STERLING BANCORP CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
We make statements in this report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting us that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "outlook," "target," "estimate," "forecast," "project," by future conditional verbs such as "will," "should," "would," "could" or "may," or by variations of such words or by similar expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of 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 theSEC , 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: •our ability to successfully implement growth and strategic initiatives, and to integrate and fully realize cost savings and other benefits we estimate in connection with acquisitions and limit business disruption arising therefrom; •oversight of the Bank by theConsumer Financial Protection Bureau ; •adverse publicity, regulatory actions or litigation with respect to us or other well-known companies and the financial services industry in general and a failure to satisfy regulatory standards; 49 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES •the effects of and changes in monetary and policies of theBoard of Governors of theFederal Reserve System and theU.S. Government , respectively; •our ability to make accurate assumptions and judgments about an appropriate level of allowance for loan losses and the collectability of our loan portfolio, including changes in the level and trend of loan delinquencies and write-offs that may 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 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 manage changes in market interest rates, which could adversely affect our financial condition and results of operations; •our ability to capitalize on our substantial investments in our information technology and operational infrastructure and systems; •changes in other economic, competitive, governmental, regulatory and technological factors affecting our markets, operations, pricing, products, services and fees; •effects of the novel coronavirus disease (COVID-19), which include, but are not limited to, the federal, state and local government actions and reactions to COVID-19, the health of our colleagues and that of our clients, the continuity of our, our clients' and our third party providers' operations, the increased likelihood of cyber and payment fraud risk, the continued ability of our borrowers to repay their loans throughout and following the pandemic, the potential decline in collateral values resulting from COVID-19 and its effects, and the resulting impact upon our financial position, results of operations, cash flows and our outlook; and •our success at managing the risks involved in the foregoing and managing our business.
These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements.
Impact of COVID-19 The COVID-19 pandemic has resulted in, and is likely to continue to result in, significant economic disruption affecting our business and the business of our clients. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Our consolidated financial statements reflect estimates and assumptions we make that affect the reported amounts of assets and liabilities, including the amount of the ACL we established. We considered the impact of COVID-19 on the assumptions and estimates used which had a material adverse effect on our provision for credit losses, and has also resulted in a significant amount of client requests for forbearance, which are in process of review and implementation. LIBOR Transition and Phase-Out We have a significant amount of loans, borrowings and swaps that are tied to LIBOR benchmark interest rates. It is anticipated that the LIBOR index will be phased out by the end of 2021 and theFederal Reserve Bank of New York has established the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to LIBOR. We have created a sub-committee of our Asset Liability Management Committee to address LIBOR transition and phase-out issues. This committee includes personnel from legal, loan operations, risk, IT, credit, business intelligence, treasury, corporate banking, marketing, audit, accounting and corporate development. We are currently reviewing loan documentation, technology systems and procedures we will need to implement for the transition.
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 2019 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 the 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% effective income tax rate.
Dollar amounts in tables and the accompanying discussion that follows are stated in thousands, except for share and per share amounts and ratios.
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STERLING BANCORP AND SUBSIDIARIES
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 73 ). 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 other businesses
that are in-line with our commercial banking strategy and risk-adjusted return
targets.
•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. Our commercial banking teams generate significant originations of
loans and deposits, which are augmented by strategic portfolio acquisitions. As
of March 31, 2020 , we had 30 commercial banking teams and 79 full service
financial centers. We currently anticipate that we will increase our number of
commercial banking teams by three to five annually, while reducing our financial
centers as we continue to execute our real estate and financial center
consolidation strategy.
Recent Developments
Effective January 1, 2020 , we adopted the CECL Standard which increased our ACL
- loans by $90,584 , our ACL - HTM securities by $796 and our ACL - off-balance
sheet credit exposures by $6,095 . Net of tax, our equity was reduced $54,254 on
January 1, 2020 , which was presented as a cumulative effect of a change in
accounting principle.
Earnings performance for the first quarter of 2020 included reported net income
available to common stockholders of $12,171 , or $0.06 per diluted share, and an
adjusted net loss available to common stockholders of $3,124 , or $0.02 per
diluted share. Our provision for credit losses expense was $138,280 . As of March
31, 2020 , our ACL stood at 1.50% of total loans.
In the first quarter of 2020, we grew spot commercial loan balances by $412,186
relative to December 31, 2019 . The increase in commercial loans was offset by
$132,578 of run-off of residential mortgage loans. Our commercial loan portfolio
grew $2,335,679 compared to March 31, 2019 , which includes the portfolio
acquisitions discussed in Note 2. "Acquisitions" in the notes to consolidated
financial statements. However, the majority of our growth was related to new
client relationships and extensions of credit in the normal course of business
in our C&I, commercial finance and commercial real estate portfolios.
Total deposits were $22,558,280 at March 31, 2020 , and core deposit growth was
$155,564 over the linked quarter and $543,293 compared to March 31, 2019 . Our
loans to deposits ratio was 96.2% at quarter end. Our cost of interest-bearing
deposits declined 10 basis points and our cost of total deposits declined eight
basis points relative to the linked quarter. We anticipate the current interest
rate environment and pricing strategies we have implemented will allow us to
continue to meaningfully reduce the cost of our funding liabilities.
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STERLING BANCORP AND SUBSIDIARIES
In the first quarter of 2020, we repurchased 4,900,759 shares of common stock at
a weighted average price of $16.53 per share, for total consideration of
$81,032 . In the past twelve months we have repurchased 16,210,858 shares of
common stock for total consideration of $309,627 . Under our approved repurchase
program, we have 6,671,776 shares remaining for repurchase at March 31, 2020 . We
have decided to temporarily suspend our share repurchase activity until the
long-term impact of the pandemic becomes more clear.
Our net interest margin and net interest income were pressured by the
significant decrease in interest rates and the impact on our floating rate loans
indexed to LIBOR and prime rates. Our tax equivalent net interest margin
excluding purchase accounting adjustments was 3.05% and our reported net
interest margin on a tax equivalent basis was 3.21%. Our net interest income was
$211,772 , which was impacted by a decrease in accretion income on acquired loans
of $8,811 and a decrease in yields on our floating rate loans.
Our adjusted non-interest expenses were $106,277 in the quarter, an increase of
$745 over the linked quarter which was mainly due to seasonal fluctuations in
compensation and benefits and an increase in professional fees associated with
strategic initiatives and a legal settlement. Our reported operating efficiency
ratio was 44.3% and our adjusted operating efficiency ratio was 42.4% for the
quarter.
Critical Accounting Policies
Our accounting and reporting policies are prepared in accordance with GAAP and
conform to general practices within the banking industry. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. While we base estimates on
historical experience, current information and other factors deemed to be
relevant, actual results could differ from those estimates. We consider
accounting estimates to be critical to reported financial results if (i) the
accounting estimate requires management to make assumptions about matters that
are highly uncertain; and (ii) different estimates that management reasonably
could have used for the accounting estimate in the current period, or changes in
the accounting estimate that are reasonably likely to occur from period to
period, could have a material impact on our financial statements. Accounting
policies related to the ACL, business combinations, 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 2019
Form 10-K.
ACL - Loans. We consider the methodology for determining the ACL to be a
critical accounting policy due to the high degree of judgment involved, the
subjectivity of the assumptions utilized and the potential for changes in the
economic environment that could result in changes to the amount of the ACL -
loans considered necessary. The balance recorded for the allowance represents
our estimate of the net amount not expected to be collected on portfolio loans
at the balance sheet date. The ACL - loans is mainly comprised of reserves on
individual assets estimated by our valuation models. Mortgage warehouse loans
and certain consumer loans are evaluated on a pool level basis as each portfolio
has common risk characteristics. Generally all other portfolio loans are
evaluated individually for expected credit loss. In addition to quantitative
amounts as determined by our valuation models, we apply a qualitative factors
overlay that incorporates trends and conditions and factors that the models may
not fully capture in our judgement. Our methodologies for estimating the ACL -
loans considers available relevant information about the collectibility of cash
flows, including information about past events, current conditions and
reasonable and supportable forecasts See Note 1. "Basis Financial Statement
Presentation - (e) Accounting Principle Change" for further discussion of the
risk factors we considered in the determination of the allowance for credit
losses - loans.
Goodwill and Intangible Assets. We record goodwill as the excess of the purchase
price in a business combination over the fair value of the identifiable net
assets acquired in accordance with GAAP. We perform our annual goodwill and
intangible assets impairment test in the fourth quarter of each year, or more
often if events or circumstances warrant. At March 31, 2020 , we performed a
qualitative assessment and concluded a goodwill and intangible asset impairment
did not exist. We will continue to monitor and evaluate the impact of COVID-19
and its impact on our market capitalization, overall economic conditions and any
other triggering events that may indicate an impairment of goodwill in the
future. In the event we conclude that all or a portion of our goodwill or
intangible assets are impaired, a non-cash charge for the amount of such
impairment would be recorded to earnings. Such a charge would have no impact on
tangible capital or our regulatory capital ratios.
Financial Impact of Recent Acquisitions
The balances of the commercial loan portfolio acquired from Woodforest were
included in our consolidated balance sheets as of February 28, 2019 , and the
operating results from those assets were included in our results of operations
from that day forward.
The balances of the commercial loan portfolio acquired from Santander were
included in our consolidated balance sheets as of November 29, 2019 , and the
operating results from those assets were included in our results from operations
from that day forward.
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STERLING BANCORP AND SUBSIDIARIES
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:
At or for the three months ended
March 31,
2020 2019
End of period balances:
Total securities $ 4,617,012 $ 5,915,050
Portfolio loans 21,709,957 19,908,473
Total assets 30,335,036 29,956,607
Non-interest bearing deposits 4,369,924 4,321,310
Interest bearing deposits 18,188,356 16,904,329
Total deposits 22,558,280 21,225,639
Borrowings 2,598,698 3,633,480
Stockholders' equity 4,422,424 4,419,223
Tangible common stockholders' equity ("TCE")1 2,495,415 2,498,472
Average balances:
Total securities $ 5,046,573 $ 6,334,694
Total loans2 21,206,177 20,412,274
Total assets 30,484,433 30,742,943
Non-interest bearing deposits 4,346,518 4,247,389
Interest bearing deposits 18,346,050 17,068,737
Total deposits and mortgage escrow 22,692,568 21,316,126
Borrowings 2,580,922 4,466,172
Stockholders' equity 4,506,537 4,415,449
TCE1 2,576,558 2,520,595
Selected operating data:
Total interest and dividend income $ 273,527 $ 309,400
Total interest expense 61,755 73,894
Net interest income 211,772 235,506
Provision for credit losses 138,280 10,200
Net interest income after provision for credit losses 73,492 225,306
Total non-interest income 47,326 19,597
Total non-interest expense 114,713 114,992
Income before income tax expense 6,105 129,911
Income tax (benefit) expense (8,042) 28,474
Net income 14,147 101,437
Preferred stock dividend 1,976 1,989
Net income available to common stockholders $ 12,171 $ 99,448
Per share data:
Reported basic EPS (GAAP) $ 0.06 $ 0.47
Reported diluted EPS (GAAP) 0.06 0.47
Adjusted diluted EPS1 (non-GAAP) (0.02) 0.50
Dividends declared per common share 0.07 0.07
Book value per share 22.04 20.43
Tangible book value per common share1 12.83 11.92
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STERLING BANCORP AND SUBSIDIARIESSee legend on following page.
At or
for the three months ended
2020 2019
Common shares outstanding:
Shares outstanding at period end 194,460,656 209,560,824
Weighted average shares basic 196,344,061 213,157,090
Weighted average shares diluted 196,709,038 213,505,842
Other data:
Full time equivalent employees at period end 1,619 1,855
Financial centers at period end 79 99
Performance ratios:
Return on average assets 0.16 % 1.31 %
Return on average equity 1.09 9.13
Reported return on average tangible assets1 0.17 1.39
Adjusted return on average tangible assets1 (0.04) 1.48
Reported return on average TCE1 1.90 16.00
Adjusted return on average TCE1 (0.49) 17.04
Reported operating efficiency1 44.3 45.1
Adjusted operating efficiency1 42.4 40.5
Net interest margin-GAAP 3.16 3.48
Net interest margin-tax equivalent3 3.21 3.54
Capital ratios (Company)4:
Tier 1 leverage ratio 9.41 % 9.21 %
Common equity Tier 1 capital ratio 10.89 11.98
Tier 1 risk-based capital ratio 11.47 12.63
Total risk-based capital ratio 13.73 13.78
Tangible equity to tangible assets 9.22 9.36
Tangible common equity to tangible assets1 8.74 8.87
Regulatory capital ratios (Bank)4:
Tier 1 leverage ratio 9.99 % 9.58 %
Tier 1 risk-based capital ratio 12.19 13.13
Total risk-based capital ratio 13.80 14.41
Asset quality data and ratios:
Allowance for credit losses $ 326,444 $ 98,960
Non-performing loans ("NPLs") 253,750 170,415
Non-performing assets ("NPAs") 265,565 189,792
Net charge-offs 6,955 6,917
NPAs to total assets 0.88 % 0.62 %
NPLs to total loans5 1.17 0.86
Allowance for loan losses to non-performing loans 128.65 58.07
Allowance for loan losses to total loans4 1.50 0.50
Annualized net charge-offs to average loans 0.13 0.14
__________________
1 See a reconciliation of as reported financial measures to as adjusted
(non-GAAP) financial measures beginning on page 73 below under the caption
"Supplemental Reporting of Non-GAAP Financial Measures."
2 Includes loans held for sale but excludes the allowance for credit losses.
3 Tax equivalent basis represents interest income earned on municipal securities
divided by the applicable Federal tax rate of 21%.
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STERLING BANCORP AND SUBSIDIARIES
4 We elected the five-year capital phase-in option effective
Results of Operations For the three months endedMarch 31, 2020 , we reported net income available to common stockholders of$12,171 , or$0.06 per diluted common share, compared to net income available to common stockholders of$99,448 , or$0.47 per diluted common share, for the three months endedMarch 31, 2019 .
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 81.7% and 92.3% of total revenue in the three months endedMarch 31, 2020 and 2019, respectively. Net interest margin is the ratio of taxable equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest bearing liabilities impact net interest income and net interest margin. We are primarily funded by core deposits. Core deposits include retail, commercial and municipal transaction deposits, money market and savings accounts and certificates of deposit accounts, including reciprocal brokered deposits through thePromontory Interfinancial Network , but excluding other brokered and wholesale deposits. As ofMarch 31, 2020 , we considered 91.8% of our total deposits to be core deposits compared to 95.0% atMarch 31, 2019 . Non-interest bearing demand deposits were$4,369,924 of our total deposits atMarch 31, 2020 , compared to$4,321,310 atMarch 31, 2019 . We believe that our low cost deposit funding base will assist in offsetting a portion of the decline in interest income as a result of the decline in market rates of interest as liabilities mature and we continue our deposit repricing strategy. 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. 55 --------------------------------------------------------------------------------
STERLING BANCORP AND SUBSIDIARIES
For the three months ended March 31,
2020 2019
Average Average
balance Interest Yield/Rate balance Interest Yield/Rate
Interest earning assets:
Traditional C&I and commercial finance loans
4.46 % $ 6,568,136 $ 88,908 5.49 %
CRE (includes multi-family) 10,288,977 110,742 4.33 9,385,420 114,855 4.96
ADC 497,009 6,320 5.11 284,299 4,341 6.19
Commercial loans 18,820,094 206,212 4.41 16,237,855 208,104 5.20
Consumer loans 233,643 2,939 5.06 295,428 4,096 5.62
Residential mortgage loans 2,152,440 26,288 4.89 3,878,991 48,095 4.96
Total gross loans1 21,206,177 235,439 4.47 20,412,274 260,295 5.17
Securities taxable 2,883,367 20,629 2.88 3,833,690 27,847 2.95
Securities non-taxable 2,163,206 16,451 3.04 2,501,004 18,806 3.01
Interest earning deposits 489,691 1,832 1.50 331,954 1,501 1.83
FRB and FHLB stock 237,820 2,630 4.45 335,302 4,900 5.93
Total securities and other earning assets 5,774,084 41,542 2.89 7,001,950 53,054 3.07
Total interest earning assets 26,980,261 276,981 4.13 27,414,224 313,349 4.64
Non-interest earning assets 3,504,172 3,328,719
Total assets $ 30,484,433 $ 30,742,943
Interest bearing liabilities:
Interest bearing demand deposits $ 4,616,658 $ 9,558 0.83 % $ 4,334,266 $ 11,643 1.09 %
Savings deposits2 2,800,021 3,506 0.50 2,460,247 1,784 0.29
Money market deposits 7,691,381 18,396 0.96 7,776,501 22,616 1.18
Certificates of deposit 3,237,990 14,321 1.78 2,497,723 9,952 1.62
Total interest bearing deposits 18,346,050 45,781 1.00 17,068,737 45,995 1.09
Senior Notes 173,323 1,434 3.31 179,439 1,412 3.15
Other borrowings 1,963,428 9,353 1.92 4,113,770 24,132 2.38
Subordinated Notes - Bank 173,203 2,360 5.45 % 172,963 2,355 5.45 %
Subordinated Notes - Company 270,968 2,827 4.17 - - -
Total borrowings 2,580,922 15,974 2.49 4,466,172 27,899 2.53
Total interest bearing liabilities 20,926,972 61,755 1.19 21,534,909 73,894 1.39
Non-interest bearing deposits 4,346,518 4,247,389
Other non-interest bearing liabilities 704,406 545,196
Total liabilities 25,977,896 26,327,494
Stockholders' equity 4,506,537 4,415,449
Total liabilities and stockholders' equity $ 30,484,433 $ 30,742,943
Net interest rate spread3 2.94 % 3.25 %
Net interest earning assets4 $ 6,053,289 $ 5,879,315
Net interest margin - tax equivalent 215,226 3.21 % 239,455 3.54 %
Less tax equivalent adjustment (3,454) (3,949)
Net interest income 211,772 235,506
Accretion income on acquired loans 10,686 25,580
Tax equivalent net interest margin excluding
accretion income on acquired loans $ 204,540 3.05 % $ 213,875 3.16 %
Ratio of interest earning assets to interest
bearing liabilities 128.9 % 127.3 %
See legend on following page.
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STERLING BANCORP AND SUBSIDIARIES
1 Average balances include loans held for sale and non-accrual loans. 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.
The following table presents the dollar amount of changes in interest income (on
a fully tax equivalent basis) and interest expense for the major categories of
our interest earning assets and interest bearing liabilities for the periods
indicated. Information is provided for each category of interest earning assets
and interest bearing liabilities with respect to (i) changes attributable to
changes in volume (i.e., changes in average balances multiplied by the prior
period average rate); and (ii) changes attributable to changes in rate (i.e.,
changes in average rate multiplied by prior period average balances). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
For
the three months ended
2020 vs 2019
Increase / (Decrease) Total
due to increase /
Volume Rate (decrease)
Interest earning assets:
Traditional C&I and commercial finance loans $ 18,409 $ (18,167) $ 242
CRE (includes multi-family) 10,904 (15,017) (4,113)
ADC 2,843 (864) 1,979
Commercial loans 32,156 (34,048) (1,892)
Consumer loans (784) (373) (1,157)
Residential mortgage loans (21,137) (670) (21,807)
Total loans 10,235 (35,091) (24,856)
Securities taxable (6,588) (630) (7,218)
Securities tax exempt (2,541) 186 (2,355)
Interest earning deposits 635 (304) 331
FRB and FHLB stock (1,221) (1,049) (2,270)
Total interest earning assets 520 (36,888) (36,368)
Interest bearing liabilities:
Interest bearing demand deposits 755 (2,840) (2,085)
Savings deposits1 276 1,446 1,722
Money market deposits (234) (3,986) (4,220)
Certificates of deposit 3,277 1,092 4,369
Total interest bearing deposits 4,074 (4,288) (214)
Senior Notes (48) 70 22
Other borrowings (10,819) (3,960) (14,779)
Subordinated Notes - Bank 5 - 5
Subordinated Notes - Company 2,827 - 2,827
Total borrowings (8,035) (3,890) (11,925)
Total interest bearing liabilities (3,961) (8,178) (12,139)
Change in tax equivalent net interest income 4,481 (28,710) (24,229)
Less tax equivalent adjustment (495) - (495)
Change in net interest income $ 4,976 ______________________
1 Includes club accounts and interest bearing mortgage escrow balances.
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STERLING BANCORP AND SUBSIDIARIES
Tax equivalent net interest income decreased $24,229 for the three months ended
March 31, 2020 , compared to the three months ended March 31, 2019 . The decrease
was mainly due to a decrease in yield on interest earning assets and a decrease
in accretion income on acquired loans. For the three months ended March 31,
2020 , total interest earning assets yielded 4.13% compared to 4.64% during 2019,
as rates on adjustable rate loans have decreased with market interest rates.
Average interest earning assets declined by $433,963 between the periods, which
was mainly due to the sale of investment securities. The tax equivalent net
interest margin decreased 33 basis points to 3.21% in the first quarter of 2020
from 3.54% in the first quarter of 2019. The percentage of loans to average
earning assets increased to 78.6% compared to 74.5% in 2019. The cost of
interest bearing liabilities declined to 1.19% compared to 1.39% in 2019, which
was mainly due to lower reliance on borrowings to fund interest earning assets.
The average balance of loans outstanding increased $793,903 for the three months
ended March 31, 2020 compared to the three months ended March 31, 2019 . The
increase was due to loans originated by our commercial banking teams and the two
portfolio acquisitions, discussed in Note 2. "Acquisitions. The average balance
of commercial loans increased $2,582,239 between the periods. The average yield
on loans was 4.47% compared to 5.17% in the comparable year ago period. The
decrease in the yield on loans was due to the change in market rates of interest
and a decline in accretion income on acquired loans, which was $10,686 compared
to $25,580 in 2019.
Interest income on traditional C&I and commercial finance loans increased $242
for the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 . This increase was mainly due to higher average loan balances as
a result of organic loan growth and loan portfolio acquisitions. The yield on
traditional C&I and commercial finance loans declined to 4.46% compared to 5.49%
in 2019. The decrease in yield was due to a change in the mix of business, as
lower yielding mortgage warehouse and public sector finance loans were a
substantial portion of the increase in average balances between the periods, and
the decrease in market interest rates.
Interest income on CRE loans and multi-family loans decreased $4,113 for the
three months ended March 31, 2020 compared to the three months ended March 31,
2019 . The average balance of CRE and multi-family loans increased $903,557
between the periods. The yield on CRE and multi-family loans was 4.33% compared
to 4.96% for the three months ended March 31, 2019 . The decrease in yield was
mainly due to a change in market interest rates and lower levels of prepayment
penalties.
Interest income on residential mortgage loans declined $21,807 for the three
months ended March 31, 2020 compared to the three months ended March 31, 2019 .
The decrease was mainly due to a $1,726,551 decline in the average balance of
residential mortgage loans, which was driven by the residential mortgage loan
sales completed in 2019 and continued run-off of the portfolio. The yield on
residential mortgage loans decreased 7 basis points to 4.89% compared to 4.96%
in 2019. The decline in yield was mainly due to lower accretion income on
acquired residential mortgage loans, which was $3,177 compared to $8,297 in
2019.
Tax equivalent interest income on securities decreased $9,573 for the three
months ended March 31, 2020 , compared to the three months ended March 31, 2019 .
This was mainly the result of a decrease of $1,288,121 in the average balance of
securities between the periods. The tax equivalent yield on securities decreased
to 2.96% compared to 2.99% in 2019. The decrease was mainly due to sales of
corporate securities and accelerated repayments of mortgage backed securities,
which increased premium amortization. The average balance of tax-exempt
securities declined to $2,163,206 , compared to $2,501,004 .
Average total deposits and mortgage escrow increased $1,376,442 in the three
months ended March 31, 2020 , compared to the three months ended March 31, 2019 .
Average interest bearing deposits increased $1,277,313 and average non-interest
bearing deposits increased to $4,346,518 . The increase in interest bearing
deposits was mainly due to success of our deposit gathering strategies, which
included digital channels and increasing penetration in our marketplace of
commercial and municipal deposit relationships. The average cost of interest
bearing deposits was 1.00% compared to 1.09%. The average cost of total deposits
was 0.81% compared to 0.88% in the first quarter of 2019. The decrease in the
cost of deposits was mainly due to declines in market interest rates, partially
offset by the competitive environment for deposits in the greater New York
metropolitan region.
Average borrowings declined $1,885,250 in the three months ended March 31, 2020 ,
compared to the same period a year ago. The decrease was mainly the result of an
increase in deposits and a decline in residential mortgage loan balances and
investment securities between the periods, as proceeds from the sales were used
mainly to reduce borrowings. The average cost of borrowings was 2.49% for the
first quarter of 2020, compared to 2.53% in 2019.
Provision for Credit Losses - Loans. The provision for credit losses - loans is
determined as the amount to be added to the ACL - loans after net charge-offs
have been deducted to bring the allowance to a level that is our best estimate
of the net amount not expected to be collected on portfolio loans. For the three
months ended March 31, 2020 and March 31, 2019 , the provision for credit losses
- loans was $136,577 and $10,200 , respectively. See the section captioned
"Non-Performing Loans ("NPLs") and Non-Performing Assets ("NPAs")" later in this
discussion for further analysis of the provision for credit losses.
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Provision for Credit Losses - HTM Securities . The provision for credit losses -
HTM securities for the three months ended March 31, 2020 was $1,703 . This
provision was mainly due to a change in the estimate of loss given default due
to COVID-19 and deterioration in economic conditions.
Non-interest income. The components of non-interest income were as follows for
the periods presented below:
For the three months ended
March 31,
2020 2019
Deposit fees and service charges $ 6,622 $ 6,212 Accounts receivable management / factoring commissions and other fees
5,538 5,423 Bank owned life insurance 5,018 3,641 Loan commissions and fees 11,024 3,838 Investment management fees 1,847 1,900 Net gain (loss) on sale of securities 8,412 (13,184) Net gain on called securities 4,880 - Gain on sale of residential mortgage loans - 8,313 Other 3,985 3,454 Total non-interest income$ 47,326 $ 19,597 Non-interest income was$47,326 for the three months endedMarch 31, 2020 , compared to$19,597 in the same period a year ago. Included in non-interest income was a net gain (loss) on sale of securities, which was a gain of$8,412 for the three months endedMarch 31, 2020 compared to a loss of$13,184 for the three months endedMarch 31, 2019 . Results for the three months endedMarch 31, 2019 included a gain on sale of residential mortgage loans of$8,313 . Net gain (loss) 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 certain items, including gains and losses on sales of securities and the gain on sale of residential mortgage loans. Excluding net gain (loss) on sale of securities and gain on sale of residential mortgage loans, non-interest income was$38,914 for the first quarter of 2020 compared to$24,468 for the first quarter of 2019.
Deposit fees and service charges were
Bank owned life insurance income represents the change in the cash surrender value of life insurance policies owned by us. BOLI income was$5,018 for the first quarter of 2020, compared to$3,641 in the same period a year ago. In the second half of 2019 we restructured the BOLI acquired in the Astoria Merger, which was the main cause of the increase. Loan commissions and fee 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$11,024 for the three months endedMarch 31, 2020 , compared to$3,838 for the three months endedMarch 31, 2019 . The increase was mainly due to gain on sale of equipment finance loans of$2,881 and fee income earned on operating leases of$4,314 . Net gain (loss) on sale of securities represents net gains or losses incurred on the sale of securities from our AFS investment securities portfolio. We realized a net gain on sale of securities of$8,412 in the three months endedMarch 31, 2020 compared to a loss of$13,184 in the three months endedMarch 31, 2019 . The net gain was mainly due to the sale of$407,524 of AFS securities in the first quarter of 2020. The proceeds were used for liquidity management purposes. In the quarter endedMarch 31, 2019 , the loss on sale was mainly due to the sale of$738,751 of AFS securities. The proceeds were used to fund a portion of the commercial loans acquired from Woodforest and to reduce wholesale deposits and borrowings.
Net gain on called securities represents income earned on security calls of
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Gain on sale of residential mortgage loans represents the net gain realized on
the sale of residential mortgage loans held for sale in the first quarter of
2019. The sale was part of our strategy of increasing the percentage of
commercial loans to total loans in our loan portfolio.
Other non-interest income principally includes fees for loan swaps, safe deposit
rentals and foreign exchange fees. Other non-interest income increased to $3,985
in 2020 from $3,454 in 2019 and was mainly due to higher loan swap transaction
volumes.
Non-interest expense. The components of non-interest expense were as follows for
the periods presented below:
For the three months ended
March 31,
2020 2019
Compensation and benefits $ 54,876 $ 55,990
Stock-based compensation plans 6,006 5,123
Occupancy and office operations 15,199 16,535
Information technology 8,018 8,675
Amortization of intangible assets 4,200 4,826
FDIC insurance and regulatory assessments 3,206 3,338
OREO, net 52 217
Charge for asset write-downs, retention and severance - 3,344
Other non-interest expense 23,156 16,944
Total non-interest expense $ 114,713 $ 114,992
Non-interest expense for the three months ended March 31, 2020 was $114,713 , a
$279 decrease from $114,992 for the three months ended March 31, 2019 . The
decrease between the periods was mainly a result of strong management of
operating expenses, a decrease in personnel and continued execution of our real
estate consolidation strategy. Changes in the components of non-interest expense
are discussed below.
Compensation and benefits expense was $54,876 for the three months ended
March 31, 2020 , compared to $55,990 for the three months ended March 31, 2019 .
The decrease was mainly due to a decline in our full-time equivalent employees.
As of March 31, 2020 , our full-time equivalent employees were 1,619 compared to
1,855 at March 31, 2019 , which was mainly due to the completion of the Astoria
Merger integration and ongoing financial center consolidation strategy.
Stock-based compensation plans expense was $6,006 in the first quarter of 2020,
compared to $5,123 in the first quarter of 2019. 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. Performance-based stock awards granted
in February 2017 with a three-year measurement period vested in the first
quarter of 2019 at 150% of the target amount granted, which resulted in
additional expense of $960 . 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 $15,199 in the first quarter of
2020, compared to $16,535 in the first quarter of 2019. At March 31, 2020 , we
had 79 financial center locations, compared to 99 financial centers at March 31,
2019 .
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 $8,018 in the first quarter of 2020, compared
to $8,675 in the first quarter of 2019. The decrease in information technology
expense was mainly due to a decline in data processing expense.
Amortization of intangible assets expense mainly includes amortization of core
deposit intangible assets, customer lists and non-compete agreements.
Amortization of intangible assets was $4,200 in the three months ended March 31,
2020 , compared to $4,826 for the three months ended March 31, 2019 . The decrease
in amortization expense was mainly due to the accelerated amortization of the
core deposit intangible assets that were recorded in the Astoria Merger and
other acquisitions. For additional information, see Note 6. "Goodwill and Other
Intangible Assets" in the notes to the consolidated financial statements
included elsewhere in this report.
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Charge for asset write-downs, severance and retention expense was $0 for the
three months ended March 31, 2020 compared to $3,344 for the three months ended
March 31, 2019 . In the year ago period, in connection with the commercial loan
portfolio and origination platform acquired from Woodforest, we incurred a
charge that included components related to professional fees, retention and
severance, systems integration costs and an impairment of a lease assumed in the
transaction.
Other non-interest expense mainly includes professional fees, depreciation
expense on operating leases acquired in the Santander Portfolio Acquisition,
advertising and promotion, communications, residential mortgage loan servicing,
insurance, operational losses, commercial loan processing expenses, pension and
post retirement plans, recruitment fees, taxes not included in income tax
expense, travel and client entertainment, and colleague training expense. For
the three months ended March 31, 2020 , other non-interest expense was $23,156 ,
compared to $16,944 for the three months ended March 31, 2019 . The increase was
mainly due to depreciation expense on operating leases of $3,492 , higher
professional fees of $1,601 , including consulting expenses related to various
automation projects, legal fees related to various loan collection and other
matters and an increase in advertising and promotion of $996 for targeted
deposit gathering efforts.
Income tax benefit was $8,042 for the three months ended March 31, 2020 compared
to income tax expense of $28,474 for the three months ended March 31, 2019 . We
recorded income taxes at an estimated annual effective tax rate of 17.5% for the
three months ended March 31, 2020 . Note that our estimated effective tax rate
may fluctuate based on the amount of provision for credit losses that we record
in the remainder of 2020. In addition, there were two discrete items that
impacted income tax (benefit) expense in the three months ended March 31, 2020 :
•Based on provisions of the CARES Act, we had an NOL carryback that resulted in
an income tax benefit of $21,313 . We recorded an accrual for uncertain tax
positions of $11,480 which is discussed in Note 10. "Income Taxes". The net of
these two items was an income tax benefit of $9,833 .
•We recorded income tax expense of $723 due to vesting of stock-based
compensation.
For the three months ended March 31, 2019 , our income tax expense was recorded
at an estimated effective income tax rate of 21.9%. 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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Portfolio Loans
The following table sets forth the composition of our loan portfolio, excluding
loans held for sale, by type of loan at the periods indicated.
March 31, 2020
Amount % Amount %
Commercial:
C&I:
Traditional C&I $ 2,745,792 12.6 % $ 2,355,031 11.0 %
Asset-based lending 1,075,092 5.0 1,082,618 5.0
Payroll finance 179,554 0.8 226,866 1.1
Warehouse lending 1,356,277 6.2 1,330,884 6.2
Factored receivables 225,144 1.0 223,638 1.0
Equipment financing 1,667,523 7.8 1,800,564 8.4
Public sector finance 1,234,092 5.7 1,213,118 5.7
Total C&I 8,483,474 39.1 8,232,719 38.4
Commercial mortgage:
CRE 5,664,443 26.1 5,418,648 25.3
Multi-family 4,735,123 21.8 4,876,870 22.7
ADC 524,714 2.4 467,331 2.2Total commercial mortgage 10,924,280 50.3 10,762,849
50.2
Total commercial 19,407,754 89.4 18,995,568 88.6
Residential mortgage 2,077,534 9.6 2,210,112 10.3
Consumer 224,669 1.0 234,532 1.1
Total portfolio loans 21,709,957 100.0 % 21,440,212 100.0 %
Allowance for credit losses (326,444) (106,238)
Total portfolio loans, net $ 21,383,513 $ 21,333,974 Note: the percentages in the table above are rounded to the nearest tenth of a percent.
Overview. Total portfolio loans, net, increased$49,539 to$21,383,513 atMarch 31, 2020 , compared to$21,333,974 atDecember 31, 2019 . This was mainly due to an increase in total commercial loans of$412,186 , which was offset by a decline in residential mortgage loans of$132,578 , and the change in the ACL of$220,206 . This change in total portfolio loans is consistent with our strategy of transitioning our loan portfolio composition to reduce residential mortgage loans and increase the proportion of commercial loans originated through our commercial banking teams. AtMarch 31, 2020 , total C&I loans comprised 39.1% of the total loan portfolio, compared to 38.4% atDecember 31, 2019 . Commercial mortgage loans comprised 50.3% and 50.2% of the total loan portfolio atMarch 31, 2020 andDecember 31, 2019 , respectively. Residential mortgage loans comprised 9.6% of the total loan portfolio atMarch 31, 2020 , compared to 10.3% atDecember 31, 2019 . Our goal, over time, is for our loan portfolio to consist of 45.0% traditional C&I and commercial finance; 45.0% commercial real estate; and 10.0% consumer and residential mortgage loans. In the three months endedMarch 31, 2020 , traditional C&I loans increased by$390,761 , which occurred mainly in March as clients drew on revolving credit facilities in response to COVID-19. Warehouse lending loans increased$25,393 , which was mainly due to the decline in residential mortgage interest rates and an increase in residential mortgage loan refinance activity. Public sector finance loans grew$20,974 and factored receivables grew$1,506 . Asset-based lending loans grew$7,526 , which includes the loans acquired from Woodforest. These increases were partially offset by declines of$133,041 in equipment finance loans, which included the sale of$95,179 of small balance equipment finance loans and discussed above and repayments and$47,312 in payroll finance loans, which included a combination seasonal fluctuations and the impact of COVID-19 to our clients' businesses. CRE loans increased$245,795 in the three months endedMarch 31, 2020 . The increase was mainly due to strong demand for these loan products in our market area. Multi-family loans declined in the first three months of 2020 by$141,747 , mainly due to run-off in broker originated loans that are not an on-going part of our multi-family portfolio focus. 62 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES ADC loans, which are a component of commercial mortgage loans, increased$57,383 in the three months endedMarch 31, 2020 . This increase is mainly due to construction loans related to our affordable housing tax credit investments. Other ADC loans are generally originated to select clients, mostly within our immediate footprint.
Residential mortgage loans were
Included in our residential mortgage portfolio are loans that were originated in
2010 or earlier as 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
$787,104 of residential mortgage loans that were originated as interest only ARM
loans at March 31, 2020 compared to $846,628 at December 31, 2019 .
Non-Performing Loans ("NPLs") and Non-Performing Assets ("NPAs") 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.
March 31, December 31,
2020 2019
Non-accrual loans:
Traditional C&I $ 26,311 $ 27,148
Asset-based lending 24,873 4,966
Payroll finance 8,684 9,396
Equipment financing 50,473 33,050
Commercial real estate 34,643 26,213
Multi-family 4,448 3,400
ADC 30,434 434
Residential mortgage 60,857 62,275
Consumer 11,482 12,169
Total non-accrual loans 252,205 179,051
Accruing loans past due 90 days or more 1,545 110
Total NPLs 253,750 179,161
OREO 11,815 12,189
Total NPAs $ 265,565 $ 191,350
TDRs accruing and not included above $ 36,622 $ 49,807
Ratios:
NPLs to total loans 1.17 % 0.84 %
NPAs to total assets 0.88 0.63
NPAs and NPLs. NPLs include non-accrual loans and accruing loans past due 90
days or more. NPAs include NPLs and OREO. At March 31, 2020 , total NPLs
increased $74,589 to $253,750 compared to $179,161 at December 31, 2019 .
Non-accrual loans were $252,205 and loans 90 days past due and still accruing
interest which were well secured and in the process of collection, were $1,545
as of March 31, 2020 . Non-accrual loans increased by $73,154 to $252,205 at
March 31, 2020 from $179,051 at December 31, 2019 . The increase was mainly due
to loans in our asset-based lending and equipment financing portfolios, which
are in the process of work-out or exit. The increase in ADC was due to one
relationship, in which we continue to work with our borrower. The decline in
traditional C&I was mainly related to a decline in taxi medallion relationships.
Loans past due 90 days or more and still accruing increased $1,435 between the
periods. This was mainly due to loans that were in the process of being renewed
at their respective period end.
TDRs. TDRs still accruing interest income are loans modified for borrowers that
have experienced financial difficulties but are performing in accordance with
the terms of their loan and were performing prior to the modification. Loan
modification concessions may include actions such as an extension of the
maturity date or the lowering of interest rates and monthly payments. At
March 31, 2020 , total TDRs were $79,112 of which $36,622 were performing in
accordance with their modified terms and $42,490 were non-
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accrual. At December 31, 2019 total TDRs were $75,656 of which $49,807 were
performing and $25,849 were non-accrual. The decrease in performing TDRs at
March 31, 2020 was mainly due to transfer to non-accrual of TDRs that were
performing at December 31, 2019 . Total charge-offs of TDR loans was $805 and $80
for the three months ended March 31, 2020 and 2019, respectively. TDR balances
are detailed in the TDR section of Note 4. "Portfolio Loans" in the notes to the
consolidated financial statements included elsewhere in this report. As of
March 31, 2020 , there were no commitments to lend additional funds to borrowers
with loans that have been classified as TDRs.
The CARES Act, signed into law on March 27, 2020 , permits financial institutions
to suspend requirements under GAAP for loan modifications to borrowers affected
by COVID-19 that would otherwise be characterized as TDRs and suspend any
determination related thereto if (i) the loan modification is made between March
1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the
coronavirus emergency declaration and (ii) the applicable loan was not more than
30 days past due as of December 31, 2019 On April 7, 2020 , various regulatory
agencies, including the Board of Governors of the Federal Reserve System and the
Office of the Comptroller of the Currency , (the "Agencies") issued an
interagency statement on loan modifications and reporting for financial
institutions working with customers affected by COVID-19. The interagency
statement was effective immediately and provided practical expedients for
evaluating whether loan modifications that occur in response to COVID-19 are
TDRs. The Agencies confirmed with the FASB that short-term modifications made on
a good faith basis in response to COVID-19 to borrowers who were current prior
to any relief, are not to be considered TDRs. This includes short-term (e.g.,
six months) modifications such as payment deferrals, fee waivers, extensions of
repayment terms, or other delays in payment that are insignificant. Borrowers
considered current are those that are less than 30 days past due on their
contractual payments at the time a modification program is implemented. We are
applying this guidance to qualifying loan modifications.
As of April 22, 2020 , we had approved loan modifications on outstanding loan
balances of approximately $1.1 billion , or 5.1% of our total loan portfolio. The
loan modifications consisted mainly of deferrals of principal or deferrals of
principal and interest were generally for a three month period and were not
considered TDRs based on the CARES Act and interagency guidance discussed above.
We are participating as a lender under the SBA's Payroll Protection Program. As
of
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 ACL. 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. AtMarch 31, 2020 , we had OREO properties with a recorded balance of$11,815 , compared to$12,189 atDecember 31, 2019 . The decrease was mainly due to$1,091 in sales. We had OREO additions of$732 in the three months endedMarch 31, 2020 . Classification of Assets. Our determination as to the classification of our assets and the amount of our ACL are subject to review by our regulators, who can direct the charge-off of loans and order the establishment of additions to our ACL. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. As ofMarch 31, 2020 , we had$132,356 of loans designated as "special mention" compared to$159,976 atDecember 31, 2019 . The decrease was mainly due to asset-based lending loans and small balance equipment finance loans which were classified substandard in the period. On the basis of management's review of our assets atMarch 31, 2020 , classified assets consisted of substandard loans of$402,393 and OREO of$11,815 . Substandard loans were$295,428 and OREO was$12,189 atDecember 31, 2019 . The increase in substandard loans in the three months endedMarch 31, 2020 was mainly related to two asset-based lending loan relationships, one ADC relationship, and small balance equipment finance loans. ACL - Loans. The ACL - loans is a valuation account that is deducted from the amortized cost basis of portfolio loans to present the net amount expected to be collected on portfolio loans over their contractual life. See Note 1. "Basis of Financial Statement Presentation - (e) Accounting Principle Change" for additional detail regarding our ACL - loan calculation methodology. Our estimate of credit losses atMarch 31, 2020 is based on the Moody's baseline forecast scenario as ofApril 11, 2020 , which included the impact of recent COVID-19 developments. The Moody's baseline forecast incorporates a significant amount of macroeconomic assumptions and variables. 64 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES To address potential model uncertainties, this we overlay qualitative factors to the quantitative results of loss estimates calculated under the assumptions above. The qualitative adjustments include the following: •Lending policies and procedures including changes in lending strategies, underwriting standards, collection, write-off and recovery practices; •Experience, ability and depth of management and lending and other relevant staff; •Nature and volume of our loans and changes therein; •Changes and expected changes in general market conditions of either the geographical area or industry related to our exposure; •An adjustment for economic conditions during reasonable and supportable period; and •An adjustment for additional factors including data quality and changes in the number of assumptions used in quantitative models.
The ACL - loans increased from
Allocation of ACL. The following table sets forth the ACL allocated by loan
category, the total loan balances by category (excluding loans held for sale),
and the percent of loans in each category to total loans at the dates indicated.
The allowance for loan losses allocated to each category is not necessarily
indicative of future losses in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
March 31, 2020 December 31, 2019
Allowance Allowance
for credit Loan % of ACL to for loan Loan % of ALLL to
losses balance loan balance losses balance loan balance
Traditional C&I $ 35,289 $ 2,745,792 1.30 % $ 15,951 $ 2,355,031 0.70 %
Asset-based lending 26,490 1,075,092 2.50 14,272 1,082,618 1.30
Payroll finance 3,730 179,554 2.10 2,064 226,866 0.90
Warehouse lending 289 1,356,277 - 917 1,330,884 0.10
Factored receivables 9,194 225,144 4.10 654 223,638 0.30
Equipment financing 60,028 1,667,523 3.60 16,723 1,800,564 0.90
Public sector finance 1,929 1,234,092 0.20 1,967 1,213,118 0.20
CRE 97,586 5,664,443 1.70 27,965 5,418,648 0.50
Multi-family 49,097 4,735,123 1.00 11,440 4,876,870 0.20
ADC 15,204 524,714 2.90 4,732 467,331 1.00
Residential mortgage 23,090 2,077,534 1.10 7,598 2,210,112 0.30
Consumer 4,518 224,669 2.00 1,955 234,532 0.80
Total $ 326,444 $ 21,709,957 1.50 % $ 106,238 $ 21,440,212 0.50 %
Collateral Dependent Loans. A loan must meet both of the following conditions to
be considered collateral dependent:
• We expect repayment of the financial asset to be provided substantially
through the operation or sale of the collateral.
• We determined the borrower is experiencing financial difficulty as of the
financial statement date.
Generally loans are identified as collateral dependent when the loan is in
foreclosure, is a TDR or is a loan that was were measured for impairment at
December 31, 2019 (see below). For collateral dependent loans we measure the
expected credit losses based on the difference between the fair value of the
collateral and the amortized cost basis. If the loan is in foreclosure, or we
determine foreclosure is probable, we reduce the fair value of the collateral by
costs to sell the asset. If we expect repayment from the operation of the asset,
we do not reduce for the cost to sell.
Collateral dependent loans were $200,948 at March 31, 2020 . The increase in
collateral dependent loans compared to impaired loans at December 31, 2019 , was
mainly due to one ADC relationship, two asset-based lending relationships and
the adoption of the CECL Standard, which impacted the classification of
collateral dependent equipment finance and residential mortgage loans. Prior to
2020, equipment finance and residential mortgage loans were measured for
impairment only if the loan balance exceeded $750 . As our CECL methodology
allows us to determine fair value and expected credit losses for each loan
individually, we now consider loans collateral dependent based on the criteria
discussed above.
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Impaired Loans. Before we implemented the CECL Standard, a loan was impaired
when it was probable we will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loan values were 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 was less than its
recorded investment, our practice was to write-down the loan against the
allowance for loan losses so the recorded investment matched the impaired value
of the loan. Impaired loans generally included a portion of non-performing loans
and accruing and performing TDR loans. At December 31, 2019 , we held impaired
loans of $109,025 .
Purchase Credit Deteriorated (PCD) Loans. As part of our adoption of the CECL
standard, loans that were classified as PCI and accounted for under ASC 310-30
were designated PCD loans. We did not reassess whether PCI loans met the
criteria of PCD loans as of the date of adoption and determined all PCI loans
were PCD loans. The amortized cost basis of PCI loans at adoption was $116,274
at December 31, 2019 . The balance increased to $129,965 due to the increase to
the balance of PCD loans of $22,496 , which represented the credit portion of the
remaining purchase accounting adjustment for PCD loans at January 1, 2020 .
Changes in Financial Condition between March 31, 2020 and December 31, 2019
Total assets decreased $251,461 to $30,335,036 at March 31, 2020 , compared to
$30,586,497 at December 31, 2019 . Components of the change in total assets were:
•Commercial loans increased by $412,186 to $19,407,754 at March 31, 2020 ,
compared to $18,995,568 at December 31, 2019 .
•Residential mortgage loans held in our loan portfolio declined by $132,578 to
$2,077,534 at March 31, 2020 compared to $2,210,112 at December 31, 2019 . This
decline was mainly due to repayments.
•Total investment securities declined by $458,297 to $4,617,012 at March 31,
2020 , compared to $5,075,309 at December 31, 2019 , mainly due to sales and calls
of securities.
•Other assets increased by $149,924 to $990,792 at March 31, 2020 , compared to
$840,868 at December 31, 2019 . The components of other assets are as follows:
March 31, December 31,
2020 2019
Low income housing tax credit investments $ 402,317 $ 386,824
Right of use asset for operating leases 107,711 112,226
Fair value of swaps (see Note 9) 166,432 67,318
Cash on deposit as swap collateral net of settlement 94,092 93,606
Operating leases - equipment and vehicles leased to others 67,701 72,291
Other asset balances 152,539 108,603
$ 990,792 $ 840,868
The table above includes the following items:
•We have invested in various limited partnerships that sponsor affordable
housing projects utilizing low income housing tax credits. These investments
assist us in achieving our goals associated with the Community Reinvestment Act.
•The right of use assets for operating leases represents the asset recognized
under the lease accounting standard which requires all operating leases to be
recorded in the consolidated balance sheets, which are discussed in Note 15.
"Leases" in the notes to consolidated financial statements included elsewhere in
this report.
•Fair value of swaps reflects the change in value since date of inception of our
back-to-back commercial client loan swap program and positions, which are
discussed in Note 9. "Derivatives" in the notes to consolidated financial
statements included elsewhere in this report.
•Cash on deposit as swap collateral net of settlement represents amounts on
deposit with third parties net of settlement to market for exchange traded and
over the counter swaps.
•Other asset balances include income tax balances, prepaid insurance, prepaid
property taxes, prepaid maintenance, other accounts receivable and miscellaneous
assets.
Total liabilities decreased $143,772 to $25,912,612 at March 31, 2020 , compared
to $26,056,384 at December 31, 2019 . The decrease was mainly due to the
following:
•FHLB borrowings decreased $290,202 to $1,955,451 at March 31, 2020 , compared to
$2,245,653 at December 31, 2019 , which was mainly the result of an increase in
deposits and sale of investment securities. Proceeds were used to and pay down
borrowings.
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•Other liabilities declined $34,309 to $659,143 at March 31, 2020 , compared to
$693,452 at December 31, 2019 . The decrease was mainly due to funding of accrued
affordable housing commitments and payout of amounts accrued for 2019
compensation.
•Brokered deposits declined $14,851 to $1,851,593 at March 31, 2020 , compared to
$1,866,444 at December 31, 2019 . The decrease was a change in funding mix as a
result of other deposit inflows.
The decreases above, were partially offset by the following increases:
•Total deposits increased $139,622 to $22,558,280 at March 31, 2020 , compared to
$22,418,658 at December 31, 2019 . Our core deposits were $20,704,023 at
March 31, 2020 , which represented 91.8% of our total deposit balances.
•Municipal deposits increased $103,212 to $2,091,259 at March 31, 2020 , compared
to $1,988,047 at December 31, 2019 . The increase was mainly due to property tax
collections in January 2020 .
Supplemental Reporting of Non-GAAP Financial Measures
The non-GAAP financial measures presented below are used by our management and
our Board of Directors on a regular basis in addition to our GAAP results to
facilitate the assessment of our financial performance and to assess our
performance compared to our annual budget and strategic plans. These non-GAAP
financial measures complement our GAAP reporting and are presented below to
provide investors, analysts, regulators and others information that we use to
manage and evaluate our performance each period. This information supplements
our GAAP reported results, and should not be viewed in isolation from, or as a
substitute for, our GAAP results. Accordingly, this financial information should
be read in conjunction with our consolidated financial statements, and notes
thereto for the quarter ended March 31, 2020 , included elsewhere in this report,
and the year ended December 31, 2019 , included in the 2019 Form 10-K.
March 31,
2020 2019
The following table shows the reconciliation of pretax pre-provision net revenue to adjusted pretax
pre-provision net revenue:
Net interest income $ 211,772 $ 235,506
Non-interest income 47,326 19,597
Total net interest income and non-interest income 259,098 255,103
Non-interest expense 114,713 114,992
Pretax pre-provision net revenue 144,385 140,111
Adjustments:
Accretion income (10,686) (25,580)
Net loss (gain) on sale of securities (8,412) 13,184
Net (gain) loss on termination of
- -
Net (gain) on sale of residential mortgage loans - (8,313)
(Gain) loss on extinguishment of debt 744 (46)
Impairment related to financial centers and real estate consolidation strategy
- -
Charge for asset write-downs, systems integration, retention and severance
- 3,344
Amortization of non-compete agreements and acquired customer list intangible assets
172 242
Adjusted pretax pre-provision net revenue $ 126,203 $ 122,942
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March 31,
2020 2019
The following table shows the reconciliation of stockholders' equity to tangible common equity and the
tangible common equity ratio 1:
Total assets $ 30,335,036 $ 29,956,607
Goodwill and other intangibles (1,789,646) (1,782,533)
Tangible assets 28,545,390 28,174,074
Stockholders' equity 4,422,424 4,419,223
Preferred stock (137,363) (138,218)
Goodwill and other intangibles (1,789,646) (1,782,533)
Tangible common stockholders' equity 2,495,415 2,498,472
Common stock outstanding at period end 194,460,656 209,560,824
Common stockholders' equity as a % of total assets 14.13 % 14.29 %
Book value per common share $ 22.04 $ 20.43
Tangible common equity as a % of tangible assets 8.74 % 8.87 %
Tangible book value per common share $ 12.83 $ 11.92
For the three months ended
March 31,
2020 2019
The following table shows the reconciliation of reported return on average tangible assets and adjusted
return on average tangible assets 2:
Average assets $ 30,484,433 $ 30,742,943
Average goodwill and other intangibles (1,792,400) (1,756,506)
Average tangible assets 28,692,033 28,986,437
Net income available to common stockholders 12,171 99,448
Net income, if annualized 48,951 403,317
Reported return on average tangible assets 0.17 % 1.39 %
Adjusted net (loss) income (non-GAAP) $ (3,124) $ 105,902
Annualized adjusted net (loss) income (12,565) 429,492
Adjusted return on average tangible assets (non-GAAP) (0.04) % 1.48 %
_______________
See legend beginning on page 70 .
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For the three months ended
March 31,
2020 2019
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)3:
Income before income tax expense $ 6,105 $ 129,911
Income tax (benefit) expense (8,042) 28,474
Net income (GAAP) 14,147 101,437
Adjustments:
Net (gain) loss on sale of securities (8,412) 13,184 Net (gain) on sale of residential mortgage loans - (8,313) Charge for asset write-downs, retention and severance - 3,344 Net loss (gain) on extinguishment of borrowings 744 (46)
Amortization of non-compete agreements and acquired customer lists
172 242 Total pre-tax adjustments (7,496) 8,411 Adjusted pre-tax (loss) income (1,391) 138,322 Adjusted income tax (benefit) expense (243) 30,431 Adjusted net (loss) income (non-GAAP) (1,148) 107,891 Preferred stock dividend 1,976 1,989
Adjusted net (loss) income available to common stockholders (non-GAAP)
$
(3,124)
Weighted average diluted shares 196,709,038 213,505,842 Diluted EPS as reported (GAAP)$ 0.06 $ 0.47 Adjusted diluted EPS (non-GAAP) (0.02) 0.50 For the three months ended March 31, 2020 2019 The following table shows the reconciliation of reported return on average tangible common stockholders' equity and adjusted return on average tangible common stockholders' equity 4: Average stockholders' equity$ 4,506,537 $ 4,415,449 Average preferred stock (137,579) (138,348) Average goodwill and other intangibles (1,792,400) (1,756,506) Average tangible common stockholders' equity 2,576,558 2,520,595 Net income available to common stockholders 12,171 99,448 Net income, if annualized 48,951 403,317 Reported return on average tangible common stockholders' equity 1.90 % 16.00 % Adjusted net (loss) income (non-GAAP)$ (3,124) $ 105,902 Annualized adjusted net (loss) income (12,565) 429,492
Adjusted return on average tangible common stockholders' equity (non-GAAP)
(0.49) % 17.04 %
See legend beginning on page 70 .
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For the three months ended
March 31,
2020 2019
The following table shows the reconciliation of the reported operating efficiency ratio and adjusted operating
efficiency ratio 5:
Net interest income $ 211,772 $ 235,506
Non-interest income 47,326 19,597
Total revenue 259,098 255,103
Tax equivalent adjustment on securities 3,454 3,949
Loss on termination of pension plan - 280
Net (gain) loss on sale of securities (8,412) 13,184
Net (gain) on sale of residential mortgage loans - (8,313)
Depreciation of operating leases (3,492) -
Adjusted total revenue (non-GAAP) 250,648 264,203
Non-interest expense 114,713 114,992
Charge for asset write-downs, systems integration, retention and severance
- (3,344)
Net (loss) gain on extinguishment of borrowings (744) 46
Depreciation of operating leases (3,492) -
Amortization of intangible assets (4,200) (4,826)
Adjusted non-interest expense (non-GAAP) $ 106,277 $ 106,868
Reported operating efficiency ratio (non-GAAP) 44.3 % 45.1 %
Adjusted operating efficiency ratio (non-GAAP) 42.4 40.4
_______________
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 are non-GAAP measures that provide
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 Reported return on average tangible assets and adjusted return on average tangible assets are non-GAAP measures that provide information to help assess our profitability.
3 Adjusted net income available to common stockholders and adjusted EPS are
non-GAAP measures that 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
net income available for common stockholders and adjusted EPS, 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.
4 Reported return on average tangible common stockholders' equity and the
adjusted return on average tangible common stockholders' equity are non-GAAP
measures that provide information to evaluate the use of our tangible common
equity.
5 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.
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Liquidity and Capital Resources
Capital. Stockholders' equity was $4,422,424 as of March 31, 2020 , a decrease of
$107,689 relative to December 31, 2019 . The decrease was due to the repurchase
of 4,900,759 common shares at a cost of $81,032 , the adoption of the CECL
Standard, which reduced capital by $54,254 and declared dividends of $13,768 on
common stock and $2,194 on preferred stock. These decreases were partially
offset by net income of $14,147 , an increase in accumulated other comprehensive
gain of $27,405 , which was primarily due to an increase in the fair value of our
AFS portfolio, and an increase of stock option exercises and stock-based
compensation of $414 .
We paid dividends of $0.07 per common share in each quarter of 2019 and the
first quarter of 2020. Most recently, our Board of Directors declared a dividend
of $0.07 per common share on April 27, 2020 , which is payable May 22, 2020 to
our holders as of the record date of May 8, 2020 . We paid dividends of $16.25
per preferred share in each quarter of 2019 and the first quarter of 2020. In
addition, on April 15, 2020 , we paid a dividend of $16.25 per preferred share.
Basel III Capital Rules. The Basel III Capital Rules were fully phased in on
January 1, 2019 . The rules are discussed in Note 14. "Stockholders' Equity -
Regulatory Capital Requirements" in the notes to consolidated financial
statements included elsewhere in this report.
Liquidity. As discussed in our 2019 Form 10-K, our liquidity position is
continuously monitored and we make adjustments to the balance between sources
and uses of funds as deemed appropriate. Liquidity risk management is an
important element in our asset / liability management process. We regularly
model liquidity stress scenarios to assess potential liquidity outflows or
funding problems resulting from economic activity, volatility in the financial
markets, unexpected credit events or other significant occurrences. These
scenarios are incorporated into our contingency funding plan, which provides the
basis for the identification of our liquidity needs. As of March 31, 2020 , our
management is not aware of any events that are reasonably likely to have a
material adverse effect on our liquidity, capital resources or operations. In
addition, management is not aware of any regulatory recommendations regarding
liquidity, including the Basel III liquidity framework, which, if implemented,
would have a material adverse effect on us.
At March 31, 2020 , the Bank had $348,636 in cash and cash equivalents on hand
and unused borrowing capacity at the FHLB of $5,593,328 . In addition, the Bank
may purchase federal funds from other institutions and enter into additional
repurchase agreements. The Bank had $2,317,396 of unencumbered securities
available to pledge as collateral as of March 31, 2020 . On March 15, 2020 , the
Federal Reserve Board reduced reserve requirements ratios to zero effective
March 26, 2020 , which eliminated our reserve requirement as of March 31, 2020 .
Prior to that time, we maintained deposits at the Federal Reserve Bank of New
York in compliance with our reserve requirements.
We are a bank holding company and do not conduct operations. Our primary sources
of liquidity are dividends received from the Bank and borrowings from outside
sources. Banking regulations may limit the amount of dividends that may be paid
by the Bank. At March 31, 2020 , the Bank had capacity to pay approximately
$48,325 of dividends to us under regulatory guidelines without prior regulatory
approval.
We had cash on hand of $256,563 at March 31, 2020 . We received dividends from
the Bank of $95,000 in the quarter ended March 31, 2020 . In the first three
months of 2019, we used $81,032 for common stock repurchases, $15,962 for
dividends and $2,000 to repurchase a portion of our outstanding Senior Notes
that we assumed in the Astoria Merger.
Effective August 27, 2019 we renewed our $35,000 credit facility with a
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 March 31, 2020 .
In connection with the Astoria Merger, we assumed $200,000 principal amount of
the Senior Notes which mature on June 8, 2020 . At March 31, 2020 , the balance
outstanding was $171,422 . We expect to use cash on hand to payoff the Senior
Notes at maturity.
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