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EX-31.2 - EXHIBIT 31.2 - STERLING BANCORPa312certification093015.htm
EX-31.1 - EXHIBIT 31.1 - STERLING BANCORPa311certification093015.htm
EX-32.0 - EXHIBIT 32.0 - STERLING BANCORPa320certification093015.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________ 
FORM 10-Q
______________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35385
______________________________ 
STERLING BANCORP
(Exact Name of Registrant as Specified in its Charter)
______________________________ 
Delaware
 
80-0091851
(State or Other Jurisdiction of
 
(IRS Employer ID No.)
Incorporation or Organization)
 
 
 
 
 
400 Rella Boulevard, Montebello, New York
 
10901
(Address of Principal Executive Office)
 
(Zip Code)
(845) 369-8040
(Registrant’s Telephone Number including area code)
______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
x
  
Accelerated Filer
 
o
 
 
 
 
 
 
 
Non-Accelerated Filer
 
o
  
Smaller Reporting Company
 
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Classes of Common Stock
  
Shares Outstanding as of November 4, 2015
$0.01 per share
  
129,740,728



STERLING BANCORP AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except share and per share data)



 
September 30,
 
December 31,

 
2015
 
2014
ASSETS:
 
 
 
Cash and due from banks
$
318,139

 
$
121,520

Securities:
 
 
 
Available for sale, at fair value
1,854,862

 
1,140,846

Held to maturity, at amortized cost (fair value of $689,049 and $586,346 at September 30, 2015 and December 31, 2014, respectively)
673,130

 
572,337

Total securities
2,527,992

 
1,713,183

Loans held for sale
66,506

 
46,599

Portfolio loans
7,525,632

 
4,815,641

Allowance for loan losses
(47,611
)
 
(42,374
)
Portfolio loans, net
7,478,021

 
4,773,267

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost
89,626

 
75,437

Accrued interest receivable
31,092

 
19,301

Premises and equipment, net
63,508

 
46,156

Goodwill
670,699

 
388,926

Core deposit and other intangible assets
80,830

 
43,332

Bank owned life insurance
195,741

 
150,522

Other real estate owned
11,831

 
5,867

Other assets
63,408

 
40,712

Total assets
$
11,597,393

 
$
7,424,822

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 

Deposits
$
8,805,411

 
$
5,212,325

FHLB borrowings
806,970

 
1,003,209

Other borrowings (repurchase agreements)
42,286

 
9,846

Senior notes
98,792

 
98,498

Mortgage escrow funds
13,865

 
4,167

Other liabilities
177,865

 
121,577

Total liabilities
9,945,189

 
6,449,622

Commitments and Contingent liabilities (See Note 15. Commitments and Contingencies)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding)

 

Common stock (par value $0.01 per share; 190,000,000 shares authorized; 136,671,178 shares and 91,246,024 shares issued at September 30, 2015 and December 31, 2014; 129,769,569 and 83,927,572 shares outstanding at September 30, 2015 and December 31, 2014, respectively)
1,367

 
912

Additional paid-in capital
1,508,669

 
858,489

Treasury stock, at cost (6,901,609 shares at September 30, 2015 and 7,318,452 at December 31, 2014)
(78,342
)
 
(82,908
)
Retained earnings
221,335

 
208,958

Accumulated other comprehensive loss, net of tax benefit of $610 at September 30, 2015 and $7,576 at December 31, 2014
(825
)
 
(10,251
)
Total stockholders’ equity
1,652,204

 
975,200

Total liabilities and stockholders’ equity
$
11,597,393

 
$
7,424,822

See accompanying notes to consolidated financial statements.

3

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



 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Interest and dividend income:
 
 
 
 
 
 
 
Loans and loan fees
$
87,774

 
$
55,793

 
$
202,789

 
$
160,294

Securities taxable
11,114

 
7,587

 
27,168

 
23,166

Securities non-taxable
3,169

 
2,866

 
8,936

 
8,291

Other earning assets
1,241

 
863

 
3,023

 
2,445

Total interest and dividend income
103,298

 
67,109

 
241,916

 
194,196

Interest expense:
 
 
 
 
 
 
 
Deposits
5,299

 
2,421

 
11,749

 
7,135

Borrowings
4,645

 
5,055

 
14,372

 
14,949

Total interest expense
9,944

 
7,476

 
26,121

 
22,084

Net interest income
93,354

 
59,633

 
215,795

 
172,112

Provision for loan losses
5,000

 
5,350

 
10,200

 
16,100

Net interest income after provision for loan losses
88,354

 
54,283

 
205,595

 
156,012

Non-interest income:
 
 
 
 
 
 
 
Accounts receivable management / factoring commissions and other fees
4,761

 
3,814

 
12,698

 
10,927

Mortgage banking income
2,956

 
2,160

 
8,643

 
6,470

Deposit fees and service charges
4,450

 
3,850

 
11,628

 
11,651

Net gain on sale of securities
2,726

 
33

 
4,958

 
1,287

Bank owned life insurance
1,293

 
791

 
3,443

 
1,469

Investment management fees
844

 
446

 
1,520

 
2,540

Other
1,772

 
1,192

 
3,778

 
3,828

Total non-interest income
18,802

 
12,286

 
46,668

 
38,172

Non-interest expense:
 
 
 
 
 
 
 
Compensation and benefits
29,238

 
22,110

 
75,070

 
70,755

Stock-based compensation plans
1,064

 
1,006

 
3,300

 
2,712

Occupancy and office operations
9,576

 
7,148

 
23,610

 
21,393

Amortization of intangible assets
3,431

 
2,511

 
6,611

 
7,533

FDIC insurance and regulatory assessments
2,281

 
1,619

 
5,093

 
4,981

Other real estate owned expense (income), net
183

 
214

 
187

 
(605
)
Merger-related expense

 

 
17,079

 
388

Defined benefit plan termination charge
13,384

 

 
13,384

 
1,486

Other
12,158

 
9,172

 
58,564

 
26,765

Total non-interest expense
71,315

 
43,780

 
202,898

 
135,408

Income before income tax expense
35,841

 
22,789

 
49,365

 
58,776

Income tax expense
11,648

 
6,452

 
16,043

 
17,096

Net income
$
24,193

 
$
16,337

 
$
33,322

 
$
41,680

Weighted average common shares:
 
 
 
 
 
 
 
Basic
129,172,832

 
83,105,944

 
102,655,566

 
83,051,192

Diluted
129,631,858

 
83,378,462

 
103,069,057

 
83,316,086

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.20

 
$
0.32

 
$
0.50

Diluted
0.19

 
0.19

 
0.32

 
0.50

See accompanying notes to consolidated financial statements.

4

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

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
24,193

 
$
16,337

 
$
33,322

 
$
41,680

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Change in unrealized holding gains (losses) on securities available for sale
14,598

 
(5,838
)
 
10,503

 
16,459

Accretion of net unrealized loss on securities transferred to held to maturity
296

 
277

 
1,120

 
896

Reclassification adjustment for net realized gains included in net income
(2,726
)
 
(33
)
 
(4,958
)
 
(1,287
)
Change in the actuarial gain (loss) of defined benefit plan and post-retirement benefit plans
9,357

 
(817
)
 
9,729

 
(2,144
)
Total other comprehensive income (loss), before tax
21,525

 
(6,411
)
 
16,394

 
13,924

Deferred tax (expense) benefit related to other comprehensive income
(9,148
)
 
2,724

 
(6,968
)
 
(5,918
)
  Other comprehensive income (loss), net of tax
12,377

 
(3,687
)
 
9,426

 
8,006

Comprehensive income
$
36,570

 
$
12,650

 
$
42,748

 
$
49,686

See accompanying notes to consolidated financial statements.

5

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


 
Number of
shares
 
Common
stock
 
Additional
paid-in
capital
 
Unallocated
ESOP
shares
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
(loss) income
 
Total
stockholders’
equity
Balance at January 1, 2014
83,955,647

 
$
912

 
$
856,946

 
$
(4,993
)
 
$
(82,176
)
 
$
173,885

 
$
(19,465
)
 
$
925,109

Net income

 

 

 

 

 
41,680

 

 
41,680

Other comprehensive income

 

 

 

 

 

 
8,006

 
8,006

Stock option & other stock transactions, net
173,597

 

 
685

 

 
2,244

 
(428
)
 

 
2,501

ESOP termination and settlement
(488,403
)
 

 
1,054

 
4,993

 
(5,983
)
 

 

 
64

Restricted stock awards, net
(12,574
)
 

 
1,879

 

 
(424
)
 

 

 
1,455

Cash dividends declared ($0.21 per common share)

 

 

 

 

 
(17,677
)
 

 
(17,677
)
Balance at September 30, 2014
83,628,267

 
$
912

 
$
860,564

 

 
$
(86,339
)
 
$
197,460

 
$
(11,459
)
 
$
961,138

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
83,927,572

 
$
912

 
$
858,489

 

 
$
(82,908
)
 
$
208,958

 
$
(10,251
)
 
$
975,200

Net income

 

 

 

 

 
33,322

 

 
33,322

Other comprehensive income

 

 

 

 

 

 
9,426

 
9,426

Common stock issued in HVB Merger
38,525,154

 
386

 
563,227

 

 

 

 

 
563,613

Stock option & other stock transactions, net
298,520

 

 
766

 

 
3,263

 
29

 

 
4,058

Restricted stock awards, net
118,323

 

 
1,197

 

 
1,303

 
338

 

 
2,838

Common equity issued, net of costs of issuance
6,900,000

 
69

 
84,990

 

 

 

 

 
85,059

Cash dividends declared ($0.21 per common share)

 

 

 

 

 
(21,312
)
 

 
(21,312
)
Balance at September 30, 2015
129,769,569

 
$
1,367

 
$
1,508,669

 
$

 
$
(78,342
)
 
$
221,335

 
$
(825
)
 
$
1,652,204

See accompanying notes to consolidated financial statements.

6

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


 
Nine months ended
 
September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
33,322

 
$
41,680

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provisions for loan losses
10,200

 
16,100

(Gain) net of losses and write-downs on other real estate owned
(953
)
 
(1,237
)
(Gain) on redemption of Subordinated Debentures

 
(712
)
Depreciation of premises and equipment
5,332

 
4,890

Asset write-downs, severance and retention compensation and other restructuring charges
40,350

 
1,431

Charge for termination of defined benefit pension plans
13,384

 
1,486

Amortization of intangibles
6,611

 
7,533

Amortization of low income housing tax credit
146

 
520

Net gain on sale of securities
(4,958
)
 
(1,287
)
Net gain on loans held for sale
(8,643
)
 
(6,470
)
Loss on disposition of premises and equipment
116

 

Net amortization of premium and discount on securities
3,465

 
2,665

Net accretion on loans
(4,805
)
 
(446
)
Accretion of discount, amortization of premium on borrowings, net
294

 
(100
)
Amortization of pre-payment penalties on restructured borrowings
(58
)
 
683

Restricted stock compensation expense
2,580

 
2,031

Stock option compensation expense
740

 
682

Originations of loans held for sale
(485,397
)
 
(348,495
)
Proceeds from sales of loans held for sale
474,133

 
361,602

Increase in cash surrender value of BOLI
(3,443
)
 
(2,456
)
Deferred income tax (benefit)
(851
)
 
(99
)
Other adjustments (principally net changes in other assets and other liabilities)
(53,390
)
 
16,242

Net cash provided by operating activities
28,175

 
96,243

Cash flows from investing activities:
 
 
 
Purchases of securities:
 
 
 
Available for sale
(890,925
)
 
(340,394
)
Held to maturity
(125,286
)
 
(118,584
)
Proceeds from maturities, calls and other principal payments on securities:
 
 
 
Available for sale
85,963

 
120,227

Held to maturity
28,545

 
25,969

Proceeds from sales of securities available for sale
808,892

 
282,673

Loan originations, net
(939,343
)
 
(621,732
)
Proceeds from sale of loans held for investment
44,020

 

Purchases of FHLB and FRB stock, net
(8,359
)
 
(22,759
)
Proceeds from sales of other real estate owned
3,040

 
8,939

Purchases of premises and equipment
(6,049
)
 
(1,854
)
Redemption of bank owned life insurance
2,455

 

Proceeds from sale of premises and equipment

 
310

Purchase low income housing tax credit

 
(1,966
)
Cash received from acquisitions, net
854,318

 

Net cash (used in) investing activities
(142,729
)
 
(669,171
)

7

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


 
Nine months ended
 
September 30,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Net increase in transaction, savings and money market deposits
470,011

 
590,404

Net decrease in time deposits
(37,671
)
 
(212,314
)
Net increase in short-term FHLB borrowings
29,000

 
150,000

Advances of term FHLB borrowings
80,000

 
325,000

Repayments of term FHLB borrowings
(305,181
)
 
(190,705
)
Repayment of debt assumed in acquisition
(4,485
)
 

Net increase (decrease) in other borrowings
7,074

 
(15,939
)
Redemption of subordinated debentures

 
(26,140
)
Net increase (decrease) in mortgage escrow funds
5,082

 
(8,968
)
Proceeds from stock option exercises
3,596

 
1,563

Equity capital raise, net of costs of issuance
85,059

 

Cash dividends paid
(21,312
)
 
(15,016
)
Net cash provided by financing activities
311,173

 
597,885

Net increase in cash and cash equivalents
196,619

 
24,957

Cash and cash equivalents at beginning of period
121,520

 
152,662

Cash and cash equivalents at end of period
$
318,139

 
$
177,619

Supplemental cash flow information:
 
 
 
  Interest payments
$
28,092

 
$
23,358

  Income tax payments
30,990

 
7,822

Real estate acquired in settlement of loans
7,829

 
1,669

Loans transfered from held for investment to held for sale
44,020

 

 
 
 
 
Acquisitions:
 
 
 
Non-cash assets acquired:
 
 
 
Securities available for sale
$
710,230

 
$

Securities held to maturity
3,611

 

Total loans, net
1,814,826

 

FHLB stock
5,830

 

Accrued interest receivable
7,392

 

Goodwill
281,773

 

Customer list
8,950

 

Core deposit intangibles
33,839

 

Bank owned life insurance
44,231

 

Premises and equipment, net
17,063

 

Other real estate owned
222

 

Other assets
25,871

 

Total non-cash assets acquired
2,953,838

 


8

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


 
Nine months ended
 
September 30,
 
2015
 
2014
Liabilities assumed:
 
 
 
Deposits
3,160,746

 

Escrow deposits
4,616

 

Other borrowings
25,366

 

Other liabilities
50,181

 

Total liabilities assumed
$
3,240,909

 
$

 


 


Net non-cash assets acquired
$
(287,071
)
 
$

Cash and cash equivalents received in acquisitions
879,240

 

Total consideration paid
$
592,169

 
$

The Company completed the acquisition of Damian Services Corporation on February 27, 2015 and the acquisition of Hudson Valley Holding Corp. on June 30, 2015. These transactions are included in the acquisitions portion of the statement of cash flows for the nine months ended September 30, 2015. See Note 2. “Acquisitions” for additional information.
See accompanying notes to consolidated financial statements.


9

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


(1) Basis of Financial Statement Presentation

Merger with Hudson Valley Holding Corp.
On June 30, 2015, Hudson Valley Holding Corp. (“HVHC”) merged with and into Sterling Bancorp (the “HVB Merger”). In connection with the merger, Hudson Valley Bank, the principal subsidiary of HVHC, also merged with and into Sterling National Bank.

Merger with Sterling Bancorp
On October 31, 2013, Provident New York Bancorp (“Legacy Provident”) merged with Sterling Bancorp (“Legacy Sterling”). In connection with the merger, the following corporate actions occurred:

Legacy Sterling merged with and into Legacy Provident (the “Provident Merger”).
Legacy Provident was the accounting acquirer and the surviving entity.
Legacy Provident changed its legal entity name to Sterling Bancorp (“Sterling” or the “Company”).
Sterling National Bank merged into Provident Bank.
Provident Bank changed its legal entity name to Sterling National Bank (the “Bank”).

We refer to the merger with Legacy Sterling as the “Provident Merger.”

Change in Fiscal Year End
On January 27, 2015, the Board of Directors amended the Company’s bylaws to change the Company’s fiscal year end from September 30 to December 31.

Nature of Operations and Principles of Consolidation
The unaudited consolidated financial statements include the accounts of Sterling; Sterling Risk Management, Inc., which is a captive insurance company; STL Holdings, Inc., which has an investment in Sterling Silver Title Agency L.P., an inactive company that provided title searches and title insurance for residential and commercial real estate; the Bank; and the Bank’s wholly-owned subsidiaries. These subsidiaries included at September 30, 2015: (i) Sterling REIT, Inc., and Grassy Sprain Real Estate Holding, which are real estate investment trusts that hold a portion of the Company’s real estate loans; (ii) Sterling National Funding Corp., a company that originates loans to municipalities and governmental entities and acquires securities issued by state and local governments; (iii) Provest Services Corp. II, which has engaged a third-party provider to sell mutual funds and annuities to the Bank’s customers; and (iv) several limited liability companies, which hold other real estate owned. Intercompany transactions and balances are eliminated in consolidation.

The consolidated financial statements have been prepared by management and, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s financial position and results of its operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented clear. The results of operations for the three months and nine months ended September 30, 2015 are not necessarily indicative of results to be expected for other interim periods or the entire calendar year ending December 31, 2015. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited financial statements included in the Company’s Transition Report on Form 10-K filed March 6, 2015.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates.


10

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

(2) Acquisitions
HVB Merger
On June 30, 2015 (“acquisition date”), the Company completed the HVB Merger. Under the terms of the HVB Merger agreement, HVHC shareholders received 1.92 shares of the Company’s common stock for each share of HVHC common stock, which resulted in the issuance of 38,525,154 shares. Based on the Company’s closing stock price of $14.63 per share on June 29, 2015, the aggregate consideration paid to HVHC shareholders was $566,307, which, in accordance with the HVB Merger agreement, also included the in-the-money cash value of outstanding HVHC stock options, the fair value of outstanding HVHC restricted stock awards and cash in lieu of fractional shares. Consistent with the Company’s strategy, the primary reason for the HVB Merger was the expansion of the Company’s geographic footprint in the greater New York metropolitan region and beyond.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of September 30, 2015 based on management’s best estimate using the information available as of the HVB Merger date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $269,757 and a core deposit intangible of $33,839.  As of June 30, 2015, HVHC had assets with a net book value of approximately $288,208, including loans with a net book value of approximately $1,816,767, and deposits with a net book value of approximately $3,160,746. The table below summarizes the amounts recognized as of the HVB Merger date for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the Company’s financial statements at fair value at the HVB Merger date:
Consideration paid through Sterling Bancorp common stock issued to HVHC shareholders
$
566,307

 
HVHC net book value
 
Fair value adjustments
 
As recorded at acquisition
Cash and cash equivalents
$
878,988

 
$

 
$
878,988

Investment securities
713,625

 
217

 (a)
713,842

Loans
1,816,767

 
(24,248
)
 (b)
1,792,519

Federal Reserve Bank stock
5,830

 

 
5,830

Bank owned life insurance
44,231

 

 
44,231

Premises and equipment
11,918

 
4,925

 (c)
16,843

Accrued interest receivable
7,392

 

 
7,392

Core deposits and other intangibles

 
33,839

 (d)
33,839

Other real estate owned
222

 

 
222

Other assets
32,639

 
(7,931
)
 (e)
24,708

Deposits
(3,160,746
)
 

 
(3,160,746
)
Other borrowings
(25,366
)
 

 
(25,366
)
Other liabilities
(37,292
)
 
1,540

 (f)
(35,752
)
Total identifiable net assets
$
288,208

 
$
8,342

 
$
296,550

 
 
 
 
 
 
Goodwill recorded in the HVB Merger
 
 
 
 
$
269,757

Explanation of certain fair value related adjustments:
(a)
Represents the fair value adjustment on investment securities held to maturity.
(b)
Represents the elimination of HVHCs allowance for loan losses and an adjustment of the net book value of loans to estimated fair value, which includes an interest rate mark and credit mark adjustment.
(c)
Represents an adjustment to reflect the fair value of HVHC owned real estate as determined by independent appraisals, which will be amortized on a straight-line basis over the estimated useful lives of the individual assets.
(d)
Represents intangible assets recorded to reflect the fair value of core deposits. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base.

11

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

(e)
Represents an adjustment in net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangibles recorded.
(f)
Represents the elimination of HVHC’s deferred rent liability.

The fair values for loans acquired from HVB were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the value of the underlying collateral, assuming the fair values of the loans were derived from the eventual sale of the collateral. These values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of HVHC’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on the date of the HVB Merger.

Acquired loan portfolio data in the HVB Merger is presented below:
 
Fair value of acquired loans at acquisition date
 
Gross contractual amounts receivable at acquisition date
 
Best estimate at acquisition date of contractual cash flows not expected to be collected
Acquired loans with evidence of deterioration since origination
$
96,973

 
$
122,104

 
$
19,024

Acquired loans with no evidence of deterioration since origination
1,695,546

 
1,974,740

 
37,520


The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the sum-of-the-years method. Other intangibles consist of below market rents which are amortized over the remaining life of each lease using the straight-line method.

Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.
The fair value of land, buildings and equipment was estimated using appraisals. Buildings will be amortized over their estimated useful lives of approximately 30 years. Improvements and equipment will be amortized or depreciated over their estimated useful lives ranging from one to five years.
The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. Management concluded the carrying value was an appropriate estimate of fair value for these deposits.
Direct acquisition and other charges incurred in connection with the HVB Merger were expensed as incurred and totaled $0 and $14,381 for the three months and nine months ended September 30, 2015, respectively. These expenses were recorded in Merger-related expenses on the consolidated income statements. Results of operations for the nine months ended September 30, 2015 included a charge for asset write-downs, information technology services and other contract terminations, employee retention and severance compensation and impairment of leases and facilities which totaled $28,055, which was recorded in other non-interest expense in the consolidated income statements.
The table on page 13 presents selected unaudited pro forma financial information reflecting the HVB Merger assuming it was completed as of January 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the HVB Merger actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full fiscal year period. Pro forma basic and diluted earnings per common share were calculated using the Company’s actual weighted average shares outstanding for the periods presented, plus the incremental shares issued, assuming the HVB Merger occurred at the beginning of the periods presented. The unaudited pro forma information is based on the actual financial statements of the Company for the periods presented, and on the actual financial statements of HVHC for the 2014 period presented and in 2015 until the date of the HVB Merger, at which time HVHC’s results of operations were included in the Company’s financial statements.

12

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

The unaudited pro forma information, for the nine months ended September 30, 2015 and 2014, set forth below reflects adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest income and expense due to amortization of premiums and accretion of discounts. Direct merger-related expenses and charges incurred in the nine months ended September 30, 2015 to write-down assets and accrue for retention and severance compensation are assumed to have occurred prior to January 1, 2014. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated potential cost savings.
 
Pro forma for the
 
nine months ended September 30,
 
2015
 
2014
Net interest income
$
264,850

 
$
241,326

Non-interest income
50,605

 
48,601

Non-interest expense
204,034

 
206,432

Net income
67,295

 
47,084

 
 
 
 
Pro forma earnings per share from continuing operations:
 
 
 
  Basic
$
0.53

 
$
0.39

  Diluted
0.52

 
0.39

Damian Acquisition
On February 27, 2015, the Bank acquired 100% of the outstanding common stock of Damian Services Corporation (“Damian”) for total consideration of $24,670 in cash. Damian is a payroll services provider located in Chicago, Illinois. In connection with the acquisition, the Bank acquired $22,307 of outstanding payroll finance loans and assumed $14,560 of liabilities. The Bank recognized a customer list intangible asset of $8,950 that is being amortized over its 16 year estimated life, and $11,930 of goodwill. The Bank also recognized a $1,500 restructuring charge consisting mainly of retention and severance compensation and asset write-downs related to the consolidation of Damian’s operations, and approximately $300 of legal fees.

FCC Acquisition
On May 7, 2015, the Bank acquired a factoring portfolio from FCC, LLC, a subsidiary of First Capital Holdings, Inc. (“FCC”), with an outstanding factoring receivables balance of approximately $44,500. The total consideration included a premium of $1,000 in addition to the outstanding receivables balance.




13

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

(3) Securities

A summary of amortized cost and estimated fair value of our securities as of September 30, 2015 and December 31, 2014 is presented below:    
 
September 30, 2015
 
Available for Sale
 
Held to Maturity
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
Amortized
cost
 
Gross
unrecognized
gains
 
Gross
unrecognized
losses
 
Fair
value
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,048,193

 
$
9,206

 
$
(1,159
)
 
$
1,056,240

 
$
228,360

 
$
4,484

 
$
(253
)
 
$
232,591

CMO/Other MBS
84,430

 
418

 
(501
)
 
84,347

 
52,201

 
571

 
(76
)
 
52,696

Total residential MBS
1,132,623

 
9,624

 
(1,660
)
 
1,140,587

 
280,561

 
5,055

 
(329
)
 
285,287

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
86,746

 
77

 
(63
)
 
86,760

 
103,976

 
3,673

 
(236
)
 
107,413

Corporate
402,661

 
1,276

 
(4,279
)
 
399,658

 
25,287

 
88

 
(19
)
 
25,356

State and municipal
188,324

 
2,445

 
(235
)
 
190,534

 
258,306

 
7,547

 
(208
)
 
265,645

Trust preferred
27,926

 
606

 

 
28,532

 

 

 

 

Other
8,781

 
10

 

 
8,791

 
5,000

 
348

 

 
5,348

Total other securities
714,438

 
4,414

 
(4,577
)
 
714,275

 
392,569

 
11,656

 
(463
)
 
403,762

Total securities
$
1,847,061

 
$
14,038

 
$
(6,237
)
 
$
1,854,862

 
$
673,130

 
$
16,711

 
$
(792
)
 
$
689,049


 
December 31, 2014
 
Available for Sale
 
Held to Maturity
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
Amortized
cost
 
Gross
unrecognized
gains
 
Gross
unrecognized
losses
 
Fair
value
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
528,818

 
$
5,398

 
$
(553
)
 
$
533,663

 
$
138,589

 
$
2,763

 
$
(2
)
 
$
141,350

CMO/Other MBS
85,619

 
178

 
(959
)
 
84,838

 
60,166

 
58

 
(564
)
 
59,660

Total residential MBS
614,437

 
5,576

 
(1,512
)
 
618,501

 
198,755

 
2,821

 
(566
)
 
201,010

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Federal agencies
150,623

 
4

 
(3,471
)
 
147,156

 
136,618

 
4,328

 
(548
)
 
140,398

Corporate
206,267

 
319

 
(1,755
)
 
204,831

 

 

 

 

State and municipal
129,576

 
2,737

 
(248
)
 
132,065

 
231,964

 
7,713

 
(89
)
 
239,588

Trust preferred
37,687

 
652

 
(46
)
 
38,293

 

 

 

 

Other

 

 

 

 
5,000

 
350

 

 
5,350

Total other securities
524,153

 
3,712

 
(5,520
)
 
522,345

 
373,582

 
12,391

 
(637
)
 
385,336

Total securities
$
1,138,590

 
$
9,288

 
$
(7,032
)
 
$
1,140,846

 
$
572,337

 
$
15,212

 
$
(1,203
)
 
$
586,346






14

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

The amortized cost and estimated fair value of securities at September 30, 2015 are presented below by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities (“MBS”) are shown separately since they are not due at a single maturity date.
 
September 30, 2015
 
Available for sale
 
Held to maturity
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Other securities remaining period to contractual maturity:
 
 
 
 
 
 
 
One year or less
$
27,914

 
$
28,001

 
$
15,166

 
$
15,287

One to five years
362,015

 
362,461

 
31,610

 
32,858

Five to ten years
286,257

 
284,815

 
234,692

 
240,979

Greater than ten years
38,252

 
38,998

 
111,101

 
114,638

Total other securities
714,438

 
714,275

 
392,569

 
403,762

Residential MBS
1,132,623

 
1,140,587

 
280,561

 
285,287

Total securities
$
1,847,061

 
$
1,854,862

 
$
673,130

 
$
689,049

 
Sales of securities for the periods indicated below were as follows:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Available for sale:
 
 
 
 
 
 
 
Proceeds from sales
$
606,459

 
$
51,151

 
$
808,892

 
$
282,673

Gross realized gains
3,079

 
292

 
5,702

 
2,303

Gross realized losses
(353
)
 
(259
)
 
(744
)
 
(1,016
)
Income tax expense on realized net gains
886

 
9

 
1,611

 
374


At September 30, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

15

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

The following table summarizes securities available for sale with unrealized losses, segregated by the length of time in a continuous unrealized loss position for the periods presented below:
 
Continuous unrealized loss position
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
value
 
Unrealized losses
 
Fair
value
 
Unrealized losses
 
Fair
value
 
Unrealized losses
Available for sale
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
194,747

 
$
(851
)
 
$
19,899

 
$
(308
)
 
$
214,646

 
$
(1,159
)
CMO/Other MBS
15,530

 
(61
)
 
25,019

 
(440
)
 
40,549

 
(501
)
Total residential MBS
210,277

 
(912
)
 
44,918

 
(748
)
 
255,195

 
(1,660
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
5,947

 
(1
)
 
15,381

 
(62
)
 
21,328

 
(63
)
Corporate
234,658

 
(3,505
)
 
24,891

 
(774
)
 
259,549

 
(4,279
)
State and municipal
35,945

 
(193
)
 
3,587

 
(42
)
 
39,532

 
(235
)
Total other securities
276,550

 
(3,699
)
 
43,859

 
(878
)
 
320,409

 
(4,577
)
Total
$
486,827

 
$
(4,611
)
 
$
88,777

 
$
(1,626
)
 
$
575,604

 
$
(6,237
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
17,379

 
$
(37
)
 
$
21,616

 
$
(516
)
 
$
38,995

 
$
(553
)
CMO/Other MBS
25,551

 
(206
)
 
43,475

 
(753
)
 
69,026

 
(959
)
Total residential MBS
42,930

 
(243
)
 
65,091

 
(1,269
)
 
108,021

 
(1,512
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
5,959

 
(87
)
 
140,699

 
(3,384
)
 
146,658

 
(3,471
)
Corporate
85,055

 
(731
)
 
65,648

 
(1,024
)
 
150,703

 
(1,755
)
State and municipal
12,012

 
(68
)
 
11,400

 
(180
)
 
23,412

 
(248
)
Trust preferred
3,900

 
(46
)
 

 

 
3,900

 
(46
)
Total other securities
106,926

 
(932
)
 
217,747

 
(4,588
)
 
324,673

 
(5,520
)
Total
$
149,856

 
$
(1,175
)
 
$
282,838

 
$
(5,857
)
 
$
432,694

 
$
(7,032
)


16

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

The following table summarizes securities held to maturity with unrecognized losses, segregated by the length of time in a continuous unrecognized loss position for the periods presented below:
 
Continuous unrecognized loss position
 
 
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
value
 
Unrecognized losses
 
Fair
value
 
Unrecognized losses
 
Fair
value
 
Unrecognized losses
Held to maturity
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
   Agency-backed
$
9,989

 
$
(253
)
 
$

 
$

 
$
9,989

 
$
(253
)
   CMO(1)/Other MBS
2,511

 
(10
)
 
6,389

 
(66
)
 
8,900

 
(76
)
Total residential MBS
12,500

 
(263
)
 
6,389

 
(66
)
 
18,889

 
(329
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
9,948

 
(52
)
 
14,816

 
(184
)
 
24,764

 
(236
)
Corporate
5,268

 
(19
)
 

 

 
5,268

 
(19
)
State and municipal
21,104

 
(166
)
 
2,754

 
(42
)
 
23,858

 
(208
)
Total other securities
36,320

 
(237
)
 
17,570

 
(226
)
 
53,890

 
(463
)
Total
$
48,820

 
$
(500
)
 
$
23,959

 
$
(292
)
 
$
72,779

 
$
(792
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,208

 
$
(2
)
 
$

 
$

 
$
1,208

 
$
(2
)
CMO/Other MBS

 

 
42,979

 
(564
)
 
42,979

 
(564
)
Total residential MBS
1,208

 
(2
)
 
42,979

 
(564
)
 
44,187

 
(566
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
9,711

 
(289
)
 
14,741

 
(259
)
 
24,452

 
(548
)
State and municipal
11,501

 
(86
)
 
233

 
(3
)
 
11,734

 
(89
)
Total other securities
21,212

 
(375
)
 
14,974

 
(262
)
 
36,186

 
(637
)
Total
$
22,420

 
$
(377
)
 
$
57,953

 
$
(826
)
 
$
80,373

 
$
(1,203
)
(1) CMO is defined in footnote 16. “Fair Value Measurements”.

At September 30, 2015, a total of 234 available for sale securities were in an unrealized loss position for less than 12 months and 42 securities were in a continuous unrealized loss position for 12 months or longer. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other than temporary impairment (“OTTI”) losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time the Company will receive full value for the securities. Furthermore, as of September 30, 2015, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. As of September 30, 2015, management believes the impairments detailed in the table above are temporary.

17

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

Securities pledged for borrowings at FHLB and other institutions, and securities pledged for municipal deposits and other purposes were as follows for the periods presented below:
 
September 30,
 
December 31,

 
2015
 
2014
Available for sale securities pledged for borrowings, at fair value
$
154,629

 
$
187,314

Available for sale securities pledged for municipal deposits, at fair value
1,050,013

 
550,681

Available for sale securities pledged for customer back-to-back swaps, at fair value
2,152

 
1,959

Held to maturity securities pledged for borrowings, at amortized cost
211,385

 
154,712

Held to maturity securities pledged for municipal deposits, at amortized cost
353,646

 
352,843

Total securities pledged
$
1,771,825