0001070154-15-000025.txt : 20150807 0001070154-15-000025.hdr.sgml : 20150807 20150807161337 ACCESSION NUMBER: 0001070154-15-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150807 DATE AS OF CHANGE: 20150807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING BANCORP CENTRAL INDEX KEY: 0001070154 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 800091851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35385 FILM NUMBER: 151037626 BUSINESS ADDRESS: STREET 1: 400 RELLA BLVD CITY: MONTEBELLO STATE: NY ZIP: 10901 BUSINESS PHONE: 8453698040 MAIL ADDRESS: STREET 1: 400 RELLA BLVD CITY: MONTEBELLO STATE: NY ZIP: 10901 FORMER COMPANY: FORMER CONFORMED NAME: PROVIDENT NEW YORK BANCORP DATE OF NAME CHANGE: 20050728 FORMER COMPANY: FORMER CONFORMED NAME: PROVIDENT BANCORP INC/NY/ DATE OF NAME CHANGE: 19980910 10-Q 1 stl2q201510-q.htm 10-Q JUNE 30, 2015 STL 2Q 2015 10-Q
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 June 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 August 6, 2015
$0.01 per share
  
129,727,255



STERLING BANCORP AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
QUARTERLY PERIOD ENDED JUNE 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)



 
June 30,
 
December 31,

 
2015
 
2014
ASSETS:
 
 
 
Cash and due from banks
$
362,856

 
$
121,520

Federal funds sold
3,571

 

Total cash and cash equivalents
366,427

 
121,520

Securities:
 
 
 
Available for sale, at fair value
2,081,414

 
1,140,846

Held to maturity, at amortized cost (fair value of $595,648 and $586,346, at June 30, 2015 and December 31, 2014, respectively)
585,196

 
572,337

Total securities
2,666,610

 
1,713,183

Loans held for sale
73,523

 
46,599

Portfolio loans
7,235,587

 
4,815,641

Allowance for loan losses
(44,317
)
 
(42,374
)
Portfolio loans, net
7,191,270

 
4,773,267

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost
74,233

 
75,437

Accrued interest receivable
29,015

 
19,301

Premises and equipment, net
63,555

 
46,156

Goodwill
669,590

 
388,926

Core deposit and other intangible assets
84,309

 
43,332

Bank owned life insurance
196,629

 
150,522

Other real estate owned
9,575

 
5,867

Other assets
141,646

 
40,712

Total assets
$
11,566,382

 
$
7,424,822

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 

Deposits
$
8,836,161

 
$
5,212,325

FHLB borrowings
777,047

 
1,003,209

Other borrowings (repurchase agreements)
39,181

 
9,846

Senior notes
98,693

 
98,498

Mortgage escrow funds
12,142

 
4,167

Other liabilities
180,048

 
121,577

Total liabilities
9,943,272

 
6,449,622

Commitments and Contingent liabilities (See Note 15.)


 


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 June 30, 2015 and December 31, 2014; 129,709,834 and 83,927,572 shares outstanding at June 30, 2015 and December 31, 2014, respectively)
1,367

 
912

Additional paid-in capital
1,507,837

 
858,489

Treasury stock, at cost (6,961,344 shares at June 30, 2015 and 7,318,452 at December 31, 2014)
(78,972
)
 
(82,908
)
Retained earnings
206,079

 
208,958

Accumulated other comprehensive (loss), net of tax (benefit) of ($9,757) at June 30, 2015 and ($7,576) at December 31, 2014
(13,201
)
 
(10,251
)
Total stockholders’ equity
1,623,110

 
975,200

Total liabilities and stockholders’ equity
$
11,566,382

 
$
7,424,822

See accompanying notes to consolidated financial statements.

3

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



 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Interest and dividend income:
 
 
 
 
 
 
 
Loans and loan fees
$
59,744

 
$
54,189

 
$
115,015

 
$
104,501

Securities taxable
8,423

 
8,005

 
16,054

 
15,578

Securities non-taxable
2,900

 
2,751

 
5,768

 
5,425

Other earning assets
880

 
816

 
1,782

 
1,582

Total interest and dividend income
71,947

 
65,761

 
138,619

 
127,086

Interest expense:
 
 
 
 
 
 
 
Deposits
3,359

 
2,319

 
6,452

 
4,713

Borrowings
5,014

 
4,991

 
9,728

 
9,894

Total interest expense
8,373

 
7,310

 
16,180

 
14,607

Net interest income
63,574

 
58,451

 
122,439

 
112,479

Provision for loan losses
3,100

 
5,950

 
5,200

 
10,750

Net interest income after provision for loan losses
60,474

 
52,501

 
117,239

 
101,729

Non-interest income:
 
 
 
 
 
 
 
Accounts receivable management / factoring commissions and other fees
4,435

 
3,613

 
7,937

 
7,113

Mortgage banking income
2,530

 
1,927

 
5,687

 
4,310

Deposit fees and service charges
3,639

 
3,897

 
7,181

 
7,801

Net gain on sale of securities
697

 
1,193

 
2,231

 
1,253

Bank owned life insurance
1,074

 
820

 
2,150

 
1,549

Investment management fees
316

 
681

 
676

 
1,223

Other
1,166

 
1,340

 
2,008

 
2,637

Total non-interest income
13,857

 
13,471

 
27,870

 
25,886

Non-interest expense:
 
 
 
 
 
 
 
Compensation and benefits
22,667

 
23,381

 
45,833

 
48,644

Stock-based compensation plans
1,128

 
780

 
2,236

 
1,707

Occupancy and office operations
7,453

 
6,992

 
14,033

 
14,246

Amortization of intangible assets
1,780

 
2,511

 
3,180

 
5,022

FDIC insurance and regulatory assessments
1,384

 
1,795

 
2,812

 
3,362

Other real estate owned (income) expense, net
40

 
(881
)
 
4

 
(820
)
Merger-related expense
14,625

 

 
17,080

 
388

Other
36,582

 
10,326

 
46,405

 
19,078

Total non-interest expense
85,659

 
44,904

 
131,583

 
91,627

(Loss) income before income tax expense
(11,328
)
 
21,068

 
13,526

 
35,988

Income tax (benefit) expense
(3,682
)
 
6,057

 
4,396

 
10,645

Net (loss) income
$
(7,646
)
 
$
15,011

 
$
9,130

 
$
25,343

Weighted average common shares:
 
 
 
 
 
 
 
Basic
91,021,716

 
83,066,938

 
89,177,177

 
83,023,362

Diluted
91,021,716

 
83,293,023

 
89,564,169

 
83,284,381

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
(0.08
)
 
$
0.18

 
$
0.10

 
$
0.30

Diluted
(0.08
)
 
0.18

 
0.10

 
0.30

See accompanying notes to consolidated financial statements.

4

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

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net (loss) income
$
(7,646
)
 
$
15,011

 
$
9,130

 
$
25,343

Other comprehensive (loss) income, before tax:
 
 
 
 
 
 
 
Change in unrealized holding (losses) gains on securities available for sale
(14,473
)
 
12,240

 
(4,095
)
 
22,296

Accretion of net unrealized loss on securities transferred to held to maturity
285

 
306

 
824

 
619

Reclassification adjustment for net realized gains included in net income
(697
)
 
(1,193
)
 
(2,231
)
 
(1,252
)
Change in the actuarial gain (loss) of defined benefit plan and post-retirement benefit plans
169

 
(26
)
 
372

 
(1,327
)
Total other comprehensive (loss) income, before tax
(14,716
)
 
11,327

 
(5,130
)
 
20,336

Deferred tax benefit (expense) related to other comprehensive income
6,254

 
(4,814
)
 
2,180

 
(8,643
)
  Other comprehensive (loss) income, net of tax
(8,462
)
 
6,513

 
(2,950
)
 
11,693

Comprehensive (loss) income
$
(16,108
)
 
$
21,524

 
$
6,180

 
$
37,036

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

 

 

 

 

 
25,343

 

 
25,343

Other comprehensive income

 

 

 

 

 

 
11,693

 
11,693

Stock option & other stock transactions, net
169,440

 

 
527

 

 
1,878

 
(386
)
 

 
2,019

ESOP termination and settlement
(505,717
)
 

 
1,054

 
4,993

 
(5,983
)
 

 

 
64

Restricted stock awards, net
(18,841
)
 

 
1,299

 

 
(385
)
 

 

 
914

Cash dividends declared ($0.14 per common share)

 

 

 

 

 
(11,709
)
 

 
(11,709
)
Balance at June 30, 2014
83,600,529

 
$
912

 
$
859,826

 

 
$
(86,666
)
 
$
187,133

 
$
(7,772
)
 
$
953,433

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
83,927,572

 
$
912

 
$
858,489

 

 
$
(82,908
)
 
$
208,958

 
$
(10,251
)
 
$
975,200

Net income

 

 

 

 

 
9,130

 

 
9,130

Other comprehensive (loss)

 

 

 

 

 

 
(2,950
)
 
(2,950
)
Common stock issued in HVB Merger
38,525,154

 
386

 
563,238

 

 

 

 

 
563,624

Stock option & other stock transactions, net
250,890

 

 
560

 

 
2,754

 
(30
)
 

 
3,284

Restricted stock awards, net
106,218

 

 
560

 

 
1,182

 
262

 

 
2,004

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

 
69

 
84,990

 

 

 

 

 
85,059

Cash dividends declared ($0.14 per common share)

 

 

 

 

 
(12,241
)
 

 
(12,241
)
Balance at June 30, 2015
129,709,834

 
$
1,367

 
$
1,507,837

 
$

 
$
(78,972
)
 
$
206,079

 
$
(13,201
)
 
$
1,623,110

See accompanying notes to consolidated financial statements.

6

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


 
Six months ended
 
June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
9,130

 
$
25,343

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provisions for loan losses
5,200

 
10,750

(Gain) net of losses and write-downs on other real estate owned
(533
)
 
(1,473
)
(Gain) on redemption of Subordinated Debentures

 
(712
)
Depreciation of premises and equipment
3,222

 
3,343

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

 

Amortization of intangibles
3,180

 
5,022

Amortization of low income housing tax credit
98

 

Net gain on sale of securities
(2,231
)
 
(1,253
)
Net gain on loans held for sale
(5,687
)
 
(4,310
)
(Gain) loss on sale of premises and equipment
116

 

Net amortization of premium and discount on securities
2,310

 
1,843

Net accretion on loans
(1,580
)
 
(2,975
)
Accretion of discount, amortization of premium on borrowings, net
153

 
(194
)
Restricted stock compensation expense
1,697

 
1,276

Stock option compensation expense
539

 
431

Originations of loans held for sale
(311,948
)
 
(231,982
)
Proceeds from sales of loans held for sale
334,731

 
240,558

Increase in cash surrender value of BOLI
(2,150
)
 
(1,659
)
Deferred income tax (benefit)
(567
)
 
(99
)
Other adjustments (principally net changes in other assets and other liabilities)
(58,325
)
 
4,906

Net cash provided by operating activities
17,705

 
48,815

Cash flows from investing activities:
 
 
 
Purchases of securities:
 
 
 
Available for sale
(541,938
)
 
(291,965
)
Held to maturity
(44,813
)
 
(97,749
)
Proceeds from maturities, calls and other principal payments on securities:
 
 
 
Available for sale
52,583

 
76,388

Held to maturity
19,626

 
13,832

Proceeds from sales of securities available for sale
202,433

 
230,306

Loan originations, net
(679,008
)
 
(419,068
)
Proceeds from sale of loans held for investment
44,020

 

Redemption (purchases) of FHLB and FRB stock, net
7,034

 
(31,202
)
Proceeds from sales of other real estate owned
1,129

 
8,807

Purchases of premises and equipment
(3,558
)
 
(1,704
)
Cash received from acquisitions, net
854,318

 

Net cash (used in) investing activities
(88,174
)
 
(512,355
)

7

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


 
Six months ended
 
June 30,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Net increase in transaction, savings and money market deposits
464,947

 
274,573

Net decrease in time deposits
(1,857
)
 
(92,680
)
Net decrease in short-term FHLB borrowings
(26,000
)
 
230,000

Advances of term FHLB borrowings
80,000

 
230,000

Repayments of term FHLB borrowings
(280,120
)
 
(30,648
)
Repayment of other term borrowings

 
(37,977
)
Repayment of debt assumed in acquisition
(4,485
)
 

Net increase in repurchase agreements and other short-term borrowings
3,969

 

Redemption of Subordinated Debentures

 
(26,140
)
Net increase (decrease) in mortgage escrow funds
3,359

 
(9,480
)
Proceeds from stock option exercises
2,745

 
1,448

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

 

Cash dividends paid
(12,241
)
 
(11,709
)
Net cash provided by financing activities
315,376

 
527,387

Net increase in cash and cash equivalents
244,907

 
63,847

Cash and cash equivalents at beginning of period
121,520

 
152,662

Cash and cash equivalents at end of period
$
366,427

 
$
216,509

Supplemental cash flow information:
 
 
 
  Interest payments
$
16,745

 
$
14,621

  Income tax payments
30,990

 
4,042

Real estate acquired in settlement of loans
4,304

 
600

Unsettled securities transactions
39,777

 
250

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
280,579

 

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
2,952,644

 


8

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


 
Six months ended
 
June 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
$
(288,265
)
 
$

Cash and cash equivalents received in acquisitions
879,240

 

Total consideration paid
$
590,975

 
$

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 six months ended June 30, 2015. See Note 2. “Acquisitions” for additional information regarding acquisitions.
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. In connection with the merger, Hudson Valley Bank, the principal subsidiary of HVHC, also merged with and into Sterling National Bank. We refer to the merger with HVHC as the “HVB Merger.”

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. 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.

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 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; STL Holdings, Inc. (formerly PBNY Holdings, Inc.), which has an investment in Sterling Silver Title Agency L.P. (formerly PB Madison Title Agency L.P.), a company that provides title searches and title insurance for residential and commercial real estate; Sterling Risk Management, Inc. (formerly Provident Risk Management, Inc.), and HVHC Risk Management Corp. (a legacy HVHC company that was merged into Sterling Risk Management on June 30, 2015) which are captive insurance companies); Sterling National Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries. These subsidiaries included at June 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) Provest Services Corp. I, which has invested in a low-income housing partnership; (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 six months ended June 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, 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 June 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 $268,648 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

 
(6,822
)
 (e)
25,817

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

 
$
9,451

 
$
297,659

 
 
 
 
 
 
Goodwill recorded in the HVB Merger
 
 
 
 
$
268,648

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 $14,381 for the three months and six months ended June 30, 2015. These expenses were recorded in Merger-related expenses on the consolidated statement of operations. Other integration costs of the HVB Merger for the three months and six months ended June 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 statement of operations.
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 six months ended June 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 six months ended June 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
 
six months ended June 30,
 
2015
 
2014
Net interest income
$
170,899

 
$
157,504

Non-interest income
31,803

 
32,296

Non-interest expense
131,276

 
138,856

Net income
43,948

 
28,093

 
 
 
 
Pro forma earnings per share from continuing operations:
 
 
 
  Basic
$
0.34

 
$
0.23

  Diluted
0.34

 
0.23

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 is presented below:    
 
June 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
$
1,095,267

 
$
3,240

 
$
(3,955
)
 
$
1,094,552

 
$
141,579

 
$
2,624

 
$
(412
)
 
$
143,791

CMO/Other MBS
236,933

 
181

 
(704
)
 
236,410

 
54,853

 
195

 
(216
)
 
54,832

Total residential MBS
1,332,200

 
3,421

 
(4,659
)
 
1,330,962

 
196,432

 
2,819

 
(628
)
 
198,623

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
178,810

 
6

 
(756
)
 
178,060

 
117,909

 
3,438

 
(549
)
 
120,798

Corporate
330,326

 
636

 
(4,661
)
 
326,301

 
15,000

 
25

 

 
15,025

State and municipal
197,674

 
2,039

 
(457
)
 
199,256

 
250,855

 
5,653

 
(611
)
 
255,897

Trust preferred
37,694

 
659

 
(299
)
 
38,054

 

 

 

 

Other
8,781

 

 

 
8,781

 
5,000

 
305

 

 
5,305

Total other securities
753,285

 
3,340

 
(6,173
)
 
750,452

 
388,764

 
9,421

 
(1,160
)
 
397,025

Total securities
$
2,085,485

 
$
6,761

 
$
(10,832
)
 
$
2,081,414

 
$
585,196

 
$
12,240

 
$
(1,788
)
 
$
595,648


 
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 June 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 are shown separately since they are not due at a single maturity date.
 
June 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
$
53,495

 
$
53,541

 
$
10,437

 
$
10,507

One to five years
400,783

 
400,498

 
7,302

 
7,650

Five to ten years
251,434

 
248,489

 
235,367

 
239,922

Greater than ten years
47,573

 
47,924

 
135,658

 
138,946

Total other securities
753,285

 
750,452

 
388,764

 
397,025

Residential MBS
1,332,200

 
1,330,962

 
196,432

 
198,623

Total securities
$
2,085,485

 
$
2,081,414

 
$
585,196

 
$
595,648

 
Sales of securities for the periods indicated below were as follows:
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Available for sale:
 
 
 
 
 
 
 
Proceeds from sales
$
86,889

 
$
170,615

 
$
202,433

 
$
230,306

Gross realized gains
959

 
1,945

 
2,623

 
2,011

Gross realized losses
(262
)
 
(752
)
 
(392
)
 
(758
)
Income tax expense on realized net gains
227

 
343

 
725

 
371


At June 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:
 
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
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
338,921

 
$
(3,369
)
 
$
22,967

 
$
(586
)
 
$
361,888

 
$
(3,955
)
CMO/Other MBS
25,272

 
(102
)
 
26,373

 
(602
)
 
51,645

 
(704
)
Total residential MBS
364,193

 
(3,471
)
 
49,340

 
(1,188
)
 
413,533

 
(4,659
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
20,776

 
(114
)
 
54,779

 
(642
)
 
75,555

 
(756
)
Corporate
224,363

 
(3,923
)
 
24,963

 
(738
)
 
249,326

 
(4,661
)
State and municipal
23,736

 
(369
)
 
3,959

 
(88
)
 
27,695

 
(457
)
Trust preferred
5,680

 
(143
)
 
3,790

 
(156
)
 
9,470

 
(299
)
Total other securities
274,555

 
(4,549
)
 
87,491

 
(1,624
)
 
362,046

 
(6,173
)
Total
$
638,748

 
$
(8,020
)
 
$
136,831

 
$
(2,812
)
 
$
775,579

 
$
(10,832
)
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:
 
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
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
   Agency-backed
$
7,435

 
$
(412
)
 
$

 
$

 
$
7,435

 
$
(412
)
   CMO/Other MBS
16,943

 
(67
)
 
6,679

 
(149
)
 
23,622

 
(216
)
Total residential MBS
24,378

 
(479
)
 
6,679

 
(149
)
 
31,057

 
(628
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
9,860

 
(140
)
 
14,590

 
(409
)
 
24,450

 
(549
)
State and municipal
35,334

 
(586
)
 
1,236

 
(25
)
 
36,570

 
(611
)
Total other securities
45,194

 
(726
)
 
15,826

 
(434
)
 
61,020

 
(1,160
)
Total
$
69,572

 
$
(1,205
)
 
$
22,505

 
$
(583
)
 
$
92,077

 
$
(1,788
)
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
)

At June 30, 2015, a total of 195 available for sale securities were in a continuous unrealized loss position for less than 12 months and 51 securities were in an 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 June 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 June 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:
 
June 30,
 
December 31,

 
2015
 
2014
Available for sale securities pledged for borrowings, at fair value
$
237,915

 
$
187,314

Available for sale securities pledged for municipal deposits, at fair value
1,051,385

 
550,681

Available for sale securities pledged for customer back-to-back swaps, at fair value
1,437

 
1,959

Held to maturity securities pledged for borrowings, at amortized cost
70,836

 
154,712

Held to maturity securities pledged for municipal deposits, at amortized cost
306,594

 
352,843

Total securities pledged
$
1,668,167

 
$
1,247,509



(4) Portfolio Loans

The composition of the Company’s loan portfolio, excluding loans held for sale, was the following:
 
June 30,
 
December 31,
 
2015
 
2014
Commercial:
 
 
 
       Commercial & industrial
$
1,573,295

 
$
1,244,555

Payroll finance
167,619

 
154,229

Warehouse lending
356,831

 
173,786

Factored receivables
205,020

 
161,625

Equipment financing
581,675

 
411,449

Total commercial
2,884,440

 
2,145,644

Commercial mortgage:
 
 
 
       Commercial real estate
2,378,315

 
1,458,277

Multi-family
782,238

 
384,544

       Acquisition, development & construction
170,134

 
96,995

Total commercial mortgage
3,330,687

 
1,939,816

Total commercial and commercial mortgage
6,215,127

 
4,085,460

Residential mortgage
725,803

 
529,766

Consumer:
 
 
 
Home equity lines of credit
260,587

 
163,569

Other consumer loans
34,070

 
36,846

Total consumer
294,657

 
200,415

Total portfolio loans
7,235,587

 
4,815,641

Allowance for loan losses
(44,317
)
 
(42,374
)
Portfolio loans, net
$
7,191,270

 
$
4,773,267


Total loans include net deferred loan origination costs of $2,700 at June 30, 2015, and $1,609 at December 31, 2014.

At June 30, 2015, the net recorded amount of loans acquired with evidence of deterioration since origination (“PCI loans”) was $99,707. This is comprised of $96,973 of loans acquired in the HVB Merger and $2,735 of loans acquired in the Provident Merger. There was no accretable yield associated with PCI loans during the six months ended June 30, 2015.

18

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

At June 30, 2015, the Company pledged loans totaling $1,500,540 to the FHLB as collateral for certain borrowing arrangements. See Note 7. “Borrowings and Senior Notes”.

The following tables set forth the amounts and status of the Company’s loans and troubled debt restructurings (“TDRs”) at June 30, 2015 and December 31, 2014: