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 in Part II. Item 1A. Risk Factors of this report 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: •risk related to the merger and integration of the Company intoWebster including, among others, (i) failure to complete the merger withWebster or unexpected delays related to the merger or either party's inability to obtain regulatory approvals or satisfy other closing conditions required to complete the merger, (ii) expenses related to the proposed merger, (iii) a fluctuation in the market price ofWebster's common stock causing our stockholders not to be certain of the precise value of merger consideration, (iv) stockholder litigation that could prevent or delay the closing of the proposed merger or otherwise negatively impact the Company's business and operations, (v) the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized, (vi) the risk that the integration of each party's operations will be materially delayed or will be more costly or difficult than expected or that the parties are otherwise unable to successfully integrate each party's businesses into the other's businesses, and (vii) deposit attrition, customer loss and/or revenue loss following the completed merger that exceeds expectations; •our ability to successfully implement growth and other strategic initiatives and reduce expenses; 40 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES •oversight of the Bank by various federal regulators; •adverse publicity, regulatory actions or litigation with respect to us or other well-known companies and the financial services industry in general and a failure to satisfy regulatory standards; •the effects of and changes in monetary policies of the FRB and theU.S. Government , respectively; •our ability to make accurate assumptions and judgments about an appropriate level of ACL - loans 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 ACL - loans not being adequate to cover actual losses, and require us to materially increase our reserves; •our use of estimates in determining the fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuation; •our ability to manage changes in market interest rates; •our ability to capitalize on our substantial investments in our information technology and operational infrastructure and systems; •changes in other economic, competitive, governmental, regulatory, and technological factors affecting our markets, operations, pricing, products, services and fees; •the ongoing trajectory of COVID-19 (and its variants) and the extent to and the speed at which the global economy recovers, the nature and extent of ongoing governmental measures to contain the pandemic (including through vaccines), the working conditions of our colleagues, the impact on our clients and vendors, and their businesses and employers, including the continued availability of our borrowers to repay in accordance with loan terms, and the potential impact of a more severe or prolonged dampening in demand for our products; and •our success at managing the risks involved in the foregoing and managing our business.
These risks and uncertainties should be considered in evaluating our forward-looking statements, and undue reliance should not be placed on such statements.
Impact of COVID-19 The COVID-19 pandemic resulted in significant economic disruption which adversely affected our business and the business of our clients. We experienced a material decline in revenues in the second quarter of 2020, as a result of the decline in market interest rates, dampened demand for our lending products in our target markets and a significant decline in transactional activity in our receivables management and payroll businesses. We saw a recovery in our revenues during the second half of 2020 and in the first nine months of 2021, as business conditions improved, driving increased demand for our products and an increase in the amount of new business generated. Although loan origination activity has continued to recover in the third quarter of 2021, prepayment activity in certain portfolios remained elevated, which continued to impact our earning asset balances. Our consolidated financial statements reflect estimates and assumptions we make that impact the reported amounts of assets and liabilities, including the amount of the ACL we establish. The impact of the COVID-19 pandemic and the severe deterioration in macro-economic conditions that resulted from it, as well as the governmental measures needed to contain it, had a material adverse effect on the amount of our provision for credit losses - loans in 2020. Our provision for credit loss is discussed further below in "Results of Operations - Provision for Credit Losses - Loans." There is still significant uncertainty concerning the ongoing trajectory of the COVID-19 pandemic and the speed at which the national and local economy will recover, and the extent to which COVID-19 will continue to adversely affect our business will depend on numerous evolving factors and future developments that we are not able to predict, including the potential impact of new variants of COVID-19, the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, the speed at which supply chain disruptions can be resolved, the impact of labor shortages on the broader economic recovery and how quickly and to what extent normal economic and operating conditions can resume. 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. 41 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES
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 2020 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 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 theGreater New York metropolitan area and nationally. The Bank targets the following geographic markets: (i) the New York Metro Market, which includesManhattan andLong Island ; and (ii) the New York Suburban Market, which includesRockland ,Orange ,Sullivan ,Ulster andWestchester Counties inNew York andBergen County inNew Jersey . Through our asset-based lending, payroll finance, warehouse lending, factored receivables, equipment finance and public sector finance businesses, the Bank also originates loans and deposits in select markets nationally includingCalifornia ,Connecticut ,Michigan ,Texas andIllinois . 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 believe that this is a client segment that is underserved by larger bank competitors in our market area. Our primary strategic objective is to generate sustainable growth in revenue and earnings over time while driving positive operating leverage. We define operating leverage, which is a non-GAAP measurement, as the ratio of growth in adjusted total revenue divided by growth in adjusted total operating expenses. To achieve this goal, we focus on the following initiatives:
•Target specific "high value" client segments and industry sectors in which we have competitive advantages and can generate attractive risk-adjusted returns.
•Deploy a single point of contact, relationship-based distribution strategy through our commercial banking teams, business banking teams, and financial centers, in which our colleagues are directly responsible for managing all aspects of the client relationship and experience.
•Augment our distribution and client coverage strategy with a contemporary digital product and service offering that provides our commercial and consumer clients with the flexibility to self-serve or interact with us through various channels.
•Expand into new technology-enabled, growth-oriented business verticals, including direct banking offerings and leverage our platform and technology to provide banking to other financial services providers ("Banking as a Service").
•Invest in technology to build a robust operating platform that uses artificial intelligence and related automation tools to maximize efficiency.
•Create a high productivity culture through differentiated compensation programs based on a pay-for-performance philosophy.
•Maintain and continue to enhance our strong risk management systems and proactively manage enterprise risk.
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STERLING BANCORP AND SUBSIDIARIESRecent Developments
OnApril 18, 2021 ,Sterling andWebster entered into a definitive Merger Agreement, pursuant to which we andWebster have agreed to combine our respective companies in an all stock merger of equals. The Merger Agreement provides that, upon the terms and subsequent conditions set forth therein, we will merge with and intoWebster , withWebster continuing as the surviving entity, in a transaction we refer to as the "Merger". The Merger Agreement was approved by the boards of directors ofSterling andWebster , and is subject to stockholder and regulator approval and other customary closing conditions. Under the terms of the Merger Agreement, stockholders ofSterling will receive 0.463 of a share ofWebster for each share ofSterling common stock they own. After the merger, it is anticipated thatWebster stockholders will own approximately 50.4% andSterling stockholders will own approximately 49.6% of the combined company. The combined company will have approximately$64 billion of assets,$42 billion in loans and$52 billion in deposits. We are progressing with our integration efforts, have identified the senior leadership of the combined company, confirmed our anticipated cost savings, and created processes to consolidate vendors. We have received stockholder and OCC approval. We are prepared to execute the Merger upon receipt of remaining regulatory approvals and subject to customary closing conditions. Performance Summary For the third quarter of 2021, we reported net income available to common stockholders of$93.7 million , or$0.49 per diluted share, and adjusted net income available to common stockholders of$99.6 million , or$0.52 per diluted share. We continue to operate in a low interest rate environment and for the third quarter of 2021, we reported net interest income of$213.8 million , a decrease of$4.0 million compared to the three months endedSeptember 30, 2020 . In the third quarter of 2021, as compared to the third quarter of 2020, accretion income on acquired loans declined by$3.0 million , and loan yields declined by 3 basis points, while our cost of funding liabilities declined by 23 basis points. Our tax equivalent net interest margin, excluding purchase accounting adjustments, increased 15 basis points to 3.25% and our reported net interest margin on a tax equivalent basis was 3.35%, an increase of 11 basis points over the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , our provision for credit losses - loans was zero and our ACL - loans was$309.9 million , which represented 1.46% of total portfolio loans and 150.8% of non-performing loans. Net charge-offs in the third quarter of 2021 were$5.0 million . In the year earlier period, provision for credit losses - loans was$31.0 million and our ACL - loans was$325.9 million , which represented 1.46% of total portfolio loans and 180.2% of non-performing loans. The ACL - loans of 1.46% of total portfolio loans represents management's estimate of credit losses inherent in the portfolio and reflects declines in modeled reserve requirements resulting from an improving economic forecast, stabilizing asset quality metrics as well as continued uncertainty related to the speed and sustainability of ongoing recovery and its impact on certain sectors of the portfolio. For the three months endedSeptember 30, 2021 , non-interest income was$32.5 million , an increase of$4.3 million over the same quarter a year ago. Deposit service charges, payroll finance fees, loan syndication fees, and fees from our swap business have continued to recover from the pandemic lows of the year ago period. Our adjusted non-interest expenses were$111.3 million in the third quarter of 2021, an increase of$5.5 million over the quarter endedSeptember 30, 2020 . The increase was mainly due to increases in compensation, professional fees, and information technology costs partially offset by lower foreclosed property expense, regulatory assessments and occupancy expenses. For the third quarter of 2021, our reported operating efficiency ratio was 50.7% and our adjusted operating efficiency ratio was 45.4%. As ofSeptember 30, 2021 , total portfolio loans were$21.3 billion , a decline of$571.9 million fromDecember 31, 2020 . This was mainly due to a$652.0 million decline in warehouse lending, the impact of$252.1 million in loan sales and pay downs of PPP loans amounting to$141.2 million . The majority of this decline occurred in the first half of 2021, while in the third quarter of 2021, we grew commercial loans by$558.7 million versus the linked quarter, mainly from robust growth in our traditional C&I and public sector finance portfolios. Our loans to deposits ratio was 88.9% as ofSeptember 30, 2021 . Total deposits were$23.9 billion atSeptember 30, 2021 , an increase of$816.5 million fromDecember 31, 2020 . Our cost of total deposits declined to 0.11% for the three months endedSeptember 30, 2021 compared to 0.31% for the three months endedSeptember 30, 2020 , a result of changes in market rates of interest and our continued repricing efforts. Critical Accounting Policies Our accounting and reporting policies are prepared in accordance with GAAP and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the ACL - loans, accounting for goodwill and other 43 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES
intangible assets and accounting for deferred income taxes. For additional information on our significant accounting policies, see Note 1. "Basis of Financial Statement Presentation and Summary of Significant Accounting Policies" in the notes to consolidated financial statements in the 2020 Form 10-K.
ACL - Loans. We consider the methodology for determining the ACL - loans 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 elements 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.
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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 At or for the nine months ended
September 30, September 30,
2021 2020 2021 2020
End of period balances:
AFS and HTM securities, net $ 4,283,969 $ 4,201,350 $ 4,283,969 $ 4,201,350
Portfolio loans 21,276,549 22,281,940 21,276,549 22,281,940
Total assets 30,028,425 30,617,722 30,028,425 30,617,722
Non-interest bearing deposits 6,743,008 5,874,554 6,743,008 5,874,554
Interest bearing deposits 17,193,015 18,380,779 17,193,015 18,380,779
Total deposits 23,936,023 24,255,333 23,936,023 24,255,333
Borrowings 523,406 993,535 523,406 993,535
Stockholders' equity 4,797,629 4,557,785 4,797,629 4,557,785
Tangible common stockholders' equity ("TCE")1 2,895,925 2,639,622 2,895,925 2,639,622
Average balances:
AFS and HTM securities, net $ 4,320,243 $ 4,392,864 $ 4,233,420 $ 4,688,747
Total loans2 20,629,138 22,159,535 20,920,013 21,771,593
Total assets 29,147,332 30,652,856 29,372,043 30,623,508
Non-interest bearing deposits 6,001,982 5,385,939 5,758,826 4,914,183
Interest bearing deposits 17,149,462 18,279,977 17,644,740 18,361,388
Total deposits and mortgage escrow 23,151,444 23,665,916 23,403,566 23,275,571
Borrowings 522,332 1,747,941 589,685 2,141,851
Stockholders' equity 4,768,712 4,530,334 4,685,920 4,500,534
TCE1 2,864,282 2,609,179 2,777,519 2,574,985
Selected operating data:
Total interest and dividend income $ 225,089 $
244,658
11,252 26,834 38,968 128,516
Net interest income 213,837 217,824 650,278 642,895
Provision for credit losses - 30,000 15,250 224,886
Net interest income after provision for credit
losses 213,837 187,824 635,028 418,009
Total non-interest income 32,547 28,225 95,117 101,641
Total non-interest expense 124,968 119,362 363,762 358,956
Income before income tax 121,416 96,687 366,383 160,694
Income tax expense 25,745 12,280 73,223 11,348
Net income 95,671 84,407 293,160 149,346
Preferred stock dividend 1,956 1,969 5,878 5,917
Net income available to common stockholders
Per share data: Reported basic EPS (GAAP)$ 0.49 $ 0.43 $ 1.50 $ 0.74 Reported diluted EPS (GAAP) 0.49 0.43 1.49 0.74 Adjusted diluted EPS1 (non-GAAP) 0.52 0.45 1.53 0.73 Dividends declared per common share 0.07 0.07 0.21 0.21 Book value per share 24.19 22.73 24.19 22.73 Tangible book value per common share1 15.03 13.57 15.03 13.57
See legend on following page.
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STERLING BANCORP AND SUBSIDIARIES
At or for the nine months ended September
At or for the three months ended September 30, 30,
2021 2020 2021 2020
Common shares outstanding:
Shares outstanding at period end 192,681,503 194,458,841 192,681,503 194,458,841
Weighted average shares basic 191,508,071 193,494,929 191,606,643 194,436,137
Weighted average shares diluted 192,340,487 193,715,943 192,417,008 194,677,020
Other data:
Full time equivalent employees at period end 1,460 1,466 1,460 1,466
Financial centers at period end 72 78 72 78
Performance ratios:
Return on average assets 1.28 % 1.07 % 1.31 % 0.63 %
Return on average equity 7.80 7.24 8.20 4.26
Reported return on average tangible assets1 1.36 1.14 1.39 0.66
Adjusted return on average tangible assets1 1.44 1.21 1.43 0.66
Reported return on average TCE1 12.98 12.57 13.83 7.44
Adjusted return on average TCE1 13.79 13.37 14.21 7.34
Reported operating efficiency1 50.7 48.5 48.8 48.2
Adjusted operating efficiency1 45.4 43.1 44.6 43.5
Net interest margin-GAAP 3.30 3.19 3.35 3.17
Net interest margin-tax equivalent3 3.35 3.24 3.40 3.22
Capital ratios (Company)4:
Tier 1 leverage ratio 11.35 % 9.93 % 11.35 % 9.93 %
Common equity Tier 1 capital ratio 12.50 11.18 12.50 11.18
Tier 1 risk-based capital ratio 13.07 11.75 13.07 11.75
Total risk-based capital ratio 15.88 14.17 15.88 14.17
Tangible equity to tangible assets 10.73 9.63 10.73 9.63
Tangible common equity to tangible assets1 10.25 9.15 10.25 9.15
Regulatory capital ratios (Bank)4:
Tier 1 leverage ratio 12.60 % 10.48 % 12.60 % 10.48 %
Tier 1 risk-based capital ratio 14.52 12.39 14.52 12.39
Total risk-based capital ratio 15.26 13.86 15.26 13.86
Asset quality data and ratios:
Allowance for credit - loans $ 309,915 $ 325,943 $ 309,915 $ 325,943
Non-performing loans ("NPLs") 205,453 180,851 205,453 180,851
Non-performing assets ("NPAs") 206,269 187,770 206,269 187,770
Net charge-offs 4,958 70,546 32,185 95,062
NPAs to total assets 0.69 % 0.61 % 0.69 % 0.61 %
NPLs to total loans5 0.97 0.81 0.97 0.81
Allowance for loan losses to non-performing
loans 150.84 180.23 150.84 180.23
Allowance for loan losses to total loans4 1.46 1.46 1.46 1.46
Annualized net charge-offs to average loans 0.10 1.27 0.21 0.58
__________________
1 See a reconciliation of as reported financial measures to as adjusted (non-GAAP) financial measures beginning on page 63 below under the caption "Supplemental Reporting of Non-GAAP Financial Measures." 2 Includes loans held for sale but excludes the ACL. 3 Tax equivalent basis represents interest income earned on municipal securities divided by the applicable Federal tax rate of 21%. 4 We elected the five-year capital phase-in option. The phase-in option is further discussed in Note 13. "Stockholders' Equity - (a) Regulatory Capital Requirements" in the notes to consolidated financial statements included elsewhere in this report. 5 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, 2021 , we reported net income available
to common stockholders of $93.7 million , or $0.49 per diluted common share,
compared to net income available to common stockholders of $82.4 million , or
$0.43 per diluted common share, for the three months ended September 30, 2020 .
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 86.8% and 88.5% of total revenue in the three months endedSeptember 30, 2021 andSeptember 30, 2020 , 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, which include transactional accounts for retail, commercial and municipal clients, money market and savings accounts and certificates of deposit accounts, including reciprocal brokered deposits, but exclude other brokered and wholesale deposits. As ofSeptember 30, 2021 , we considered 97.7% of our total deposits to be core deposits compared to 93.0% atSeptember 30, 2020 . The increase in core deposits was mainly due to the reclassification of one deposit relationship that met the "primary purpose" exception under the relevant guidance. See Note 6. "Deposits" for more information. Non-interest bearing demand deposits were$6.7 billion of our total deposits atSeptember 30, 2021 , compared to$5.9 billion atSeptember 30, 2020 . The following tables set forth average balances, 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 the respective average balance of the particular loan type, 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. 47 --------------------------------------------------------------------------------
STERLING BANCORP AND SUBSIDIARIES
For the three months ended September 30,
2021 2020
Average Average
balance Interest Yield/Rate balance Interest Yield/Rate
Interest earning assets:
Traditional C&I and commercial finance
loans $ 8,260,805 $ 76,340 3.67 % $ 9,133,454 $ 83,415 3.63 %
CRE (includes multi-family) 10,121,953 100,038 3.92 10,320,930 104,463 4.03
ADC 711,020 7,798 4.35 636,061 6,117 3.83
Commercial loans 19,093,778 184,176 3.83 20,090,445 193,995 3.84
Consumer loans 160,962 1,752 4.32 206,700 2,025 3.90
Residential mortgage loans 1,374,398 11,229 3.27 1,862,390 16,989 3.65
Total gross loans1 20,629,138 197,157 3.79 22,159,535 213,009 3.82
Securities taxable 2,393,325 15,433 2.56 2,363,059 18,623 3.14
Securities non-taxable 1,926,918 14,692 3.05 2,029,805 15,515 3.06
Interest earning deposits 604,396 216 0.14 424,249 154 0.14
FRB and FHLB stock 151,230 676 1.77 186,689 615 1.31
Total securities and other earning assets 5,075,869 31,017 2.42 5,003,802 34,907 2.78
Total interest earning assets 25,705,007 228,174 3.52 27,163,337 247,916 3.63 Non-interest earning assets 3,442,325 3,489,519 Total assets$ 29,147,332 $ 30,652,856 Interest bearing liabilities: Interest bearing demand deposits$ 4,686,129 $ 1,348 0.11 %$ 4,688,343 $ 2,911 0.25 % Savings deposits2 2,721,327 446 0.07 2,727,475 1,205 0.18 Money market deposits 8,369,994 3,222 0.15 8,304,834 8,078 0.39 Certificates of deposit 1,372,012 1,145 0.33 2,559,325 6,057 0.94 Total interest bearing deposits 17,149,462 6,161 0.14 18,279,977 18,251 0.40 Other borrowings 30,057 7 0.09 1,303,849 3,378 1.03 Subordinated Notes - Bank - - - 173,328 2,360 5.45 Subordinated Notes - Company 492,275 5,084 4.13 270,764 2,845 4.20 Total borrowings 522,332 5,091 3.87 1,747,941 8,583 1.95 Total interest bearing liabilities 17,671,794 11,252 0.25 20,027,918 26,834
0.53
Non-interest bearing deposits 6,001,982 5,385,939 Other non-interest bearing liabilities 704,844 708,665 Total liabilities 24,378,620 26,122,522 Stockholders' equity 4,768,712 4,530,334 Total liabilities and stockholders' equity$ 29,147,332 $ 30,652,856 Net interest rate spread3 3.27 % 3.10 % Net interest earning assets4$ 8,033,213 $ 7,135,419 Net interest margin - tax equivalent 216,922 3.35 % 221,082 3.24 % Less tax equivalent adjustment (3,085) (3,258) Net interest income 213,837 217,824 Accretion income on acquired loans 6,197 9,172 Tax equivalent net interest margin excluding accretion income on acquired loans$ 210,725 3.25 %$ 211,910 3.10 % Ratio of interest earning assets to interest bearing liabilities 145.5 % 135.6 % See legend on following page. 48
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STERLING BANCORP AND SUBSIDIARIES
For the nine months ended September 30,
2021 2020
Average Average
balance Interest Yield/Rate balance Interest Yield/Rate
Interest earning assets:
Traditional C&I and commercial finance
loans $ 8,390,679 $ 231,327 3.69 % $ 8,654,615 $ 256,756 3.96 %
CRE (includes multi-family) 10,244,942 306,889 4.00 10,338,120 321,610 4.16
ADC 660,442 20,304 4.11 552,558 18,200 4.40
Commercial loans 19,296,063 558,520 3.87 19,545,293 596,566 4.08
Consumer loans 171,384 5,546 4.33 219,751 7,198 4.38
Residential mortgage loans 1,452,566 40,631 3.73 2,006,549 64,588 4.29
Total gross loans1 20,920,013 604,697 3.86 21,771,593 668,352 4.10
Securities taxable 2,292,829 46,534 2.71 2,583,795 58,107 3.00
Securities tax exempt 1,940,591 44,384 3.05 2,104,952 48,209 3.05
Interest earning deposits 634,455 530 0.11 456,405 2,131 0.62
FRB and FHLB stock 151,708 2,422 2.13 212,673 4,736 2.97
Total securities and other earning assets 5,019,583 93,870 2.50 5,357,825 113,183 2.82
Total interest earning assets 25,939,596 698,567 3.60 27,129,418 781,535 3.85 Non-interest earning assets 3,432,447 3,494,090 Total assets$ 29,372,043 $ 30,623,508 Interest bearing liabilities: Interest bearing demand deposits$ 4,876,228 $ 5,003 0.14 %$ 4,690,425 $ 17,275 0.49 % Savings deposits2 2,738,880 1,448 0.07 2,805,680 7,128 0.34 Money market deposits 8,420,375 10,176 0.16 8,011,729 38,186 0.64 Certificates of deposit 1,609,257 5,100 0.42 2,853,554 29,553 1.38 Total interest bearing deposits 17,644,740 21,727 0.16 18,361,388 92,142 0.67 Senior Notes - - - 100,029 2,378 3.18 Other borrowings 50,185 52 0.14 1,597,631 18,418 1.54 Subordinated Notes - Bank 47,381 1,957 5.51 173,266 7,078 5.45 Subordinated Notes - Company 492,119 15,232 4.13 270,925 8,500 4.18 Total borrowings 589,685 17,241 3.91 2,141,851 36,374 2.27 Total interest bearing liabilities 18,234,425 38,968 0.29 20,503,239 128,516
0.84
Non-interest bearing deposits 5,758,826 4,914,183 Other non-interest bearing liabilities 692,872 705,552 Total liabilities 24,686,123 26,122,974 Stockholders' equity 4,685,920 4,500,534 Total liabilities and stockholders' equity$ 29,372,043 $ 30,623,508 Net interest rate spread3 3.31 % 3.01 % Net interest earning assets4$ 7,705,171 $ 6,626,179 Net interest margin - tax equivalent 659,599 3.40 % 653,019 3.22 % Less tax equivalent adjustment (9,321) (10,124) Net interest income 650,278 642,895 Accretion income on acquired loans 22,281 29,944 Tax equivalent net interest margin excluding accretion income on acquired loans$ 637,318 3.28 %$ 623,075 3.07 % Ratio of interest earning assets to interest bearing liabilities 142.3 % 132.3 % 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. 49 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES 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
2021 vs. 2020
Increase / (Decrease) Total
due to increase /
Volume Rate (decrease)
Interest earning assets:
Traditional C&I and commercial finance loans $ (7,995) $ 920 $ (7,075)
CRE (includes multi-family) (1,831) (2,594) (4,425)
ADC 781 900 1,681
Commercial loans (9,045) (774) (9,819)
Consumer loans (478) 205 (273)
Residential mortgage loans (4,122) (1,638) (5,760)
Total loans (13,645) (2,207) (15,852)
Securities taxable 242 (3,432) (3,190)
Securities tax exempt (773) (50) (823)
Interest earning deposits 62 - 62
FRB and FHLB stock (130) 191 61
Total interest earning assets (14,244) (5,498) (19,742)
Interest bearing liabilities:
Interest bearing demand deposits (1) (1,562) (1,563)
Savings deposits1 (3) (756) (759)
Money market deposits 65 (4,921) (4,856)
Certificates of deposit (2,048) (2,864) (4,912)
Total interest bearing deposits (1,987) (10,103) (12,090)
Other borrowings (1,678) (1,693) (3,371)
Subordinated Notes - Bank (1,180) (1,180) (2,360)
Subordinated Notes - Company 2,288 (49) 2,239
Total borrowings (570) (2,922) (3,492)
Total interest bearing liabilities (2,557) (13,025) (15,582)
Change in tax equivalent net interest income (11,687) 7,527 (4,160)
Less tax equivalent adjustment (220) 47 (173)
Change in net interest income $
(11,467)
______________________
1 Includes club accounts and interest bearing mortgage escrow balances.
50
--------------------------------------------------------------------------------
STERLING BANCORP AND SUBSIDIARIES
For the nine months ended
2021 vs. 2020
Increase / (Decrease) Total
due to increase /
Volume Rate (decrease)
Interest earning assets:
Traditional C&I and commercial finance loans $ (7,858) $ (17,571) $ (25,429)
CRE (includes multi-family) (2,795) (11,926) (14,721)
ADC 3,365 (1,261) 2,104
Commercial loans (7,288) (30,758) (38,046)
Consumer loans (1,571) (81) (1,652)
Residential mortgage loans (16,267) (7,690) (23,957)
Total loans (25,126) (38,529) (63,655)
Securities taxable (6,227) (5,346) (11,573)
Securities tax exempt (3,825) - (3,825)
Interest earning deposits 605 (2,206) (1,601)
FRB and FHLB stock (1,165) (1,149) (2,314)
Total interest earning assets (35,738) (47,230) (82,968)
Interest bearing liabilities:
Interest bearing demand deposits 646 (12,918) (12,272)
Savings deposits1 (165) (5,515) (5,680)
Money market deposits 1,878 (29,888) (28,010)
Certificates of deposit (9,422) (15,031) (24,453)
Total interest bearing deposits (7,063) (63,352) (70,415)
Senior Notes (1,189) (1,189) (2,378)
Other borrowings (9,649) (8,717) (18,366)
Subordinated Notes - Bank (5,198) 77 (5,121)
Subordinated Notes - Company 6,834 (102) 6,732
Total borrowings (9,202) (9,931) (19,133)
Total interest bearing liabilities (16,265) (73,283) (89,548)
Change in tax equivalent net interest income (19,473) 26,053 6,580
Less tax equivalent adjustment (803) - (803)
Change in net interest income $
(18,670)
______________________
1 Includes club accounts and interest bearing mortgage escrow balances.
Tax equivalent net interest income decreased$4.2 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . This was mainly a result of lower interest income, which declined in line with lower market interest rates and was only partially offset by lower funding costs. Over the course of 2020 and during the first nine months of 2021, we have continued to reprice deposit relationships and have repaid higher costing FHLB and other borrowings. As a result, interest expense declined by 58.1% over the prior year quarter, while tax equivalent interest and dividend income declined by 8.0% over the same period. For the three months endedSeptember 30, 2021 , total interest earning assets yielded 3.52% compared to 3.63% during the same period in 2020. The cost of interest bearing liabilities declined to 0.25% in the third quarter of 2021 compared to 0.53% in the same period in 2020. The tax equivalent net interest margin increased 11 basis points to 3.35% in the third quarter of 2021 from 3.24% in the third quarter of 2020. The percentage of average loans to average earning assets decreased to 80.3% compared to 81.6% in 2020. 51 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES Tax equivalent net interest income increased$6.6 million to$659.6 million for the nine months endedSeptember 30, 2021 , compared to$653.0 million for the nine months endedSeptember 30, 2020 , with the decline in interest income offset by the decline in interest expense, due to the same factors discussed above. The tax equivalent net interest margin increased to 3.40% for the nine months endedSeptember 30, 2021 from 3.22% in the nine months endedSeptember 30, 2020 . The yield on interest earning assets was 3.60% compared to 3.85% for the nine months endedSeptember 30, 2020 , which was mainly due to changes in market interest rates and lower accretion income. The cost of interest bearing liabilities declined to 0.29% for the nine months endedSeptember 30, 2021 compared to 0.84% for the nine months endedSeptember 30, 2020 , which was mainly due to the same factors described above. The percentage of loans to average earning assets increased to 80.6% for the nine months endedSeptember 30, 2021 , compared to 80.3% for the nine months endedSeptember 30, 2020 . Average interest earning assets decreased by$1.5 billion for the three months endedSeptember 30, 2021 when compared to the prior year period. This was mainly due to a decline in average commercial loans of$996.7 million and average residential mortgage loans of$488.0 million . Average interest earning assets decreased by$1.2 billion for the nine months endedSeptember 30, 2021 . The decline year over year was mainly due to repayments and sales of securities, which resulted in a$455.3 million decline in average securities, a runoff of residential mortgage loans, which declined$554.0 million , and a decline of$249.2 million in the average balance of commercial loans. The average balance of commercial loans decreased$996.7 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The decrease was mainly due to loan sales and repayments of PPP loans, a decline in our mortgage warehouse balances, and net repayments from ABL, equipment finance and multifamily portfolios. The average yield on commercial loans declined to 3.83% compared to 3.84% in the prior year period. The decrease in the yield on commercial loans was in line with declines in market interest rates, as well as a decline in accretion income on acquired loans. Accretion income on acquired commercial loans declined to$6.2 million for the three months endedSeptember 30, 2021 compared to$9.2 million in the corresponding prior year quarter. The average balance of loans outstanding decreased$851.6 million in the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , mainly due to the same factors as discussed above. The average yield on loans was 3.86% in the nine months endedSeptember 30, 2021 compared to 4.10% in the comparable year ago period. The decrease was mainly due to declines in market rates of interest and the decline in accretion income on acquired commercial loans for the nine months endedSeptember 30, 2021 , to$18.2 million compared to$22.0 million in the year ago period. Interest income on traditional C&I and commercial finance loans decreased$7.1 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , which was mainly due to the decline in average balances discussed above. The yield on traditional C&I and commercial finance loans increased to 3.67%, compared to 3.63% in the corresponding prior year period. The increase in yield was mainly due to a change in the mix of our traditional C&I and commercial finance loans caused by the decline in mortgage warehouse loans, which have lower yields than most other traditional C&I and commercial finance loans. Interest income on traditional C&I and commercial finance loans decreased$25.4 million and was$231.3 million in the nine months endedSeptember 30, 2021 , compared to$256.8 million for the nine months endedSeptember 30, 2020 . This decrease was mainly due to the same factors as discussed above. The yield on traditional C&I and commercial finance loans decreased to 3.69% compared to 3.96% in the nine months endedSeptember 30, 2020 , in line with changes in market rates of interest. Interest income on CRE loans and multi-family loans decreased$4.4 million to$100.0 million for the three months endedSeptember 30, 2021 compared to$104.5 million for the three months endedSeptember 30, 2020 . The decrease was mainly due to repayments of broker originated multi-family loans and declines in market rates of interest. The yield on CRE and multi-family loans was 3.92% for the three months endedSeptember 30, 2021 , compared to 4.03% in the three months endedSeptember 30, 2020 . Interest income on CRE loans and multi-family loans decreased$14.7 million to$306.9 million in the nine months endedSeptember 30, 2021 compared to$321.6 million for the nine months endedSeptember 30, 2020 . The yield on CRE and multi-family loans was 4.00% in the nine months endedSeptember 30, 2021 , compared to 4.16% in the nine months endedSeptember 30, 2020 . The decrease in yield was mainly due to the change in market rates of interest and the increase in lower yielding CRE loans, which replaced the majority of the multi-family run off. Interest income on residential mortgage loans declined$5.8 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The decrease was mainly due to a decline in average balances and a 38 basis point decline in the yield, a result of adjustable rate loans repricing to market rates of interest and lower accretion income on acquired loans, which was$629 thousand in the three months endedSeptember 30, 2021 , compared to$1.8 million in the prior year period. The average balance of 52 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES
residential mortgage loans declined
Interest income on residential mortgage loans decreased$24.0 million to$40.6 million in the nine months endedSeptember 30, 2021 compared to$64.6 million for the nine months endedSeptember 30, 2020 . The decrease was mainly due to a$554.0 million decline in the average balance of residential mortgage loans resulting from elevated levels of pay downs as well as a result of loan sales in 2020. The yield on residential mortgage loans decreased to 3.73% for the nine months endedSeptember 30, 2021 compared to 4.29% for the nine months endedSeptember 30, 2020 . Accretion income on acquired residential mortgage loans was$3.5 million for the nine months endedSeptember 30, 2021 , compared to$7.1 million for the nine months endedSeptember 30, 2020 . Tax equivalent interest income on securities decreased$4.0 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , mainly due to a decrease of$72.6 million in the average balance of securities between the periods. The decline in balances was mainly due to accelerated repayment of mortgage-backed securities. The tax equivalent yield on securities decreased to 2.77%, compared to 3.09% in the prior year period. The decrease in tax equivalent yield was mainly due to lower reinvestment rates and continued pay downs in our municipal securities portfolio. The average balance of tax-exempt securities declined to$1.9 billion for the three months endedSeptember 30, 2021 , compared to$2.0 billion for the corresponding period in 2020. Tax equivalent interest income on securities decreased$15.4 million to$90.9 million in the nine months endedSeptember 30, 2021 , compared to$106.3 million for the nine months endedSeptember 30, 2020 . This was mainly the result of a decrease of$455.3 million in the average balance of securities between the periods. The tax equivalent yield on securities was 2.87% in the nine months endedSeptember 30, 2021 , compared to 3.03% in the nine months endedSeptember 30, 2020 . The decrease in tax equivalent yield on securities was mainly due to the same factors as discussed in respect of the three month period. Average interest earning deposits were$604.4 million for the three months endedSeptember 30, 2021 , an increase of$180.1 million compared to the three months endedSeptember 30, 2020 . The increase was due to deposit inflows and lower than anticipated loan demand. Interest earning deposits yielded 0.14% for the three months endedSeptember 30, 2021 , unchanged from the same period in 2020. Average total deposits and mortgage escrow balances decreased$514.5 million to$23.2 billion in the three months endedSeptember 30, 2021 , compared to the third quarter of 2020. Average interest bearing deposits decreased$1.1 billion and average non-interest bearing deposits increased$616.0 million . The decrease in average interest bearing deposits was mainly due to a decline in higher costing certificate accounts which we allowed to mature without renewal. The increase in non-interest bearing deposits was due to organic growth. The average cost of interest bearing deposits was 0.14% for the three months endedSeptember 30, 2021 compared to 0.40% in the three months endedSeptember 30, 2020 . The average cost of total deposits was 0.11% for the three months endedSeptember 30, 2021 , compared to 0.31% in the third quarter of 2020. The decrease in the cost of deposits was mainly due to repricing of deposit relationships in line with declines in market interest rates. Average total deposits and mortgage escrow increased$128.0 million to$23.4 billion in the nine months endedSeptember 30, 2021 , compared to$23.3 billion in the nine months endedSeptember 30, 2020 . Over the same period, average interest bearing deposits decreased$716.6 million compared to the nine months endedSeptember 30, 2020 . Average non-interest bearing deposits increased$844.6 million to$5.8 billion in the nine months endedSeptember 30, 2021 , compared to$4.9 billion in the nine months endedSeptember 30, 2020 . The increase was mainly due to organic growth generated by our commercial banking teams and financial centers. The average cost of interest bearing deposits was 0.16% in the nine months endedSeptember 30, 2021 compared to 0.67% in the nine months endedSeptember 30, 2020 . The average cost of total deposits was 0.12% in the nine months endedSeptember 30, 2021 compared to 0.53% in the nine months endedSeptember 30, 2020 . The decrease in the cost of deposits was mainly due to the same factors discussed above. Average borrowings declined$1.2 billion in the three months endedSeptember 30, 2021 , compared to the same period a year ago. Given the increase in deposits and the decline in our loan portfolio and in investment securities between the periods, excess liquidity was used to reduce borrowings. The average cost of borrowings was 3.87% for the third quarter of 2021, compared to 1.95% in the prior year period. The increase in the average cost of borrowings was a result of changes in funding mix, with a greater proportion of our borrowings comprised of longer term and more expensive subordinated notes in 2021, compared to 2020. Average borrowings decreased$1.6 billion to$589.7 million in the nine months endedSeptember 30, 2021 , compared to$2.1 billion in the same period a year ago. The decrease in average borrowings was due to the same factors as discussed related to the three month period. The average cost of borrowings was 3.91% for the nine months endedSeptember 30, 2021 , compared to 2.27% in the nine months endedSeptember 30, 2020 . The increase was mainly due to the same factors as discussed in the three month period. 53 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES 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 endedSeptember 30, 2021 andSeptember 30, 2020 , the provision for credit losses - loans was zero and$31.0 million , respectively. See the section "Non-Performing Loans and Non-Performing Assets" later in this discussion for further analysis of the provision for credit losses - loans. Provision for Credit Losses -HTM Securities . In the third quarter of 2021, we did not record a provision for credit losses - HTM securities compared to a negative provision of$1.0 million recorded in the third quarter of 2020. In the third quarter of 2020, we reduced the allowance for credit losses - HTM securities after we sold$93.0 million of HTM securities, that had demonstrated significant credit deterioration since the date of purchase. In the nine months endedSeptember 30, 2021 we recorded a negative provision for credit losses - HTM securities of$750 thousand compared to the nine months endedSeptember 30, 2020 , for which we recorded a provision for credit losses - HTM securities of$703 thousand . The negative provision for credit losses recorded in the nine months endedSeptember 30, 2021 reflects lower levels of modeled loss content in our HTM securities portfolio.
Non-interest income. The components of non-interest income were as follows for the periods presented below:
For the three months ended For the nine months ended
September 30, September 30,
2021 2020 2021 2020
Deposit fees and service charges $ 7,007 $ 5,960 $ 20,666 $ 17,928
Accounts receivable management / factoring
commissions and other fees 5,937 5,393 16,854 15,349
Bank owned life insurance 5,009 5,363 14,945 15,331
Loan commissions and fees 8,620 7,290 27,859 26,317
Investment management fees 1,819 1,735 5,689 4,960
Net gain on sale of securities 1,656 642 2,361 9,539
Net gain on called securities 85 - 19 4,880
Other 2,414 1,842 6,724 7,337
Total non-interest income $ 32,547 $
28,225
Non-interest income was$32.5 million for the three months endedSeptember 30, 2021 , compared to$28.2 million in the same period a year ago. Non-interest income was$95.1 million for the nine months endedSeptember 30, 2021 , compared to$101.6 million in the nine months endedSeptember 30, 2020 . Deposit fees and service charges increased$1.0 million compared to the third quarter of 2020. This was mainly due to higher transaction volumes, higher analysis charges and an increase in wire fees and check printing fees. In the nine months endedSeptember 30, 2021 , deposit fees and charges increased$2.7 million compared to the same period a year ago. The increase was mainly due to increased transaction volumes compared to the same period a year ago which were impacted by the the pandemic. Accounts receivable management / factoring commissions and other fees increased$544 thousand in the three months endedSeptember 30, 2021 compared to the third quarter of 2020 and increased$1.5 million in the nine months endedSeptember 30, 2021 as compared to the same period a year ago. The increases were mainly due to a rebound in transaction volume in our factoring and payroll finance businesses. 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. The nine month period endedSeptember 30, 2021 includes referral fees of$1.8 million earned earlier in the year from second round PPP loans. In the year ago period, loan fees also included gain on sale of equipment finance loans of$2.9 million . Excluding these items, the increase in the nine month period was mainly due to higher loan syndication fees. Net gain on sale of securities represents net gains and losses realized on the sale of securities from our AFS investment securities portfolio. The net gain on sale of securities of$1.7 million realized in the three months endedSeptember 30, 2021 was mainly due to the sale ofUS Government and corporate securities. The net gain in the three months endedSeptember 30, 2020 was mainly due to the sale of securities held in our held to maturity portfolio, as we sold securities from one issuer that had demonstrated significant deterioration in 54 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES credit quality since the date we acquired the securities. The net gain on sale of securities in the nine months endedSeptember 30, 2020 , was mainly to reduce the level of investment securities to total earning assets.
Net gain on called securities in the nine months ended
Other non-interest income principally includes fees for interest rate swaps, earnings from community development investments, safe deposit rentals, and foreign exchange fees. Other non-interest income increased$572 thousand compared to the third quarter of 2020. The increase was mainly due to an increase in earnings from community development investments and interest rate swaps. For the nine months endedSeptember 30, 2021 , other non-interest income declined$613 thousand , which was mainly due to lower transactional volumes in our derivatives business, which was$1.0 million in the nine months endedSeptember 30, 2021 , compared to$2.6 million in the same period in 2020. Partially offsetting this decline was an increase in earnings from community development investments.
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,
2021 2020 2021 2020
Compensation and benefits $ 57,178 $
55,960
6,648 5,869 20,046 17,788
Occupancy and office operations 13,967 14,722 42,357 44,616
Information technology 10,214 8,422 29,201 23,752
Professional fees 7,251 6,343 21,889 17,550
Amortization of intangible assets 3,776 4,200 11,328 12,600
FDIC insurance and regulatory assessments 2,844 3,332 8,418 10,176
Other real estate owned expense ("OREO"), net 1 151 (139) 1,436
Merger-related expense 4,581 - 7,062 -
Impairment related to financial centers and real
estate consolidation strategy 118 - 1,226 -
Loss on extinguishment of borrowings - 6,241 1,243 16,713
Other non-interest expense 18,390 14,122 48,913 48,821
Total non-interest expense $ 124,968 $
119,362
Non-interest expense increased$4.3 million in the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 non-interest expense increased$4.8 million compared to the same period a year ago. The increases were mainly due to merger-related expenses. Fluctuations in our non-interest expenses are discussed below. Compensation and benefits expense was$57.2 million for the three months endedSeptember 30, 2021 , compared to$56.0 million for the three months endedSeptember 30, 2020 . The increase was mainly due to a higher bonus compensation accrual and an increase in medical costs. For the nine months endedSeptember 30, 2021 , compensation and employee benefits expense was$172.2 million compared to$165.5 million for the nine months endedSeptember 30, 2020 . The increase in the nine month period was mainly due to the same factors discussed above. The reduction in financial center personnel has been offset by continued hiring of commercial banking, business development and risk management personnel. Stock-based compensation plans expense was$6.6 million in the third quarter of 2021, compared to$5.9 million in the third quarter of 2020. The increase was due to additional personnel included in our stock-based compensation plan. For additional information related to our employee benefit plans and stock-based compensation, see Note 10. "Stock-Based Compensation" in the notes to consolidated financial statements included elsewhere in this report. For the nine months endedSeptember 30, 2021 , stock-based compensation expense was$20.0 million compared to$17.8 million for the nine months endedSeptember 30, 2020 . The increase was due to the same factors discussed above. 55 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES Occupancy and office operations expense was$14.0 million in the third quarter of 2021, compared to$14.7 million in the third quarter of 2020. The decline in occupancy and office operations expense is due to continuing efforts to rationalize our real estate footprint. For the nine months endedSeptember 30, 2021 , occupancy and office operations expense was$42.4 million , compared to$44.6 million for the nine months endedSeptember 30, 2020 . This decrease was due to the same factors discussed above. 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, as well as amortization related to our investment in various digital initiatives, was$10.2 million in the third quarter of 2021, compared to$8.4 million in the third quarter of 2020. The increase was mainly due to amortization on investments made in various back-office automation initiatives and digital transformation efforts, which are designed to enable us to drive future revenue growth and expand our digital offerings. For the nine months endedSeptember 30, 2021 , information technology expense was$29.2 million , compared to$23.8 million for the nine months endedSeptember 30, 2020 . The increase was due to the same factors discussed above. Professional fees, were$7.3 million for the three months endedSeptember 30, 2021 , compared to$6.3 million for the three months endedSeptember 30, 2020 . The increase was mainly due to incremental fees related to outsourced services in connection with certain infrastructure needs as well as incremental consulting fees related to infrastructure transformation, automation and other digital initiatives. For the nine months endedSeptember 30, 2021 , professional fees were$21.9 million , compared to$17.6 million for the nine months endedSeptember 30, 2020 . The increase was due to the same factors discussed above. Amortization of intangible assets expense mainly includes amortization of core deposit intangible assets, customer lists and non-compete agreements. Amortization of intangible assets was$3.8 million in the three months endedSeptember 30, 2021 , compared to$4.2 million for the three months endedSeptember 30, 2020 . Amortization of intangible assets expense was$11.3 million for the nine months endedSeptember 30, 2021 , compared to$12.6 million for the nine months endedSeptember 30, 2020 . The decreases in amortization expense were mainly due to the accelerated amortization of the core deposit intangible assets that were recorded in the merger withAstoria Financial Corporation and other acquisitions. For additional information, see Note 5. "Goodwill and Other Intangible Assets" in the notes to the consolidated financial statements included elsewhere in this report.FDIC insurance and regulatory assessments were$2.8 million and$8.4 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to$3.3 million and$10.2 million for the three and nine months period endedSeptember 30, 2020 , respectively. The decline was due to lowerFDIC insurance assessments and was mainly due to a decline in average assets, retention of 100% of capital, and improvement in earnings in 2021 compared to 2020. Merger-related expense was$4.6 million and$7.1 million for the three months and nine months endedSeptember 30, 2021 , respectively, and was incurred in connection with our pending merger withWebster . The expense included fees for financial advisory services, diligence, and integration efforts to date. Impairment related to financial centers and real estate consolidation strategy was$118 thousand for the three months endedSeptember 30, 2021 . This charge included a lease termination payment. The charge of$1.2 million for the nine months endedSeptember 30, 2021 , also included write-off of leasehold improvements of$127 thousand , loss on sale of fixed assets from the sale of two owned locations of$309 thousand , and write-off of other fixed assets abandoned when we disposed of certain facilities of$197 thousand . Loss on extinguishment of borrowings was$1.2 million for the nine months endedSeptember 30, 2021 and represents the loss related to the payoff of the subordinated notes - Bank, which were redeemed onApril 1, 2021 . For the three and nine months endedSeptember 30, 2020 , the losses of$6.2 million and$16.7 million , respectively, were related to the repayment of FHLB borrowings. Other non-interest expense includes depreciation expense on operating leases, 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. The increase in the three month period endedSeptember 30, 2021 when compared to the same period in 2020 was mainly due to accrual for legal settlements of$2.0 million , loss on the sale of the majority of our mortgage servicing assets of$324 thousand , an increase in loan processing expense of$510 thousand , an increase in franchise taxes of$368 thousand and an increase in recruiting fees of$300 thousand . For the nine monthsSeptember 30, 2021 when compared to the same period in 2020, the increase was much smaller because in 2020 we incurred incremental operating costs related to the pandemic and made additional contributions to theSterling National Bank Charitable Foundation . See Note 11. "Other Non-Interest Expense, Other Assets and Other Liabilities" in the notes to the consolidated financial statements included elsewhere in this report for details on significant components. 56 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES Income tax expense was$25.7 million , representing an effective income tax rate of 21.2% for the three months endedSeptember 30, 2021 , compared to income tax expense of$12.3 million for the three months endedSeptember 30, 2020 . Our estimated effective income tax rate for full year 2021 is 20.0% prior to the impact of discrete items. Income tax expense was$73.2 million , or 20.0% of pre-tax income, for the nine months endedSeptember 30, 2021 and a benefit of$11.3 million , or a benefit of 7.1% for the nine months endedSeptember 30, 2020 . See Note 9. "Income Taxes" in the notes to the consolidated financial statements included elsewhere in this report for additional information. Portfolio Loans The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the periods indicated. September 30, 2021 December 31, 2020 Amount % Amount % Commercial: C&I: Traditional C&I$ 3,342,356 15.6 %$ 2,920,205 13.4 % Asset-based lending 673,679 3.2 803,004 3.7 Payroll finance 166,999 0.8 159,237 0.7 Warehouse lending 1,301,639 6.1 1,953,677 8.9 Factored receivables 228,834 1.1 220,217 1.0 Equipment financing 1,254,846 5.9 1,531,109 7.0 Public sector finance 1,825,976 8.6 1,572,819 7.2 Total C&I 8,794,329 41.3 9,160,268 41.9 Commercial mortgage: CRE 5,941,508 27.9 5,831,990 26.7 Multi-family 4,296,829 20.2 4,406,660 20.2 ADC 694,443 3.3 642,943 2.9 Total commercial mortgage 10,932,780 51.4 10,881,593 49.8 Total commercial 19,727,109 92.7 20,041,861 91.7 Residential mortgage 1,395,248 6.6 1,616,641 7.4 Consumer 154,192 0.7 189,907 0.9 Total portfolio loans 21,276,549 100.0 % 21,848,409 100.0 % ACL - loans (309,915) (326,100) Total portfolio loans, net$ 20,966,634 $ 21,522,309
Note: the percentages in the table above are rounded to the nearest tenth of a percent.
Overview. Total portfolio loans, net, decreased$555.7 million to$21.0 billion atSeptember 30, 2021 , compared to$21.5 billion atDecember 31, 2020 . A slowdown in mortgage refinance activity drove a$652.0 million sequential decline in our mortgage warehouse lending balance and was the primary driver of the decline in total C&I. Repayments of multi-family loans that were predominately broker originated contributed to the decline in total commercial loans while repayments of residential mortgage loans contributed to the decline in total portfolio loans. AtSeptember 30, 2021 , total C&I loans comprised 41.3% of the total loan portfolio, compared to 41.9% atDecember 31, 2020 . Commercial mortgage loans comprised 51.4% and 49.8% of the total loan portfolio atSeptember 30, 2021 andDecember 31, 2020 , respectively. Residential mortgage loans comprised 6.6% of the total loan portfolio atSeptember 30, 2021 , compared to 7.4% atDecember 31, 2020 . In the nine months endedSeptember 30, 2021 , traditional C&I loans increased by$422.2 million , primarily as a result of increases in line of credit usage and C&I loan origination activity, which was offset by repayments of PPP loans of$141.2 million . Total C&I loans 57 --------------------------------------------------------------------------------STERLING BANCORP AND SUBSIDIARIES declined largely as a result of the decline in warehouse lending loans discussed above and were also impacted by pay downs of asset-based lending loans, which decreased by$129.3 million , and by pay downs of equipment finance loans which decreased$276.3 million . These decreases were partially offset by an increase in public sector finance loans of$253.2 million . CRE loans increased$109.5 million in the nine months endedSeptember 30, 2021 . The increase was mainly due to an uptick in demand for these loan products in our market area. Multi-family loans declined by$109.8 million in the first nine months of 2021, mainly due to run-off in broker originated loans. Our CRE loans balances were impacted by the sale of$23.7 million of classified loans in the third quarter of 2021 and the sale of$192.5 million of mostly criticized and classified CRE loans in the first half of 2021. ADC loans, which are a component of commercial mortgage loans, increased$51.5 million in the nine months endedSeptember 30, 2021 . The increase is mainly due to originations related to our affordable housing tax credit investments.
Residential mortgage loans were
Included in our residential mortgage portfolio are loans that were originated 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 $498.1 million of
residential mortgage loans that were originated as interest only ARM loans at
September 30, 2021 compared to $599.5 million at December 31, 2020 .
Non-Performing Loans and Non-Performing Assets
The table below sets forth the amounts and categories of our NPAs at the dates
indicated. There were no warehouse lending or public sector finance loans that
were non-performing at such dates.
September 30, December 31,
2021 2020
Non-accrual loans:
Traditional C&I $ 41,447 $ 19,223
Asset-based lending 3,790 5,255
Payroll finance - 2,300
Equipment financing 21,478 30,634
CRE 87,014 46,053
Multi-family 327 4,485
ADC 22,500 30,000
Residential mortgage 16,976 18,661
Consumer 8,550 10,278
Total non-accrual loans 202,082 166,889
Accruing loans past due 90 days or more 3,371 170
Total NPLs 205,453 167,059
OREO 816 5,347
Total NPAs $ 206,269 $ 172,406
TDRs accruing and not included above $ 21,376 $ 37,492
Ratios:
NPLs to total loans 0.97 % 0.76 %
NPAs to total assets 0.69 0.58
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, 2021 , total NPLs
increased $38.4 million to $205.5 million compared to $167.1 million at December
31, 2020 . Non-accrual loans were $202.1 million and loans 90 days or more past
due and still accruing interest were $3.4 million as of September 30, 2021 .
Non-accrual loans increased by $35.2 million to $202.1 million at September 30,
2021 from $166.9 million at December 31, 2020 . The increase was mainly due to
three CRE relationships, two C&I relationships, one equipment finance
relationship, and smaller ABL
58
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STERLING BANCORP AND SUBSIDIARIESloans which are in the process of work-out or exit, partially offset by the payoff of one CRE relationship and two C&I relationships and the partial charge off of one ADC loan.
TDRs. TDRs still accruing interest income are loans modified for borrowers that have experienced financial difficulties but are performing in accordance with the modified 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. AtSeptember 30, 2021 , total TDRs were$48.3 million , of which$21.4 million were performing in accordance with their modified terms and approximately$27.0 million were non-accrual. AtDecember 31, 2020 , total TDRs were$79.0 million , of which$37.5 million were performing and$41.5 million were non-accrual. The decrease in TDRs atSeptember 30, 2021 was primarily due to the loan sales mentioned above and the payoff of one CRE relationship. TDR balances are more fully discussed in Note 3. "Portfolio Loans - TDRs" in the notes to the consolidated financial statements included elsewhere in this report. As ofSeptember 30, 2021 , there were no commitments to lend additional funds to borrowers with loans that have been classified as TDRs. Forbearance under the CARES Act. The CARES Act permits financial institutions to suspend requirements related to loan modifications to borrowers affected by COVID-19 that would otherwise, in accordance with GAAP, be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made betweenMarch 1, 2020 and as modified by the Consolidated Appropriations Act, the earlier ofJanuary 1, 2022 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 ofDecember 31, 2019 . OnApril 7, 2020 , various regulatory agencies, including theBoard of Governors of theFederal Reserve System and theOffice 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 theFinancial Accounting Standards Board 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 considered to be TDRs. This includes short-term (e.g., nine 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.
At
Deferral of
Loan balance principal and
outstanding interest %
Traditional C&I $ 3,342,356 $ - - %
Asset-based lending 673,679 - -
Payroll finance 166,999 - -
Warehouse lending 1,301,639 - -
Factored receivables 228,834 - -
Equipment finance 1,254,846 728 0.1
Public sector finance 1,825,976 - -
Commercial real estate 5,941,508 32,365 0.5
Multi-family 4,296,829 - -
ADC 694,443 - -
Residential mortgage 1,395,248 39,944 2.9
Consumer 154,192 2,961 1.9
Total Portfolio loans $ 21,276,549 $ 75,998 0.4 %
Principal and interest deferrals were in place in respect of loans representing
0.4% of our loan portfolio. Deferrals consist mainly of 90-day principal and
interest deferral with the ability to extend an additional 90-day period at the
Bank's option. We are closely monitoring and working with our clients to
determine ongoing deferral extensions and requests.
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. When real estate is transferred to OREO, it is recorded at fair value less cost to sell. If the fair value less cost to sell is less than the loan balance, the difference is charged against the ACL - loans. After transfer to OREO, we regularly update the fair value of the properties.
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STERLING BANCORP AND SUBSIDIARIES
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, 2021 , we
had OREO properties with a recorded balance of $816 thousand , compared to $5.3
million at December 31, 2020 . The decrease was mainly due to sales of OREO
properties for cash. We had no additions to OREO in the nine months ended
September 30, 2021 .
Classification of Assets. Our determination as to the classification of our
assets and the amount of our ACL - loans is subject to review by our regulators,
who can direct the charge-off of loans and order the establishment of additional
ACL. Management regularly reviews our asset portfolio to determine whether any
assets require classification in accordance with applicable regulations. As of
September 30, 2021 , we had $351.7 million of loans designated as special mention
compared to $461.5 million at December 31, 2020 . The decrease in special mention
loans in the nine months ended September 30, 2021 was mainly due to
approximately $105 million of loans that were downgraded to substandard,
approximately $110 million of loans that were upgraded to pass, approximately
$95 million of repayments and approximately $20 million of loans included in our
loan sales. These declines were partially offset by approximately $230 million
of loans, mainly multi-family, CRE, ADC and C&I that were newly designated
special mention during the period. The vast majority of the borrowers continue
to perform.
On the basis of management's review of our assets at September 30, 2021 ,
classified assets consisted of loans of $626.3 million ($611.8 million were
rated substandard and one loan of $4.6 million was rated doubtful) and OREO of
$816 thousand . Substandard loans were $528.8 million and OREO was $5.3 million
at December 31, 2020 . The increase in substandard loans in the nine months ended
September 30, 2021 was mainly related to loans transferred from special mention
and newly designated classified loans of approximately $273 million , and was
partially offset by approximately $100 million of substandard loans that were
included in our loan sales, approximately $100 million of repayments and
approximately $9 million of charge-offs. Our asset resolution team is working
with these borrowers to reduce the outstanding balances and maximize repayments.
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.
Our estimate of credit losses at
To address potential model uncertainties, 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 geographic area or industry related to our exposure; •An adjustment for economic conditions during a 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 decreased from$326.1 million atDecember 31, 2020 to$309.9 million atSeptember 30, 2021 . The ACL - loans atSeptember 30, 2021 represented 150.8% of non-performing loans and 1.46% of total portfolio loans. AtDecember 31, 2020 , the allowance for loan losses represented 195.2% of non-performing loans and 1.49% of total portfolio loans. 60 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES Allocation of ACL - loans. The following table sets forth the ACL - loans allocated by loan category, the total loan balances by category (excluding loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The ACL allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. September 30, 2021 December 31, 2020 Allowance Allowance for credit Loan % of ACL to for loan Loan % of ACL to losses balance loan balance losses balance loan balance Traditional C&I$ 61,483 $ 3,342,356 1.84 %$ 42,670 $ 2,920,205 1.46 % Asset-based lending 10,051 673,679 1.49 12,762 803,004 1.59 Payroll finance 1,691 166,999 1.01 1,957 159,237 1.23 Warehouse lending 1,150 1,301,639 0.09 1,724 1,953,677 0.09 Factored receivables 3,145 228,834 1.37 2,904 220,217 1.32 Equipment financing 25,474 1,254,846 2.03 31,794 1,531,109 2.08 Public sector finance 5,534 1,825,976 0.30 4,516 1,572,819 0.29 CRE 147,604 5,941,508 2.48 155,313 5,831,990 2.66 Multi-family 29,379 4,296,829 0.68 33,320 4,406,660 0.76 ADC 10,380 694,443 1.49 17,927 642,943 2.79 Residential mortgage 10,874 1,395,248 0.78 16,529 1,616,641 1.02 Consumer 3,150 154,192 2.04 4,684 189,907 2.47 Total$ 309,915 $ 21,276,549 1.46$ 326,100 $ 21,848,409 1.49 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 measured for impairment when we adopted CECL onJanuary 1, 2020 . 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 cost 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$188.7 million atSeptember 30, 2021 , which was an increase of$43.7 million versus the$145.0 million atDecember 31, 2020 . The increase in collateral dependent loans was mainly due the the addition of four CRE relationships, one C&I relationship and one equipment finance relationship. This increase in collateral dependent loans was partially offset by payoffs of three C&I relationships, one CRE relationship, the partial charge-off of an ADC loan and various other loans and the sale of certain CRE and multi-family loans. 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. AtSeptember 30, 2021 , we had specific reserves of$36.8 million allocated to$150.6 million in principal on loans that are considered collateral dependent loans in our ACL. Changes in Financial Condition betweenSeptember 30, 2021 andDecember 31, 2020 Total assets increased$208.3 million atSeptember 30, 2021 , compared toDecember 31, 2020 . Components of the change in total assets were: •Cash balances increased$624.3 million to$929.3 million atSeptember 30, 2021 , compared toDecember 31, 2020 . The increase was mainly due to increases in deposit balances and included the impact of seasonal increases in municipal deposits at the end of the third quarter in connection with tax collections. •Total investment securities increased by$244.5 million to$4.3 billion atSeptember 30, 2021 , compared to$4.0 billion atDecember 31, 2020 . The increase in investment securities included the purchase ofUS Treasury and corporate securities in response to the significant levels of excess liquidity generated by deposit inflows and the contraction in our loan portfolio. •These increases were partially offset by the following: •Portfolio loans, net, decreased$555.7 million atSeptember 30, 2021 , compared toDecember 31, 2020 , primarily as a result of the following: 61 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES ?Commercial loans decreased by$314.8 million to$19.7 billion atSeptember 30, 2021 , compared to$20.0 billion atDecember 31, 2020 . The decline was mainly due to a slowdown in mortgage refinance activity which resulted in a$652.0 million decline in mortgage warehouse loans. In addition we sold mainly criticized and classified commercial loan in 2021 that totaled$216.2 million . ?Residential mortgage loans held in our loan portfolio declined by$221.4 million to$1.4 billion atSeptember 30, 2021 compared to$1.6 billion atDecember 31, 2020 mainly due to repayments. •Other assets decreased by$74.7 million to$1.0 billion atSeptember 30, 2021 , compared to$1.1 billion atDecember 31, 2020 . The components of other assets are as follows: September 30, December 31, 2021 2020 Low income housing tax credit investments$ 527,953 $ 488,303 Right of use asset for operating leases 94,647 105,667 Fair value of swaps 94,524 149,797 Cash on deposit as swap collateral net of settlement 55,774 82,478 Operating leases - equipment and vehicles leased to others 43,052 55,224 Other assets 172,751 181,934$ 988,701 $ 1,063,403 The table above includes the following items: •We have invested in various limited partnerships that sponsor affordable housing projects using low income housing tax credits. •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 14. "Commitments and Contingencies" 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 8. "Derivatives" in the notes to consolidated financial statements included elsewhere in this report. The decrease was mainly due to the increase in interest rates in the nine months endedSeptember 30, 2021 . •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. •Operating leases - equipment and vehicles leased to others is mainly the remaining balance of leases we acquired in 2019. •Other assets include income taxes, prepaid insurance, prepaid property taxes, prepaid maintenance, accounts receivable and other miscellaneous assets. Total liabilities increased$1.2 million to$25.2 billion atSeptember 30, 2021 , as compared toDecember 31, 2020 . The increase was mainly due to the following: •Total deposits increased$816.5 million to$23.9 billion atSeptember 30, 2021 , compared to$23.1 billion atDecember 31, 2020 . The increase in the first nine months of 2021 included increases primarily in interest bearing and non-interest bearing transaction accounts, money market accounts and municipal deposits. Certificate of deposit accounts declined$674.4 million mainly due to higher costing balances that matured and were not renewed. •Municipal deposits increased$795.0 million to$2.4 billion atSeptember 30, 2021 , compared to$1.6 billion atDecember 31, 2020 . The increase was mainly due to growth generated from our municipal and public sector banking teams as well as seasonal factors. The increases above were partially offset by the following increases: •FHLB borrowings decreased$382.0 million , fed funds purchased decreased$277.0 million , and Subordinated Notes - Bank declined$143.7 million compared toDecember 31, 2020 . The decreases were funded from excess liquidity generated by increases in our deposit base and loan repayments. •Other liabilities decreased$36.6 million to$692.1 million atSeptember 30, 2021 , compared to$728.7 million atDecember 31, 2020 . The decrease was mainly due to declines in compensation payable as a result of the payment in the first quarter of accrued bonuses and a decline in the value of swap liabilities due to changes in interest rates. 62 -------------------------------------------------------------------------------- STERLING BANCORP AND SUBSIDIARIES Supplemental Reporting of Non-GAAP Financial Measures The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance and to assess our performance compared to our annual budget and strategic plans. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors, analysts, regulators and others information that we use to manage and evaluate our performance each period. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements, and notes thereto for the quarter endedSeptember 30, 2021 included elsewhere in this report, and the year endedDecember 31, 2020 , included in our Annual Report for the year endedDecember 31, 2020 filed on Form 10-K. September 30, 2021 2020 The following table shows the reconciliation of pretax pre-provision net revenue to adjusted pretax pre-provision net revenue(1): Net interest income$ 213,837 $ 217,824 Non-interest income 32,547 28,225 Total net interest income and non-interest income 246,384 246,049 Non-interest expense 124,968 119,362 Pretax pre-provision net revenue 121,416 126,687
Adjustments:
Net (gain) on sale of securities (1,656) (642) Litigation accrual 2,000 - Loss on sale of mortgage servicing rights 324 - Loss on extinguishment of debt - 6,241 Impairment related to financial centers and real estate consolidation strategy 118 - Merger-related expense 4,581 -
Amortization of non-compete agreements and acquired customer list intangible assets
148 172
Adjusted pretax pre-provision net revenue including accretion income
126,931 132,458
Accretion income (6,197) (9,172)
Adjusted pretax pre-provision net revenue excluding accretion income
$ 120,734 $ 123,286 See legend beginning on page 66 . 63 --------------------------------------------------------------------------------
STERLING BANCORP AND SUBSIDIARIES
September 30,
2021 2020
The following table shows the reconciliation of stockholders' equity to tangible common equity and the
tangible common equity ratio 2:
Total assets $ 30,028,425 $ 30,617,722
Goodwill and other intangibles (1,765,718) (1,781,246)
Tangible assets 28,262,707 28,836,476
Stockholders' equity 4,797,629 4,557,785
Preferred stock (135,986) (136,917)
Goodwill and other intangibles (1,765,718) (1,781,246)
Tangible common stockholders' equity 2,895,925 2,639,622
Common stock outstanding at period end 192,681,503 194,458,841
Common stockholders' equity as a % of total assets 15.52 % 14.44 %
Book value per common share $ 24.19 $ 22.73
Tangible common equity as a % of tangible assets 10.25 % 9.15 %
Tangible book value per common share $ 15.03 $ 13.57
See legend beginning on page 66 .
For the three months ended For the nine months ended
September 30, September 30,
2021 2020 2021 2020
The following table shows the reconciliation of reported return on average tangible assets and adjusted return on average
tangible assets 3:
Average assets $ 29,147,332 $
30,652,856
(1,771,948) (1,788,190)
Average tangible assets 27,379,123 28,868,840 27,600,095 28,835,318
Net income available to common stockholders 93,715 82,438 287,282 143,429
Net income, if annualized 371,804 327,960 384,095 191,588
Reported return on average tangible assets 1.36 % 1.14 % 1.39 % 0.66 %
Adjusted net income (non-GAAP) $ 99,589 $
87,682
395,109 348,822 394,652 188,902
Adjusted return on average tangible assets
(non-GAAP) 1.44 % 1.21 % 1.43 % 0.66 %
See legend beginning on page 66 .
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STERLING BANCORP AND SUBSIDIARIES
For the three months ended For the nine months ended
September 30, September 30,
2021 2020 2021 2020The 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)4: Income before income tax expense
$ 121,416 $
96,687
25,745 12,280 73,223 11,348
Net income (GAAP) 95,671 84,407 293,160 149,346
Adjustments:
Net (gain) on sale of securities (1,656) (642) (2,361) (9,539) Accrual for legal settlements 2,000 - 2,000 - Loss on sale of mortgage servicing rights 324 - 324 - Impairment related to financial centers and real estate consolidation strategy 118 - 1,226 - Net loss on extinguishment of borrowings - 6,241 1,243 16,713 Merger-related expense 4,581 - 7,062 - Amortization of non-compete agreements and acquired customer lists 148 172 443 515 Total pre-tax adjustments 5,515 5,771 9,937 7,689 Adjusted pre-tax income 126,931 102,458 376,320 168,383 Adjusted income tax expense 25,386 12,807 75,264 21,048 Adjusted net income (non-GAAP) 101,545 89,651 301,056 147,335 Preferred stock dividend 1,956 1,969 5,878 5,917 Adjusted net income available to common stockholders (non-GAAP)$ 99,589 $
87,682
Weighted average diluted shares 192,340,487 193,715,943 192,417,008 194,677,020 Diluted EPS as reported (GAAP) $ 0.49 $
0.43 $ 1.49
0.52 0.45 1.53 0.73
See legend beginning on page 66 .
For the three months ended For the nine months ended
September 30, September 30,
2021 2020 2021 2020The 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
$ 4,768,712 $
4,530,334
(136,221) (137,139) (136,453) (137,359)
Average goodwill and other intangibles (1,768,209) (1,784,016) (1,771,948) (1,788,190)
Average tangible common stockholders' equity 2,864,282 2,609,179 2,777,519 2,574,985
Net income available to common stockholders 93,715 82,438 287,282 143,429
Net income, if annualized 371,804 327,960 384,095 191,588
Reported return on average tangible common
stockholders' equity 12.98 % 12.57 % 13.83 % 7.44 %
Adjusted net income (non-GAAP) $ 99,589 $ 87,682 $ 295,178 $ 141,418
Annualized adjusted net income 395,109 348,822 394,652 188,902
Adjusted return on average tangible common
stockholders' equity (non-GAAP) 13.79 % 13.37 % 14.21 % 7.34 %
See legend beginning below.
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STERLING BANCORP AND SUBSIDIARIES
For the three months ended For the nine months ended
September 30, September 30,
2021 2020 2021 2020
The following table shows the reconciliation of the reported operating efficiency ratio and adjusted operating efficiency ratio6:
Net interest income $ 213,837 $ 217,824 $ 650,278 $ 642,895
Non-interest income 32,547 28,225 95,117 101,641
Total revenue 246,384 246,049 745,395 744,536
Tax equivalent adjustment on securities 3,085 3,258 9,321 10,124
Net loss (gain) on sale of securities (1,656) (642) (2,361) (9,539)
Depreciation of operating leases (2,846) (3,130) (8,888) (9,758)
Adjusted total revenue (non-GAAP) 244,967 245,535 743,467 735,363
Non-interest expense 124,968 119,362 363,762 358,956
Impairment related to financial centers and
real estate consolidation strategy (118) - (1,226) -
Net loss on extinguishment of borrowings - (6,241) (1,243) (16,713)
Accrual for legal settlements (2,000) - (2,000) -
Loss on sale of mortgage servicing rights (324) - (324) -
Merger-related expense (4,581) - (7,062) -
Depreciation of operating leases (2,846) (3,130) (8,888) (9,758)
Amortization of intangible assets (3,776) (4,200) (11,328) (12,600)
Adjusted non-interest expense (non-GAAP) $ 111,323 $ 105,791 $ 331,691 $ 319,885
Reported operating efficiency ratio (non-GAAP) 50.7 % 48.5 % 48.8 % 48.2 %
Adjusted operating efficiency ratio (non-GAAP) 45.4 43.1 44.6 43.5
_______________
See legend beginning below.
1 PPNR is a non-GAAP financial measure calculated by summing our GAAP net
interest income plus GAAP non-interest income minus our GAAP non-interest
expense and eliminating provision for credit losses and income taxes. We believe
the use of PPNR provides useful information to readers of our financial
statements because it enables an assessment of our ability to generate earnings
to cover losses through a credit cycle. Adjusted PPNR includes the adjustments
we make for adjusted earnings and excludes accretion income. We believe adjusted
PPNR supplements our PPNR calculation. We use this calculation to assess our
performance in the current operating environment.
2 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.
3 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.
4 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.
5 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.
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STERLING BANCORP AND SUBSIDIARIES
6 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.
Liquidity and Capital Resources
Capital. Stockholders' equity was $4.8 billion as of September 30, 2021 , an
increase of $207.1 million relative to December 31, 2020 . The increase was
mainly due to net income of $293.2 million , stock-based compensation and stock
option exercises of $22.7 million , partially offset by common stock repurchases
of $27.3 million , common shares acquired from stock compensation plan activity
of $6.9 million , common dividends of $40.3 million , preferred dividends of $6.6
million , and other comprehensive loss of $27.7 million , which was primarily due
to a decline in the fair value of our AFS portfolio.
In the first quarter of 2021, we repurchased 1,235,372 common shares at a cost
of $27.3 million and an average price of $22.12 per share. Pursuant to the
Merger Agreement with Webster , we did not repurchase any common shares in the
open market in the second or third quarters of 2021.
We paid dividends of $0.07 per common share in each quarter of 2020 and in each
of the first three quarters of 2021. On October 20, 2021 , our Board of Directors
approved a dividend of $0.07 per common share, which is payable on November 15,
2021 to our holders of record on November 1, 2021 . We paid dividends of $16.25
per preferred share in each quarter of 2020 and in each of the first three
quarters of 2021. In addition, on October 15, 2021 , we paid a dividend of $16.25
per preferred share.
Liquidity. As discussed in our 2020 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. Contingencies have
been expanded to include analysis of the impact to cash flows associated with
outstanding forbearance agreements and other factors associated with the
pandemic. These scenarios are incorporated into our contingency funding plan,
which provides the basis for the identification of our liquidity needs. As of
September 30, 2021 , 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 September 30, 2021 , the Bank had $929.3 million in cash and cash equivalents
on hand and unused borrowing capacity at the FHLB of $5.8 billion . In addition,
the Bank may purchase federal funds from other institutions and enter into
additional repurchase agreements. The Bank had $1.6 billion of unencumbered
securities available to pledge as collateral as of September 30, 2021 .
We are a bank holding company and do not conduct business 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, 2021 , the Bank had capacity to pay
approximately $269.2 million of dividends to us under regulatory guidelines
without prior regulatory approval.
We had cash on hand of $115.0 million at September 30, 2021 . In the first nine
months of 2021, we received dividends from the Bank of $80.0 million and our
primary uses of cash were $27.3 million for common stock repurchases and $46.9
million for dividends.
We have a $35.0 million credit facility with a financial institution 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, 2021 .
The facility expires on November 28, 2021 .
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