Innovation
in action
2018 Annual Report
High Performance Banking
Sterling Bancorp (NYSE: STL) (“Sterling”) is a regional bank holding company whose principal subsidiary, Sterling National Bank, specializes in the delivery of financial services and solutions to business owners, their families and consumers within the communities it serves through teams of dedicated and experienced relationship managers. Pursuing its strategic goal of building a high performing company, Sterling is sharply focused on delivering a superior client experience, increasing shareholder value, serving its communities, and creating a workplace where talent and initiative can thrive.
A Letter from Jack L. Kopnisky President + CEO
Building a high performing company has been the central goal of Sterling’s strategy since the current management team joined the company nearly seven years ago. Since that time, through the talent, hard work and energy of our team members, we have made tremendous progress in delivering on our strategy. We have demonstrated the ability to grow our business at a strong pace, both organically and through acquisitions, while driving positive operating leverage, meeting aggressive objectives for returns on assets and equity, and increasing the market value of our stock.
While we are pleased with these accomplishments, our strategy will continually drive us to aim higher and do more, as we strive to deliver the benefits of high performance to Sterling’s shareholders, customers, colleagues and communities.
Our merger with Astoria Financial, completed on October 2, 2017, represents a milestone in Sterling’s strategic transformation. The transaction created a Top 10 regional bank by combining two well-established institutions with deep ties to the markets and communities of the Greater New York metropolitan area. As of 2017 year-end, the result was a banking institution with $30.4 billion in total assets, $20.0 billion in gross loans and $20.5 billion in deposits—with a diversified commercial and consumer loan and deposit base, solid capital foundation and broad footprint in a dynamic and growing marketplace. We now cover an expanded service area that encompasses New York City, Westchester County, the Hudson Valley, Long Island, and northern New Jersey.
By combining the strengths of Sterling and Astoria, we have created one of the premier banking companies in our market. As a result, we go forward with the critical mass, financial resources, earnings power, range of solutions, talented professionals, and geographic reach to connect individuals, businesses and communities with new opportunities—and to continue to deliver on our promise to be a high performing organization.By combining the strengths of Sterling and Astoria, we have created one of the premier banking companies in our market. As a result, we go forward with the critical mass, financial resources, earnings power, range of solutions, talented professionals, and geographic reach to connect individuals, businesses and communities with new opportunities—and to continue to deliver on our promise to be a high performing organization.
We are very pleased with our progress in integrating Astoria and Sterling. Our teams are working together to deliver a compelling service offering and strong financial results. The Astoria deposit base is solid, with opportunities to grow core deposits. We are finding strong receptivity among Long Island commercial clients to our “single point of contact” approach to service. We are retaining existing clients, attracting new business, and adding talented professionals to our teams. As for the financial benefits, there continues to be significant opportunity to drive operating leverage as we apply Sterling’s operating model, focused on growing revenues at two to three times the rate of expenses. I always say that, “execution is key,” and while there is still much to do to integrate and grow the “new” company, we are well along in creating a company that consistently delivers high performance.
2018 PERFORMANCE: RECORD ADJUSTED NET INCOME AND STRONG GROWTH
Sterling’s strong financial performance in 2017 reflected positive EPS accretion from the Astoria merger, along with the profitable growth and positive operating leverage that have been the hallmarks of our strategy from Day 1. Net income available to common stockholders for 2017 on a GAAP basis was $91.0 million, or $0.58 per diluted share, after merger--related expenses and restructuring charges in connection with the Astoria merger, and a charge to income tax expense due to changes in the tax law. Excluding these items, our adjusted net income available to common stockholders was a record $222.0 million and adjusted diluted earnings per share were $1.40. This represents growth in adjusted net income available to common stockholders and adjusted diluted earnings per share of 52.6% and 26.1%, respectively. Adjusted return on average tangible assets for 2017 was 1.27% and adjusted return on average tangible common equity was 15.17%, once again exceeding our stated performance goals.
A focus on creating positive operating leverage by growing revenues at a faster pace than expenses continues to be a main driver of our performance. In 2017, we grew adjusted total net revenue by $182.5 million while adjusted non-interest expenses increased by $55.0 million, equivalent to an operating leverage of about 3.3 times.
Our business continued to deliver strong organic growth in 2017. In particular, we successfully grew our loan portfolio in key categories, including commercial and industrial, commercial finance and commercial real estate lending. Total commercial loans in those categories were up $543 million since the close of the Astoria merger, representing an annualized growth rate of 15.4%. While the Astoria merger resulted in an increase in the percentage of residential mortgages and multi-family loans, we are working toward our target portfolio mix of 45% commercial and industrial loans, 45% total commercial mortgage loans, and 10% residential mortgage and consumer loans.
The Astoria merger contributed significantly to our growth in core deposits, which increased $10.5 billion from 2016 year-end; our core deposits represented 94.3% of total deposits at December 31, 2017. Maintaining a stable and cost-efficient funding base of core deposits is a vital element in our profitability model.
Credit quality has remained strong. Non-performing loans as a percentage of total loans were 0.94%, and the allowance for loan losses was 41.6% of non-performing loans at 2017 year-end. Due to the Astoria merger, a significant portion of our loan portfolio does not carry an allowance for loan losses, as the acquired loans are recorded at their estimated fair value on the acquisition date.Our capital base is robust, with ample capital and liquidity to support our continued growth and the execution of our strategy. Benefiting from the Astoria merger, Sterling Bancorp’s tangible common equity to tangible assets ratio was 8.27% and Tier 1 leverage ratio was 9.39% at December 31, 2017. At Sterling National Bank, the Tier 1 leverage ratio was 10.10%.
Sterling has continued to add new banking teams while augmenting existing teams with highly skilled professionals to support our asset and deposit generation capabilities. Since closing the Astoria merger, we recruited 40 commercial bankers across our various business lines and geographic markets. A particular focus of our efforts has been on adding commercial banking professionals to serve clients on Long Island and building on Astoria’s strong market presence. During the past year, we also added depth to our teams in areas such as public sector finance, cash management, payroll finance, factoring and trade finance and residential mortgage warehouse lending.
To further strengthen our executive team, as we work to realize the benefits of the Astoria merger and continue our journey toward becoming a high performing bank, we have continued to invest in talent across the Company, including key additions in senior management, operations and enterprise risk management.
Since late 2011, when the current management team joined the company, Sterling has been guided by a clear strategic vision of what it means to be a high performing regional bank. We have worked diligently to make that vision a reality and the results of that effort are clear. From 2011 to the end of 2018, total assets have increased from $3.1 billion to $30.4 billion, total loans have gone from $1.7 billion to $19.2 billion, and total deposits have risen from $2.3 billion to $21.2 billion. Adjusted earnings have increased from $9.4 million to $449.6 million and adjusted diluted EPS went from $0.25 to $2.00. ROATA and ROATE have improved to levels achieved by the highest performing banks in the U.S.We are confident that we can expand further on these accomplishments and continue on our high performing journey. Sterling’s long-term performance – and shareholder value – will be built on a solid platform:
I would like to thank our colleagues for their hard work and engagement, our clients for their loyalty, our shareholders for their confidence in Sterling, and our Board of Directors for their sound guidance. We look forward to rewarding your support through our continued focus on creating a high performing company that can deliver on its exciting promise and potential.
Jack L. Kopnisky President and Chief Executive Officer