014
2013
2014
Cash flows from operating activities:
Net income (loss)
$
139,972
$
66,114
$
17,004
$
(14,002) $
27,678
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in (undistributed) excess distributed
earnings of:
The Bank
Non-bank subsidiaries
Loss (gain) on extinguishment of borrowings
Other adjustments, net
Net cash provided by (used in) operating
activities
Cash flows from investing activities:
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
Equity capital raise
Redemption of Senior Notes
Cash dividends paid
Stock-based compensation transactions
Net cash provided by (used for) financing
activities
Net increase (decrease) in cash
Cash at beginning of the period
Cash at end of the period
(87,364)
—
1,013
6,273
(32,230)
360
—
(3,123)
(11,171)
(674)
—
(10,707)
12,376
(206)
—
15,310
(12,590)
(355)
(712)
22,065
59,894
31,121
(5,548)
13,478
36,086
3
(65,000)
—
(64,997)
—
—
90,995
(23,793)
(36,451)
3,588
34,339
29,236
19,529
—
(84,500)
—
(84,500)
—
—
85,059
—
(30,384)
4,472
59,147
5,768
13,761
—
—
—
—
—
—
—
—
(5,870)
1,810
(4,060)
(9,608)
23,369
—
(15,000)
473
(14,527)
—
—
—
—
(2,661)
2,569
(92)
(1,141)
56,230
$
48,765
$
19,529
$
13,761
$
55,089
$
1,112
(15,000)
6,437
(7,451)
(20,659)
(26,140)
—
—
(17,677)
2,980
(61,496)
(32,861)
56,230
23,369
135
Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015, three months ended December 31, 2014 and 2013 (unaudited) and
fiscal year ended September 30, 2014
(Dollars in thousands, except share or per share data)
(22) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for calendar 2016 and calendar 2015:
For the year ended December 31, 2016
Reporting period
For the quarter ended
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
Reporting period
For the quarter ended
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income tax
Income tax expense (benefit)
Net income (loss)
Earnings per common share:
Basic
Diluted
$
$
$
$
$
$
First
quarter
March 31
Second
quarter
June 30
Third
quarter
September 30
118,161
$
15,031
103,130
5,500
19,039
62,256
54,413
16,991
37,422
$
114,309
13,929
100,380
5,000
20,442
59,640
56,182
18,412
37,770
$
0.29
0.29
0.29
0.29
106,006
12,495
93,511
4,000
15,449
68,934
36,026
12,242
23,784
0.18
0.18
$
$
$
For the year ended December 31, 2015
First
quarter
March 31
Second
quarter
June 30
Third
quarter
$
$
$
66,672
7,805
58,867
2,100
14,010
45,921
24,856
8,078
16,778
0.19
0.19
September 30
103,298
$
9,944
93,354
5,000
18,802
71,315
35,841
11,648
24,193
71,947
8,373
63,574
3,100
13,857
85,659
(11,328)
(3,682)
(7,646) $
(0.08) $
(0.08)
0.19
0.19
Fourth
quarter
December 31
$
$
$
123,075
15,827
107,248
5,500
16,057
57,072
60,733
19,737
40,996
0.31
0.31
Fourth
quarter
December 31
$
$
$
106,224
10,803
95,421
5,500
16,081
57,419
48,583
15,792
32,791
0.25
0.25
The Company incurred a net loss in the second quarter ended June 30, 2015 due mainly to merger-related expense, asset write-downs
and other charges associated with the HVB Merger. The Company recognized charges of $14,625, which mainly included charges for
change-in-control payments, employee benefit plan terminations, financial and legal advisory fees and merger-related marketing
expenses. Other restructuring charges of $28,055 mainly included charges for information technology services, contract terminations,
impairments of leases and facilities and retention compensation.
(23) Recently Issued Accounting Standards
136
Table of Contents
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that
clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize 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. To achieve that core principle, an entity should apply the following steps: (i) identify
the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price;
(iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity
satisfies a performance obligation. This standard is effective for the Company on January 1, 2018. Our revenue is comprised of net
interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-
interest income, which is subject to ASU 2014-09. Although management continues to evaluate the potential impact of ASU 2014-09
on our consolidated financial statements at this time we believe the adoption of this standard will not have a significant impact to our
consolidated financial
ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance
Costs Associated with Line-of-Credit Arrangements. Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18,
2015 EITF Meeting." ASU 2015-15 adds SEC paragraphs pursuant to an SEC Staff Announcement that given the absence of
authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not
object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance
costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-
of-credit arrangement. ASU 2015-15 had no significant impact to our consolidated financial
ASU 2016-1, “No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities.” ASU 2016-1, among other things: (i) requires equity investments, with certain exceptions, to be measured
at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments
without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement
for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the
exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option
for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity
should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective
for us on January 1, 2018 and is not expected to have a significant impact on our financial
ASU 2016-02, “Leases.” ASU 2016-02 amends existing lease accounting guidance, including the requirement to recognize most
lease arrangements on the balance sheet. The adoption of this standard will result in the Company recognizing a right-of-use asset
representing its rights to use the underlying asset for the lease term with an offsetting lease liability. ASU 2016-02 will be effective for
for the company on January 1, 2019, with early adoption permitted and will require transition using a modified retrospective approach
for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The
Company has not yet concluded whether it will adopt the standard prior to January 1, 2019; however, if the standard were effective at
December 31, 2016, it would not have had an impact on any borrowings or covenants that are relevant to the Company and
management estimates that the impact to the Bank’s and the Company’s regulatory capital ratios would be less than five basis points.
ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”
ASU 2016-09, requires excess tax benefits and tax deficiencies to be recorded in the statements of operations as a component of the
provision for income taxes when stock awards vest or are settled. In addition, the standard provides an accounting policy election to
account for forfeitures as they occur and allows the Company to withhold more of an employee’s vesting shares for tax withholding
purposes without triggering liability accounting. ASU 2016-09 will be effective for the Company beginning January 1, 2017. The
adoption of this standard is expected to mainly impact our provision for income tax expense. Previously, vesting or settlement of
share-based payments impacted stockholder’s equity directly, but under the new standard, vesting or settlements will impact our
provision for income taxes as a discrete item. The amount is not expected to be significant to our consolidated financial statements.
ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU
2016-13 amends current guidance on the impairment of financial instruments. ASU 2016-13 adds an impairment model known as the
current expected credit loss (“CECL”) model that is based on expected losses rather than incurred losses. For the Company, the CECL
137
Table of Contents
model will apply mainly to held-to-maturity investment securities, loans and loan commitments. ASU 2016-13 will be effective for the
Company for fiscal years beginning after December 15, 2019, and the Company is permitted to early adopt the new guidance for fiscal
years beginning after December 15, 2018. ASU 2016-13 will significantly change the accounting for credit impairment. The new
guidance will require the Company to modify current processes and systems for establishing the allowance for loan losses and OTTI
to ensure they comply with the requirements of the new standard. As as result, the Company has engaged a nationally recognized
accounting firm to advise and assist management in performing an implementation readiness assessment and adopt the standard. ASU
2017-04 is Management is continuing its evaluation and has not yet concluded whether it will early adopt the standard or its impact to
our consolidated financial statements.
ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04
eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting
unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting
unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the
reporting unit. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted. ASU
2017-04 is not expected to have a significant impact on our financial
See Note 1. “Basis of Financial Statement Presentation and Summary of Significant Accounting Policies” for a discussion of the
adoption of new accounting standards that affected the consolidated financial statements contained in this report.
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 December 31, 2016, 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 fourth fiscal quarter and the fiscal year
ended December 31, 2016 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 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 the Board 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 December 31,
2016. 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
December 31, 2016, the Company’s internal control over financial reporting is effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by Crowe
Horwath LLP, as stated in their report which is included elsewhere herein.
ITEM 9B. Other Information
Not applicable.
138
Table of Contents
ITEM 10. Directors, Executive Officers, and Corporate Governance
PART III
The information required by this item will be included in our Proxy Statement for the Annual Meeting of Stockholders (the “2017
Proxy Statement”) and is incorporated herein by reference.
ITEM 11. Executive Compensation
The information required by this item will be included in the 2017 Proxy Statement and 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.
Set forth below is certain information as of December 31, 2016, 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)
1,004,119
$
11.00
Number of securities
remaining available
for issuance under plan
3,639,838
(1) Weighted average exercise price represents Stock Option Plans only, since restricted shares have no exercise price.
The information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
The information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.
139
Table of Contents
ITEM 15. Exhibits and Financial Statement Schedules
(1)
Financial Statements
PART IV
The financial statements filed in Item 8 of this Form 10-K are as follows:
(A)
(B)
(C)
Report of Independent Registered Public Accounting Firm on Financial Statements
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, the three months ended December 31,
2014 and 2013 (2013 Unaudited) and the fiscal year ended September 30, 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016 and 2015, the three months
ended December 31, 2014 and 2013 (2013 Unaudited) and for the fiscal year ended September 30, 2014
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015, the three months
ended December 31, 2014 and the fiscal year ended September 30, 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015, the three months ended December 31,
2014 and 2013 (2013 Unaudited) and for the fiscal year ended September 30, 2014
Notes to Consolidated Financial Statements
Financial Statement Schedules
(D)
(E)
(F)
(G)
(H)
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
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K filed on June 1, 2015).
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report
on Form 8-K filed on January 25, 2017).
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 by and among the Company, the Bank and Michael E. Finn, dated November 10, 2016
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 14, 2016).*
Employment Agreement by and among the Company, the Bank and James P. Blose, dated October 31, 2016 (filed
herewith).*
Amended and Restated Employment Agreement, dated as of December 8, 2015, with Jack L. Kopnisky (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 11, 2015).*
Special Performance Award Notice and Agreement, dated as of December 8, 2015, with Jack L. Kopnisky (incorporated by
reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on December 11, 2015).*
Amended and Restated Employment Agreement, dated as of December 8, 2015, with Luis Massiani (incorporated by
reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on December 11, 2015).*
Special Performance Award Notice and Agreement, dated as of December 8, 2015, with Luis Massiani (incorporated by
reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on December 11, 2015).*
Consulting Agreement, dated as of June 30, 2015, with James J. Landy (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed on July 2, 2015).*
Employment Agreement, dated as of October 31, 2016, with Rodney Whitwell (incorporated by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K filed on November 3, 2016).*
Employment Agreement, dated as of October 31, 2016, with James R. Peoples (incorporated by reference to Exhibit 10.2 of
the Company’s Current Report on Form 8-K filed on November 3, 2016).*
10.10
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)).*
140
Table of Contents
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
21
23
31.1
31.2
32
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).*
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
(incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed on November 28, 2014).*
Form of Stock Option Award Agreement Pursuant to the Provident New York Bancorp 2012 Stock Incentive Plan
(incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on November 28, 2014).*
Form of Performance-Based Stock Award Agreement Pursuant to the Provident New York Bancorp 2012 Stock Incentive
Plan (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed on November 28,
2014).*
Form of Restricted Stock Award Agreement Pursuant to the 2014 Stock Incentive Plan (incorporated by reference to Exhibit
10.31 to the Company’s Annual Report on Form 10-K filed on November 28, 2014).*
Form of Stock Option Award Agreement Pursuant to the 2014 Stock Incentive Plan (incorporated by reference to Exhibit
10.31 to the Company’s Annual Report on Form 10-K filed on November 28, 2014).*
Form of Performance-Based Stock Award Agreement Pursuant to the 2014 Stock Incentive Plan (incorporated by reference to
Exhibit 10.33 to the Company’s Transition Report on Form 10-K/T filed on March 6, 2015).*
Sterling Bancorp 2015 Omnibus Equity and Incentive Plan (incorporated by reference to Annex B to the Company’s Proxy
Statement for the 2015 Annual Meeting of Stockholders, filed on April 17, 2015).*
Form of Stock Option Award Agreement Pursuant to the Sterling Bancorp 2015 Omnibus Equity and Incentive Plan (filed
herewith).
Form of Performance-Based Stock Award Agreement Pursuant to the Sterling Bancorp 2015 Omnibus Equity and Incentive
Plan (filed herewith).
Form of NEO Restricted Stock Award Agreement Pursuant to the Sterling Bancorp 2015 Omnibus Equity and Incentive
Plan (filed herewith).
Form of non-NEO Restricted Stock Award Agreement Pursuant to the Sterling Bancorp 2015 Omnibus Equity and Incentive
Plan (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on August 7,
2015).*
Subsidiaries of Registrant (filed herewith)
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)
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)
141
Table of Contents
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
*
Indicates management contract or compensatory plan or arrangement.
142
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Sterling Bancorp has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 24, 2017
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: February 24, 2017
By:
/s/ Louis J. Cappelli
Louis J. Cappelli
Chairman of the Board of Directors
Date: February 24, 2017
By:
/s/ Luis Massiani
Luis Massiani
Senior Executive Vice President
Chief Financial Officer
Principal Financial Officer
(Principal Accounting Officer)
Date: February 24, 2017
143
Table of Contents
By:
Date:
By:
Date:
By:
Date:
By:
Date:
By:
Date:
/s/ Robert Abrams
Robert Abrams
Director
February 24, 2017
/s/ Navy E. Djonovic
Navy E. Djonovic
Director
February 24, 2017
/s/ Thomas G. Kahn
Thomas G. Kahn
Director
February 24, 2017
/s/ John C. Millman
John C. Millman
Director
February 24, 2017
/s/ Craig S. Thompson
Craig S. Thompson
Director
February 24, 2017
By:
Date:
By:
Date:
By:
Date:
By:
Date:
/s/ James F. Deutsch
James F. Deutsch
Director
February 24, 2017
/s/ William F. Helmer
William F. Helmer
Director
February 24, 2017
/s/ Robert W. Lazar
Robert W. Lazar
Director
February 24, 2017
/s/ Burt B. Steinberg
Burt B. Steinberg
Director
February 24, 2017
By:
Date:
By:
Date:
By:
Date:
By:
Date:
By:
Date:
/s/ John P. Cahill
John P. Cahill
Director
February 24, 2017
/s/ Fernando Ferrer
Fernando Ferrer
Director
February 24, 2017
/s/ James J. Landy
James J. Landy
Director
February 24, 2017
/s/ Richard O’Toole
Richard O’Toole
Director
February 24, 2017
/s/ William E. Whiston
William E. Whiston
Director
February 24, 2017
144
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
John P. Cahill
Counsel, Chadbourne & Parke LLP
and Principal, Pataki-Cahill Group LLC
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, Inc.
Thomas G. Kahn
Registered Investment Advisor,
President, Kahn Brothers Group, Inc.,
Kahn Brothers LLC and Kahn Brothers
Advisors LLC
James J. Landy
Retired Banking Executive
Robert W. Lazar, CPA
Senior Advisor, Teal, Becker &
Chiaramonte CPAs, P.C.
John C. Millman
Retired Banking Executive
Richard O’Toole
Executive Vice President,
General Counsel, The Related
Companies
Burt Steinberg
President and Consultant,
BSRC Consulting
Craig S. Thompson
President, Thompson Pension
Employee Plans, Inc.
William E. Whiston
Chief Financial Officer,
the Archdiocese of New York
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 and
Chief Operating Officer
James P. Blose
General Counsel and Chief Legal
Officer
Michael E. Finn
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 December 31, 2016 will be furnished without charge to
shareholders upon written request to:
Manager of Shareholder Relations
Sterling Bancorp
400 Rella Boulevard, PO Box 600
Montebello, NY 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
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 assumptions, 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 elsewhere 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
“Forward-Looking State ments” under “Item 7, Man age ment’s
Discussion and Analysis of Financial Condition and Results of
Operations” for important informa tion relating to forward-
looking statements.
If you have any questions concerning your share holder 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.
Sterling National Bank
Member FDIC
S
T
E
R
L
I
N
G
B
A
N
C
O
R
P
2
0
1
6
A
N
N
U
A
L
R
E
P
O
R
T
Sterling Bancorp Corporate Office
400 Rella Boulevard • Montebello, NY 10901
Phone: 845.369.8040 • Fax: 845.369.8255
www.sterlingbancorp.com