Performing &

Transforming

2018 Annual Report

Performing & Transforming

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

To Our Shareholders:

I am pleased to report that 2018 was a year of strong performance and solid progress for Sterling. Among our many accomplishments: we delivered record adjusted net income and EPS available to common stockholders; met the needs of our customers, as reflected in strong commercial loan and deposit growth; completed the integration of Astoria Financial; made great strides in transforming our balance sheet; and reaffirmed our commitment to shareholder value by expanding our share buyback program.

In all of these initiatives, we continued to be guided by a well-defined strategic purpose: to create a high-performing regional bank focused on the Greater New York metropolitan area. This purpose gives the company a clear reason for being, unites our team members in pursuing shared objectives, and ensures that we have a sustainable vision for the way we want to serve our customers, stockholders and communities.

RECORD FINANCIAL PERFORMANCE

Our operating and financial performance in 2018 reflected record profitability, positive operating leverage, and increasingly strong returns on equity and assets. Net income available to common stockholders on a GAAP basis was $439.3 million, or $1.95 per diluted share, compared to $91.0 million, or $0.58 per diluted share, for 2017. Our adjusted net income available to common stockholders was a record $449.6 million and adjusted diluted earnings per share available to common stockholders was $2.00. Adjusted earnings and diluted earnings per share rose 102.5% and 42.9%, respectively, over the prior year. Our profitability metrics continued to strengthen in 2018, with adjusted returns on average tangible assets of 1.55% and average tangible common equity of 18.29%.

Sterling’s performance continues to be driven by our determined focus on creating positive operating leverage. In 2018, adjusted total net revenues grew by $425.1 million—nearly three times faster than the increase in adjusted non-interest expenses of $145.7 million. Our adjusted efficiency ratio for 2018 was 38.8%, improving from 41.8% a year earlier.

We generated strong commercial loan growth in 2018, with total commercial loans of $16.2 billion at year-end, up 11.1% from December 31, 2017. The largest increases were in the traditional C&I, equipment finance, factoring and public finance categories, as we continued to meet the needs of small to mid-sized business in our region, as well as state, municipal and local governments nationally.

Total deposits were $21.2 billion at 2018 year-end, rising $675.9 million from the prior year. Sterling continues to enjoy a stable and cost-efficient funding base of core deposits, which represented 94.3% of total deposit balances at December 31, 2018.

Credit quality has remained strong, despite concerns that the banking industry may be entering the later stages of the credit cycle. Non-performing loans as a percentage of total loans were 0.88%, and the allowance for loan losses was 56.7% of non-performing loans at 2018 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 were 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. Sterling Bancorp’s tangible common equity to tangible assets ratio was 8.60% and Tier 1 leverage ratio was 9.50% at December 31, 2018. At Sterling National Bank, the Tier 1 leverage ratio was 9.94%.


Net Income available to common stockholders1($ in millions)
Net Income Available to Common Stockholders (GAAP)
Adjust Net Incom Available to Common Stockholders (Non-GAAP)
$27.2
$57.8
FYE
9/30/14
$66.1
$105.4
FYE
12/31/15
$140.0
$145.5
FYE
12/31/16
$91.0
$222.0
FYE
12/31/17
$439.3
$449.6
FYE
12/31/18
1

See reconciliation of reported net income (GAAP) to adjusted net income (non-GAAP) on page 24 of Form 10-K.

Diluted Earnings Per Share2
Diluted EPS (GAAP)
Adjusted Diluted EPS (Non-GAAP)
$0.34
$0.72
FYE
9/30/14
$0.60
$0.96
FYE
12/31/15
$1.07
$1.11
FYE
12/31/16
$0.58
$1.40
FYE
12/31/17
$1.95
$2.00
FYE
12/31/18
2

See reconciliation of reported diluted earnings per share (GAAP) to adjusted diluted earnings per share (non-GAAP) on page 24 of Form 10-K.


INTEGRATING THE ASTORIA MERGER

“Execution is key,” is an often-heard phrase at Sterling. Certainly, our team’s successful execution of the integration process for the Astoria Financial merger has been a key to our strong performance—and our future potential. Despite the challenges of merging two organizations with a combined $30+ billion in total assets, the integration was completed by the third quarter of 2018, less than one year after the effective date of the merger. Among the many milestones in the process were the sale of Astoria’s Lake Success headquarters for a gain of $11.8 million, conversion of Astoria core deposit systems to one integrated technology platform, and consolidation of 22 financial centers and two back-office locations. Significantly, we are achieving cost savings in excess of our expectations at the time of the merger. We appreciate the efforts of all our colleagues who worked tirelessly to make the integration a success.

With the integration accomplished, we go forward as one of the premier banks in our region. We have the ability to serve customers in a dynamic market that spans New York City, Westchester County, the Hudson Valley, Long Island, and northern New Jersey, in addition to our national commercial lending capabilities. And, we have the talented people, range of financial solutions, earnings power, operating leverage and capital strength to continue to advance our purpose of becoming a high-performing organization.

TRANSITIONING THE BALANCE SHEET

At the time we announced the Astoria merger, we set a critical goal of transitioning the resulting balance sheet to a more optimal mix, including a balanced and diverse loan portfolio with a substantial commercial loan component. We were successful in that regard in 2018, and continuing into 2019. We acquired Advantage Funding Management, a provider of commercial vehicle and transportation financing services, early in 2018, adding more than $450 million in total outstanding loans and leases and providing access to a client base across various industry sectors and geographic markets nationwide. In December 2018, we announced plans to sell approximately $1.6 billion of fixed-rate residential mortgage loans acquired with Astoria. And in the first quarter of 2019, we purchased a $504 million portfolio of asset-based and equipment finance loans from Woodforest National Bank, which will add significant origination capabilities in the Midwest and Southwest regions to Sterling’s established national commercial lending platform, including a direct lending equipment finance sales and originations team.

The balance sheet repositioning provides several important strategic benefits. We are exiting low- yielding mortgage loans and working to replace them with relationship-oriented, higher-yielding commercial lending assets. The result will be an improved net interest margin, reduced interest rate risk, and higher liquidity.

RETURNING CAPITAL TO SHAREHOLDERS

Reflecting our commitment to enhance shareholder value, Sterling’s Board of Directors increased the amount of shares authorized to be repurchased under our existing Repurchase Program to 20,000,000 shares of common stock. This represents approximately 8.9% of the common shares issued by the company, excluding treasury stock. The Board previously authorized the repurchase of up to 10,000,000 shares of common stock in February 2018.

Through the end of December 2018, the company had repurchased approximately 9.1 million shares under the Repurchase Program. We will continue to execute on the approved share buyback program, depending on market conditions as well as our opportunities to deploy our capital to support the growth of our business.


Total Assets($ in billions)
$7.3
AT
9/30/14
$12.0
AT
12/31/15
$14.2
AT
12/31/16
$30.4
AT
12/31/17
$31.4
AT
12/31/18
Total Deposits($ in billions)
$5.3
AT
9/30/14
$8.6
AT
12/31/15
$10.1
AT
12/31/16
$20.5
AT
12/31/17
$21.2
AT
12/31/18
Return on Average Tangible Common Equity, adjusted3
12.84%
FYE
9/30/14
13.86%
FYE
12/31/15
14.90%
FYE
12/31/16
15.17%
FYE
12/31/17
18.29%
FYE
12/31/18
3

See reconciliation of as reported return on average tangible common equity (GAAP) to as adjusted return on average tangible common equity (non-GAAP) on page 24 of Form 10-K.

Return on Average Tangible Assets, adjusted4
0.92%
FYE
9/30/14
1.17%
FYE
12/31/15
1.20%
FYE
12/31/16
1.27%
FYE
12/31/17
1.55%
FYE
12/31/18
4

See reconciliation of as reported return on average tangible assets (GAAP) to as adjusted return on average tangible assets (non-GAAP) on page 25 of Form 10-K.


CONTINUOUS TRANSFORMATION BY INVESTING IN INNOVATION

Customers are increasingly asking banks to do more, through the use of technology, to make banking more convenient, self-directed and personalized. At the same time, advances such as data analytics and machine learning can help financial institutions become more responsive, efficient and cost-effective. We are making the shift to a more technology-forward enterprise, by investing in technology to better serve customers in a changing marketplace, and to ensure that our systems, processes and information security are ready for the challenges and opportunities of a digital business environment.

Our technology investments are focused on four key goals. First, we are transitioning to an “always on” mode of IT operation, as today’s bank customers demand that financial institutions provide services without interruption in a safe, secure and resilient manner. Second, we are working to advance our digital capabilities to the next level. For example, we have launched our proprietary digital experience, Sterling Connect, which brings together a range of solutions in a unified way, and will be the foundation for our future digital and mobile offerings. Third, we are creating a technology ecosystem based on the application of data analytics, using our data as a strategic asset to improve the customer experience. And, finally, we are working to automate several operational functions through the use of robotics and artificial intelligence, which has exciting potential to make our business more efficient, reduce cycle times, and be more responsive to users.

ENGAGING WITH OUR COMMUNITIES

Living our purpose by becoming a high-performing bank also inspires us to perform on behalf of our communities—ensuring that they are healthy, thriving and inclusive. Accordingly, Sterling is active in community reinvestment efforts aimed at increasing the availability of affordable housing, supporting neighborhood economic development, and lending to small businesses that create jobs.

In the past year, Sterling provided more than $737 million in funding—including loans and qualified investments—for community development. Among our major initiatives, we provided financing for the LinkNYC kiosks that provide free public Wi-Fi and communications services, supported Neighborhood Housing Services’ program for lower-income, first-time home buyers in New York City, and helped finance a homeless shelter in Long Island City. Loans from Sterling also enabled the development of 1,981 units of affordable housing.

Our Sterling colleagues volunteered more than 4,600 hours with community service organizations such as Junior Achievement; Habitat for Humanity in Rockland, Westchester and Suffolk counties; Neighborhood Housing Services programs in NYC and Queens; Food Bank Westchester; the Long Island Housing Partnership; Year Up; and Big Brothers Big Sisters.

We also established the Sterling National Bank Charitable Foundation to make a difference in the communities we serve, by supporting worthy organizations that share our commitment to revitalize underserved communities and help underprivileged populations. Through direct grants and matching gifts, the Foundation reflects the caring nature of Sterling and its people. In 2018, the Foundation funded a total of $1.14 million through 79 awards to various organizations across the communities in which we operate. The Foundation also matched colleague donations totaling more than $57,000.

National asset originations supported by strong deposit generation platform in NYC

PLATFORM FOR PERFORMANCE

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 $31.4 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:

  • Our success in driving growth through both organic means and strategic acquisitions;
  • The ability to further generate positive operating leverage, including the potential for expense reductions from planned branch consolidations and the benefits of the systems conversion;
  • A stable, cost-effective funding base of core deposits;
  • The capital flexibility to support profitable growth and enhance shareholder value;
  • Growing investments in digital initiatives; and
  • A team of extremely talented, dedicated and highly motivated people who understand that “Execution is key.”

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