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EX-32.0 - EXHIBIT 32.0 - STERLING BANCORPexhibit320certification093.htm
EX-31.2 - EXHIBIT 31.2 - STERLING BANCORPexhibit312certification093.htm
EX-31.1 - EXHIBIT 31.1 - STERLING BANCORPexhibit311certification093.htm
EX-3.1 - EXHIBIT 3.1 - STERLING BANCORPexhibit31amenedandrestated.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________ 
FORM 10-Q
______________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35385
______________________________ 
STERLING BANCORP
(Exact Name of Registrant as Specified in its Charter)
______________________________ 
Delaware
 
80-0091851
(State or Other Jurisdiction of
 
(IRS Employer ID No.)
Incorporation or Organization)
 
 
 
 
 
400 Rella Boulevard, Montebello, New York
 
10901
(Address of Principal Executive Office)
 
(Zip Code)
(845) 369-8040
(Registrant’s Telephone Number including area code)
______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer             x    Accelerated filer             ¨
Non-accelerated filer             ¨    Smaller reporting company     ¨
Emerging growth company     ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Classes of Common Stock
  
Shares outstanding as of November 1, 2018
$0.01 per share
  
224,427,793



STERLING BANCORP AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
 
 
PART I. FINANCIAL INFORMATION - UNAUDITED
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


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



 
September 30,
 
December 31,
 
2018
 
2017
ASSETS:
 
 
 
Cash and due from banks
$
533,984

 
$
479,906

Securities:
 
 
 
Available for sale, at fair value
3,843,244

 
3,612,072

Held to maturity, at amortized cost (fair value of $2,746,080 and $2,863,909 at September 30, 2018 and December 31, 2017, respectively)
2,842,728

 
2,862,489

Total securities
6,685,972

 
6,474,561

Loans held for sale
31,042

 
5,246

Portfolio loans
20,533,214

 
20,008,983

Allowance for loan losses
(91,365
)
 
(77,907
)
Portfolio loans, net
20,441,849

 
19,931,076

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost
351,455

 
284,112

Accrued interest receivable
109,377

 
94,098

Premises and equipment, net
289,794

 
321,722

Goodwill
1,609,772

 
1,579,891

Other intangible assets, net
135,409

 
153,191

Bank owned life insurance
660,279

 
651,638

Other real estate owned
22,735

 
27,095

Other assets
389,597

 
357,005

Total assets
$
31,261,265

 
$
30,359,541

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 

Deposits
$
21,456,057

 
$
20,538,204

FHLB borrowings
4,429,110

 
4,510,123

Repurchase agreements
22,888

 
30,162

Senior Notes
200,972

 
278,209

Subordinated Notes
172,885

 
172,716

Mortgage escrow funds
96,952

 
122,641

Other liabilities
444,098

 
467,308

Total liabilities
26,822,962

 
26,119,363

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


 


STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; 135,000 shares issued and outstanding at September 30, 2018 and December 31, 2017)
138,627

 
139,220

Common stock (par value $0.01 per share; 310,000,000 shares authorized at September 30, 2018 and December 31, 2017; 229,872,925 shares issued at September 30, 2018 and December 31, 2017; 225,446,089 and 224,782,694 shares outstanding at September 30, 2018 and December 31, 2017, respectively)
2,299

 
2,299

Additional paid-in capital
3,773,164

 
3,780,908

Treasury stock, at cost (4,426,836 shares at September 30, 2018 and 5,090,231 at December 31, 2017)
(51,973
)
 
(58,039
)
Retained earnings
694,861

 
401,956

Accumulated other comprehensive loss, net of tax benefit of $(45,332) at September 30, 2018 and $(17,083) at December 31, 2017
(118,675
)
 
(26,166
)
Total stockholders’ equity
4,438,303

 
4,240,178

Total liabilities and stockholders’ equity
$
31,261,265

 
$
30,359,541

See accompanying notes to consolidated financial statements.

3

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


 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income:
 
 
 
 
 
 
 
Loans and loan fees
$
257,211

 
$
119,898

 
$
746,079

 
$
336,308

Securities taxable
29,765

 
15,141

 
85,856

 
40,536

Securities non-taxable
15,244

 
8,542

 
45,959

 
23,951

Other earning assets
6,805

 
2,111

 
17,382

 
5,160

Total interest and dividend income
309,025

 
145,692

 
895,276

 
405,955

Interest expense:
 
 
 
 
 
 
 
Deposits
35,974

 
13,392

 
88,645

 
33,805

Borrowings
29,102

 
12,227

 
82,098

 
30,029

Total interest expense
65,076

 
25,619

 
170,743

 
63,834

Net interest income
243,949

 
120,073

 
724,533

 
342,121

Provision for loan losses
9,500

 
5,000

 
35,500

 
14,000

Net interest income after provision for loan losses
234,449

 
115,073

 
689,033

 
328,121

Non-interest income:
 
 
 
 
 
 
 
Deposit fees and service charges
6,333

 
3,309

 
20,319

 
9,893

Accounts receivable management / factoring commissions and other fees
5,595

 
4,764

 
16,292

 
12,670

Bank owned life insurance
3,733

 
1,320

 
11,591

 
4,342

Loan commissions and fees
4,142

 
2,819

 
12,114

 
8,643

Investment management fees
1,943

 
271

 
5,889

 
825

Net loss on sale of securities
(56
)
 
(21
)
 
(5,902
)
 
(274
)
Gain on sale of fixed assets

 
1

 
11,800

 
1

Other
2,455

 
1,525

 
8,617

 
4,342

Total non-interest income
24,145

 
13,988

 
80,720

 
40,442

Non-interest expense:
 
 
 
 
 
 
 
Compensation and benefits
54,823

 
31,727

 
165,662

 
93,893

Stock-based compensation plans
3,115

 
1,969

 
9,304

 
5,602

Occupancy and office operations
16,558

 
8,583

 
51,956

 
25,550

Information technology
10,699

 
2,512

 
32,412

 
7,402

Amortization of intangible assets
5,865

 
2,166

 
17,782

 
6,582

FDIC insurance and regulatory assessments
6,043

 
2,310

 
16,885

 
6,232

Other real estate owned expense, net
1,497

 
894

 
1,635

 
2,682

Merger-related expense

 
4,109

 

 
9,002

Charge for asset write-downs, retention and severance

 

 
13,132

 
603

Other
13,173

 
8,347

 
39,680

 
25,076

Total non-interest expense
111,773

 
62,617

 
348,448

 
182,624

Income before income tax expense
146,821

 
66,444

 
421,305

 
185,939

Income tax expense
27,171

 
21,592

 
88,542

 
59,620

Net income
$
119,650

 
$
44,852

 
$
332,763

 
$
126,319

Preferred stock dividend
1,993

 

 
5,988

 

Net income available to common stockholders
$
117,657

 
$
44,852

 
$
326,775

 
$
126,319

Weighted average common shares:
 
 
 
 
 
 
 
Basic
225,088,511

 
135,346,791

 
224,969,121

 
135,276,634

Diluted
225,622,895

 
135,950,160

 
225,504,463

 
135,895,513

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.33

 
$
1.45

 
$
0.93

Diluted
0.52

 
0.33

 
1.45

 
0.93

See accompanying notes to consolidated financial statements.

4

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

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
119,650

 
$
44,852

 
$
332,763

 
$
126,319

Other comprehensive (loss) income, before tax:
 
 
 
 
 
 
 
Change in unrealized holding (losses) gains on securities available for sale
(27,083
)
 
4,209

 
(128,496
)
 
20,374

Reclassification adjustment for net realized losses included in net income
56

 
21

 
5,902

 
274

Accretion of net unrealized loss on securities transferred to held to maturity
225

 
238

 
686

 
726

Change in the actuarial loss of defined benefit plan and post-retirement benefit plans
415

 
10

 
1,150

 
74

Total other comprehensive (loss) income, before tax
(26,387
)
 
4,478

 
(120,758
)
 
21,448

Deferred tax benefit (expense) related to other comprehensive (loss) income
7,293

 
(1,769
)
 
33,378

 
(8,472
)
Other comprehensive (loss) income, net of tax
(19,094
)
 
2,709

 
(87,380
)
 
12,976

Comprehensive income
$
100,556

 
$
47,561

 
$
245,383

 
$
139,295

See accompanying notes to consolidated financial statements.

5

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


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

 
$

 
$
1,411

 
$
1,597,287

 
$
(66,188
)
 
$
349,308

 
$
(26,635
)
 
$
1,855,183

Net income

 

 

 

 

 
39,067

 

 
39,067

Other comprehensive income

 

 

 

 

 

 
2,914

 
2,914

Stock option & other stock transactions, net
40,253

 

 

 
49

 
553

 
(109
)
 

 
493

Restricted stock awards, net
306,612

 

 

 
(7,043
)
 
3,589

 
3,846

 

 
392

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(9,436
)
 

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

 

 
1,411

 
1,590,293

 
(62,046
)
 
382,676

 
(23,721
)
 
1,888,613

Net income

 

 

 

 

 
42,400

 

 
42,400

Other comprehensive income

 

 

 

 

 
$

 
7,353

 
7,353

Stock option & other stock transactions, net
71,395

 

 

 
49

 
980

 
$
(298
)
 

 
731

Restricted stock awards, net
(17,604
)
 

 

 
1,957

 
(510
)
 
$
293

 

 
1,740

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(9,454
)
 

 
(9,454
)
Balance at June 30, 2017
135,658,226

 

 
1,411

 
1,592,299

 
(61,576
)
 
415,617

 
(16,368
)
 
1,931,383

Net income

 

 

 

 

 
44,852

 

 
44,852

Other comprehensive income

 

 

 

 

 

 
2,709

 
2,709

Stock option & other stock transactions, net
6,950

 

 

 
48

 
94

 
(29
)
 

 
113

Restricted stock awards, net
142,368

 

 

 
(1,595
)
 
1,808

 
1,667

 

 
1,880

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(9,457
)
 

 
(9,457
)
Balance at September 30, 2017
135,807,544

 
$

 
$
1,411

 
$
1,590,752

 
$
(59,674
)
 
$
452,650

 
$
(13,659
)
 
$
1,971,480





6

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


 
Number of common
shares
 
Preferred
stock
 
Common
stock
 
Additional
paid-in
capital
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
(loss) income
 
Total
stockholders’
equity
Balance at January 1, 2018
224,782,694

 
$
139,220

 
$
2,299

 
$
3,780,908

 
$
(58,039
)
 
$
401,956

 
$
(26,166
)
 
$
4,240,178

Net income

 

 

 

 

 
98,872

 

 
98,872

Other comprehensive (loss)

 

 

 

 

 

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

 

 

 
2

 
375

 
(46
)
 

 
331

Restricted stock awards, net
654,778

 

 

 
(14,630
)
 
6,562

 
8,078

 

 
10

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(15,693
)
 

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

 
(195
)
 

 

 

 
(1,999
)
 

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

 

 

 

 

 
5,129

 
(5,129
)
 

Balance at March 31, 2018
225,466,266

 
139,025

 
2,299

 
3,766,280

 
(51,102
)
 
496,297

 
(79,044
)
 
4,273,755

Net income

 

 

 

 

 
114,241

 

 
114,241

Other comprehensive (loss)

 

 

 

 

 

 
(20,537
)
 
(20,537
)
Stock option & other stock transactions, net
7,500

 

 

 
2

 
91

 
(18
)
 

 
75

Restricted stock awards, net
(3,512
)
 

 

 
3,223

 
(258
)
 
168

 

 
3,133

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(15,739
)
 

 
(15,739
)
Cash dividends declared ($16.25 per preferred share)

 
(197
)
 

 

 

 
(1,996
)
 

 
(2,193
)
Balance at June 30, 2018
225,470,254

 
138,828

 
2,299

 
3,769,505

 
(51,269
)
 
592,953

 
(99,581
)
 
4,352,735

Net income

 

 

 

 

 
119,650

 

 
119,650

Other comprehensive (loss)

 

 

 

 

 

 
(19,094
)
 
(19,094
)
Stock option & other stock transactions, net
13,500

 

 

 
2

 
164

 
(10
)
 

 
156

Restricted stock awards, net
(37,665
)
 

 

 
3,657

 
(868
)
 

 

 
2,789

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(15,739
)
 

 
(15,739
)
Cash dividends declared ($16.25 per preferred share)

 
(201
)
 

 

 

 
(1,993
)
 

 
(2,194
)
Balance at September 30, 2018
225,446,089

 
$
138,627

 
$
2,299

 
$
3,773,164

 
$
(51,973
)
 
$
694,861

 
$
(118,675
)
 
$
4,438,303

See accompanying notes to consolidated financial statements.

7

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


 
Nine months ended
 
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
332,763

 
$
126,319

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provisions for loan losses
35,500

 
14,000

Net (gain) loss from write-downs and sales of other real estate owned
(796
)
 
1,647

Depreciation of premises and equipment
15,214

 
6,639

Asset write-downs, retention and severance compensation and other restructuring charges
13,132

 
603

Amortization of intangible assets
17,782

 
6,582

Amortization of low income housing tax credits
3,732

 
414

Net loss on sale of securities
5,902

 
274

Net gain on loans held for sale
(25
)
 
(952
)
Net gain on sale of premises and equipment
(11,800
)
 
(1
)
Net amortization of premiums on securities
29,759

 
16,635

Amortization of premium on certificates of deposit
(4,850
)
 

Net accretion of purchase discount and amortization of net deferred loan costs
(85,129
)
 
(10,515
)
Net accretion of debt issuance costs and amortization of premium on borrowings
(1,081
)
 
410

Restricted stock compensation expense
9,299

 
5,456

Stock option compensation expense
5

 
146

Originations of loans held for sale
(52,919
)
 
(5,159
)
Proceeds from sales of loans held for sale
27,148

 
48,000

Increase in cash surrender value of bank owned life insurance
(11,591
)
 
(4,442
)
Deferred income tax expense (benefit)
45,589

 
(1,933
)
Other adjustments (principally net changes in other assets and other liabilities)
(79,631
)
 
(16,760
)
Net cash provided by operating activities
288,003

 
187,363

Cash flows from investing activities:
 
 
 
Purchases of securities:
 
 
 
Available for sale
(753,638
)
 
(1,017,426
)
Held to maturity
(140,976
)
 
(619,649
)
Proceeds from maturities, calls and other principal payments on securities:
 
 
 
Available for sale
271,558

 
164,598

Held to maturity
135,327

 
64,158

Proceeds from sales of securities available for sale
117,810

 
15,247

Proceeds from sales of securities held to maturity
254

 

Portfolio loan originations, net
10,619

 
(900,269
)
Portfolio loans purchased
(37,668
)
 
(94,912
)
Proceeds from sale of loans held for investment

 
28,990

Purchases of FHLB and FRB stock, net
(67,343
)
 
(56,178
)
Proceeds from sales of other real estate owned
16,786

 
5,182

Purchases of premises and equipment
(16,369
)
 
(5,699
)
Proceeds from bank owned life insurance
2,950

 
50

Proceeds from sale of premises and equipment
35,261

 

Purchases of low income housing tax credits
(3,655
)
 
(8,260
)
Cash paid for acquisition, net
(484,385
)
 

Net cash (used in) investing activities
(913,469
)
 
(2,424,168
)

8

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


 
Nine months ended
 
September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Net increase in transaction, savings and money market deposits
$
786,541

 
$
992,573

Net increase (decrease) in certificates of deposit
136,162

 
(17,394
)
Net (decrease) increase in short-term FHLB borrowings
(555,000
)
 
200,000

Advances of term FHLB borrowings
2,975,000

 
1,975,000

Repayments of term FHLB borrowings
(2,500,000
)
 
(950,000
)
Repayment of Senior Notes
(77,000
)
 

Net (decrease) increase in other borrowings
(7,274
)
 
171,761

Net (decrease) increase in mortgage escrow funds
(25,689
)
 
5,576

Proceeds from stock option exercises
556

 
1,193

Cash dividends paid - common stock
(47,171
)
 
(28,347
)
Cash dividends paid - preferred stock
(6,581
)
 

Net cash provided by financing activities
679,544

 
2,350,362

Net decrease in cash and cash equivalents
54,078

 
113,557

Cash and cash equivalents at beginning of period
479,906

 
293,646

Cash and cash equivalents at end of period
$
533,984

 
$
407,203

Supplemental cash flow information:
 
 
 
  Interest payments
$
165,306

 
$
57,357

  Income tax payments
23,445

 
67,625

Real estate acquired in settlement of loans
11,630

 
4,907

Loans transferred from held for investment to held for sale

 
28,990

 
 
 
 
Acquisitions:
 
 
 
Non-cash assets acquired:
 
 
 
Total loans, net
$
442,884

 
$

Goodwill
36,094

 

Premises and equipment, net
379

 

Other assets
7,071

 

Total non-cash assets acquired
486,428

 

Liabilities assumed:
 
 
 
Other liabilities
4,884

 

Total liabilities assumed
4,884

 

 
 
 
 
Net non-cash assets acquired
481,544

 

Cash and cash equivalents received in acquisitions
20,508

 

Total consideration paid
$
502,052

 
$


See accompanying notes to consolidated financial statements.

9

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


(1) Basis of Financial Statement Presentation

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

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

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

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

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

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

Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities (the “New Fair Value Standard”), makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. The New Fair Value Standard requires equity investments to be measured at fair value with changes in fair value recognized in net income; however, the Company owned no assets subject to this

10

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

portion of the New Fair Value Standard. The New Fair Value Standard also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. As a result of the adoption of the New Fair Value Standard, the Company modified its calculation used to estimate the fair value of portfolio loans. See Note 17. “Fair Value Measurements” for further discussion of the Company’s methodology. The New Fair Value Standard had no impact to the consolidated balance sheets or income statements.

ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the “New Retirement Standard”), requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are presented as a component of other non-interest expense. The adoption of this standard resulted in the reclassification of $328 from compensation and benefits to other non-interest expense for the nine months ended September 30, 2017.

ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (the “AOCI Standard”), allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the stranded tax effects caused by the revaluation of estimated deferred taxes resulting from the enactment of the Tax Cuts and Jobs Act of 2017. As a result of the adoption of the AOCI Standard the Company reduced AOCI and increased retained earnings by $5,129 in the nine months ended September 30, 2018 related to unrealized losses on securities available for sale, securities transferred to held to maturity and a net actuarial loss on defined benefit retirement plans. As a result of the adoption of the AOCI standard, the Company will release such income tax effects only when the entire portfolio to which the underlying items are liquidated, sold or extinguished. The adoption of the AOCI Standard did not impact total stockholders’ equity or the consolidated income statements for any period.

(2) Acquisitions

Advantage Funding Management Co., Inc. (“Advantage Funding”)
On April 2, 2018, the Bank acquired 100% of the outstanding common stock of Advantage Funding (the “Advantage Funding Acquisition”). The total consideration in the transaction was $502,052 and was paid in cash on the closing date. Advantage Funding is a provider of commercial vehicle and transportation financing services based in Lake Success, NY. Advantage Funding had total outstanding loans and leases of $457,638 on the acquisition date consisting mainly of fixed rate assets. The fair value of these loans was $442,844. The Bank paid a premium on the gross loans and leases receivable of 4.5% or $20,300. In the nine months ended September 30, 2018, we recorded a $4,396 restructuring charge consisting mainly of professional fees, retention and severance compensation, systems integration expense and facilities consolidation. This charge is included in charge for asset write-downs, retention and severance on the consolidated income statement. The Advantage Funding Acquisition is consistent with our strategy of growing commercial loans and increasing the proportion of commercial loans in our loan portfolio. The operations of the business will be fully integrated into our equipment finance business line.

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

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

Accounting guidance identifies the measurement period for the Astoria Merger as the period that is required to identify and measure the fair value of the identifiable assets acquired and the liabilities assumed. The measurement period ends when the Company has all of the information that the Company arranged to obtain and that is known to be obtainable. The measurement period ended October 2, 2018. During the third quarter of 2018 the Company completed the final tax returns related to Astoria’s business and operations

11

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

through October 1, 2017. After completion of these tax returns, the Company reduced income tax balances and goodwill by $6,214, which finalized all purchase accounting adjustments for the Astoria Merger.

(3) Securities

A summary of amortized cost and estimated fair value of securities as of September 30, 2018 and December 31, 2017 is presented below. The term “MBS” refers to mortgage-backed securities and the term “CMOs” refers to collateralized mortgage obligations. Both of these terms are further defined in Note 17. “Fair Value Measurements”.    
 
September 30, 2018
 
Available for Sale
 
Held to Maturity
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
Amortized
cost
 
Gross
unrecognized
gains
 
Gross
unrecognized
losses
 
Fair
value
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
2,303,793

 
$
2

 
$
(96,604
)
 
$
2,207,191

 
$
326,950

 
$
33

 
$
(13,656
)
 
$
313,327

CMOs/Other MBS
603,692

 
2

 
(27,642
)
 
576,052

 
29,015

 

 
(1,328
)
 
27,687

Total residential MBS
2,907,485

 
4

 
(124,246
)
 
2,783,243

 
355,965

 
33

 
(14,984
)
 
341,014

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
338,764

 

 
(21,031
)
 
317,733

 
58,960

 

 
(440
)
 
58,520

Corporate
512,221

 
408

 
(9,303
)
 
503,326

 
68,563

 
391

 
(1,045
)
 
67,909

State and municipal
244,267

 
135

 
(5,460
)
 
238,942

 
2,340,990

 
1,350

 
(81,727
)
 
2,260,613

Other

 

 

 

 
18,250

 
29

 
(255
)
 
18,024

Total other securities
1,095,252

 
543

 
(35,794
)
 
1,060,001

 
2,486,763

 
1,770

 
(83,467
)
 
2,405,066

Total securities
$
4,002,737

 
$
547

 
$
(160,040
)
 
$
3,843,244

 
$
2,842,728

 
$
1,803

 
$
(98,451
)
 
$
2,746,080


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

 
$
1,570

 
$
(21,965
)
 
$
2,150,649

 
$
355,013

 
$
978

 
$
(2,504
)
 
$
353,487

CMOs/Other MBS
656,514

 
31

 
(7,142
)
 
649,403

 
33,496

 
26

 
(760
)
 
32,762

Total residential MBS
2,827,558

 
1,601

 
(29,107
)
 
2,800,052

 
388,509

 
1,004

 
(3,264
)
 
386,249

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Federal agencies
409,322

 

 
(9,326
)
 
399,996

 
58,640

 
949

 

 
59,589

Corporate
147,781

 
1,421

 
(976
)
 
148,226

 
56,663

 
1,255

 
(103
)
 
57,815

State and municipal
264,310

 
1,380

 
(1,892
)
 
263,798

 
2,342,927

 
12,396

 
(10,900
)
 
2,344,423

Other

 

 

 

 
15,750

 
83

 

 
15,833

Total other securities
821,413

 
2,801

 
(12,194
)
 
812,020

 
2,473,980

 
14,683

 
(11,003
)
 
2,477,660

Total securities
$
3,648,971

 
$
4,402

 
$
(41,301
)
 
$
3,612,072

 
$
2,862,489

 
$
15,687

 
$
(14,267
)
 
$
2,863,909



12

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

The amortized cost and estimated fair value of securities at September 30, 2018 are presented below by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential MBS are shown separately since they are not due at a single maturity date.
 
September 30, 2018
 
Available for sale
 
Held to maturity
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Remaining period to contractual maturity:
 
 
 
 
 
 
 
One year or less
$
22,244

 
$
22,260

 
$
92,954

 
$
92,982

One to five years
207,237

 
204,204

 
115,470

 
114,545

Five to ten years
759,223

 
732,965

 
476,895

 
467,936

Greater than ten years
106,548

 
100,572

 
1,801,444

 
1,729,603

Total securities with a stated maturity date
1,095,252

 
1,060,001

 
2,486,763

 
2,405,066

Residential MBS
2,907,485

 
2,783,243

 
355,965

 
341,014

Total securities
$
4,002,737

 
$
3,843,244

 
$
2,842,728

 
$
2,746,080


Sales of securities for the periods indicated below were as follows:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Available for sale:
 
 
 
 
 
 
 
Proceeds from sales
$

 
$
5,015

 
$
117,810

 
$
15,247

Gross realized gains (1)

 
1

 
82

 
7

Gross realized losses (1)
(3
)
 
(22
)
 
(5,910
)
 
(281
)
Income tax benefit on realized net losses
(1
)
 
(7
)
 
(1,224
)
 
(89
)
Held to maturity: (2)
 
 
 
 
 
 
 
Proceeds from sale
$

 
$

 
$
254

 
$

Gross realized loss (1)
(53
)
 

 
(74
)
 

Income tax expense on realized loss
(11
)
 

 
(15
)
 


(1) Gross realized gains and losses includes securities called prior to maturity.
(2) In the nine months ended September 30, 2018, the Company sold a security that was held to maturity due to a decline in the credit rating and other evidence of deterioration of the issuer’s creditworthiness.

At September 30, 2018 and December 31, 2017, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity, other than the U.S. federal government and its agencies.


13

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

The following table summarizes securities available for sale with unrealized losses, segregated by the length of time in a continuous unrealized loss position for the periods presented below:
 
Continuous unrealized loss position
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
value
 
Unrealized losses
 
Fair
value
 
Unrealized losses
 
Fair
value
 
Unrealized losses
Available for sale
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,110,789

 
$
(38,095
)
 
$
1,095,722

 
$
(58,509
)
 
$
2,206,511

 
$
(96,604
)
CMOs/Other MBS
543,311

 
(26,005
)
 
32,546

 
(1,637
)
 
575,857

 
(27,642
)
Total residential MBS
1,654,100

 
(64,100
)
 
1,128,268

 
(60,146
)
 
2,782,368

 
(124,246
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
204,358

 
(11,154
)
 
113,375

 
(9,877
)
 
317,733

 
(21,031
)
Corporate
355,696

 
(6,520
)
 
55,695

 
(2,783
)
 
411,391

 
(9,303
)
State and municipal
144,619

 
(2,703
)
 
77,621

 
(2,757
)
 
222,240

 
(5,460
)
Total other securities
704,673

 
(20,377
)
 
246,691

 
(15,417
)
 
951,364

 
(35,794
)
Total securities
$
2,358,773

 
$
(84,477
)
 
$
1,374,959

 
$
(75,563
)
 
$
3,733,732

 
$
(160,040
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,349,217

 
$
(10,550
)
 
$
486,948

 
$
(11,415
)
 
$
1,836,165

 
$
(21,965
)
CMOs/Other MBS
605,200

 
(6,064
)
 
36,107

 
(1,078
)
 
641,307

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

 
(16,614
)
 
523,055

 
(12,493
)
 
2,477,472

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

 
(1,955
)
 
156,520

 
(7,371
)
 
399,996

 
(9,326
)
Corporate
65,056

 
(397
)
 
15,268

 
(579
)
 
80,324

 
(976
)
State and municipal
97,307

 
(757
)
 
56,324

 
(1,135
)
 
153,631

 
(1,892
)
Total other securities
405,839

 
(3,109
)
 
228,112

 
(9,085
)
 
633,951

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

 
$
(19,723
)
 
$
751,167

 
$
(21,578
)
 
$
3,111,423

 
$
(41,301
)


14

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

The following table summarizes securities held to maturity with unrecognized losses, segregated by the length of time in a continuous unrecognized loss position for the periods presented below:
 
Continuous unrecognized loss position
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
value
 
Unrecognized losses
 
Fair
value
 
Unrecognized losses
 
Fair
value
 
Unrecognized losses
Held to maturity
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
200,871

 
$
(7,022
)
 
$
110,986

 
$
(6,634
)
 
$
311,857

 
$
(13,656
)
CMOs/Other MBS
3,333

 
(69
)
 
24,354

 
(1,259
)
 
27,687

 
(1,328
)
Total residential MBS
204,204

 
(7,091
)
 
135,340

 
(7,893
)
 
339,544

 
(14,984
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
58,520

 
(440
)
 

 

 
58,520

 
(440
)
Corporate
47,519

 
(1,045
)
 

 

 
47,519

 
(1,045
)
State and municipal
1,482,745

 
(51,225
)
 
637,296

 
(30,502
)
 
2,120,041

 
(81,727
)
Other
10,745

 
(255
)
 

 

 
10,745

 
(255
)
Total other securities
1,599,529

 
(52,965
)
 
637,296

 
(30,502
)
 
2,236,825

 
(83,467
)
Total securities
$
1,803,733

 
$
(60,056
)
 
$
772,636

 
$
(38,395
)
 
$
2,576,369

 
$
(98,451
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
136,679

 
$
(572
)
 
$
74,303

 
$
(1,932
)
 
$
210,982

 
$
(2,504
)
CMOs/Other MBS
10,314

 
(129
)
 
20,160

 
(631
)
 
30,474

 
(760
)
Total residential MBS
146,993

 
(701
)
 
94,463

 
(2,563
)
 
241,456

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

 
(103
)
 

 

 
16,560

 
(103
)
State and municipal
860,536

 
(5,310
)
 
393,200

 
(5,590
)
 
1,253,736

 
(10,900
)
Total other securities
877,096

 
(5,413
)
 
393,200

 
(5,590
)
 
1,270,296

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

 
$
(6,114
)
 
$
487,663

 
$
(8,153
)
 
$
1,511,752

 
$
(14,267
)

At September 30, 2018, a total of 372 available for sale securities were in a continuous unrealized loss position for less than 12 months and 237 available for sale securities were in a continuous unrealized loss position for 12 months or longer. At September 30, 2018, a total of 575 held to maturity securities were in a continuous unrealized loss position for less than 12 months and 206 held to maturity securities were in a continuous unrealized loss position for 12 months or longer. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other than temporary impairment (“OTTI”) losses, management considers, among other things: (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.


15

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

Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time the Company anticipates it will receive full value for the securities. Furthermore, as of September 30, 2018, management did not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons related to credit quality. As of September 30, 2018, management believes the impairments detailed in the table above are temporary.
Securities pledged for borrowings at the FHLB and other institutions, and securities pledged for municipal deposits and other purposes, were as follows for the periods presented below:
 
September 30,
 
December 31,
 
2018
 
2017
Available for sale securities pledged for borrowings, at fair value
$
19,743

 
$
10,225

Available for sale securities pledged for municipal deposits, at fair value
651,439

 
323,341

Held to maturity securities pledged for borrowings, at amortized cost
39,443

 
35,047

Held to maturity securities pledged for municipal deposits, at amortized cost
1,686,889

 
1,182,674

Total securities pledged
$
2,397,514

 
$
1,551,287


(4) Portfolio Loans

The composition of the Company’s loan portfolio, excluding loans held for sale, was the following for the periods presented below:
 
September 30,
 
December 31,
 
2018
 
2017
Commercial:
 
 
 
Commercial and industrial (“C&I”):
 
 
 
       Traditional C&I
$
2,037,556

 
$
1,979,448

Asset-based lending
868,047

 
797,570

Payroll finance
235,734

 
268,609

Warehouse lending
864,063

 
723,335

Factored receivables
270,002

 
220,551

Equipment financing
1,161,435

 
679,541

Public sector finance
807,193

 
637,767

Total C&I
6,244,030

 
5,306,821

Commercial mortgage:
 
 
 
       Commercial real estate
4,457,485

 
4,138,864

Multi-family
4,827,172

 
4,859,555

       Acquisition, development & construction (“ADC”)
265,676

 
282,792

Total commercial mortgage
9,550,333

 
9,281,211

Total commercial
15,794,363

 
14,588,032

Residential mortgage
4,421,520

 
5,054,732

Consumer
317,331

 
366,219

Total portfolio loans
20,533,214

 
20,008,983

Allowance for loan losses
(91,365
)
 
(77,907
)
Total portfolio loans, net
$
20,441,849

 
$
19,931,076



16

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

Total portfolio loans include net deferred loan origination fees of $5,892 and $4,813 at September 30, 2018 and December 31, 2017, respectively.

At September 30, 2018 and December 31, 2017, the Company pledged residential mortgage and commercial real estate loans of $8,548,416 and $9,123,601, respectively, to the FHLB as collateral for certain borrowing arrangements. See Note 8. “Borrowings”.

The following tables set forth the amounts and status of the Company’s loans, troubled debt restructurings (“TDRs”) and non-performing loans at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
Current
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 
Total
Traditional C&I
$
1,987,436

 
$
5,634

 
$
479

 
$
2,546

 
$
41,461

 
$
2,037,556

Asset-based lending
860,329

 

 

 

 
7,718

 
868,047

Payroll finance
234,749

 

 
756

 

 
229

 
235,734

Warehouse lending
864,063

 

 

 

 

 
864,063

Factored receivables
270,002

 

 

 

 

 
270,002

Equipment financing
1,135,922

 
11,835

 
3,714

 

 
9,964

 
1,161,435

Public sector finance
807,193

 

 

 

 

 
807,193

Commercial real estate
4,422,756

 
329

 
2,856

 
4,400

 
27,144

 
4,457,485

Multi-family
4,822,883

 
19

 
569

 

 
3,701

 
4,827,172

ADC
265,676

 

 

 

 

 
265,676

Residential mortgage
4,330,083

 
12,217

 
6,116

 
266

 
72,838

 
4,421,520

Consumer
296,816

 
4,213

 
1,347

 
134

 
14,821

 
317,331

Total portfolio loans
$
20,297,908

 
$
34,247

 
$
15,837

 
$
7,346

 
$
177,876

 
$
20,533,214

Total TDRs included above
$
39,393

 
$
57

 
$
367

 
$
418

 
$
37,112

 
$
77,347

Non-performing loans:
 
 
 
 
 
 
 
 
 
 
 
Loans 90+ days past due and still accruing
 
 
 
 
 
 
 
 
$
7,346

 
 
Non-accrual loans
 
 
 
 
 
 
 
 
177,876

 
 
Total non-performing loans
 
 
 
 
 
 
 
 
$
185,222

 
 
.

17

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

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

 
$
1,232

 
$
187

 
$

 
$
37,642

 
$
1,979,448

Asset-based lending
797,570

 

 

 

 

 
797,570

Payroll finance
268,609

 

 

 

 

 
268,609

Warehouse lending
723,335

 

 

 

 

 
723,335

Factored receivables
220,551

 

 

 

 

 
220,551

Equipment financing
667,083

 
1,143

 
3,216

 

 
8,099

 
679,541

Public sector finance
637,767

 

 

 

 

 
637,767

Commercial real estate
4,104,173

 
8,403

 
4,131

 
437

 
21,720

 
4,138,864

Multi-family
4,853,677

 
595

 
834

 

 
4,449

 
4,859,555

ADC
278,587

 

 

 

 
4,205

 
282,792

Residential mortgage
4,925,996

 
22,416

 
6,038

 
324

 
99,958

 
5,054,732

Consumer
350,502

 
4,364

 
974

 
95

 
10,284

 
366,219

Total portfolio loans
$
19,768,237

 
$
38,153

 
$
15,380

 
$
856

 
$
186,357

 
$
20,008,983

Total TDRs included above
$
13,175

 
$
389

 
$

 
$

 
$
29,325

 
$
42,889

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

 
 
Non-accrual loans
 
 
 
 
 
 
 
 
186,357

 
 
Total non-performing loans
 
 
 
 
 
 
 
 
$
187,213

 


The following table provides additional analysis of the Company’s non-accrual loans at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
Recorded investment total non-accrual loans
 
Unpaid principal balance non-accrual loans
 
Recorded investment total non-accrual loans
 
Unpaid principal balance non-accrual loans
Traditional C&I
$
41,461

 
$
49,199

 
$
37,642

 
$
37,853

Asset-based lending
7,718

 
7,718

 

 

Payroll finance
229

 
229

 

 

Equipment financing
9,964

 
13,203

 
8,099

 
8,099

Commercial real estate
27,144

 
32,214

 
21,720

 
25,739

Multi-family
3,701

 
3,959

 
4,449

 
4,705

ADC

 

 
4,205

 
4,205

Residential mortgage
72,838

 
84,315

 
99,958

 
113,002

Consumer
14,821

 
16,966

 
10,284

 
12,096

Total
$
177,876

 
$
207,803

 
$
186,357

 
$
205,699


There were no non-accrual ADC, warehouse lending, factored receivables or public sector finance loans at September 30, 2018. There were no non-accrual asset-based lending, payroll finance, warehouse lending, factored receivables or public sector finance loans at December 31, 2017.

When the ultimate collectibility of the total principal of an impaired loan is in doubt and the loan is on non-accrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectibility of the total principal of an impaired loan is

18

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

not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method.

At September 30, 2018 and December 31, 2017, the recorded investment of residential mortgage loans that were in the process of foreclosure was $52,087 and $76,712, respectively, which is 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 September 30, 2018:
 
Loans evaluated by segment
 
Allowance evaluated by segment
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
PCI loans(1)
 
Total
 loans
 
Individually
evaluated for
impairment
 
Collectively
evaluated for
impairment
 
Total allowance for loan losses
Traditional C&I
$
40,909

 
$
1,987,707

 
$
8,940

 
$
2,037,556

 
$

 
$
14,716

 
$
14,716

Asset-based lending
18,573

 
849,474

 

 
868,047

 

 
6,828

 
6,828

Payroll finance

 
235,734

 

 
235,734

 

 
2,183

 
2,183

Warehouse lending

 
864,063

 

 
864,063

 

 
2,685

 
2,685

Factored receivables

 
270,002

 

 
270,002

 

 
1,508

 
1,508

Equipment financing
2,394

 
1,159,041

 

 
1,161,435

 

 
11,153

 
11,153

Public sector finance

 
807,193

 

 
807,193

 

 
1,444

 
1,444

Commercial real estate
37,739

 
4,390,799

 
28,947

 
4,457,485

 

 
31,468

 
31,468

Multi-family
1,688

 
4,814,697

 
10,787

 
4,827,172

 

 
7,682

 
7,682

ADC

 
265,676

 

 
265,676

 

 
1,876

 
1,876

Residential mortgage
2,332

 
4,322,621

 
96,567

 
4,421,520

 

 
6,800

 
6,800

Consumer
8,050

 
300,518

 
8,763

 
317,331

 

 
3,022

 
3,022

Total portfolio loans
$
111,685

 
$
20,267,525

 
$
154,004

 
$
20,533,214

 
$

 
$
91,365

 
$
91,365


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


19

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

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

 
$
1,933,155

 
$
10,372

 
$
1,979,448

 
$

 
$
19,072

 
$
19,072

Asset-based lending

 
797,570

 

 
797,570

 

 
6,625

 
6,625

Payroll finance

 
268,609

 

 
268,609

 

 
1,565

 
1,565

Warehouse lending

 
723,335

 

 
723,335

 

 
3,705

 
3,705

Factored receivables

 
220,551

 

 
220,551

 

 
1,395

 
1,395

Equipment financing
5,341

 
674,200

 

 
679,541

 

 
4,862

 
4,862

Public sector finance

 
637,767

 

 
637,767

 

 
1,797

 
1,797

Commercial real estate
9,663

 
4,090,143

 
39,058

 
4,138,864

 

 
24,945

 
24,945

Multi-family
1,597

 
4,842,898

 
15,060

 
4,859,555

 

 
3,261

 
3,261

ADC
5,208

 
277,322

 
262

 
282,792

 

 
1,680

 
1,680

Residential mortgage

 
4,903,218

 
151,514

 
5,054,732

 

 
5,819

 
5,819

Consumer
3,132

 
352,741

 
10,346

 
366,219

 

 
3,181

 
3,181

Total portfolio loans
$
60,862

 
$
19,721,509

 
$
226,612

 
$
20,008,983

 
$

 
$
77,907

 
$
77,907


Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Evaluation of impairment is generally treated the same across all classes of loans on a loan-by-loan basis. Generally loans of $750 or less are evaluated for impairment on a homogeneous pool basis. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment of the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure or liquidation is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is generally recognized through a charge-off to the allowance for loan losses. 

The following table presents the changes in the balance of the accretable yield discount for PCI loans for the three and nine months ended September 30, 2018 and 2017:
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
21,711

 
$
10,877

 
$
45,582

 
$
11,117

Accretion of income
(4,027
)
 
(2,412
)
 
(10,578
)
 
(4,612
)
Reclassification (to) from non-accretable difference
1,056

 
1,412

 
(1,192
)
 
3,372

Other, adjustments

 

 
(15,072
)
 

Balance at end of period
$
18,740

 
$
9,877

 
$
18,740

 
$
9,877


Income is not recognized on PCI loans unless the Company can reasonably estimate the cash flows that are expected to be collected over the life of the loan. The balance of PCI loans that were treated under the cost recovery method was $5,363 and $7,992 at September 30, 2018 and December 31, 2017, respectively.


20

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

The following table presents loans individually evaluated for impairment, excluding PCI loans, by segment of loans at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
Unpaid principal balance
 
Recorded investment
 
Unpaid principal balance
 
Recorded investment
Loans with no related allowance recorded:
 
 
 
 
 
 
Traditional C&I
$
54,756

 
$
40,909

 
$
36,408

 
$
35,921

Asset-based lending
18,573

 
18,573

 

 

Equipment financing
2,394

 
2,394

 
5,341

 
5,341

Commercial real estate
45,150

 
37,739

 
10,128

 
9,663

Multi-family
2,352

 
1,688

 
1,597

 
1,597

ADC

 

 
5,474

 
5,208

Residential mortgage
2,552

 
2,332

 

 

Consumer
8,050

 
8,050

 
3,132

 
3,132

Total
$
133,827

 
$
111,685

 
$
62,080

 
$
60,862


At September 30, 2018 and December 31, 2017, there were no payroll finance, warehouse lending, factored receivables or public sector finance loans that were individually evaluated for impairment.

The Company’s policy generally requires a charge-off of the difference between the present value of the cash flows or the net collateral value of the collateral securing the loan and the Company’s recorded investment. As a result, there were no impaired loans with an allowance recorded at September 30, 2018 or December 31, 2017.

The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the three months ended September 30, 2018 and September 30, 2017:
 
For the three months ended
 
September 30, 2018
 
September 30, 2017
 
QTD average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
 
QTD average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
Loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Traditional C&I
$
36,731

 
$
116

 
$

 
$
24,653

 
$
8

 
$

Asset-based lending
14,639

 
123

 

 

 

 

Equipment financing
798

 

 

 
5,469

 

 

Commercial real estate
27,149

 
294

 

 
13,258

 
95

 

Multi-family
1,768

 
17

 

 

 

 

ADC

 

 

 
5,611

 
48

 

Residential mortgage
1,849

 

 

 
1,060

 

 

Consumer
4,762

 

 

 
2,356

 

 

Total
$
87,696

 
$
550

 
$

 
$
52,407

 
$
151

 
$


For the three months ended September 30, 2018 and 2017, there were no payroll finance, warehouse lending, factored receivables or public sector finance loans that were impaired, and there was no cash-basis interest income recognized.


21

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

The following table presents the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the nine months ended September 30, 2018 and 2017:
 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
YTD average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
 
YTD average
recorded
investment
 
Interest
income
recognized
 
Cash-basis
interest
income
recognized
Loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Traditional C&I
$
35,935

 
$
149

 
$

 
$
24,747

 
$
22

 
$

Asset-based lending
10,980

 
347

 

 

 

 

Equipment financing
598

 

 

 
3,429

 

 

Commercial real estate
22,704

 
360

 

 
10,410

 
271

 

Multi-family
1,726

 
48

 

 

 

 

ADC

 

 

 
5,562

 
154

 

Residential mortgage
1,387

 

 

 
787

 

 

Consumer
4,355

 

 

 
1,927

 

 

Total
$
77,685

 
$
904

 
$

 
$
46,862

 
$
447

 
$


For the nine months ended September 30, 2018 and 2017, there were no payroll finance, warehouse lending, factored receivables or public sector finance loans that were impaired, and there was no cash-basis interest income recognized.

Troubled Debt Restructuring (“TDRs”)
The following tables set forth the amounts and past due status of the Company’s TDRs at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
Current loans
 
30-59
days
past due
 
60-89
days
past due
 
90+
days
past due
 
Non-
accrual
 
Total
Traditional C&I
$
449

 
$

 
$

 
$
418

 
$
25,351

 
$
26,218

Asset-based lending
10,855

 

 

 

 

 
10,855

Equipment financing
3,340

 

 

 

 
1,181

 
4,521

Commercial real estate
16,091

 

 

 

 
2,935

 
19,026

ADC
434

 

 

 

 

 
434

Residential mortgage
5,685

 

 
367

 

 
2,473

 
8,525

Consumer
2,539

 
57

 

 

 
5,172

 
7,768

Total
$
39,393

 
$
57

 
$
367

 
$
418

 
$
37,112

 
$
77,347


22

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

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

 
$

 
$

 
$

 
$
21,083

 
$
21,648

Equipment financing
898

 

 

 

 
826

 
1,724

Commercial real estate
2,921

 

 

 

 
115

 
3,036

ADC
1,495

 

 

 

 
4,205

 
5,700

Residential mortgage
5,154

 
336

 

 

 
2,810

 
8,300

Consumer
2,142

 
53

 

 

 
286

 
2,481

Total
$
13,175

 
$
389

 
$

 
$

 
$
29,325

 
$
42,889

There were no payroll finance, warehouse lending, factored receivables, public sector finance or multi-family loans that were TDRs for either period presented above and there were no asset-based lending loans that were TDRs at December 31, 2017. The Company did not have any outstanding commitments to lend additional amounts to customers with loans classified as TDRs as of September 30, 2018 or December 31, 2017.
There were 20 loans modified as a TDR in the nine months ended September 30, 2018. The following table presents loans by segment modified as TDRs that occurred during the first nine months of 2018 and 2017:
 
September 30, 2018
 
September 30, 2017
 
 
 
Recorded investment
 
 
 
Recorded investment
 
Number
Pre-
modification
 
Post-
modification
 
Number
Pre-
modification
 
Post-
modification
Traditional C&I
2

 
$
11,606

 
$
10,477

 
1
 
$
23,188

 
$
23,188

Asset-based lending
1

 
12,766

 
12,766

 
 

 

Equipment financing
4

 
3,307

 
3,307

 
2
 
3,088

 
3,088

Commercial real estate
1

 
12,187

 
12,187

 
2
 
1,724

 
1,724

ADC

 

 

 
1
 
797

 
797

Residential mortgage
11

 
1,684

 
1,367

 
2
 
552

 
551

Consumer
1

 
4,944

 
4,944

 
 

 

Total TDRs
20

 
$
46,494

 
$
45,048

 
8
 
$
29,349

 
$
29,348


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

During the nine months ended September 30, 2018 or 2017, except for certain TDRs that are included in non-accrual loans, there were no TDRs that experienced a payment default within the twelve months following the modification. A payment default is defined as missing three consecutive monthly payments or being over 90 days past due on a scheduled payment. The asset-based lending loan that was designated as a TDR in 2018 is a borrowing base facility in which the advance rate is determined by the estimated value of loans to third parties used to finance the acquisition of taxi medallions, which are collateral for the facility. This loan has never been delinquent and has continued to perform according to its modified terms at the time of restructuring. TDRs during the periods presented above did not significantly impact the determination of the allowance for loan losses.


23

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

(5) Allowance for Loan Losses

Activity in the allowance for loan losses for the three months ended September 30, 2018 and 2017 is summarized below:
 
For the three months ended September 30, 2018
 
Beginning
balance
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision / (reversal of)
 
Ending balance
Traditional C&I
$
18,075

 
$
(3,415
)
 
$
235

 
$
(3,180
)
 
$
(179
)
 
$
14,716

Asset-based lending
5,837

 

 

 

 
991

 
6,828

Payroll finance
1,658

 
(2
)
 
5

 
3

 
522

 
2,183

Warehouse lending
2,787

 

 

 

 
(102
)
 
2,685

Factored receivables
1,321

 
(18
)
 
2

 
(16
)
 
203

 
1,508

Equipment financing
8,841

 
(829
)
 
85

 
(744
)
 
3,056

 
11,153

Public sector finance
1,354

 

 

 

 
90

 
1,444

Commercial real estate
26,870

 
(359
)
 
612

 
253

 
4,345

 
31,468

Multi-family
7,389

 
(168
)
 
4

 
(164
)
 
457

 
7,682

ADC
2,172

 

 

 

 
(296
)
 
1,876

Residential mortgage
5,917

 
(114
)
 
5

 
(109
)
 
992

 
6,800

Consumer
3,805

 
(458
)
 
254

 
(204
)
 
(579
)
 
3,022

Total allowance for loan losses
$
86,026

 
$
(5,363
)
 
$
1,202

 
$
(4,161
)
 
$
9,500

 
$
91,365

Annualized net charge-offs to average loans outstanding:
 
 
 
 
 
 
 
0.08
%
 
 
For the three months ended September 30, 2017
 
Beginning
balance
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision / (reversal of)
 
Ending balance
Traditional C&I
$
15,506

 
$
(68
)
 
$
316

 
$
248

 
$
1,446

 
$
17,200

Asset-based lending
2,582

 

 
1

 
1

 
2,192

 
4,775

Payroll finance
1,287

 
(188
)
 
1

 
(187
)
 
1,091

 
2,191

Warehouse lending
2,435

 

 

 

 
1,299

 
3,734

Factored receivables
1,151

 
(564
)
 
5

 
(559
)
 
679

 
1,271

Equipment financing
5,735

 
(741
)
 
45

 
(696
)
 
(577
)
 
4,462

Public sector finance
1,887

 

 

 

 
(535
)
 
1,352

Commercial real estate
25,181

 
(1,345
)
 
17

 
(1,328
)
 
(648
)
 
23,205

Multi-family
5,028

 

 

 

 
(974
)
 
4,054

ADC
920

 
(5
)
 

 
(5
)
 
399

 
1,314

Residential mortgage
5,124

 
(389
)
 

 
(389
)
 
319

 
5,054

Consumer
3,315

 
(156
)
 
48

 
(108
)
 
309

 
3,516

Total allowance for loan losses
$
70,151

 
$
(3,456
)
 
$
433

 
$
(3,023
)
 
$
5,000

 
$
72,128

Annualized net charge-offs to average loans outstanding:
 
 
 
 
 
 
 
0.12
%


24

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

Activity in the allowance for loan losses for the nine months ended September 30, 2018 and 2017 is summarized below:
 
For the nine months ended September 30, 2018
 
Beginning
balance
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision/ (reversal of)
 
Ending balance
Traditional C&I
$
19,072

 
$
(8,818
)
 
$
674

 
$
(8,144
)
 
$
3,788

 
$
14,716

Asset-based lending
6,625

 

 
9

 
9

 
194

 
6,828

Payroll finance
1,565

 
(316
)
 
34

 
(282
)
 
900

 
2,183

Warehouse lending
3,705

 

 

 

 
(1,020
)
 
2,685

Factored receivables
1,395

 
(181
)
 
7

 
(174
)
 
287

 
1,508

Equipment financing
4,862

 
(7,505
)
 
347

 
(7,158
)
 
13,449

 
11,153

Public sector finance
1,797

 

 

 

 
(353
)
 
1,444

Commercial real estate
24,945

 
(4,878
)
 
702

 
(4,176
)
 
10,699

 
31,468

Multi-family
3,261

 
(168
)
 
7

 
(161
)
 
4,582

 
7,682

ADC
1,680

 
(721
)
 

 
(721
)
 
917

 
1,876

Residential mortgage
5,819

 
(697
)
 
54

 
(643
)
 
1,624

 
6,800

Consumer
3,181

 
(1,074
)
 
482

 
(592
)
 
433

 
3,022

Total allowance for loan losses
$
77,907

 
$
(24,358
)
 
$
2,316

 
$
(22,042
)
 
$
35,500

 
$
91,365

Annualized net charge-offs to average loans outstanding:
 
 
 
 
 
 
 
0.15
%

 
For the nine months ended September 30, 2017
 
Beginning
balance
 
Charge-offs
 
Recoveries
 
Net
charge-offs
 
Provision/ (reversal of)
 
Ending balance
Traditional C&I
$
12,864

 
$
(919
)
 
$
978

 
$
59

 
$
4,277

 
$
17,200

Asset-based lending
3,316

 

 
5

 
5

 
1,454

 
4,775

Payroll finance
951

 
(188
)
 
1

 
(187
)
 
1,427

 
2,191

Warehouse lending
1,563

 

 

 

 
2,171

 
3,734

Factored receivables
1,669

 
(871
)
 
23

 
(848
)
 
450

 
1,271

Equipment financing
5,039

 
(1,822
)
 
331

 
(1,491
)
 
914

 
4,462

Public sector finance
1,062

 

 

 

 
290

 
1,352

Commercial real estate
20,466

 
(2,372
)
 
117

 
(2,255
)
 
4,994

 
23,205

Multi-family
4,991

 

 

 

 
(937
)
 
4,054

ADC
1,931

 
(27
)
 
269

 
242

 
(859
)
 
1,314

Residential mortgage
5,864

 
(668
)
 
159

 
(509
)
 
(301
)
 
5,054

Consumer
3,906

 
(687
)
 
177

 
(510
)
 
120

 
3,516

Total allowance for loan losses
$
63,622

 
$
(7,554
)
 
$
2,060

 
$
(5,494
)
 
$
14,000

 
$
72,128

Annualized net charge-offs to average loans outstanding:
 
 
 
 
 
 
 
0.08
%

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

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

25

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


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

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

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

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

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

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

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

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


26

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

Loans that are risk-rated 1 through 6, as defined above, are considered to be pass-rated loans. As of September 30, 2018 and December 31, 2017, the risk category of gross loans by segment was as follows:
 
September 30, 2018
 
December 31, 2017
 
Special
mention
 
Substandard
 
Doubtful
 
Special
mention
 
Substandard
 
Doubtful
Traditional C&I
$
11,662

 
$
42,974

 
$
2,213

 
$
7,453

 
$
53,915

 
$
746

Asset-based lending
56

 
42,913

 

 
30,958

 
3,835

 

Payroll finance
13,708

 
15,511

 

 
15,542

 
352

 

Factored receivables
778

 

 

 
187

 

 

Equipment financing
10,593

 
16,266

 

 
4,093

 
9,299

 

Commercial real estate
18,822

 
52,870

 

 
40,438

 
34,529

 

Multi-family
21,201

 
18,489

 

 
26,602

 
14,266

 

ADC
4,096

 
434

 

 
4,204

 
4,639

 

Residential mortgage
6,116

 
75,803

 

 
6,038

 
101,149

 

Consumer
1,440

 
15,098

 
6

 
1,043

 
10,507

 
18

Total
$
88,472

 
$
280,358

 
$
2,219

 
$
136,558

 
$
232,491

 
$
764


There were no criticized or classified warehouse lending or public sector finance loans for the periods presented. There were no loans rated “loss” at September 30, 2018 or December 31, 2017.

(6) Goodwill and Other Intangible Assets

The balance of goodwill and other intangible assets for the periods presented were as follows:
 
September 30,
 
December 31,
 
2018
 
2017
Goodwill
$
1,609,772

 
$
1,579,891

Other intangible assets:
 
 
 
Core deposits
$
109,833

 
$
126,545

Customer lists
4,972

 
5,854

Non-compete agreements
104

 
292

Trade name
20,500

 
20,500

Total
$
135,409

 
$
153,191


The increase in goodwill at September 30, 2018 compared to December 31, 2017 was due to the Advantage Funding Acquisition. See Note 2. “Acquisitions” for additional information.

The decrease in other intangible assets at September 30, 2018 compared to December 31, 2017 was due to amortization of intangibles.


27

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

The estimated aggregate future amortization expense for intangible assets remaining as of September 30, 2018 was as follows:
 
Amortization expense
Remainder of 2018
$
5,863

2019
19,181

2020
16,800

2021
15,104

2022
13,703

2023
12,322

Thereafter
31,936

Total
$
114,909


(7) Deposits

Deposit balances at September 30, 2018 and December 31, 2017 were as follows: 
 
September 30,
 
December 31,
 
2018
 
2017
Non-interest bearing demand
$
4,651,369

 
$
4,080,742

Interest bearing demand
4,302,725

 
3,882,064

Savings
2,470,949

 
2,758,642

Money market
7,460,064

 
7,377,118

Certificates of deposit
2,570,950

 
2,439,638

Total deposits
$
21,456,057

 
$
20,538,204

Total municipal deposits were $2,019,893 and $1,585,076 at September 30, 2018 and December 31, 2017, respectively. See Note 3. “Securities” for the aggregate amount of securities that were pledged as collateral for municipal deposits and other purposes.     
Brokered deposits at September 30, 2018 and December 31, 2017 were as follows:
 
September 30,
 
December 31,
 
2018
 
2017
Interest bearing demand
$
17,471

 
$
23,820

Money market
779,285

 
773,804

Money market - reciprocal deposits (1)

 
102,259

CDARs(2) and ICS(3) one way
150,181

 
204,331

Total brokered deposits
$
946,937

 
$
1,104,214

1 Section 29 of the Federal Deposit Insurance Act was amended to except a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions, including the Bank. As a result, the Bank no longer reports its reciprocal deposits as brokered deposits.
2 CDARs are deposits generated through the certificate of deposit account registry service.
3 ICS are deposits generated through the insured cash sweep program.


28

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

(8) Borrowings

The Company’s borrowings and weighted average interest rates were as follows for the periods presented: 
 
September 30,
 
December 31,
 
2018
 
2017
 
Amount
 
Rate
 
Amount
 
Rate
By type of borrowing:
 
 
 
 
 
 
 
FHLB borrowings
$
4,429,110

 
2.21
%
 
$
4,510,123

 
1.69
%
Repurchase agreements
22,888

 
1.19

 
30,162

 
0.64

5.50% Senior Notes

 

 
76,805

 
5.98

3.50% Senior Notes
200,972

 
3.19

 
201,404

 
3.19

Subordinated Notes
172,885

 
5.45

 
172,716

 
5.45

Total borrowings
$
4,825,855

 
2.37
%
 
$
4,991,210

 
1.96
%
By remaining period to maturity:
 
 
 
 
 
 
 
Less than one year
$
2,707,935

 
2.24
%
 
$
2,989,093

 
1.69
%
One to two years
1,392,912

 
2.15

 
775,714

 
1.79

Two to three years
552,123

 
2.58

 
802,650

 
2.34

Three to four years

 

 
251,037

 
2.04

Greater than five years
172,885

 
5.45

 
172,716

 
5.45

Total borrowings
$
4,825,855

 
2.37
%
 
$
4,991,210

 
1.96
%

FHLB borrowings. As a member of the FHLB, the Bank may borrow up to a discounted percentage of the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of September 30, 2018 and December 31, 2017, the Bank had total residential mortgage and commercial real estate loans pledged after discount of $8,548,416 and $9,123,601, respectively. In addition to the pledged mortgages, the Bank had also pledged securities to secure borrowings, which are disclosed in Note 3. “Securities.” As of September 30, 2018, the Bank had unused borrowing capacity at the FHLB of $6,235,781 and may increase its borrowing capacity by pledging securities not required to be pledged for other purposes with a collateral value of approximately $3,578,859.

Repurchase agreements. The Bank enters into sales of securities under agreements to repurchase. These repurchase agreements facilitate the needs of our customers and a portion of our secured short-term funding needs. Securities sold under agreements to repurchase at September 30, 2018 and December 31, 2017 are secured short-term borrowings that mature in one to 45 days and are generally renewed on a continuous basis. Repurchase agreements are stated at the amount of cash received in connection with these transactions. The securities pledged under these repurchase agreements fluctuate in value due to market conditions. The Bank is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

5.50% Senior Notes. On July 2, 2013, the Company issued $100,000 principal amount of 5.50% fixed rate notes, which matured on July 2, 2018. At such date, the Company utilized cash on hand to repay the outstanding principal balance and interest of such notes.

3.50% Senior Notes. On October 2, 2017, in connection with the Astoria Merger, the Company assumed $200,000 principal amount of 3.50% fixed rate senior notes that mature on June 8, 2020 (the “3.50% Senior Notes”). The 3.50% Senior Notes were issued by Astoria on June 8, 2017 through a public offering. The Company recorded the 3.50% Senior Notes at an estimated fair value of 100.76% on the acquisition date, which was based on the quoted market value. The fair value adjustment, with a remaining balance of $972 at September 30, 2018, is being amortized over the remaining maturity using a level-yield methodology, which results in an effective cost of 3.19%.

Subordinated Notes. On March 29, 2016, the Bank issued $110,000 principal amount of 5.25% fixed-to-floating rate subordinated notes (the “Subordinated Notes”) through a private placement at a discount of 1.25%. The cost of issuance was $500. On September 2, 2016, the Bank reopened the Subordinated Notes offering and issued an additional $65,000 principal amount of Subordinated Notes. The Subordinated Notes issued September 2, 2016 are fully fungible with, rank equally in right of payment with, and form a single series with the Subordinated Notes issued in March 2016. The Subordinated Notes issued in September 2016 were issued to the

29

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

purchasers at a premium of 0.50% and an underwriters discount of 1.25%. The cost of issuance was $275. At September 30, 2018, the net unamortized discount of all Subordinated Notes was $2,115, which will be accreted to interest expense over the life of the Subordinated Notes, resulting in an effective yield of 5.45%. Interest is due semi-annually in arrears on April 1 and October 1 of each year, until April 1, 2021. From and including April 1, 2021, the Subordinated Notes will bear interest at a floating rate per annum equal to three-month LIBOR plus 3.937%, payable quarterly on January 1, April 1, July 1 and October 1 of each year, beginning on July 1, 2021, through maturity on April 1, 2026 or earlier redemption. The Subordinated Notes are also redeemable by the Bank, in whole or in part, on April 1, 2021 and each interest payment date thereafter. The Subordinated Notes are redeemable in whole at any time upon the occurrence of certain specified events. The Subordinated Notes are unsecured, subordinated obligations of the Bank and are subordinated in right of payment to all of the Bank’s existing and future senior indebtedness, including claims of depositors and general creditors. The Subordinated Notes qualify as Tier 2 capital for regulatory purposes. See Note 15. “Stockholders’ Equity” for additional information.

Revolving line of credit. Effective September 2, 2018, the Company renewed its $35,000 revolving line of credit facility (the “Credit Facility”). The Credit Facility, which is with another financial institution, matures on September 2, 2019. The balance was zero at September 30, 2018 and December 31, 2017. The use of proceeds are for general corporate purposes. The Credit Facility and accrued interest is payable at maturity, and the Company is required to maintain a zero balance for at least 30 days during its term. Loans under the Credit Facility bear interest at one-month LIBOR plus 1.25%. Under the terms of the Credit Facility, the Company and the Bank must maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. The Company and the Bank were in compliance with all requirements of the Credit Facility at September 30, 2018.

(9) Derivatives

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

The Company has entered into interest rate swap contracts that are both over-the-counter, or OTC, and those that are exchanged on futures markets such as the Chicago Mercantile Exchange (“CME”). At September 30, 2018 and December 31, 2017, the OTC derivatives are included in the financial statements at the gross fair value amount of the asset (included in other assets) and liability (included in other liabilities), which represents the change in the fair value of the contract since inception. Effective for the quarter ended March 31, 2017, the CME amended its rulebook to legally characterize variation margin payments (a payment made based on changes in the fair value of the interest rate swap contracts) as a settlement, referred to as settled-to-market (“STM”). As a result of this change, at September 30, 2018 and December 31, 2017, the Company paid cash as STM in the amount of $15,131 and $3,523, respectively, for the net fair value of its CME interest rate swap contracts with another financial institution. The variation margin payment changes daily, positively or negatively, based on a change in the fair value of the underlying interest rate swap contracts.

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


30

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

Summary information as of September 30, 2018 and December 31, 2017 regarding these derivatives is presented below:
 
Notional
amount
 
Average
maturity (in years)
 
Weighted
average
fixed rate 
 
Weighted
average
variable rate
 
Fair value
September 30, 2018
 
 
 
 
 
 
 
 
 
Included in other assets:
 
 
 
 
 
 
 
 
 
Third-party interest rate swap
$
670,460

 
 
 
 
 
 
 
$
3,347

Customer interest rate swap
213,651

 
 
 
 
 
 
 
290

Total
$
884,111

 
5.48
 
4.50
%
 
1 m Libor + 2.24%
 
$
3,637

Included in other liabilities:
 
 
 
 
 
 
 
 
 
Third-party interest rate swap
$
(213,651
)
 
 
 
 
 
 
 
$
(1,369
)
Customer interest rate swap
(670,460
)
 
 
 
 
 
 
 
(17,399
)
Total
$
(884,111
)
 
5.48
 
4.50
%
 
1 m Libor + 2.24%
 
$
(18,768
)
December 31, 2017
 
 
 
 
 
 
 
 
 
Included in other assets:
 
 
 
 
 
 
 
 
 
Third-party interest rate swap
$
314,754

 
 
 
 
 
 
 
$
1,155

Customer interest rate swap
306,529

 
 
 
 
 
 
 
3,302

Total
$
621,283

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

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

(10) Income Taxes

Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate for the
following reasons:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Income before income tax expense
$
146,821

 
$
66,444

 
$
421,305

 
$
185,939

Tax at Federal statutory rate of 21% for 2018 and 35% for 2017
30,833

 
23,253

 
88,474

 
65,076

State and local income taxes, net of Federal tax benefit
7,330

 
2,531

 
21,284

 
7,302

Tax exempt interest, net of disallowed interest
(4,970
)
 
(5,213
)
 
(14,435
)
 
(12,487
)
Bank owned life insurance income
(861
)
 
(462
)
 
(2,406
)
 
(1,484
)
Non-deductible acquisition related costs

 
237

 

 
1,193

Investments in qualified affordable housing projects
(401
)
 
(139
)
 
(2,903
)
 
(416
)
Stock-based compensation benefit

 
(1
)
 
(441
)
 
(807
)
FDIC insurance premium limitation
466

 

 
1,483

 

Other, net
(5,226
)
 
1,386

 
(2,514
)
 
1,243

Actual income tax expense
$
27,171

 
$
21,592

 
$
88,542

 
$
59,620

Effective income tax rate
18.5
%
 
32.5
%
 
21.0
%
 
32.1
%

Net deferred tax assets totaled $85,431 at September 30, 2018 and $97,333 at December 31, 2017. No valuation allowance was recorded against deferred tax assets as of those dates, based upon management’s consideration of historical and anticipated future pre-

31

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

tax income, and the reversal periods for the items resulting in deferred tax assets and liabilities. There were no unrecognized tax benefits during any of the reported periods.

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

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

The Tax Cuts and Jobs Act of 2017 reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company was required to remeasure, through income tax expense, the Company’s deferred tax assets and liabilities using the enacted tax rate at which the deferred items are expected to be recovered or settled. The remeasurement of the Company’s net deferred tax assets resulted in additional provisional income tax expense of $40,285 recorded in 2017. During the third quarter of 2018 the Company completed its evaluation of certain aspects of the new tax law, as well as the final tax returns related to Astoria’s business and operations through October 1, 2017. After completion of these tax returns, the Company reduced income tax balances and goodwill in the amount of $6,214, which finalized all purchase accounting adjustments for the Astoria Merger.
(11) Stock-Based Compensation

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

The Company’s stockholders approved the 2015 Omnibus Equity and Incentive Plan (the “2015 Plan”) on May 28, 2015. The 2015 Plan permits the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units, deferred stock and other stock-based awards. The total number of shares that may be awarded under the 2015 Plan is 2,800,000 shares plus the remaining shares available for grant under the stockholder approved 2014 Stock Incentive Plan as of the date of adoption of the 2015 Plan. At September 30, 2018, there were, in aggregate, 2,379,112 shares available for future grant under the 2015 Plan.

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

The following table summarizes the activity in the Company’s active stock-based compensation plans for the nine months ended September 30, 2018:
 
 
 
Non-vested stock awards/stock units outstanding
 
Stock options outstanding
 
Shares available for grant
 
Number of shares
 
Weighted average grant date fair value
 
Number of shares
 
Weighted average exercise price
Balance at January 1, 2018
3,101,327

 
1,238,760

 
$
20.00

 
757,867

 
$
11.15

Granted
(772,271
)
 
772,271

 
23.54

 

 

Stock awards vested

 
(341,501
)
 
17.35

 

 

Exercised

 

 

 
(49,794
)
 
11.19

Forfeited
55,356

 
(50,056
)
 
22.32

 
(5,300
)
 
13.18

Canceled/expired
(5,300
)
 

 

 

 
13.18

Balance at September 30, 2018
2,379,112

 
1,619,474

 
$
22.08

 
702,773

 
$
11.13

Exercisable at September 30, 2018
 
 
 
 
 
 
701,106

 
$
11.12

 
The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $7,640 and $7,629, respectively, at September 30, 2018.

32

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


The Company uses an option pricing model to estimate the grant date fair value of stock options granted. There were no stock options granted during the nine months ended September 30, 2018 or September 30, 2017.

Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Stock-based compensation expense associated with stock options and non-vested stock awards and the related income tax benefit are presented below:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
$
2

 
$
48

 
$
5

 
$
146

Non-vested stock awards/performance units
3,113

 
1,921

 
9,299

 
5,456

Total
$
3,115

 
$
1,969

 
$
9,304

 
$
5,602

Income tax benefit
654

 
640

 
1,954

 
1,821

Proceeds from stock option exercises
154

 
65

 
556

 
1,193


Unrecognized stock-based compensation expense as of September 30, 2018 was as follows:
 
September 30, 2018
Stock options
$

Non-vested stock awards/performance units
21,289

Total
$
21,289


The weighted average period over which unrecognized non-vested stock awards/performance units expense is expected to be recognized is 1.67 years.

(12) Pension and Other Post-Retirement Benefits

Total pension and other post-retirement benefits expense is comprised of the following for the periods presented below:
 
For the three months ended
 
September 30, 2018
 
September 30, 2017
 
Pension Benefits
 
Other Post Retirement Benefits
 
Pension Benefits
 
Other Post Retirement Benefits
Service cost
$

 
$
20

 
$

 
$

Interest cost
2,121

 
254

 

 
101

Expected return on plan assets
(3,353
)
 

 

 

Net amortization and deferral

 

 

 
8

Net periodic pension and other post-retirement (benefit) expense
$
(1,232
)
 
$
274

 
$

 
$
109



33

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

 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
Pension Benefits
 
Other Post Retirement Benefits
 
Pension Benefits
 
Other Post Retirement Benefits
Service cost
$

 
$
62

 
$

 
$

Interest cost
6,364

 
780

 

 
302

Expected return on plan assets
(10,058
)
 

 

 

Net amortization and deferral

 

 

 
26

Net periodic pension and other post-retirement (benefit) expense
$
(3,694
)
 
$
842

 
$

 
$
328


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

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

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

The Company contributed $41,825 and $13 to fund pension and other post retirement benefits during the three months ended September 30, 2018 and 2017, respectively, and contributed $42,500 and $109 to fund pension and other post retirement benefits during the nine months ended September 30, 2018 and 2017, respectively. Included in the contribution made during the three and nine months ended September 30, 2018 was a payment of $41,510 towards the Astoria Bank Pension Plan unfunded accumulated benefit obligation. Total pension and other post-retirement benefits plans liabilities were $43,867 and $89,965 at September 30, 2018 and December 31, 2017, respectively, and are included in other liabilities in the consolidated balance sheets.

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

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

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

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

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


34

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

Factored Receivables. The Company provides accounts receivable management services.  The purchase of a client’s accounts receivable is traditionally known as “factoring” and results in payment by the client of a factoring fee. The factoring fee included in non-interest income represents compensation to the Company for the bookkeeping and collection services provided.  The factoring fee, which is non-refundable, is recognized at the time the receivable is assigned to the Company. Other revenue associated with factored receivables includes wire fees, technology fees, field examination fees and UCC fees. All such fees are recognized as income upon receipt, which is when the Company’s obligations are provided to the Company’s customers.

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

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

Contract Balances. A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as investment management fees based on period-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2018 and December 31, 2017, the Company did not have any significant contract balances.

(b) Other Non-Interest Expense
Other non-interest expense items for the three and nine months ended September 30, 2018 and 2017, respectively, are presented in the following table:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Other non-interest expense:
 
 
 
 
 
 
 
   Professional fees
$
2,866

 
$
2,234

 
$
9,269

 
$
6,917

   Advertising and promotion
1,147

 
649

 
3,962

 
2,034

Telephone
1,238

 
589

 
4,500

 
1,705

Operational losses
791

 
130

 
2,945

 
642

Stationery & office supplies
507

 
170

 
1,790

 
641

Insurance & surety bond premium
1,299

 
841

 
2,680

 
2,065

   Other
5,325

 
3,734

 
14,534

 
11,072

Total other non-interest expense
$
13,173

 
$
8,347

 
$
39,680

 
$
25,076



35

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

(14) Earnings Per Common Share

The following is a summary of the calculation of earnings per common share (“EPS”):
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 Net income available to common stockholders
$
117,657

 
$
44,852

 
$
326,775

 
$
126,319

Weighted average common shares outstanding for computation of basic EPS
225,088,511

 
135,346,791

 
224,969,121

 
135,276,634

Common-equivalent shares due to the dilutive effect of stock options and unvested performance share grants(1)
534,384

 
603,369

 
535,342

 
618,879

Weighted average common shares for computation of diluted EPS
225,622,895

 
135,950,160

 
225,504,463

 
135,895,513

EPS:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.33

 
$
1.45

 
$
0.93

Diluted
0.52

 
0.33

 
1.45

 
0.93

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

 

 

 

(1) Represents incremental shares computed using the treasury stock method.
(2) Anti-dilutive shares are not included in determining diluted EPS. There were no anti-dilutive shares in the three and nine months ended September 30, 2018 or September 30, 2017.
(15) Stockholders’ Equity

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

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

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

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital (as defined in the regulations) for both the Bank and the Company includes a permissible portion of the allowance for loan losses and $172,885 and $139,429 of the Subordinated Notes, respectively. During the final five years of the term of the Subordinated Notes, the permissible portion eligible for inclusion in Tier 2 capital decreases by 20% annually.

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


36

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

The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which excludes goodwill and other intangible assets, among other items. When fully phased-in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 capital to RWA of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to RWA of at least 7.0% upon full implementation); (ii) a minimum ratio of Tier 1 capital to RWA of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to RWA of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (iv) a minimum Tier 1 leverage ratio of 4.0%.

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

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

The following tables present actual and required capital ratios as of September 30, 2018 and December 31, 2017 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2018 and December 31, 2017 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well-capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
 
Actual
 
Minimum capital required - Basel III phase-in schedule
 
Minimum capital required - Basel III fully phased-in
 
Required to be considered well- capitalized
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
 
Capital amount
 
Ratio
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
$
2,970,656

 
14.23
%
 
$
1,330,866

 
6.375
%
 
$
1,461,343

 
7.00
%
 
$
1,356,961

 
6.50
%
Sterling Bancorp
2,710,568

 
12.97

 
1,332,021

 
6.375

 
1,462,611

 
7.00

 
N/A

 
N/A

Tier 1 capital to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
2,970,656

 
14.23
%
 
1,644,011

 
7.875
%
 
1,774,488

 
8.50
%
 
1,670,106

 
8.00
%
Sterling Bancorp
2,849,195

 
13.64

 
1,645,438

 
7.875

 
1,776,028

 
8.50

 
N/A

 
N/A

Total capital to RWA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
3,235,560

 
15.50
%
 
2,061,538

 
9.875
%
 
2,192,015

 
10.50
%
 
2,087,633

 
10.00
%
Sterling Bancorp
3,080,643

 
14.74

 
2,063,327

 
9.875

 
2,193,917

 
10.50

 
N/A

 
N/A

Tier 1 leverage ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sterling National Bank
2,970,656

 
10.10
%
 
1,176,278

 
4.00
%
 
1,176,278

 
4.00
%
 
1,470,347

 
5.00
%
Sterling Bancorp
2,849,195

 
9.68

 
1,177,205

 
4.00

 
1,177,205

 
4.00

 
N/A

 
N/A


37

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

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

 
13.95
%
 
$
1,142,247

 
5.75
%
 
$
1,390,561

 
7.00
%
 
$
1,291,236

 
6.50
%
Sterling Bancorp
2,458,449

 
12.37

 
1,143,045

 
5.75

 
1,391,534

 
7.00

 
N/A

 
N/A

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

 
13.95
%
 
1,440,224

 
7.25
%
 
1,688,539

 
8.50
%
 
1,589,213

 
8.00
%
Sterling Bancorp
2,597,669

 
13.07

 
1,441,231

 
7.25

 
1,689,719

 
8.50

 
N/A

 
N/A

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

 
15.21
%
 
1,837,527

 
9.25
%
 
2,085,842

 
10.50
%
 
1,986,516

 
10.00
%
Sterling Bancorp
2,818,404

 
14.18

 
1,838,812

 
9.25

 
2,087,300

 
10.50

 
N/A

 
N/A

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

 
10.10
%
 
1,097,449

 
4.00
%
 
1,097,449

 
4.00
%
 
1,371,811

 
5.00
%
Sterling Bancorp
2,597,669

 
9.39

 
1,106,977

 
4.00

 
1,106,977

 
4.00

 
N/A

 
N/A


The Bank and the Company are subject to the regulatory capital requirements administered by the FRB, and, for the Bank, the Office of the Comptroller of the Currency. Regulatory authorities can initiate certain mandatory actions if the Bank or the Company fails to meet the minimum capital requirements, which could have a direct material effect on our financial statements. As of September 30, 2018, and December 31, 2017, the most recent regulatory notifications categorized the Company and 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 classification.
 
(b) Dividend Restrictions
The Company is mainly dependent on dividends from the Bank to provide funds for the payment of dividends to stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that fiscal year combined with the retained net profits for the preceding two fiscal years. Under the foregoing dividend restrictions and while maintaining its “well-capitalized” status, at September 30, 2018, the Bank had capacity to pay aggregate dividends of up to $324,008 to the Company without prior regulatory approval.

(c) Stock Repurchase Plans
From time to time, the Company’s Board of Directors has authorized stock repurchase plans. The Company may purchase up to 10,000,000 common shares, which represents 4.4% of our shares outstanding at September 30, 2018. Repurchases may be made at management’s discretion through open market purchases and block trades in accordance with SEC and regulatory requirements. Any common shares purchased will be held as Treasury stock and made available for general corporate purposes. There were no shares repurchased under the repurchase program during the nine months ended September 30, 2018 or September 30, 2017.

(16) Commitments and Contingencies

(a) Off-Balance Sheet Financial Instruments
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in its consolidated balance 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 losses under these commitments by subjecting them to credit approval and monitoring procedures.


38

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

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.  Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. Based on the Company’s credit risk exposure assessment of its standby letter of credit arrangements, the arrangements contain security and debt covenants similar to those contained in loan agreements.

The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance sheet financial instruments, are summarized as follows: 
 
September 30,
 
December 31,
 
2018
 
2017
Loan origination commitments
$
372,047

 
$
510,135

Unused lines of credit
1,359,953

 
1,195,656

Letters of credit
289,877

 
166,824


(b) Lease Commitments
The Company leases certain premises and equipment under operating leases with terms expiring through January 2034. Included in occupancy and office operations expense was net rent expense of $4,572 and $1,874 during the three months ended September 30, 2018 and 2017, respectively. Net rent expense was $13,972 and $6,263 for the nine months ended September 30, 2018 and 2017, respectively. Future minimum lease payments due under non-cancelable operating leases at September 30, 2018 were as follows:
Remainder of 2018
$
4,863

2019
17,817

2020
16,577

2021
13,878

2022
10,007

2023
8,163

2024 and thereafter
22,158

 
$
93,463


(c) Litigation
The Company and the Bank are involved in a number of judicial proceedings concerning matters arising from their business activities. These include routine legal proceedings arising in the ordinary course of business. These proceedings also include actions brought against the Company and the Bank with respect to corporate matters and transactions in which the Company and the Bank are or were involved.

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

(17) Fair Value Measurements

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


39

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

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

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

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

In general, fair value is based on quoted market prices, when available. If quoted market prices in active markets are not available, fair value is based on internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other items, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates; therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which usually coincide with the Company’s monthly and/or quarterly valuation process.

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

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

As of September 30, 2018, management does not believe any of our securities are OTTI; however, management reviews all of the Company’s securities on at least a quarterly basis to assess whether impairment, if any, is OTTI.
 
Derivatives
The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements, and the creditworthiness of the counterparty as of the measurement date (Level 2 inputs). The Company’s derivatives consist of interest rate swaps. See Note 9. “Derivatives” for additional information.


 

40

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

A summary of such investment securities available for sale and derivatives at September 30, 2018 and December 31, 2017, respectively, measured at estimated fair value on a recurring basis, is as follows:
 
September 30, 2018
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
Residential MBS(1):
 
 
 
 
 
 
 
Agency-backed
$
2,207,191

 
$

 
$
2,207,191

 
$

CMOs(2)/Other MBS
576,052

 

 
576,052

 

Total residential MBS
2,783,243

 

 
2,783,243

 

Other securities:
 
 
 
 
 
 
 
Federal agencies
317,733

 

 
317,733

 

Corporate
503,326

 

 
503,326

 

State and municipal
238,942

 

 
238,942

 

Total other securities
1,060,001

 

 
1,060,001

 

Total available for sale securities
3,843,244

 

 
3,843,244

 

Swaps
3,637

 

 
3,637

 

Total assets
$
3,846,881

 
$

 
$
3,846,881

 
$

Liabilities:
 
 
 
 
 
 
 
Swaps
$
(18,768
)
 
$

 
$
(18,768
)
 
$

Total liabilities
$
(18,768
)
 
$

 
$
(18,768
)
 
$


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

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

41

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

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

 
$

 
$
2,150,649

 
$

CMOs/Other MBS
649,403

 

 
649,403

 

Total residential MBS
2,800,052

 

 
2,800,052

 

Federal agencies
399,996

 

 
399,996

 

Corporate bonds
148,226

 

 
148,226

 

State and municipal
263,798

 

 
263,798

 

Total other securities
812,020

 

 
812,020

 

Total available for sale securities
3,612,072

 

 
3,612,072

 

Swaps
4,457

 

 
4,457

 

Total assets
$
3,616,529

 
$

 
$
3,616,529

 
$

Liabilities:
 
 
 
 
 
 
 
Swaps
$
7,980

 
$

 
$
7,980

 
$

Total liabilities
$
7,980

 
$

 
$
7,980

 
$


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

Impaired Loans
Loans that meet certain criteria are evaluated individually for impairment. Generally, loans less than $750 are evaluated for impairment on a pooled basis. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value of the underlying collateral is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market place and are also based on Level 3 inputs. Impaired loans are remeasured at least quarterly and their carrying values are adjusted as needed. Impaired loans subject to non-recurring fair value measurements were $111,685 and $60,862 at September 30, 2018 and December 31, 2017, respectively. Changes in fair value recognized as a charge-off on loans held by the Company were $10,477 and $542 for the nine months ended September 30, 2018 and 2017, respectively.

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

A summary of the classes with impaired loans at September 30, 2018 and December 31, 2017, respectively, is set forth below:
 
September 30, 2018
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Traditional C&I
$
30,895

 
$

 
$

 
$
30,895

Commercial real estate
11,160

 

 

 
11,160

Multi-family
1,236

 

 

 
1,236

Residential mortgage
769

 

 

 
769

Total impaired loans measured at fair value
$
44,060

 
$

 
$

 
$
44,060


42

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

 
December 31, 2017
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Traditional C&I
$
114

 
$

 
$

 
$
114

Commercial real estate
782

 

 

 
782

Total impaired loans measured at fair value
$
896

 
$

 
$

 
$
896

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

At September 30, 2018, the assumption for constant prepayment rates (“CPR”) ranged from 8.68 to 19.23, with a weighted average CPR of 9.28, and the assumption for market discount rate ranged from 9.06% to 20.00%, with a weighted average market discount rate of 9.54%. At December 31, 2017, the CPR assumption ranged from 9.79 to 16.76, with a weighted average CPR of 10.30, and the assumption for market discount rate ranged from 9.50% to 20.00%, with a weighted average market discount rate of 9.90%. The fair value of mortgage servicing rights at September 30, 2018 and December 31, 2017 was $11,564 and $10,363, respectively.

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

At September 30, 2018 and December 31, 2017, appraisals were discounted by 22.0%, which considers estimated costs to sell and overall marketability of the properties. OREO subject to non-recurring fair value measurement was $22,735 and $27,095 at September 30, 2018 and December 31, 2017, respectively. There were $553 and $1,737 of write-downs related to changes in fair value for OREO held by the Company during the nine months ended September 30, 2018 and September 30, 2017, respectively.

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


43

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

The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were held for trading purposes) as of September 30, 2018:
 
September 30, 2018
 
Carrying
amount
 

Level 1 inputs
 

Level 2 inputs
 

Level 3 inputs
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
533,984

 
$
533,984

 
$

 
$

Securities available for sale
3,843,244

 

 
3,843,244

 

Securities held to maturity
2,842,728

 

 
2,746,081

 

Loans held for sale
31,042

 

 
31,042

 

Portfolio loans, net
20,441,849

 

 

 
20,317,154

Accrued interest receivable on securities
43,934

 

 
43,934

 

Accrued interest receivable on loans
65,443

 

 

 
65,443

FHLB stock and FRB stock
351,455

 

 

 

Swaps
3,637

 

 
3,637

 

Financial liabilities:
 
 
 
 
 
 
 
Non-maturity deposits
(18,885,107
)
 
(18,885,107
)
 

 

Certificates of deposit
(2,570,950
)
 

 
(2,532,989
)
 

FHLB borrowings
(4,429,110
)
 

 
(4,403,358
)
 

Other borrowings
(22,888
)
 

 
(22,886
)
 

Senior Notes
(200,972
)
 

 
(199,370
)
 

Subordinated Notes
(172,885
)
 

 
(172,061
)
 

Mortgage escrow funds
(96,952
)
 

 
(87,766
)
 

Accrued interest payable on deposits
(1,905
)
 

 
(1,905
)
 

Accrued interest payable on borrowings
(14,284
)
 

 
(14,284
)
 

Swaps
(18,768
)
 

 
(18,768
)
 


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

44

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

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

Level 1 inputs
 

Level 2 inputs
 

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

 
$
479,906

 
$

 
$

Securities available for sale
3,612,072

 

 
3,612,072

 

Securities held to maturity
2,862,489

 

 
2,863,909

 

Loans held for sale
5,246

 

 
5,246

 

Portfolio loans, net
19,931,076

 

 

 
19,903,231

Accrued interest receivable on securities
34,652

 

 
34,652

 

Accrued interest receivable on loans
59,446

 

 

 
59,446

FHLB stock and FRB stock
284,112

 

 

 

Swaps
4,457

 

 
4,457

 

Financial liabilities:

 

 

 

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

 

Certificates of deposit
(2,439,638
)
 

 
(2,412,495
)
 

FHLB borrowings
(4,510,123
)
 

 
(4,496,184
)
 

Other borrowings
(30,162
)
 

 
(30,160
)
 

Senior Notes
(278,209
)
 

 
(278,968
)
 

Subordinated Notes
(172,716
)
 

 
(179,619
)
 

Mortgage escrow funds
(122,641
)
 

 
(117,050
)
 

Accrued interest payable on deposits
(1,103
)
 

 
(1,103
)
 

Accrued interest payable on borrowings
(9,649
)
 

 
(9,649
)
 

Swaps
(7,980
)
 

 
(7,980
)
 


(18) Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss were as follows as of the dates shown below:
 
September 30,
 
December 31,
 
2018
 
2017
Net unrealized holding loss on available for sale securities
$
(159,493
)
 
$
(36,899
)
Related income tax benefit
44,084

 
14,575

Available for sale securities, net of tax
(115,409
)
 
(22,324
)
Net unrealized holding loss on securities transferred to held to maturity
(3,741
)
 
(4,426
)
Related income tax benefit
1,034

 
1,748

Securities transferred to held to maturity, net of tax
(2,707
)
 
(2,678
)
Net unrealized holding loss on retirement plans
(773
)
 
(1,924
)
Related income tax benefit
214

 
760

Retirement plans, net of tax
(559
)
 
(1,164
)
Accumulated other comprehensive loss
$
(118,675
)
 
$
(26,166
)

45

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

The following table presents the changes in each component of accumulated other comprehensive loss for the three months ended September 30, 2018 and 2017:
 
Net unrealized holding (loss) gain on available for sale securities
 
Net unrealized holding (loss) gain on securities transferred to held to maturity
 
Net unrealized holding (loss) gain on retirement plans
 
Total
For the three months ended September 30, 2018
 
 
 
 
 
 
 
Balance beginning of the period
$
(95,852
)
 
$
(2,870
)
 
$
(859
)
 
$
(99,581
)
Other comprehensive loss before reclassification
(19,613
)
 

 

 
(19,613
)
Amounts reclassified from accumulated other comprehensive loss
56

 
163

 
300

 
519

Total other comprehensive (loss) income
(19,557
)
 
163

 
300

 
(19,094
)
Balance at end of period
$
(115,409
)
 
$
(2,707
)
 
$
(559
)
 
$
(118,675
)
For the three months ended September 30, 2017
 
 
 
 
 
 
 
Balance beginning of the period
$
(12,704
)
 
$
(2,969
)
 
$
(695
)
 
$
(16,368
)
Other comprehensive gain before reclassification
2,538

 

 

 
2,538

Amounts reclassified from accumulated other comprehensive loss
21

 
144

 
6

 
171

Total other comprehensive income
2,559

 
144

 
6

 
2,709

Balance at end of period
$
(10,145
)
 
$
(2,825
)
 
$
(689
)
 
$
(13,659
)
Location in consolidated income statements where reclassification from accumulated other comprehensive loss is included
Net loss on sale of securities
 
Interest income on securities
 
Other non-interest expense
 
 

46

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

The following table presents the changes in each component of accumulated other comprehensive loss for the nine months ended September 30, 2018 and 2017:
 
Net unrealized holding (loss) gain on available for sale securities
 
Net unrealized holding (loss)gain on securities transferred to held to maturity
 
Net unrealized holding (loss) gain on retirement plans
 
Total
For the nine months ended September 30, 2018
 
 
 
 
 
 
 
Balance beginning of the period
$
(22,324
)
 
$
(2,678
)
 
$
(1,164
)
 
$
(26,166
)
Reclassification of the stranded income tax effects from the enactment of the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive loss
(4,376
)
 
(525
)
 
(228
)
 
(5,129
)
Other comprehensive loss before reclassification
(94,611
)
 

 

 
(94,611
)
Amounts reclassified from accumulated other comprehensive loss
5,902

 
496

 
833

 
7,231

Total other comprehensive (loss) income
(93,085
)
 
(29
)
 
605

 
(92,509
)
Balance at end of period
$
(115,409
)
 
$
(2,707
)
 
$
(559
)
 
$
(118,675
)
For the nine months ended September 30, 2017
 
 
 
 
 
 
 
Balance beginning of the period
$
(22,637
)
 
$
(3,264
)
 
$
(734
)
 
$
(26,635
)
Other comprehensive gain before reclassification
12,218

 

 

 
12,218

Amounts reclassified from AOCI
274

 
439

 
45

 
758

Total other comprehensive income
12,492

 
439

 
45

 
12,976

Balance at end of period
$
(10,145
)
 
$
(2,825
)
 
$
(689
)
 
$
(13,659
)
Location in consolidated income statements where reclassification from AOCI is included
Net loss on sale of securities
 
Interest income on securities
 
Other non-interest expense
 
 

(19) Recently Issued Accounting Standards Not Yet Adopted

ASU 2016-02,“Leases (Topic 842).” ASU 2016-02 amends existing lease accounting guidance, including the requirement to recognize most lease arrangements on the balance sheet. The adoption of this standard will result in the Company recognizing a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability. ASU 2016-02 is effective for the company on January 1, 2019. ASU 2016-02 requires a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, ASU 2018-11 “Leases (Topic 842) Targeted Improvements” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is implementing a third-party vendor solution to assist in the application of the new lease standard. The Company has aggregated a list of all leases, and if the standard would have been effective at September 30, 2018, it would not have had an impact on any borrowings or financial covenants that are relevant to the Company. Management estimates the increase in assets from the recognition of a right-of-use asset will be approximately $90 million to $110 million and that the impact to the Bank’s and the Company’s regulatory capital ratios would be a decrease of approximately five to seven basis points, which would be due to an increase in total assets and risk-weighted assets, given our lease arrangements for financial centers and other locations. The Company currently intends to apply certain practical expedients provided under ASU 2016-02 in which we will not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, and initial direct costs for any existing leases. We also do not expect to apply the recognition requirements of ASU 2016-02 to any short-term leases.

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

47

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

model will apply mainly to held-to-maturity investment securities, loans and loan commitments. ASU 2016-13 will be effective for the Company for fiscal years beginning after December 15, 2019, and the Company is permitted to early adopt the new guidance for fiscal years beginning after December 15, 2018. ASU 2016-13 will significantly change the accounting for credit impairments. The new guidance will require the Company to modify current processes and systems for establishing the allowance for loan losses and OTTI to ensure they comply with the requirements of the new standard. The Company engaged a nationally recognized accounting firm to assist management in performing an implementation readiness assessment. The Company has made significant progress since 2017 as disclosed in the 2017 Form 10-K. In 2018, we are focusing on several areas including mitigation of gaps in data, and we anticipate being in a position to test our CECL models and methodology by the end of the fourth quarter of 2018. The Company is unable to estimate the impact of adopting ASU 2016-13 at this time; however, it currently anticipates the allowance for loan losses in the aggregate will be greater under the CECL model compared to the current incurred loss model and that the composition of the loan and securities portfolio, as well as the status of the economic environment, will be significant factors that impact the balance at date of adoption.

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

ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 make certain targeted improvements to simplify the application of the hedge accounting guidance in GAAP.  The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.  To meet that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update also includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. Prior to the issuance of this updated, GAAP contained specific requirements for initial and ongoing quantitative hedge effectiveness testing and strict requirements for specialized effective testing methods that allowed an entity to forgo quantitative hedge effectiveness assessments for qualifying relationships. ASU 2017-12 is effective for the Company on January 1, 2019, and the Company anticipates using the modified retrospective method. The Company is in the process of reviewing its state and municipal and MBS investment securities portfolios to determine if it will reclassify securities from the held to maturity portfolio to the available for sale portfolio. The Company has not yet identified a population of specific securities to be reclassified and does not anticipate that the reclassification will have a material impact on its capital position.

ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 will be effective for the Company on January 1, 2020, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 will be effective for us on January 1, 2020, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

48

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


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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

The factors described herein in Part II. Item 1A. Risk Factors or otherwise described in our filings with the SEC, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations expressed in our forward-looking statements, including, but not limited to:
difficulties and delays in integrating our and Astoria’s businesses or fully realizing cost savings and other benefits, and business disruption following the Astoria Merger;
difficulties and delays in integrating Advantage Funding into our business and business disruption following the Advantage Funding Acquisition;
our ability to successfully implement growth and strategic initiatives, to increase revenues faster than we grow expenses, and to integrate and fully realize cost savings and other benefits we estimate in connection with acquisitions and limit business disruption arising therefrom;
a deterioration in general economic conditions, either nationally, internationally, or in our market areas, including extended declines in real estate markets and constrained financial markets;
oversight of the Bank by the Consumer Financial Protection Bureau;
adverse publicity, regulatory actions or litigation with respect to us or other well-known financial services companies and the financial services industry in general and a failure to satisfy regulatory standards;
our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and/or require us to materially increase our reserves;
our ability to manage changes in market interest rates, which could adversely affect our financial condition and results of operations;
our use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
our ability to capitalize on our substantial investments in our information technology and operational infrastructure and systems;
the effects of, and changes in, laws and regulations (including laws and regulations concerning banking and taxes) with which we and the Bank must comply;
changes in other economic, competitive, governmental, regulatory and technological factors affecting our markets, operations, pricing, products, services and fees; and
our success at managing the risks involved in the foregoing and managing our business.


49

STERLING BANCORP AND SUBSIDIARIES

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

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

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

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

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

Our primary strategic objective is to drive positive operating leverage, which we believe will allow us to generate sustainable growth in revenues and earnings over time. We define operating leverage as the ratio of growth in adjusted total revenue divided by growth in adjusted total operating expenses (a reconciliation of non-GAAP financial measures is included beginning on page 71). To achieve this goal, we focus on the following initiatives:

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

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

We deploy a team-based distribution strategy in which clients are served by a focused and experienced group of relationship managers who are responsible for all aspects of the client relationship and delivery of our products and services. While the Astoria Merger resulted in substantial growth in 2017, our commercial banking teams also generated significant originations of loans and deposits. As of September 30, 2018, we had 35 commercial banking teams and 113 full service financial centers. We currently anticipate that we will increase our number of commercial banking teams by three to five annually and will reduce our financial centers as we continue to execute our real estate and financial center consolidation strategy.

Recent Developments
On April 2, 2018, we completed the Advantage Funding Acquisition in an all cash transaction. Advantage Funding, formerly a wholly-owned subsidiary of Macquaire Bank Limited, was a leading provider of commercial vehicle and transportation financing services based in Lake Success, NY. At the acquisition date, Advantage Funding had total outstanding loans and leases of $457.6 million with a diversified client base across various industry sectors and geographic markets nationwide. Advantage Funding is

50

STERLING BANCORP AND SUBSIDIARIES

being integrated into our established national equipment finance platform, which, on a combined basis, had $1.2 billion of loans and leases outstanding as of September 30, 2018.

Our earnings performance for the third quarter of 2018 included reported net income available to common stockholders of $117,657, or $0.52 per diluted share, and adjusted net income available to common stockholders of $114,273, or $0.51 per diluted share. This represents growth of 162.3% in reported net income available to common stockholders and 138.7% in adjusted net income available to common stockholders, respectively, over the same period a year ago. The reported EPS growth was 57.6%, and the adjusted EPS growth was 45.7%, respectively, over the same period a year ago. Results for the third quarter of 2018 reflect the ongoing execution of our commercial banking strategy, the substantial progress we have made on the integration of the Astoria Merger, and our ability to execute opportunistic transactions such as the Advantage Funding Acquisition. In the third quarter of 2018, our reported operating efficiency ratio was 41.7% and our adjusted operating efficiency ratio was 38.9%. Our continued growth, diversification of our business and improved operating efficiency resulted in a reported return on average tangible assets of 1.59% and an adjusted return on average tangible assets of 1.55%, and a reported return on average tangible common stockholders’ equity of 18.63% and an adjusted return on average tangible common stockholders’ equity of 18.09% in the third quarter of 2018. Adjusted net income available to common stockholders, adjusted diluted EPS, reported operating efficiency ratio, adjusted operating efficiency ratio, reported return on average tangible assets, adjusted return on average tangible assets, reported return on average tangible common equity and adjusted return on average tangible common stockholders’ equity are non-GAAP financial measures that are reconciled to our GAAP results beginning on page 71.

A significant component of our strategy includes repositioning our earning assets to create a more optimal balance sheet. As of September 30, 2018, our total loan portfolio was $20.5 billion, of which 21.5% consisted of residential mortgage loans, most of which we acquired in the Astoria Merger. The residential mortgage portfolio declined $633,212 in the first nine months of 2018 and we anticipate it will continue to run-off at approximately $200 - $250 million per quarter. We intend to replace the run-off of residential loans with more diversified commercial loans originated through our commercial banking teams, our commercial finance business lines, and through acquisitions. By the end of the fourth quarter of 2019, we are targeting a loan composition of approximately 45% C&I loans, which includes our traditional C&I and our commercial finance business lines, 45% commercial real estate loans, which includes multi-family and ADC loans, and 10% residential mortgage and consumer loans, which includes HELOCs and other personal loans. To accelerate the transition of our loan portfolio, we will continue to evaluate potential acquisitions of commercial finance loan portfolios and other assets that meet our risk-adjusted return criteria, similar to the Advantage Funding Acquisition.  As potential acquisition opportunities arise, we may reduce or divest a portion of our residential mortgage loans and investment securities to accelerate the transition of our balance sheet and loan portfolio to the target mix highlighted above. We are evaluating a potential sale of approximately $1.5 billion of residential mortgage loans; however, we have not yet entered into a definitive agreement to do so, and we have not yet identified specific loans that may be sold. We do not anticipate recording a significant gain or loss on sale as we anticipate the carrying value of the residential mortgages approximates fair value, as the carrying value continues to include fair value purchase accounting adjustments recorded at the closing of the Astoria Merger. The Company intends to initially utilize the proceeds from a potential sale of residential mortgage loans to reduce borrowings in anticipation of completing potential acquisitions as outlined above.

As mentioned above, we have made significant progress on the integration of the employees, systems and facilities that we acquired and assumed in the Astoria Merger. As we previously announced, we intend to consolidate between 25 to 30 financial centers through the fourth quarter of 2019. In the first nine months of 2018, we consolidated 15 financial centers, which reduced our total number of financial centers to 113, and have announced the consolidation of seven additional financial centers in the fourth quarter of 2018. In addition, we are also executing a back-office real estate consolidation strategy, which included the sale of Astoria’s headquarters facility located in Lake Success, NY and the consolidation of two back-office locations in Long Island. We will reinvest a portion of the operating expense savings generated by these consolidations and reduction in our real estate footprint into hiring three to five additional commercial banking teams and our ongoing investment in risk management systems and personnel. We currently anticipate achieving an annual operating expense run-rate, excluding the impact of amortization of intangible assets, of approximately $425.0 million for the full year 2018 and an operating leverage ratio of 2 - 3x. Comparing our results in the third quarter of 2018 to the same quarter a year ago, we generated positive operating leverage of 2.7x, which is on the high end of our targeted range. We anticipate that our ability to generate positive operating leverage will allow us to improve profitability and result in growth in earnings and EPS.

Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with GAAP and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain; and (ii) different estimates that management reasonably

51

STERLING BANCORP AND SUBSIDIARIES

could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for loan losses, business combinations, goodwill, trade names and other intangible assets, and deferred income taxes are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. For additional information regarding critical accounting policies, refer to Note 1. “Basis of Financial Statement Presentation” in the notes to consolidated financial statements included elsewhere in this report and the sections captioned “Critical Accounting Policies” and “Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2017 Form 10-K. There have been no significant changes in our application of critical accounting policies for the nine months ended September 30, 2018.

Financial Impact of Recent Acquisitions
The balances of Astoria were included in our balance sheet as of October 2, 2017, and the operating results of Astoria were included in our results of operations from that day forward.

The balances of Advantage Funding were included in our balance sheet as of April 2, 2018, and the operating results of Advantage Funding were included in our results of operations from that day forward.

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

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STERLING BANCORP AND SUBSIDIARIES

 
At or for the three months ended September 30,
 
At or for the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
End of period balances:
 
 
 
 
 
 
 
Total securities
$
6,685,972

 
$
4,515,650

 
$
6,685,972

 
$
4,515,650

Portfolio loans
20,533,214

 
10,493,535

 
20,533,214

 
10,493,535

Total assets
31,261,265

 
16,780,097

 
31,261,265

 
16,780,097

Non-interest bearing deposits
4,651,369

 
3,134,359

 
4,651,369

 
3,134,359

Interest bearing deposits
16,804,688

 
7,909,079

 
16,804,688

 
7,909,079

Total deposits
21,456,057

 
11,043,438

 
21,456,057

 
11,043,438

Borrowings
4,825,855

 
3,453,783

 
4,825,855

 
3,453,783

Stockholders’ equity
4,438,303

 
1,971,480

 
4,438,303

 
1,971,480

Tangible common stockholders’ equity1
2,554,495

 
1,215,190

 
2,554,495

 
1,215,190

Average balances:
 
 
 
 
 
 
 
Total securities
$
6,774,712

 
$
3,916,076

 
$
6,710,104

 
$
3,543,776

Total loans2
20,386,994

 
10,186,414

 
20,123,704

 
9,754,768

Total assets
31,036,026

 
15,661,514

 
30,686,808

 
14,802,911

Non-interest bearing deposits
4,174,908

 
3,042,392

 
4,036,303

 
3,134,621

Interest bearing deposits
16,940,446

 
7,648,614

 
16,822,651

 
7,254,884

Total deposits and mortgage escrow
21,115,354

 
10,691,006

 
20,858,954

 
10,389,505

Borrowings
5,052,752

 
2,779,143

 
5,029,411

 
2,301,036

Stockholders’ equity
4,397,823

 
1,955,252

 
4,316,455

 
1,913,072

Tangible common stockholders’ equity1
2,506,198

 
1,197,754

 
2,430,260

 
1,153,282

Selected operating data:
 
 
 
 
 
 
 
Total interest and dividend income
$
309,025

 
$
145,692

 
$
895,276

 
$
405,955

Total interest expense
65,076

 
25,619

 
170,743

 
63,834

Net interest income
243,949

 
120,073

 
724,533

 
342,121

Provision for loan losses
9,500

 
5,000

 
35,500

 
14,000

Net interest income after provision for loan losses
234,449

 
115,073

 
689,033

 
328,121

Total non-interest income
24,145

 
13,988

 
80,720

 
40,442

Total non-interest expense
111,773

 
62,617

 
348,448

 
182,624

Income before income tax expense
146,821

 
66,444

 
421,305

 
185,939

Income tax expense
27,171

 
21,592

 
88,542

 
59,620

Net income
$
119,650

 
$
44,852

 
$
332,763

 
$
126,319

Per share data:
 
 
 
 
 
 
 
Reported basic EPS (GAAP)
$
0.52

 
$
0.33

 
$
1.45

 
$
0.93

Reported diluted EPS (GAAP)
0.52

 
0.33

 
1.45

 
0.93

Adjusted diluted EPS1 (non-GAAP)
0.51

 
0.35

 
1.48

 
0.98

Dividends declared per common share
0.07

 
0.07

 
0.21

 
0.21

Book value per share
19.07

 
14.52

 
19.07

 
14.52

Tangible book value per common share1
11.33

 
8.95

 
11.33

 
8.95

See legend on following page.

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STERLING BANCORP AND SUBSIDIARIES

 
At or for the three months ended September 30,
 
At or for the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Common shares outstanding:
 
 
 
 
 
 
 
Shares outstanding at period end
225,446,089

 
135,807,544

 
225,446,089

 
135,807,544

Weighted average shares basic
225,088,511

 
135,346,791

 
224,969,121

 
135,276,634

Weighted average shares diluted
225,622,895

 
135,950,160

 
225,504,463

 
135,895,513

Other data:
 
 
 
 
 
 
 
Full time equivalent employees at period end
1,959

 
992

 
1,959

 
992

Financial centers at period end
113

 
40

 
113

 
40

Performance ratios:
 
 
 
 
 
 
 
Return on average assets
1.50
%
 
1.14
%
 
1.42
%
 
1.14
%
Return on average equity
10.61

 
9.10

 
10.12

 
8.83

Reported return on average tangible assets1
1.59

 
1.19

 
1.51

 
1.20

Adjusted return on average tangible assets1
1.55

 
1.27

 
1.54

 
1.27

Reported return on average TCE1
18.63

 
14.86

 
17.98

 
14.64

Adjusted return on average TCE1
18.09

 
15.85

 
18.33

 
15.50

Reported operating efficiency1
41.7

 
46.7

 
43.3

 
47.7

Adjusted operating efficiency1
38.9

 
40.6

 
39.1

 
42.1

Net interest margin-GAAP
3.48

 
3.29

 
3.53

 
3.35

Net interest margin-tax equivalent3
3.54

 
3.42

 
3.59

 
3.48

Capital ratios (Company):
 
 
 
 
 
 
 
Tier 1 leverage ratio
9.68
%
 
8.42
%
 
9.68
%
 
8.42
%
Common equity Tier 1 capital ratio
12.97

 
8.42

 
12.97

 
8.42

Tier 1 risk-based capital ratio
13.64

 
10.27

 
13.64

 
10.27

Total risk-based capital ratio
14.74

 
12.15

 
14.74

 
12.15

Tangible equity to tangible assets
9.12

 
7.58

 
9.12

 
7.58

Tangible common equity to tangible assets1
8.65

 
7.58

 
8.65

 
7.58

Regulatory capital ratios (Bank):
 
 
 
 
 
 
 
Tier 1 leverage ratio
10.10
%
 
8.54
%
 
10.10
%
 
8.54
%
Tier 1 risk-based capital ratio and common equity Tier 1 capital ratio
14.23

 
10.41

 
14.23

 
10.41

Total risk-based capital ratio
15.50

 
12.41

 
15.50

 
12.41

Asset quality data and ratios:
 
 
 
 
 
 
 
Allowance for loan losses
$
91,365

 
$
72,128

 
$
91,365

 
$
72,128

Non-performing loans (“NPLs”)
185,222

 
69,452

 
185,222

 
69,452

Non-performing assets (“NPAs”)
207,957

 
81,149

 
207,957

 
81,149

Net charge-offs
4,161

 
3,023

 
22,042

 
5,494

NPAs to total assets
0.67
%
 
0.48
%
 
0.67
%
 
0.48
%
NPLs to total loans4 
0.90

 
0.66

 
0.90

 
0.66

Allowance for loan losses to non-performing loans
49.33

 
103.85

 
49.33

 
103.85

Allowance for loan losses to total loans4
0.44

 
0.69

 
0.44

 
0.69

Annualized net charge-offs to average loans
0.08

 
0.12

 
0.15

 
0.08

________________
 
 
 
 
 
 
 
1 See a reconciliation of as reported financial measures to as adjusted (non-GAAP) financial measures beginning on page 71 below under the caption “Supplemental Reporting of Non-GAAP Financial Measures.” TCE is tangible common stockholders’ equity.
2    Includes loans held for sale but excludes the allowance for loan losses.
3 Tax equivalent basis represents interest income earned on municipal securities divided by the applicable Federal tax rate
       of 21% for 2018 and 35% for 2017.
4 Total loans excludes loans held for sale.    

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STERLING BANCORP AND SUBSIDIARIES


Results of Operations
For the three months ended September 30, 2018, we reported net income available to common stockholders of $117,657, or $0.52 per diluted common share, compared to net income available to common stockholders of $44,852, or $0.33 per diluted common share, for the three months ended September 30, 2017. The change in our results between the periods was mainly due to the following:

the closing of the Astoria Merger on October 2, 2017;

loans and deposits originated by our commercial banking teams and financial centers; and

the closing of the Advantage Funding Acquisition on April 2, 2018.

For the nine months ended September 30, 2018, we reported net income available to common stockholders of $326,775, or $1.45 per diluted common share, compared to net income available to common stockholders of $126,319, or $0.93 per diluted common share, for the nine months ended September 30, 2017. The change in our results between the periods was mainly due to the same factors as discussed above.

Details of the changes in the various components of net income available to common stockholders are further discussed below.

Net Interest Income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing 91.0% and 89.6% of total revenue in the three months ended September 30, 2018 and 2017, respectively. Net interest margin is the ratio of taxable equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest bearing liabilities impact net interest income and net interest margin.

We are primarily funded by core deposits. Given our greater proportion of certificates of deposit after the Astoria Merger, we modified our definition of core deposits to include certificates of deposit in the first quarter of 2018. Core deposits include retail, commercial and municipal transaction, money market and savings accounts and certificates of deposit and exclude brokered deposits except for reciprocal brokered deposits through the Promontory Interfinancial Network, including Insured Cash Sweep (“ICS”) and CDAR balances. As of September 30, 2018, we considered 95.3% of our total deposits to be core deposits compared to 88.3% at September 30, 2017. Non-interest bearing demand deposits were $4,651,369 of our total deposits at September 30, 2018, compared to $3,134,359 at September 30, 2017. We believe that our low cost deposit funding base, combined with the continued transition of our loan portfolio and earning assets, will have a positive impact on our net interest income and net interest margin over time in a scenario in which market interest rates continue to increase.

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

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STERLING BANCORP AND SUBSIDIARIES


 
For the three months ended September 30,
 
2018
 
2017
 
Average
balance
 
Interest
 
Yield/Rate
 
Average
balance
 
Interest
 
Yield/Rate
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Traditional C&I and commercial finance loans
$
6,102,184

 
$
81,296

 
5.29
%
 
$
4,564,517

 
$
58,395

 
5.08
%
Commercial real estate (includes multi-family)
9,170,117

 
107,292

 
4.64

 
4,443,142

 
47,336

 
4.23

ADC
252,710

 
4,115

 
6.46

 
229,242

 
4,197

 
7.26

Commercial loans
15,525,011

 
192,703

 
4.92

 
9,236,901

 
109,928

 
4.72

Consumer loans
330,061

 
4,651

 
5.59

 
262,693

 
2,891

 
4.37

Residential mortgage loans
4,531,922

 
59,857

 
5.28

 
686,820

 
7,079

 
4.12

Total net loans1
20,386,994

 
257,211

 
5.01

 
10,186,414

 
119,898

 
4.67

Securities taxable
4,193,910

 
29,765

 
2.82

 
2,483,718

 
15,141

 
2.42

Securities tax exempt
2,580,802

 
19,296

 
2.99

 
1,432,358

 
13,141

 
3.67

Interest earning deposits
278,450

 
1,038

 
1.48

 
202,650

 
462

 
0.90

FRB and FHLB stock
359,777

 
5,767

 
6.36

 
165,980

 
1,649

 
3.94

Total securities and other earning assets
7,412,939

 
55,866

 
2.99

 
4,284,706

 
30,393

 
2.81

Total interest earning assets
27,799,933

 
313,077

 
4.47

 
14,471,120

 
150,291

 
4.12

Non-interest earning assets
3,236,093

 
 
 
 
 
1,190,394

 
 
 
 
Total assets
$
31,036,026

 
 
 
 
 
$
15,661,514

 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
4,286,278

 
$
9,717

 
0.90
%
 
$
2,298,645

 
$
3,701

 
0.64
%
Savings deposits2
2,678,662

 
1,651

 
0.24

 
825,620

 
925

 
0.44

Money market deposits
7,404,208

 
16,547

 
0.89

 
3,889,780

 
6,897

 
0.70

Certificates of deposit
2,571,298

 
8,059

 
1.24

 
634,569

 
1,869

 
1.17

Total interest bearing deposits
16,940,446

 
35,974

 
0.84

 
7,648,614

 
13,392

 
0.69

Senior Notes
201,894

 
1,619

 
3.21

 
76,664

 
1,143

 
5.96

Other borrowings
4,678,011

 
25,129

 
2.13

 
2,529,854

 
8,733

 
1.37

Subordinated Notes
172,847

 
2,354

 
5.45

 
172,625

 
2,351

 
5.45

Total borrowings
5,052,752

 
29,102

 
2.29

 
2,779,143

 
12,227

 
1.75

Total interest bearing liabilities
21,993,198

 
65,076

 
1.17

 
10,427,757

 
25,619

 
0.97

Non-interest bearing deposits
4,174,908

 
 
 
 
 
3,042,392

 
 
 
 
Other non-interest bearing liabilities
470,097

 
 
 
 
 
236,113

 
 
 
 
Total liabilities
26,638,203

 
 
 
 
 
13,706,262

 
 
 
 
Stockholders’ equity
4,397,823

 
 
 
 
 
1,955,252

 
 
 
 
Total liabilities and stockholders’ equity
$
31,036,026

 
 
 
 
 
$
15,661,514

 
 
 
 
Net interest rate spread3
 
 
 
 
3.30
%
 
 
 
 
 
3.15
%
Net interest earning assets4
$
5,806,735

 
 
 
 
 
$
4,043,363

 
 
 
 
Net interest margin - tax equivalent
 
 
248,001

 
3.54
%
 
 
 
124,672

 
3.42
%
Less tax equivalent adjustment
 
 
(4,052
)
 
 
 
 
 
(4,599
)
 
 
Net interest income
 
 
$
243,949

 
 
 
 
 
$
120,073

 
 
Ratio of interest earning assets to interest bearing liabilities
126.4
%
 
 
 
 
 
138.8
%
 
 
 
 
See legend on following page.

56

STERLING BANCORP AND SUBSIDIARIES

 
For the nine months ended September 30,
 
2018
 
2017
 
Average
balance
 
Interest
 
Yield/Rate
 
Average
balance
 
Interest
 
Yield/Rate
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Traditional C&I and commercial finance loans
$
5,653,784

 
$
220,175

 
5.21
%
 
$
4,205,530

 
159,213

 
5.06
%
Commercial real estate (includes multi-family)
9,113,324

 
318,583

 
4.67

 
4,344,338

 
136,451

 
4.20

ADC
255,894

 
11,216

 
5.86

 
239,336

 
10,639

 
5.94

Commercial loans
15,023,002

 
549,974

 
4.89

 
8,789,204

 
306,303

 
4.66

Consumer loans
345,216

 
14,174

 
5.49

 
270,550

 
9,095

 
4.49

Residential mortgage loans
4,755,486

 
181,931

 
5.10

 
695,014

 
20,911

 
4.01

Total net loans1
20,123,704

 
746,079

 
4.96

 
9,754,768

 
336,309

 
4.61

Securities taxable
4,108,186

 
85,856

 
2.79

 
2,215,923

 
40,535

 
2.45

Securities tax exempt
2,601,918

 
58,176

 
2.98

 
1,327,853

 
36,846

 
3.70

Interest earning deposits
292,096

 
2,649

 
1.21

 
202,073

 
1,018

 
0.67

FRB and FHLB stock
341,380

 
14,733

 
5.77

 
145,647

 
4,142

 
3.80

Total securities and other earning assets
7,343,580

 
161,414

 
2.94

 
3,891,496

 
82,541

 
2.84

Total interest earning assets
27,467,284

 
907,493

 
4.42

 
13,646,264

 
418,850

 
4.10

Non-interest earning assets
3,219,524

 
 
 
 
 
1,156,647

 

 
 
Total assets
$
30,686,808

 

 
 
 
$
14,802,911

 

 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
4,085,595

 
$
22,269

 
0.73
%
 
$
2,075,434

 
$
8,946

 
0.58
%
Savings deposits2
2,836,805

 
4,674

 
0.22

 
813,136

 
2,741

 
0.45

Money market deposits
7,378,522

 
40,327

 
0.73

 
3,766,428

 
17,350

 
0.62

Certificates of deposit
2,521,729

 
21,375

 
1.13

 
599,886

 
4,767

 
1.06

Total interest bearing deposits
16,822,651

 
88,645

 
0.70

 
7,254,884

 
33,804

 
0.62

Senior Notes
252,455

 
7,147

 
3.79

 
76,581

 
3,427

 
5.98

Other borrowings
4,604,165

 
67,891

 
1.97

 
2,051,881

 
19,552

 
1.27

Subordinated Notes
172,791

 
7,060

 
5.45

 
172,574

 
7,050

 
5.45

Total borrowings
5,029,411

 
82,098

 
2.18

 
2,301,036

 
30,029

 
1.74

Total interest bearing liabilities
21,852,062

 
170,743

 
1.04

 
9,555,920

 
63,833

 
0.89

Non-interest bearing deposits
4,036,303

 
 
 

 
3,134,621

 
 
 
 
Other non-interest bearing liabilities
481,988

 
 
 
 
 
199,298

 
 
 
 
Total liabilities
26,370,353

 
 
 
 
 
12,889,839

 
 
 
 
Stockholders’ equity
4,316,455

 
 
 
 
 
1,913,072

 
 
 
 
Total liabilities and stockholders’ equity
$
30,686,808

 
 
 
 
 
$
14,802,911

 
 
 
 
Net interest rate spread3
 
 
 
 
3.38
%
 
 
 
 
 
3.21
%
Net interest earning assets4
$
5,615,222

 
 
 
 
 
$
4,090,344

 
 
 
 
Net interest margin - tax equivalent
 
 
736,750

 
3.59
%
 
 
 
355,017

 
3.48
%
Less tax equivalent adjustment
 
 
(12,217
)
 
 
 
 
 
(12,896
)
 
 
Net interest income
 
 
$
724,533

 
 
 
 
 
$
342,121

 
 
Ratio of interest earning assets to interest bearing liabilities
125.7
%
 
 
 
 
 
142.8
%
 
 
 
 

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

57

STERLING BANCORP AND SUBSIDIARIES

The following tables present the dollar amount of changes in interest income (on a fully tax equivalent basis) and interest expense for the major categories of our interest earning assets and interest bearing liabilities for the periods indicated. Information is provided for each category of interest earning assets and interest bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior period average rate); and (ii) changes attributable to changes in rate (i.e., changes in average rate multiplied by prior period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
 
For the three months ended September 30,
 
2018 vs 2017
 
Increase / (Decrease)
due to
 
Total
increase /
 
Volume
 
Rate
 
(decrease)
Interest earning assets:
 
 
 
 
 
Traditional C&I and commercial finance loans
$
20,398

 
$
2,503

 
$
22,901

Commercial real estate (includes multi-family)
54,949

 
5,007

 
59,956

ADC
405

 
(487
)
 
(82
)
Commercial loans
75,752

 
7,023

 
82,775

Consumer loans
843

 
917

 
1,760

Residential mortgage loans
50,250

 
2,527

 
52,777

Total loans
126,845

 
10,467

 
137,312

Securities taxable
11,794

 
2,831

 
14,625

Securities tax exempt
8,988

 
(2,833
)
 
6,155

Interest earning deposits
212

 
364

 
576

FRB and FHLB stock
2,699

 
1,419

 
4,118

Total interest earning assets
150,538

 
12,248

 
162,786

Interest bearing liabilities:
 
 
 
 
 
Interest bearing demand deposits
4,093

 
1,923

 
6,016

Savings deposits1
1,297

 
(570
)
 
727

Money market deposits
7,421

 
2,230

 
9,651

Certificates of deposit
6,071

 
119

 
6,190

Total interest bearing deposits
18,882

 
3,702

 
22,584

Senior Notes
1,199

 
(723
)
 
476

Other borrowings
9,978

 
6,417

 
16,395

Subordinated Notes
3

 

 
3

Total borrowings
11,180

 
5,694

 
16,874

Total interest bearing liabilities
30,062

 
9,396

 
39,458

Change in tax equivalent net interest income
120,476

 
2,852

 
123,328

Less tax equivalent adjustment
3,088

 
(4,905
)
 
(1,817
)
Change in net interest income
$
117,388

 
$
7,757

 
$
125,145


See legend on next page.

58

STERLING BANCORP AND SUBSIDIARIES

 
For the nine months ended September 30,
 
2018 vs 2017
 
Increase / (Decrease)
due to
 
Total
increase /
 
Volume
 
Rate
 
(decrease)
Interest earning assets:
 
 
 
 
 
Traditional C&I and commercial finance loans
$
56,131

 
$
4,832

 
$
60,963

Commercial real estate (includes multi-family)
165,283

 
16,849

 
182,132

ADC
723

 
(146
)
 
577

Commercial loans
222,137

 
21,535

 
243,672

Consumer loans
2,810

 
2,269

 
5,079

Residential mortgage loans
153,861

 
7,159

 
161,020

Total loans
378,808

 
30,963

 
409,771

Securities taxable
38,986

 
6,336

 
45,322

Securities tax exempt
29,623

 
(8,294
)
 
21,329

Interest earning deposits
581

 
1,050

 
1,631

FRB and FHLB stock
7,642

 
2,948

 
10,590

Total interest earning assets
455,640

 
33,003

 
488,643

Interest bearing liabilities:
 
 
 
 
 
Interest bearing demand deposits
10,516

 
2,807

 
13,323

Savings deposits1
3,925

 
(1,992
)
 
1,933

Money market deposits
19,390

 
3,587

 
22,977

Certificates of deposit
16,273

 
335

 
16,608

Total interest bearing deposits
50,104

 
4,737

 
54,841

Senior Notes
5,384

 
(1,664
)
 
3,720

Other borrowings
33,685

 
14,654

 
48,339

Subordinated Notes
10

 

 
10

Total borrowings
39,079

 
12,990

 
52,069

Total interest bearing liabilities
89,183

 
17,727

 
106,910

Change in tax equivalent net interest income
366,457

 
15,276

 
381,733

Less tax equivalent adjustment
8,216

 
(8,895
)
 
(679
)
Change in net interest income
$
358,241

 
$
24,171

 
$
382,412

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

Tax equivalent net interest income increased $123,328 to $248,001 for the three months ended September 30, 2018, compared to $124,672 for the three months ended September 30, 2017. The increase was mainly due to an increase in average interest earning assets of $13,328,813, or 92.1%, due to the Astoria Merger, organic originations of loans and deposits and the Advantage Funding Acquisition. Also contributing to the increase in net interest income was an increase in accretion income on acquired loans, which was $26,574 for the three months ended September 30, 2018 compared to $3,397 for the three months ended September 30, 2017. The tax equivalent net interest margin increased 12 basis points to 3.54% from 3.42% in the third quarter of 2017. The yield on interest earning assets was 4.47% compared to 4.12% for the three months ended September 30, 2017, which was mainly due to the increase in accretion income on acquired loans. The percentage of loans to average earning assets increased to 73.3% from 70.4% for the three months ended September 30, 2017. The cost of interest bearing liabilities increased to 1.17% for the three months ended September 30, 2018 compared to 0.97% for the three months ended September 30, 2017, which was due mainly to higher interest rates paid on deposits and borrowings due to increases in market interest rates.

Tax equivalent net interest income increased $381,733 to $736,750 for the nine months ended September 30, 2018, compared to
$355,017 for the nine months ended September 30, 2017. The increase was mainly due to an increase in average interest earning assets of $13,821,020, or 101.3% and was mainly due to the Astoria Merger, organic growth and the Advantage Funding Acquisition. The tax equivalent net interest margin increased 11 basis points to 3.59% for the nine months ended September 30,

59

STERLING BANCORP AND SUBSIDIARIES

2018 from 3.48% in the nine months ended September 30, 2017. The increase was mainly due to additional accretion income on acquired loans. Accretion income was $84,925 for the nine months ended September 30, 2018 compared to $9,767 for the nine months ended September 30, 2017. The yield on interest earning assets was 4.42% compared to 4.10% for the nine months ended September 30, 2017, which was mainly due to the increase in accretion income on acquired loans. The percentage of loans to average earning assets increased to 73.3% from 71.5% for the nine months ended September 30, 2017. The cost of interest bearing liabilities increased to 1.04% for the nine months ended September 30, 2018 compared to 0.89% for the nine months ended September 30, 2017, mainly due to increases in market interest rates between the periods.

The average balance of loans outstanding increased $10,200,580, or 100.1%, for the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The increase was mainly due to the Astoria Merger, organic growth generated by our commercial banking teams and the Advantage Funding Acquisition. The average yield on loans was 5.01% compared to 4.67% in the comparable year ago period. The increase in the yield on loans was mainly due to the increase in accretion income on acquired loans.

The average balance of loans outstanding increased $10,368,936, or 106.3%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase was mainly due to the Astoria Merger, organic growth generated by our commercial banking teams and the Advantage Funding Acquisition. The average yield on loans was 4.96% in the nine months ended September 30, 2018 compared to 4.61% in the comparable year ago period. The increase was mainly due to the increase in accretion income on acquired loans.

Interest income on traditional C&I and commercial finance loans increased $22,901 and was $81,296 for the three months ended September 30, 2018 compared to $58,395 for the three months ended September 30, 2017. This increase was mainly due to organic loan growth and the Advantage Funding Acquisition. The yield on traditional C&I and commercial finance loans increased to 5.29% compared to 5.08% for the three months ended September 30, 2017. The increase in yield was mainly due to repricing of floating rate loans to higher levels given increases in market interest rates.

Interest income on traditional C&I and commercial finance loans increased $60,963 and was $220,175 in the nine months ended September 30, 2018 compared to $159,213 for the three months ended September 30, 2017. This increase was mainly due to organic loan growth and the Advantage Funding Acquisition. The yield on traditional C&I and commercial finance loans increased to 5.21% compared to 5.06% in the nine months ended September 30, 2017. The increase in yield was mainly due to repricing of floating rate loans to higher rates given increases in market interest rates.

Interest income on commercial real estate loans and multi-family loans increased $59,956 to $107,292 for the three months ended September 30, 2018 compared to $47,336 for the three months ended September 30, 2017. The increase was mainly due to loans acquired in the Astoria Merger. The yield on commercial real estate and multi-family loans was 4.64% compared to 4.23% for the three months ended September 30, 2017. The increase in yield was mainly due to an increase of $12,605 in accretion income on acquired commercial real estate and multi-family loans.

Interest income on commercial real estate loans and multi-family loans increased $182,132 to $318,583 in the nine months ended September 30, 2018 compared to $136,451 for the three months ended September 30, 2017. The increase was mainly due to loans acquired in the Astoria Merger. The yield on commercial real estate and multi-family loans was 4.67% compared to 4.20% in the nine months ended September 30, 2017. The increase in yield was mainly due to an increase of $38,092 in accretion income on acquired commercial real estate and multi-family loans.

Interest income on residential mortgage loans increased $52,778 to $59,857 for the three months ended September 30, 2018 compared to $7,079 for the three months ended September 30, 2017. The increase was mainly due to the Astoria Merger, which resulted in an increase of $3,845,102 in the average balance of residential mortgage loans. In addition, the yield on residential mortgage loans increased to 5.28% compared to 4.12% for the three months ended September 30, 2017, mainly due to the increase in accretion income on acquired residential mortgage loans of $12,885.

Interest income on residential mortgage loans increased $161,020 to $181,931 in the nine months ended September 30, 2018 compared to $20,911 for the three months ended September 30, 2017. The increase was mainly due to the Astoria Merger, which resulted in an increase of $4,060,472 in the average balance of residential mortgage loans. In addition, the yield on residential mortgage loans increased to 5.10% compared to 4.01% for the nine months ended September 30, 2017, mainly due to the increase in accretion income on acquired residential mortgage loans of $40,005.

Tax equivalent interest income on securities increased $20,779 to $49,061 for the three months ended September 30, 2018, compared to $28,282 for the three months ended September 30, 2017. This was mainly the result of an increase of $2,858,636 in the average balance of securities between the periods. The tax equivalent yield on securities was unchanged at 2.87%, as the reduction

60

STERLING BANCORP AND SUBSIDIARIES

in tax equivalent interest income, which assumed a 35% federal tax rate in 2017 compared to a 21% federal tax rate in 2018, was offset by higher market rates of interest on securities. The average balance of tax exempt securities grew to $2.6 billion, compared to $1.4 billion in the third quarter of 2017.

Tax equivalent interest income on securities increased $66,651 to $144,032 in the nine months ended September 30, 2018, compared to $77,381for the three months ended September 30, 2017. This was mainly the result of an increase of $3,166,328 in the average balance of securities between the periods. The tax equivalent yield on securities was 2.87% in the nine months ended September 30, 2018, compared to 2.92% in the nine months ended September 30, 2017. The decrease in tax equivalent yield on securities was due to the change in the assumed federal tax rate between the periods.

Average deposits increased $10,424,348 to $21,115,354 in the three months ended September 30, 2018, compared to $10,691,006. Average interest bearing deposits increased $9,291,832 compared to the third quarter of 2017. Average non-interest bearing deposits increased to $4,174,908 in the three months ended September 30, 2018, compared to $3,042,392 in the three months ended September 30, 2017. These increases were mainly due to the Astoria Merger and organic growth generated by our commercial banking teams and financial centers. The average cost of interest bearing deposits was 0.84% compared to 0.69% in the third quarter of 2017. The average cost of total deposits was 0.68% compared to 0.50% in the third quarter of 2017. The increase in the cost of deposits was mainly due to the increase in market interest rates and the competitive environment.

Average deposits increased $10,469,449 and were $20,858,954 in the nine months ended September 30, 2018, compared to $10,389,505. Average interest bearing deposits increased $9,567,767 in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Average non-interest bearing deposits increased $901,682 and were $4,036,303 in the nine months ended September 30, 2018, compared to $3,134,621 in the nine months ended September 30, 2017. These increases were mainly due to the Astoria Merger and organic growth generated by our commercial banking teams and financial centers. The average cost of interest bearing deposits was 0.70% in the nine months ended September 30, 2018 compared to 0.62% in the nine months ended September 30, 2017. The average cost of total deposits was 0.57% in the nine months ended September 30, 2018 compared to 0.44% in the nine months ended September 30, 2017. The increase in the cost of deposits was mainly due to the same factors discussed in the three-month period.

Average borrowings increased $2,273,609 to $5,052,752 in the three months ended September 30, 2018, compared to $2,779,143 in the same period a year ago. The increase in average borrowings was mainly used to fund the increase in average earning assets, including growth in loans and investment securities. The average cost of borrowings was 2.29% for the third quarter of 2018, compared to 1.75% for the third quarter of 2017. Market interest rates on borrowings have increased in the last 12 months, which was the main factor contributing to the increase in the cost of borrowings.

Average borrowings increased $2,728,375 to $5,029,411 in the nine months ended September 30, 2018, compared to $2,301,036 in the same period a year ago. The increase in average borrowings was mainly used to fund the increase in average loan balances and investment securities. The average cost of borrowings was 2.18% for the nine months ended September 30, 2018 compared to 1.74% in the nine months ended September 30, 2017. The increase was mainly due to the same factors as discussed in the three month period.

Provision for Loan Losses. The provision for loan losses is determined as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level that is our best estimate of probable incurred credit losses inherent in the outstanding loan portfolio. For the three months ended September 30, 2018 and September 30, 2017, the provision for loan losses was $9,500 and $5,000, respectively. For the nine months ended September 30, 2018, the provision for loan losses was $35,500 compared to $14,000 for the nine months ended September 30, 2017. See the section captioned “Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets - Provision for Loan Losses” later in this discussion for further analysis of the provision for loan losses.

Non-interest income. The components of non-interest income were as follows for the periods presented below:

61

STERLING BANCORP AND SUBSIDIARIES

 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Deposit fees and service charges
$
6,333

 
$
3,309

 
$
20,319

 
$
9,893

Accounts receivable management / factoring commissions and other related fees
5,595

 
4,764

 
16,292

 
12,670

Bank owned life insurance
3,733

 
1,320

 
11,591

 
4,342

Loan commissions and fees
4,142

 
2,819

 
12,114

 
8,643

Investment management fees
1,943

 
271

 
5,889

 
825

Net (loss) on sale of securities
(56
)
 
(21
)
 
(5,902
)
 
(274
)
Gain on sale of fixed assets

 
1

 
11,800

 
1

Other
2,455

 
1,525

 
8,617

 
4,342

Total non-interest income
$
24,145

 
$
13,988

 
$
80,720

 
$
40,442


Non-interest income was $24,145 for the three months ended September 30, 2018, compared to $13,988 in the same period a year ago. Included in non-interest income is net loss on sale of securities, which was $56 for the three months ended September 30, 2018, compared to $21 for the three months ended September 30, 2017. Net loss on sale of securities is impacted significantly by changes in market interest rates and strategies we use to manage yield, liquidity and interest rate risk, and it is difficult to forecast the amount of net losses or gains consistently. When we analyze the results of our non-interest income, we exclude gains and losses on sales of securities and fixed assets. Excluding net loss on sale of securities and gain on sale of fixed assets, non-interest income was $24,201 compared to $14,009 for the third quarter of 2017. The increase was mainly due to the Astoria Merger.

For the nine months ended September 30, 2018, total non-interest income was $80,720 compared to $40,442 for the same period a year ago. Included in non-interest income for the nine months ended September 30, 2018 was $5,902 of net loss on sale of securities compared to net loss on sale of securities of $274 for the comparable year ago period. In addition, we realized a gain on sale of fixed assets during the nine months ended September 30, 2018 of $11,800 related to the sale of one real estate location acquired in the Astoria Merger. Excluding net loss on sale of securities and gain on sale of fixed assets, non-interest income was $74,822 for the nine months ended September 30, 2018, compared to $40,715 for the nine months ended September 30, 2017. The increase between the periods was mainly due to the Astoria Merger.

Our annualized run-rate of non-interest income excluding securities losses and gain on sale of fixed assets was $100,037 through the nine months ended September 30, 2018. We currently anticipate the main drivers of growth in non-interest income will be other loan fees, loan swap fees, loan syndication fees and deposit fees and service charges generated by commercial treasury management services. Additionally, we continue to evaluate potential acquisitions of commercial finance businesses that are also fee income generators. Changes in the components of non-interest income are discussed below.

Deposit fees and service charges were $6,333 for the third quarter of 2018, which represented a $3,024 increase compared to $3,309 for the same period a year ago. The increase in deposit fees and service charges is mainly due to the Astoria Merger. For the nine months ended September 30, 2018, deposit fees and service charges were $20,319, which represented an increase of $10,426 compared to the same period a year ago, and was mainly due to the Astoria Merger.

Accounts receivable management / factoring commissions and other related fees represents fees generated in our factoring and payroll finance businesses. A portion of the fees generated in the factoring and payroll finance businesses are allocated to interest income on loans and the remainder is recognized as fee income. In our factored receivables business, we receive a nonrefundable factoring fee, which is generally a percentage of the factored receivables or sales volume, and is designed to compensate us for the bookkeeping and collection services provided and, if applicable, the credit review of the client’s customer and assumption of customer credit risk. In payroll finance, we provide outsourcing support services for clients in the temporary staffing industry. We generate fee income in exchange for providing full back-office, payroll, tax and accounting services to independently-owned temporary staffing companies. Total fee income in these businesses increased $831, or 17.4%, to $5,595 for the three months ended September 30, 2018, compared to $4,764 for the year ago period. The increase in fees between the periods is mainly due to a change in the allocation of total client revenue between interest income and fee income. Total revenue generated by factored receivables and payroll finance clients, including fee income and interest income, was $12,389 in the third quarter of 2018 compared to $12,294 in the third quarter of 2017. Total fee income in these businesses increased to $16,292 for the nine months ended September 30, 2018, compared to $12,670 for the same period a year ago. The increase in fees was mainly due to the revenue allocation change in 2018.


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STERLING BANCORP AND SUBSIDIARIES

Bank owned life insurance (“BOLI”) income represents the change in the cash surrender value of life insurance policies owned by us. BOLI income was $3,733 for the third quarter of 2018, compared to $1,320 in the same period a year ago, and was $11,591 for the nine months ended September 30, 2018, compared to $4,342 in the same period a year ago. The increase was mainly due to BOLI acquired in the Astoria Merger.

Loan commissions and fees income includes fees on lines of credit, loan servicing fees, loan syndication fees, collateral monitoring, and other loan related fees that are not included in interest income. Loan commissions and fees were $4,142 for the three months ended September 30, 2018, compared to $2,819 for the three months ended September 30, 2017, and were $12,114 for the nine months ended September 30, 2018, compared to $8,643 in the same period a year ago. The increase was mainly due to higher loan syndication fees and other loan fees generated by our commercial banking teams.

Investment management fees represent fees from the sale of mutual funds, annuities and insurance commissions. These revenues were $1,943 in the third quarter of 2018 and $271 in the same period a year ago, and were $5,889 for the first nine months of 2018, compared to $825 in the same period a year ago. We have increased our revenues from the sale of mutual funds, annuities and insurance agency commissions as a result of the Astoria Merger.

Net (loss) on sale of securities represents net losses incurred on the sale of securities from our available for sale investment securities portfolio. We realized a net loss on sale of securities of $56 in the three months ended September 30, 2018 compared to $21 in the three months ended September 30, 2017. We realized a net loss on sale of securities of $5,902 for the nine months ended September 30, 2018, compared to $274 for the same period a year ago. The loss on sale of securities in the nine months ended September 30, 2018 was mainly due to the sale of $117,810 of available for sale securities; the proceeds were used to fund a portion of the purchase of Advantage Funding in April 2018.

Net gain on sale of fixed assets of $11,800 for the nine months ended September 30, 2018 is related to the sale of one real estate location acquired in the Astoria Merger. The sales price was $36,000, which we received in cash. We anticipate fully exiting the location in the first quarter of 2019.

Other non-interest income principally includes fees for loan swaps, safe deposit rentals and foreign exchange fees. Other non-interest income increased $930 to $2,455 for the third quarter of 2018 from $1,525 for the same period a year ago. The increase was mainly due to the Astoria Merger and higher volumes of loan swap originations. Other non-interest income was $8,617 for the nine months ended September 30, 2018, compared to $4,342 for the nine months ended September 30, 2017. The increase was due to the same factors as those discussed for the three-month period.

Non-interest expense. The components of non-interest expense were as follows for the periods presented below:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Compensation and benefits
$
54,823

 
$
31,727

 
$
165,662

 
$
93,893

Stock-based compensation plans
3,115

 
1,969

 
9,304

 
5,602

Occupancy and office operations
16,558

 
8,583

 
51,956

 
25,550

Information technology
10,699

 
2,512

 
32,412

 
7,402

Amortization of intangible assets
5,865

 
2,166

 
17,782

 
6,582

FDIC insurance and regulatory assessments
6,043

 
2,310

 
16,885

 
6,232

Other real estate owned expense, net
1,497

 
894

 
1,635

 
2,682

Merger-related expense

 
4,109

 

 
9,002

Charge for asset write-downs, retention and severance

 

 
13,132

 
603

Other non-interest expense
13,173

 
8,347

 
39,680

 
25,076

Total non-interest expense
$
111,773

 
$
62,617

 
$
348,448

 
$
182,624


Non-interest expense for the three months ended September 30, 2018 was $111,773, a $49,156 increase compared to $62,617 for the three months ended September 30, 2017. For the nine months ended September 30, 2018, non-interest expense was $348,448, an increase of $165,824 compared to $182,624 for the nine months ended September 30, 2017. The increase between the periods was mainly due to the Astoria Merger. Our annualized run-rate of total non-interest expense excluding amortization of intangible assets was $420,178 in the third quarter of 2018. Changes in the components of non-interest expense are discussed below.

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STERLING BANCORP AND SUBSIDIARIES


Compensation and benefits expense was $54,823 for the three months ended September 30, 2018, compared to $31,727 for the three months ended September 30, 2017. As of September 30, 2018, our full-time equivalent employees were 1,959 compared to 992 at September 30, 2017. For the nine months ended September 30, 2018, compensation and employee benefits expense was $165,662 compared to $93,893 for the nine months ended September 30, 2017. The increase in compensation and employee benefits for the three and nine month periods was mainly due to the Astoria Merger and continued hiring of commercial bankers and risk management personnel.

Stock-based compensation plans expense was $3,115 in the third quarter of 2018, compared to $1,969 in the third quarter of 2017. The increase was due to a greater percentage of compensation paid to our executive management and senior personnel in stock awards to better align the interests of management and employees to those of our stockholders. For the nine months ended September 30, 2018, stock-based compensation expense was $9,304 compared to $5,602 for the nine months ended September 30, 2017 and the increase was due to the same factors discussed above. For additional information related to our employee benefit plans and stock-based compensation, see Note 11. “Stock-Based Compensation” in the notes to consolidated financial statements included elsewhere in this report.

Occupancy and office operations expense was $16,558 in the third quarter of 2018, compared to $8,583 in the third quarter of 2017. At September 30, 2018, we had 113 financial center locations, compared to 40 financial centers at September 30, 2017. For the nine months ended September 30, 2018, occupancy and office operations expense was $51,956, compared to $25,550 for the nine months ended September 30, 2017. The increase was mainly due to the Astoria Merger. We anticipate we will reduce our total number of financial centers over time. In the first nine months of 2018, we consolidated 15 financial centers, two back office facilities, and completed the sale of the Lake Success headquarters. We currently anticipate we will consolidate an additional seven financial centers in the fourth quarter of 2018.

Information technology expense, which mainly includes the cost of our loan and deposit operating systems and contracted service and maintenance associated with other data processing systems, was $10,699 in the third quarter of 2018, compared to $2,512 in the third quarter of 2017. For the nine months ended September 30, 2018, information technology expense was $32,412, compared to $7,402 for the nine months ended September 30, 2017. The increase in information technology expense is mainly due to the Astoria Merger. During the three months ended September 30, 2018, we completed the full integration of Astoria’s legacy deposit systems. We anticipate a reduction in information technology expense of approximately $1,500 per quarter as cost savings from the Astoria systems conversion are realized.

Amortization of intangible assets expense mainly includes amortization of core deposit intangible assets, customer lists and non-compete agreements. Amortization of intangible assets was $5,865 in the three months ended September 30, 2018, compared to $2,166 for the three months ended September 30, 2017. Amortization of intangible assets was $17,782 for the nine months ended September 30, 2018, compared to $6,582 for the nine months ended September 30, 2017. The increase in amortization expense was mainly due to amortization of the core deposit intangible assets recorded in the Astoria Merger. For additional information, see Note 6. “Goodwill and Other Intangible Assets” in the notes to the consolidated financial statements included elsewhere in this report.

FDIC insurance and regulatory assessments expense was $6,043 for the third quarter of 2018, compared to $2,310 for the third quarter of 2017. The increase was mainly due to the Astoria Merger and organic growth in assets. FDIC insurance and regulatory assessments expense was $16,885 for the nine months ended September 30, 2018, compared to $6,232 for the nine months ended September 30, 2017. The increase in the nine month period was due to the same factors as in the three-month period.

Other real estate owned expense, net includes property taxes, maintenance costs, insurance, write-downs (subsequent to any write-down at the time of foreclosure or transfer to OREO), and gains and losses from the disposition of OREO. OREO includes real estate assets that have been foreclosed and owned financial center locations that have been closed and are held for sale. OREO expense, net included the following:

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STERLING BANCORP AND SUBSIDIARIES

 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
(Gain) on sale, net
$
(65
)
 
$
(8
)
 
$
(1,348
)
 
$
(93
)
Direct property write-downs
190

 
444

 
552

 
1,737

Rental income
(35
)
 
(10
)
 
(114
)
 
(35
)
Property tax
617

 
437

 
851

 
763

Other expenses
790

 
31

 
1,694

 
310

OREO expense, net
$
1,497

 
$
894

 
$
1,635


$
2,682


OREO expense, net was $1,497 for the three months ended September 30, 2018, compared to expense of $894 for the three months ended September 30, 2017. The increase was mainly due to additional OREO properties acquired in the Astoria Merger. OREO expense, net was $1,635 for the nine months ended September 30, 2018, compared to $2,682 for the nine months ended September 30, 2017. In the nine months ended September 30, 2017 we recorded a significant write-down on a residential property, which was subsequently sold during the year. The balance of OREO declined by $4,360 to $22,735 at September 30, 2018 compared to $27,095 at December 31, 2017.

Merger-related expense was $0 in the three and nine months ended September 30, 2018, compared to $4,109 and $9,002 for the three and nine months ended September 30, 2017, respectively. Merger-related expense in 2017 included financial and legal advisory fees in connection with the Astoria Merger.

Charge for asset write-downs, severance and retention expense was $13,132 for the nine months ended September 30, 2018 and was $603 for the nine months ended September 30, 2017. In the nine months ended September 30, 2018, we incurred a charge of $8,736 due to the consolidation and exit of one back-office location which was related to the Astoria Merger. This impairment charge had been identified at the time of the closing of the Astoria Merger; however, the exit of the back-office facility had not met the requirements to record the impairment charge until this reporting period. The balance of the charge recorded in nine months ended September 30, 2018 of $4,396 was related to the Advantage Funding Acquisition. The charge included professional fees, retention and severance, systems integration costs and an impairment of a lease assumed in the transaction. The charge incurred in 2017 was related to the consolidation of two financial centers. There were no such charges in the third quarter of 2018 and 2017.
 
Other non-interest expense mainly includes professional fees, advertising and promotion, communications and operational losses. Also included in other non-interest expense are loan processing expenses, net benefit of pension and post retirement plans, recruitment fees, taxes not included in income tax expense, travel and client entertainment, and training expense. For the three months ended September 30, 2018, other non-interest expense was $13,173, compared to $8,347 for the three months ended September 30, 2017, and was $39,680 for the nine months ended September 30, 2018, compared to $25,076 for the same period a year ago. The increase was mainly related to the Astoria Merger. See Note 13. “Non-Interest Income and Other Non-Interest Expense” in the notes to the consolidated financial statements included elsewhere in this report for details on significant components.

Income tax expense was $27,171 for the three months ended September 30, 2018 compared to $21,592 for the three months ended September 30, 2017. Based upon the completion of the Astoria short-period tax returns for 2017, and the increasing proportion of non-taxable assets and revenues due to our business mix, our estimated effective tax rate for 2018 decreased to 21.0%. Therefore, we recorded income tax expense at 18.5% for the three months ended September 30, 2018, which resulted in an estimated effective income tax rate of 21.0% for the nine months ended September 30, 2018. Our estimated effective income tax rate was 32.5% in 2017.

Income tax expense was $88,542 for the nine months ended September 30, 2018 and was $59,620 for the nine months ended September 30, 2017, which represented an effective income tax rate of 21.0% and 32.1%, respectively. See Note 10. “Income Taxes” in the notes to the consolidated financial statements included elsewhere in this report for additional information.


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STERLING BANCORP AND SUBSIDIARIES

Portfolio Loans
The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the periods indicated.
 
September 30, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
Commercial:
 
 
 
 
 
 
 
C&I:
 
 
 
 
 
 
 
Traditional C&I
$
2,037,556

 
9.9
%
 
$
1,979,448

 
9.9
%
Asset-based lending
868,047

 
4.2

 
797,570

 
4.0

Payroll finance
235,734

 
1.1

 
268,609

 
1.3

Warehouse lending
864,063

 
4.2

 
723,335

 
3.6

Factored receivables
270,002

 
1.3

 
220,551

 
1.1

Equipment financing
1,161,435

 
5.7

 
679,541

 
3.4

Public sector finance
807,193

 
3.9

 
637,767

 
3.2

Total C&I
6,244,030

 
30.4

 
5,306,821

 
26.5

Commercial mortgage:
 
 
 
 
 
 
 
Commercial real estate
4,457,485

 
21.7

 
4,138,864

 
20.7

Multi-family
4,827,172

 
23.5

 
4,859,555

 
24.3

ADC
265,676

 
1.3

 
282,792

 
1.4

Total commercial mortgage
9,550,333

 
46.5

 
9,281,211

 
46.4

Total commercial
15,794,363

 
76.9

 
14,588,032

 
72.9

Residential mortgage
4,421,520

 
21.5

 
5,054,732

 
25.3

Consumer
317,331

 
1.5

 
366,219

 
1.8

Total portfolio loans
20,533,214

 
100.0
%
 
20,008,983

 
100.0
%
Allowance for loan losses
(91,365
)
 
 
 
(77,907
)
 
 
Total portfolio loans, net
$
20,441,849

 
 
 
$
19,931,076

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

Overview. Total portfolio loans, net, increased $510,773, to $20,441,849 at September 30, 2018, compared to $19,931,076 at December 31, 2017, as total commercial loans increased $1,206,331 while residential mortgage loans decreased by $633,212, which is consistent with our strategy of transitioning our loan portfolio composition to reduce residential mortgage loans and increase commercial loans.

At September 30, 2018, total C&I loans comprised 30.4% of the total loan portfolio, compared to 26.5% at December 31, 2017. Commercial mortgage loans comprised 46.5% and 46.4% of the total loan portfolio at September 30, 2018 and December 31, 2017, respectively. Residential mortgage loans comprised 21.5% of the total loan portfolio at September 30, 2018, compared to 25.3% at December 31, 2017. Our goal, over time, is for our loan portfolio to consist of 20.0% traditional C&I; 25.0% commercial finance; 45.0% commercial real estate; and 10.0% consumer and residential mortgage loans.
 
In the nine months ended September 30, 2018, equipment finance loans grew $481,894, which includes the loans acquired in the Advantage Funding acquisition, public sector finance loans grew $169,426, warehouse lending loans grew $140,728, asset based lending loans grew $70,477, traditional C&I loans grew $58,108, and factored receivables grew $49,451 relative to December 31, 2017. These increases were partially offset by s decline of $32,875 in payroll finance loans. The increase in traditional C&I and commercial finance portfolios is a significant component of our growth strategy. The warehouse lending portfolio can experience fluctuations at quarter end mainly due to changes in mortgage refinance activity. The decrease in payroll finance is consistent with performance in prior years, as this business line typically experiences seasonal highs in the fourth quarter of the year.

Commercial real estate loans increased $318,621 in the nine months ended September 30, 2018. Multi-family loans declined in the first nine months of 2018 by $32,383 mainly due to net repayments of multi-family loans acquired in the Astoria Merger. Demand for commercial real estate, including multi-family loans, in the greater New York metropolitan area continues to be strong; however, pricing and loan terms are competitive and our growth in these portfolios has been limited.


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ADC loans, which are a component of commercial mortgage loans, declined $17,116 in the nine months ended September 30, 2018. The decrease was due to completion of construction projects, which resulted in the pay-off of a construction loan. We originate construction loans mainly to select clients, mostly within our immediate footprint. Many of our new ADC originations are associated with low income housing tax credits, which are related to our community reinvestment activities.

Residential loans were $4,421,520 at September 30, 2018 compared to $5,054,732 at December 31, 2017. The decline is mainly due to repayments. Included in our residential mortgage portfolio are loans that were originated in 2010 or earlier that are interest-only adjustable rate mortgages (“ARM loans”) with terms of up to forty years, which have an initial fixed rate for five, seven or 10 years and convert into one year interest-only ARM loans at the end of the initial fixed rate period. Interest-only ARM loans require the borrower to pay interest only during the first ten years of the loan term, which typically results in a material increase in the borrower’s monthly payments upon conversion. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining term. There were $342,531 of interest-only loans and loans that converted to principal amortization status within the past 24 months at September 30, 2018 compared to $599,714 at December 31, 2017.

Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets
Past Due, Non-Performing Loans, Non-Performing Assets (Risk Elements). The table below sets forth the amounts and categories of our NPAs at the dates indicated. There were no warehouse lending, factored receivables or public sector finance loans that were non-performing at such dates.
 
September 30,
 
December 31,
 
2018
 
2017
Non-accrual loans:
 
 
 
Traditional C&I
$
41,461

 
$
37,642

Asset-based lending
7,718

 

Payroll finance
229

 

Equipment financing
9,964

 
8,099

Commercial real estate
27,144

 
21,720

Multi-family
3,701

 
4,449

ADC

 
4,205

Residential mortgage
72,838

 
99,958

Consumer
14,821

 
10,284

Total non-accrual loans
177,876

 
186,357

Accruing loans past due 90 days or more
7,346

 
856

Total NPLs
185,222

 
187,213

OREO
22,735

 
27,095

Total NPAs
$
207,957

 
$
214,308

TDRs accruing and not included above
$
39,817

 
$
13,564

Ratios:
 
 
 
NPLs to total loans
0.90
%
 
0.94
%
NPAs to total assets
0.67

 
0.71


NPAs and NPLs. NPLs include non-accrual loans and accruing loans past due 90 days or more. NPAs include NPLs and OREO. At September 30, 2018, total NPLs declined $1,991 to $185,222 compared to $187,213 at December 31, 2017. Non-accrual loans were $177,876 and loans 90 days past due and still accruing interest which were well secured and in the process of collection were $7,346 as of September 30, 2018. Non-accrual loans declined $8,481 from $186,357 at December 31, 2017. The decline in non-accrual loans was mainly the result of charge-offs and loans transferred to OREO. Loans past due 90 days or more and still accruing increased $6,490 between the periods. This was mainly due to traditional C&I and commercial real estate loans that were in the process of being renewed that reached 90 days past due at September 30, 2018.
 
TDRs. TDRs still accruing interest income are loans modified for borrowers that have experienced financial difficulties but are performing in accordance with the terms of their loan and were performing prior to the modification. Loan modification concessions may include actions such as an extension of the maturity date or the lowering of interest rates and monthly payments. At September 30, 2018, accruing TDRs were $39,817 compared to $13,564 at December 31, 2017. The increase was mainly due to the designation as a TDR of one asset-based lending relationship, which is a borrowing base facility and one commercial real estate relationship during the nine months ended September 30, 2018. At September 30, 2018, the largest component of TDRs are taxi medallion related loans. At December 31, 2017, performing TDR loans were mainly secured by real estate, and non-accrual TDRS included a

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STERLING BANCORP AND SUBSIDIARIES

taxi medallion relationship. Total TDRs were $77,347 at September 30, 2018, of which $37,112 were non-accrual. Total TDRs were $42,889 at December 31, 2017, of which $29,325 were non-accrual. The increase in non-accrual TDRs was mainly the result of classifying one taxi medallion relationship as non-accrual when the loan was formally restructured as a TDR, and classifying one HELOC loan as a TDR. TDR balances are detailed in the TDR section of Note 4. “Portfolio Loans” in the notes to the consolidated financial statements included elsewhere in this report. As of September 30, 2018, there were no commitments to lend additional funds to borrowers with loans that have been classified as TDRs.

OREO. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO until such time as it is sold. In addition, financial centers that were closed or consolidated that are held for sale are also classified as OREO. When real estate is transferred to OREO, it is recorded at fair value less costs to sell. If the fair value less cost to sell is less than the loan balance, the difference is charged against the allowance for loan losses. If the fair value of a financial center that we hold for sale is less than its prior carrying value, we recognize a charge included in other operating expense to reduce the recorded value of the investment to fair value, less costs to sell. After transfer to OREO, we regularly update the fair value of the properties. Subsequent declines in fair value are charged to current earnings and included in other non-interest expense as part of OREO expense. At September 30, 2018, we had OREO properties with a recorded balance of $22,735, compared to $27,095 at December 31, 2017. The decrease was due to $15,437 in sales and $553 of write-downs to reflect the estimated current sale value of the properties. This was partially offset by OREO additions of $11,630 in the period.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality, such as “substandard”, “doubtful”, or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are charged-off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as “special mention”. As of September 30, 2018, we had $88,472 of loans designated as “special mention” compared to $136,558 at December 31, 2017. The decrease in loans designated as “special mention” at September 30, 2018 compared to December 31, 2017 was mainly due to loans that were repaid and loans that were reclassified as 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 direct the charge-off of loans and order the establishment of additions to our allowance for loan losses. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at September 30, 2018, classified assets consisted of loans of $282,577 and OREO of $22,735. Classified loans were $233,255 and OREO was $27,095 at December 31, 2017. The increase in classified loans in the nine months ended September 30, 2018, includes loans that have been designated TDR, and was mainly due to asset-based loans, one payroll finance loan, equipment finance loans and commercial real estate loans that were downgraded from pass and special mention, which was partially offset by decline in residential mortgage loans due to repayments and loan charge-offs.

Taxi Medallion Loans. At September 30, 2018, we had three taxi medallion relationships that totaled $36,832, or 0.18% of portfolio loans, compared to $45,976, or 0.23% of portfolio loans, at December 31, 2017. The decline in the balance between the periods of $9,144 was mainly due to partial charge-offs of $6,207, to reflect the decline in the value of collateral on two of our taxi medallion relationships, and repayments of $2,937. Our taxi medallion loans are mainly collateralized by New York City taxi medallions, and other corporate and personal collateral of the borrowers. All taxi medallion relationships are classified as TDRs and as substandard loans, and two of the relationships are on non-accrual and totaled $25,978 at September 30, 2018, compared to $33,083 at December 31, 2017. The third relationship, which is a performing asset-based lending TDR, had a balance of $10,855 at September 30, 2018. We continue to closely monitor the collateral values, cash flows and performance of each of these loans and are working with our borrowers to reduce these outstanding balances.

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. Our process for determining the appropriate level of allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan

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STERLING BANCORP AND SUBSIDIARIES

quality trends, including the levels of, and trends related to, non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries and loan documentation exceptions, among other factors. See Note 5. “Allowance for Loan Losses” in the notes to consolidated financial statements included elsewhere in this report for further information regarding the allowance for loan losses.

The allowance for loan losses increased from $77,907 at December 31, 2017 to $91,365 at September 30, 2018, as the provision for loan losses exceeded net charge-offs by $13,458. The allowance for loan losses at September 30, 2018 represented 49.3% of non-performing loans and 0.44% of total portfolio loans. At December 31, 2017, the allowance for loan losses represented 41.6% of non-performing loans and 0.39% of total portfolio loans. Loans acquired in prior merger transactions and acquisitions were recorded with a fair value adjustment as of the acquisition date that included estimated lifetime credit losses and interest rate adjustments, among other factors (the “loan mark”). A substantial portion of portfolio loans covered by the loan mark continue to carry no allowance for loan losses. As a result, we believe our allowance for loan losses to portfolio loans may not be comparable to other banking entities that have not engaged in mergers and acquisitions.

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (excluding loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
September 30, 2018
 
December 31, 2017
 
Allowance
for loan
losses
 
Loan
balance
 
% of total loans
 
Allowance
for loan
losses
 
Loan
balance
 
% of total loans
Traditional C&I
$
14,716

 
$
2,037,556

 
9.9
%
 
$
19,072

 
$
1,979,448

 
9.9
%
Asset-based lending
6,828

 
868,047

 
4.2

 
6,625

 
797,570

 
4.0

Payroll finance
2,183

 
235,734

 
1.1

 
1,565

 
268,609

 
1.3

Warehouse lending
2,685

 
864,063

 
4.2

 
3,705

 
723,335

 
3.6

Factored receivables
1,508

 
270,002

 
1.3

 
1,395

 
220,551

 
1.1

Equipment financing
11,153

 
1,161,435

 
5.7

 
4,862

 
679,541

 
3.4

Public sector finance
1,444

 
807,193

 
3.9

 
1,797

 
637,767

 
3.2

Commercial real estate
31,468

 
4,457,485

 
21.7

 
24,945

 
4,138,864

 
20.7

Multi-family
7,682

 
4,827,172

 
23.5

 
3,261

 
4,859,555

 
24.3

ADC
1,876

 
265,676

 
1.3

 
1,680

 
282,792

 
1.4

Residential mortgage
6,800

 
4,421,520

 
21.5

 
5,819

 
5,054,732

 
25.3

Consumer
3,022

 
317,331

 
1.5

 
3,181

 
366,219

 
1.8

Total
$
91,365

 
$
20,533,214

 
100.0
%
 
$
77,907

 
$
20,008,983

 
100.0
%

At September 30, 2018, the allocation of the allowance for loan losses increased in the equipment financing portfolio mainly due to $7,158 of net charge-offs, which caused an increase in our trailing loss factor which is a significant component of the overall allowance calculation. The increase in commercial real estate was also attributable to $4,176 of net charge-offs in the period. The decline in the allowance for loan losses applicable to traditional C&I loans was mainly due to the isolation of taxi medallion loans, which we have excluded from the trailing loss factor for traditional C&I loans as all taxi medallion loans are now individually evaluated for impairment.

Impaired Loans. A loan is impaired when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loan values are based on one of three measures: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, our practice is to write-down the loan against the allowance for loan losses so the recorded investment matches the impaired value of the loan. Impaired loans generally include a portion of non-performing loans and accruing and performing TDR loans. At September 30, 2018, we had $111,685 in impaired loans compared to $60,862 at December 31, 2017. The increase was mainly due to loans that were designated as TDR during the period and included one taxi medallion relationship that was placed on non-accrual at the time of restructuring, certain commercial real estate loans that are in workout, and certain residential mortgage loans.

PCI Loans. A PCI loan is an acquired loan that has demonstrated evidence of deterioration in credit quality subsequent to origination. As of September 30, 2018, the balance of PCI loans was $154,004, compared to $226,612 at December 31, 2017 and is mainly comprised of loans acquired in the Astoria Merger. The decline was mainly due to borrower repayments, amounts charged-off against the loan purchase accounting mark, and loans that moved to OREO. At September 30, 2018 and December 31, 2017, we

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STERLING BANCORP AND SUBSIDIARIES

held $5,363 and $7,992, respectively, of PCI loans, which are accounted for under the cost-recovery method and were included in our non-accrual loan totals above. The decline between the periods was mainly due to borrower repayments. The remaining PCI loans of $148,641 and $218,620 at September 30, 2018 and December 31, 2017, respectively, are accounted for under applicable guidance, which results in an accretable yield that represents the amount of expected cash flows that exceeds the initial investment in the loan. See the tables of loans evaluated for impairment by segment and changes in accretable yield for PCI loans in Note 4. “Portfolio Loans” in the notes to consolidated financial statements included elsewhere in this report for additional information.

Provision for Loan Losses. We recorded $9,500 in loan loss provision for the three months ended September 30, 2018, compared to $5,000 for the three months ended September 30, 2017. Net charge-offs for the three months ended September 30, 2018 were $4,161, or 0.08% of average loans on an annualized basis, compared to net charge-offs of $3,023, or 0.12% of average loans on an annualized basis for the three months ended September 30, 2017. Provision expense for the first nine months of 2018 was $35,500 compared to $14,000 for the nine months ended September 30, 2017. The increase in provision expense was driven mainly by loans acquired in prior mergers and acquisitions that are now subject to our allowance for loan losses, organic loan growth and to changes in loan classifications.

Changes in Financial Condition between September 30, 2018 and December 31, 2017
Total assets increased $901,724, or 3.0%, to $31,261,265 at September 30, 2018, compared to $30,359,541 at December 31, 2017. Components of the change in total assets were:
Total portfolio loans increased by $524,231, or 2.6%, to $20,533,214 at September 30, 2018, compared to $20,008,983 at December 31, 2017. The increase was due to the Advantage Funding acquisition and organic loan growth, substantially offset by repayments of residential mortgage loans.
Commercial loans increased by $1,206,331, or 8.3%, to $15,794,363 at September 30, 2018, compared to $14,588,032 at December 31, 2017. The increase was due to the Advantage Funding Acquisition and organic loan growth.
Residential mortgage loans declined by $633,212 to $4,421,520 at September 30, 2018 compared to $5,054,732 at December 31, 2017. The decline was mainly due to repayments.
Total investment securities increased by $211,411, or 3.3%, to $6,685,972 at September 30, 2018, compared to $6,474,561 at December 31, 2017. The increase was mainly due to the purchase of corporate securities and tax exempt securities issued by New York State, New York City, other municipal entities in New York, and by other states. Investment securities were 21.4% of total assets at September 30, 2018, compared to 21.3% at December 31, 2017.
Cash and cash equivalents increased by $54,078 to $533,984 at September 30, 2018, compared to $479,906 at December 31, 2017.
Other changes in assets included the following:
an increase in Federal Reserve Bank of New York (“FRBNY”) common stock holdings, which we acquired in the first quarter of 2018 as a result of the Astoria Merger. FRBNY common stock increased $73,726 at September 30, 2018 compared to December 31, 2017.
an increase of $25,796 in loans held for sale, which mainly represents originations from our loan syndications team.

Total liabilities increased $703,599, or 2.7%, to $26,822,962 at September 30, 2018, compared to $26,119,363 at December 31, 2017. This increase was mainly due to the following:
Total deposits increased $917,853, or 4.5%, to $21,456,057 at September 30, 2018, compared to $20,538,204 at December 31, 2017. Our core retail, commercial and municipal transaction, money market, savings accounts and certificates of deposit accounts were $20,448,343, at September 30, 2018, which represented 95.3% of our total deposit balances. The increase in deposits was mainly driven by our commercial banking teams, as several of our recent commercial banking hires are focused on growing deposits, as well as growth in municipal deposits. Municipal deposits, excluding municipal certificates of deposits, increased $434,817 to $2,019,893 at September 30, 2018, compared to $1,585,076 at December 31, 2017.
FHLB borrowings decreased $81,013, to $4,429,110 at September 30, 2018, compared to $4,510,123 at December 31, 2017. The decrease in FHLB borrowings was mainly the result of growth in core deposits.

Supplemental Reporting of Non-GAAP Financial Measures
The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance and to assess our performance compared to our annual budget and strategic plans. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors, analysts, regulators and others information that we use to manage and evaluate our performance each period. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for,

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STERLING BANCORP AND SUBSIDIARIES

our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements, and notes thereto for the quarter ended September 30, 2018, included elsewhere in this report, and the year ended December 31, 2017, included in the 2017 Form 10-K.

 
September 30,
 
2018
 
2017
The following table shows the reconciliation of stockholders’ equity to tangible common equity and the tangible common equity ratio 1:
Total assets
$
31,261,265

 
$
16,780,097

Goodwill and other intangibles
(1,745,181
)
 
(756,290
)
Tangible assets
29,516,084

 
16,023,807

Stockholders’ equity
4,438,303

 
1,971,480

Preferred stock
(138,627
)
 

Goodwill and other intangibles
(1,745,181
)
 
(756,290
)
Tangible common stockholders’ equity
2,554,495

 
1,215,190

Common stock outstanding at period end
225,446,089

 
135,807,544

Common stockholders’ equity as a % of total assets
13.75
%
 
11.75
%
Book value per common share
$
19.07

 
$
14.52

Tangible common equity as a % of tangible assets
8.65
%
 
7.58
%
Tangible book value per common share
$
11.33

 
$
8.95

_______________
 
 
 
See legend beginning on page 73.
 
 
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
The following table shows the reconciliation of reported net income and reported EPS (GAAP) to adjusted net income available to common stockholders (non-GAAP) and adjusted diluted EPS (non-GAAP)2:
Income before income tax expense
$
146,821

 
$
66,444

 
$
421,305

 
$
185,939

Income tax expense
27,171

 
21,592

 
88,542

 
59,620

Net income (GAAP)
119,650

 
44,852

 
332,763

 
126,319

Adjustments:
 
 
 
 
 
 
 
Net loss on sale of securities
56

 
21

 
5,902

 
274

Net (gain) on sale of fixed assets

 

 
(11,800
)
 
(1
)
Merger-related expense

 
4,109

 

 
9,002

Charge for asset write-downs, retention and severance

 

 
13,132

 
603

Amortization of non-compete agreements and acquired customer lists
295

 
333

 
883

 
1,080

Total pre-tax adjustments
351

 
4,463

 
8,117

 
10,958

Adjusted pre-tax income
147,172

 
70,907

 
429,422

 
196,897

Adjusted income tax expense
(30,906
)
 
(23,042
)
 
(90,179
)
 
(63,181
)
Adjusted net income (non-GAAP)
116,266

 
47,865

 
339,243

 
133,716

Preferred stock dividend
1,993

 

 
5,988

 

Adjusted net income available to common stockholders (non-GAAP)
$
114,273

 
$
47,865

 
$
333,255

 
$
133,716

 
 
 
 
 
 
 
 
Weighted average diluted shares
225,622,895

 
135,950,160

 
225,504,463

 
135,895,513

Diluted EPS as reported (GAAP)
$
0.52

 
$
0.33

 
$
1.45

 
$
0.93

Adjusted diluted EPS (non-GAAP)
0.51

 
0.35

 
1.48

 
0.98

_______________
 
 
 
 
 
 
 
See legend beginning on page 73.
 
 
 
 
 
 
 



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STERLING BANCORP AND SUBSIDIARIES

 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
The following table shows the reconciliation of the reported operating efficiency ratio and adjusted operating efficiency ratio 3:
Net interest income
$
243,949

 
$
120,073

 
$
724,533

 
$
342,121

Non-interest income
24,145

 
13,988

 
80,720

 
40,442

Total net revenue
268,094

 
134,061

 
805,253

 
382,563

Tax equivalent adjustment on securities
4,052

 
4,599

 
12,217

 
12,896

Net (gain) on sale of fixed assets

 

 
(11,800
)
 
(1
)
Net loss on sale of securities
56

 
21

 
5,902

 
274

Adjusted total revenue (non-GAAP)
272,202

 
138,681

 
811,572

 
395,732

Non-interest expense
111,773

 
62,617

 
348,448

 
182,624

Merger-related expense

 
(4,109
)
 

 
(9,002
)
Charge for asset write-downs, retention and severance

 

 
(13,132
)
 
(603
)
Amortization of intangible assets
(5,865
)
 
(2,166
)
 
(17,782
)
 
(6,582
)
Adjusted non-interest expense (non-GAAP)
$
105,908

 
$
56,342

 
$
317,534

 
$
166,437

Reported operating efficiency ratio
41.7
%
 
46.7
%
 
43.3
%
 
47.7
%
Adjusted operating efficiency ratio (non-GAAP)
38.9

 
40.6

 
39.1

 
42.1

_______________
 
 
 
 
 
 
 
See legend beginning on page 73.
 
 
 
 
 
 
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
The following table shows the reconciliation of reported return on average tangible assets and adjusted return on average tangible assets 4:
Average assets
$
31,036,026

 
$
15,661,514

 
$
30,686,808

 
$
14,802,911

Average goodwill and other intangibles
(1,752,933
)
 
(757,498
)
 
(1,747,141
)
 
(759,790
)
Average tangible assets
29,283,093

 
14,904,016

 
28,939,667

 
14,043,120

Net income available to common stockholders
117,657

 
44,852

 
326,775

 
126,319

Net income, if annualized
466,791

 
177,945

 
436,897

 
168,888

Reported return on average tangible assets
1.59
%
 
1.19
%
 
1.51
%
 
1.20
%
Adjusted net income (non-GAAP)
$
114,273

 
$
47,865

 
$
333,255

 
$
133,716

Annualized adjusted net income
453,366

 
189,899

 
445,561

 
178,778

Adjusted return on average tangible assets (non-GAAP)
1.55
%
 
1.27
%
 
1.54
%
 
1.27
%
_______________
 
 
 
 
 
 
 
See legend beginning on page 73.
 
 
 
 
 
 
 

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STERLING BANCORP AND SUBSIDIARIES

 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
The following table shows the reconciliation of reported return on average tangible common stockholders’ equity and adjusted return on average tangible common stockholders’ equity 5:
Average stockholders’ equity
$
4,397,823

 
$
1,955,252

 
$
4,316,455

 
$
1,913,072

Average preferred stock
(138,692
)
 

 
(139,054
)
 

Average goodwill and other intangibles
(1,752,933
)
 
(757,498
)
 
(1,747,141
)
 
(759,790
)
Average tangible common stockholders’ equity
2,506,198

 
1,197,754

 
2,430,260

 
1,153,282

Net income available to common stockholders
117,657

 
44,852

 
326,775

 
126,319

Net income, if annualized
466,791

 
177,945

 
436,897

 
168,888

Reported return on average tangible common stockholders’ equity
18.63
%
 
14.86
%
 
17.98
%
 
14.64
%
Adjusted net income (non-GAAP)
$
114,273

 
$
47,865

 
$
333,255

 
$
133,716

Annualized adjusted net income
453,366

 
189,899

 
445,561

 
178,778

Adjusted return on average tangible common stockholders’ equity (non-GAAP)
18.09
%
 
15.85
%
 
18.33
%
 
15.50
%
_______________________
 
 
 
 
 
 
 
See legend beginning below.
 
 
 
 
 
 
 


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

2 Adjusted net income available to common stockholders and adjusted EPS present a summary of our earnings which includes adjustments to exclude certain revenues and expenses (generally associated with discrete merger transactions and non-recurring strategic plans) to help in assessing our recurring profitability. For the purpose of calculating adjusted earnings and adjusted earnings per share, income tax expense is calculated using the estimated effective income tax rate for the full year in effect for the particular period end, as we believe this is a more accurate presentation of run rate income tax expense and earnings.

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

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

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

Liquidity and Capital Resources
Capital. Stockholders’ equity was $4,438,303 as of September 30, 2018, an increase of $198,125 relative to December 31, 2017. The increase was mainly the result of net income available to common stockholders of $326,775. Also contributing was an increase of stock option exercises and stock-based compensation, which totaled $6,494. These increases were offset by a decline in accumulated other comprehensive loss of $87,380, which was primarily due to a change in the fair value of our available for sale securities portfolio, as well as declared dividends of $47,171 on common stock and $6,581 on preferred stock.

We paid dividends of $0.07 per common share in each quarter of 2017 and the first two quarters of 2018. Most recently, our Board of Directors declared a dividend of $0.07 per common share on October 23, 2018, which is payable November 19, 2018 to our holders as of the record date of November 5, 2018. In addition, on October 15, 2018, we paid a dividend of $2,194 on the preferred stock.


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STERLING BANCORP AND SUBSIDIARIES

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

Liquidity. As discussed in our 2017 Form 10-K, our liquidity position is continuously monitored and we make adjustments to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset / liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic activity, volatility in the financial markets, unexpected credit events or other significant occurrences. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of September 30, 2018, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, including the Basel III liquidity framework, which, if implemented, would have a material adverse effect on us.

At September 30, 2018, the Bank had $533,984 in cash and cash equivalents on hand and unused borrowing capacity at the FHLB of $6,235,781. In addition, the Bank may purchase federal funds from other institutions and enter into additional repurchase agreements. The Bank had $3,578,859 of securities available to pledge as collateral as of September 30, 2018. The Bank was required to maintain $106,073 of cash on hand or on deposit with the FRB to meet regulatory reserve and clearing requirements at September 30, 2018.

We are a bank holding company and do not conduct operations. Our primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. At September 30, 2018, the Bank had capacity to pay approximately $324,008 of dividends to us and maintain its “well capitalized” status under regulatory guidelines as well as internal capital management policies and procedures. We had cash on hand of $60,176 at September 30, 2018. In October 2018, we received a regularly scheduled quarterly dividend from the Bank which increased our cash on hand. We utilized a portion of this cash to repurchase $17,000 principal amount, plus interest, of our outstanding 3.50% Senior Notes that we acquired in the Astoria Merger and we commenced the announced repurchase of our shares in the open market. Through October 31, 2018 we had purchased 1,020,000 shares of our common stock.

Effective September 2, 2018, we renewed our $35,000 credit facility with another financial institution, which is more fully described in Note 8. “Borrowings” in the notes to consolidated financial statements included elsewhere in this report. The use of proceeds are for general corporate purposes. The credit facility has no outstanding balance and requires us and the Bank to maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. We and the Bank were in compliance with all requirements at September 30, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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STERLING BANCORP AND SUBSIDIARIES


Estimated Changes in EVE and NII. The table below sets forth, as of September 30, 2018, the estimated changes in our (i) EVE that would result from the designated instantaneous changes in the forward rate curves; and (ii) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied on as indicative of actual results.

Interest rates
 
Estimated
 
Estimated change in EVE
 
Estimated
 
Estimated change in NII
(basis points)
 
EVE
 
Amount
 
Percent
 
NII
 
Amount
 
Percent
 
 
(Dollars in thousands)
+300
 
$
4,162,254

 
$
(782,358
)
 
(15.8
)%
 
$
1,010,294

 
$
32,729

 
3.3
 %
+200
 
4,481,181

 
(463,431
)
 
(9.4
)
 
1,004,688

 
27,123

 
2.8

+100
 
4,769,337

 
(175,275
)
 
(3.5
)
 
994,150

 
16,585

 
1.7

0
 
4,944,612

 

 

 
977,565

 

 

-100
 
4,964,471

 
19,859

 
0.4

 
948,055

 
(29,510
)
 
(3.0
)
-200
 
4,777,086

 
(167,526
)
 
(3.4
)
 
897,297

 
(80,268
)
 
(8.2
)

The table above indicates that at September 30, 2018, in the event of an immediate 200 basis point increase in interest rates, we would expect to experience a 9.4% decrease in EVE and a 2.8% increase in NII.

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

During the third quarter of 2018, the federal funds target rate increased a quarter point to 2.00 - 2.25%. U.S. Treasury yields with two year maturities increased 92 basis points from 1.89% to 2.81% over the nine months ended September 30, 2018, while the yield on U.S. Treasury 10-year notes increased 65 basis points from 2.40% to 3.05% over the same nine month period. The increase in interest rates on longer-term maturities relative to the greater increase in interest rates on short-term maturities resulted in a flatter 2-10 year U.S. Treasury yield curve at September 30, 2018 compared to December 31, 2017.  At its September 2018 meeting, the Federal Open Markets Committee (the “FOMC”) stated that in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. However, should economic conditions improve at a faster pace than anticipated, the FOMC could increase the federal funds target rate quicker. This could cause the shorter end of the yield curve to rise disproportionately relative to the longer end, thereby resulting in an even flatter yield curve, which may result in greater margin compression.

Item 4. Controls and Procedures

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


75

STERLING BANCORP AND SUBSIDIARIES

Changes in Internal Controls 
There were no changes in the Company’s internal controls over financial reporting during the three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

76


PART II
Item 1. Legal Proceedings

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

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

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

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

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosure

Not Applicable.

Item 5. Other Information

Not Applicable.


77


Item 6. Exhibits
Exhibit Number
 
Description
3.1
 
3.2
 
3.3
 
4.1
 
4.2
 
4.3
 
4.4
 
4.5
 
4.6
 
4.7
 
4.8
 
4.9
 
31.1
 
31.2
 
32.0
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document

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

78



SIGNATURES

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

Sterling Bancorp
Date:
 
November 2, 2018
By:
/s/ Jack Kopnisky
 
 
 
 
Jack Kopnisky
 
 
 
 
President, Chief Executive Officer and Director
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Date:
 
November 2, 2018
By:
/s/ Luis Massiani
 
 
 
 
Luis Massiani
 
 
 
 
Senior Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
 



79