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Section 1: 10-Q (10-Q)

Document
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, 2018
OR
o
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, if any, every Interactive Data File required to be submitted 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 such files). Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer             x    Accelerated filer             ¨
Non-accelerated filer             ¨    Smaller reporting company     ¨
Emerging growth company     ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
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 1, 2018
$0.01 per share
  
224,427,793



STERLING BANCORP AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
 
 
PART I. FINANCIAL INFORMATION - UNAUDITED
 
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.
 
 
 
 


Table of Contents
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share and per share data)



 
September 30,
 
December 31,
 
2018
 
2017
ASSETS:
 
 
 
Cash and due from banks
$
533,984

 
$
479,906

Securities:
 
 
 
Available for sale, at fair value
3,843,244

 
3,612,072

Held to maturity, at amortized cost (fair value of $2,746,080 and $2,863,909 at September 30, 2018 and December 31, 2017, respectively)
2,842,728

 
2,862,489

Total securities
6,685,972

 
6,474,561

Loans held for sale
31,042

 
5,246

Portfolio loans
20,533,214

 
20,008,983

Allowance for loan losses
(91,365
)
 
(77,907
)
Portfolio loans, net
20,441,849

 
19,931,076

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost
351,455

 
284,112

Accrued interest receivable
109,377

 
94,098

Premises and equipment, net
289,794

 
321,722

Goodwill
1,609,772

 
1,579,891

Other intangible assets, net
135,409

 
153,191

Bank owned life insurance
660,279

 
651,638

Other real estate owned
22,735

 
27,095

Other assets
389,597

 
357,005

Total assets
$
31,261,265

 
$
30,359,541

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 

Deposits
$
21,456,057

 
$
20,538,204

FHLB borrowings
4,429,110

 
4,510,123

Repurchase agreements
22,888

 
30,162

Senior Notes
200,972

 
278,209

Subordinated Notes
172,885

 
172,716

Mortgage escrow funds
96,952

 
122,641

Other liabilities
444,098

 
467,308

Total liabilities
26,822,962

 
26,119,363

Commitments and Contingent liabilities (See Note 16. “Commitments and Contingencies”)


 


STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; 135,000 shares issued and outstanding at September 30, 2018 and December 31, 2017)
138,627

 
139,220

Common stock (par value $0.01 per share; 310,000,000 shares authorized at September 30, 2018 and December 31, 2017; 229,872,925 shares issued at September 30, 2018 and December 31, 2017; 225,446,089 and 224,782,694 shares outstanding at September 30, 2018 and December 31, 2017, respectively)
2,299

 
2,299

Additional paid-in capital
3,773,164

 
3,780,908

Treasury stock, at cost (4,426,836 shares at September 30, 2018 and 5,090,231 at December 31, 2017)
(51,973
)
 
(58,039
)
Retained earnings
694,861

 
401,956

Accumulated other comprehensive loss, net of tax benefit of $(45,332) at September 30, 2018 and $(17,083) at December 31, 2017
(118,675
)
 
(26,166
)
Total stockholders’ equity
4,438,303

 
4,240,178

Total liabilities and stockholders’ equity
$
31,261,265

 
$
30,359,541

See accompanying notes to consolidated financial statements.

3

Table of Contents
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,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income:
 
 
 
 
 
 
 
Loans and loan fees
$
257,211

 
$
119,898

 
$
746,079

 
$
336,308

Securities taxable
29,765

 
15,141

 
85,856

 
40,536

Securities non-taxable
15,244

 
8,542

 
45,959

 
23,951

Other earning assets
6,805

 
2,111

 
17,382

 
5,160

Total interest and dividend income
309,025

 
145,692

 
895,276

 
405,955

Interest expense:
 
 
 
 
 
 
 
Deposits
35,974

 
13,392

 
88,645

 
33,805

Borrowings
29,102

 
12,227

 
82,098

 
30,029

Total interest expense
65,076

 
25,619

 
170,743

 
63,834

Net interest income
243,949

 
120,073

 
724,533

 
342,121

Provision for loan losses
9,500

 
5,000

 
35,500

 
14,000

Net interest income after provision for loan losses
234,449

 
115,073

 
689,033

 
328,121

Non-interest income:
 
 
 
 
 
 
 
Deposit fees and service charges
6,333

 
3,309

 
20,319

 
9,893

Accounts receivable management / factoring commissions and other fees
5,595

 
4,764

 
16,292

 
12,670

Bank owned life insurance
3,733

 
1,320

 
11,591

 
4,342

Loan commissions and fees
4,142

 
2,819

 
12,114

 
8,643

Investment management fees
1,943

 
271

 
5,889

 
825

Net loss on sale of securities
(56
)
 
(21
)
 
(5,902
)
 
(274
)
Gain on sale of fixed assets

 
1

 
11,800

 
1

Other
2,455

 
1,525

 
8,617

 
4,342

Total non-interest income
24,145

 
13,988

 
80,720

 
40,442

Non-interest expense:
 
 
 
 
 
 
 
Compensation and benefits
54,823

 
31,727

 
165,662

 
93,893

Stock-based compensation plans
3,115

 
1,969

 
9,304

 
5,602

Occupancy and office operations
16,558

 
8,583

 
51,956

 
25,550

Information technology
10,699

 
2,512

 
32,412

 
7,402

Amortization of intangible assets
5,865

 
2,166

 
17,782

 
6,582

FDIC insurance and regulatory assessments
6,043

 
2,310

 
16,885

 
6,232

Other real estate owned expense, net
1,497

 
894

 
1,635

 
2,682

Merger-related expense

 
4,109

 

 
9,002

Charge for asset write-downs, retention and severance

 

 
13,132

 
603

Other
13,173

 
8,347

 
39,680

 
25,076

Total non-interest expense
111,773

 
62,617

 
348,448

 
182,624

Income before income tax expense
146,821

 
66,444

 
421,305

 
185,939

Income tax expense
27,171

 
21,592

 
88,542

 
59,620

Net income
$
119,650

 
$
44,852

 
$
332,763

 
$
126,319

Preferred stock dividend
1,993

 

 
5,988

 

Net income available to common stockholders
$
117,657

 
$
44,852

 
$
326,775

 
$
126,319

Weighted average common shares:
 
 
 
 
 
 
 
Basic
225,088,511

 
135,346,791

 
224,969,121

 
135,276,634

Diluted
225,622,895

 
135,950,160

 
225,504,463

 
135,895,513

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.33

 
$
1.45

 
$
0.93

Diluted
0.52

 
0.33

 
1.45

 
0.93

See accompanying notes to consolidated financial statements.

4

Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
119,650

 
$
44,852

 
$
332,763

 
$
126,319

Other comprehensive (loss) income, before tax:
 
 
 
 
 
 
 
Change in unrealized holding (losses) gains on securities available for sale
(27,083
)
 
4,209

 
(128,496
)
 
20,374

Reclassification adjustment for net realized losses included in net income
56

 
21

 
5,902

 
274

Accretion of net unrealized loss on securities transferred to held to maturity
225

 
238

 
686

 
726

Change in the actuarial loss of defined benefit plan and post-retirement benefit plans
415

 
10

 
1,150

 
74

Total other comprehensive (loss) income, before tax
(26,387
)
 
4,478

 
(120,758
)
 
21,448

Deferred tax benefit (expense) related to other comprehensive (loss) income
7,293

 
(1,769
)
 
33,378

 
(8,472
)
Other comprehensive (loss) income, net of tax
(19,094
)
 
2,709

 
(87,380
)
 
12,976

Comprehensive income
$
100,556

 
$
47,561

 
$
245,383

 
$
139,295

See accompanying notes to consolidated financial statements.

5

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


 
Number of common
shares
 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
(loss) income
 
Total
stockholders’
equity
Balance at January 1, 2017
135,257,570

 
$

 
$
1,411

 
$
1,597,287

 
$
(66,188
)
 
$
349,308

 
$
(26,635
)
 
$
1,855,183

Net income

 

 

 

 

 
39,067

 

 
39,067

Other comprehensive income

 

 

 

 

 

 
2,914

 
2,914

Stock option & other stock transactions, net
40,253

 

 

 
49

 
553

 
(109
)
 

 
493

Restricted stock awards, net
306,612

 

 

 
(7,043
)
 
3,589

 
3,846

 

 
392

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(9,436
)
 

 
(9,436
)
Balance at March 31, 2017
135,604,435

 

 
1,411

 
1,590,293

 
(62,046
)
 
382,676

 
(23,721
)
 
1,888,613

Net income

 

 

 

 

 
42,400

 

 
42,400

Other comprehensive income

 

 

 

 

 
$

 
7,353

 
7,353

Stock option & other stock transactions, net
71,395

 

 

 
49

 
980

 
$
(298
)
 

 
731

Restricted stock awards, net
(17,604
)
 

 

 
1,957

 
(510
)
 
$
293

 

 
1,740

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(9,454
)
 

 
(9,454
)
Balance at June 30, 2017
135,658,226

 

 
1,411

 
1,592,299

 
(61,576
)
 
415,617

 
(16,368
)
 
1,931,383

Net income

 

 

 

 

 
44,852

 

 
44,852

Other comprehensive income

 

 

 

 

 

 
2,709

 
2,709

Stock option & other stock transactions, net
6,950

 

 

 
48

 
94

 
(29
)
 

 
113

Restricted stock awards, net
142,368

 

 

 
(1,595
)
 
1,808

 
1,667

 

 
1,880

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(9,457
)
 

 
(9,457
)
Balance at September 30, 2017
135,807,544

 
$

 
$
1,411

 
$
1,590,752

 
$
(59,674
)
 
$
452,650

 
$
(13,659
)
 
$
1,971,480





6

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


 
Number of common
shares
 
Preferred
stock
 
Common
stock
 
Additional
paid-in
capital
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
(loss) income
 
Total
stockholders’
equity
Balance at January 1, 2018
224,782,694

 
$
139,220

 
$
2,299

 
$
3,780,908

 
$
(58,039
)
 
$
401,956

 
$
(26,166
)
 
$
4,240,178

Net income

 

 

 

 

 
98,872

 

 
98,872

Other comprehensive (loss)

 

 

 

 

 

 
(47,749
)
 
(47,749
)
Stock option & other stock transactions, net
28,794

 

 

 
2

 
375

 
(46
)
 

 
331

Restricted stock awards, net
654,778

 

 

 
(14,630
)
 
6,562

 
8,078

 

 
10

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(15,693
)
 

 
(15,693
)
Cash dividends declared ($16.25 per preferred share)

 
(195
)
 

 

 

 
(1,999
)
 

 
(2,194
)
Reclassification of the stranded income tax effects from the enactment of the Tax Cuts and Jobs Act from accumulated other comprehensive (loss)

 

 

 

 

 
5,129

 
(5,129
)
 

Balance at March 31, 2018
225,466,266

 
139,025

 
2,299

 
3,766,280

 
(51,102
)
 
496,297

 
(79,044
)
 
4,273,755

Net income

 

 

 

 

 
114,241

 

 
114,241

Other comprehensive (loss)

 

 

 

 

 

 
(20,537
)
 
(20,537
)
Stock option & other stock transactions, net
7,500

 

 

 
2

 
91

 
(18
)
 

 
75

Restricted stock awards, net
(3,512
)
 

 

 
3,223

 
(258
)
 
168

 

 
3,133

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(15,739
)
 

 
(15,739
)
Cash dividends declared ($16.25 per preferred share)

 
(197
)
 

 

 

 
(1,996
)
 

 
(2,193
)
Balance at June 30, 2018
225,470,254

 
138,828

 
2,299

 
3,769,505

 
(51,269
)
 
592,953

 
(99,581
)
 
4,352,735

Net income

 

 

 

 

 
119,650

 

 
119,650

Other comprehensive (loss)

 

 

 

 

 

 
(19,094
)
 
(19,094
)
Stock option & other stock transactions, net
13,500

 

 

 
2

 
164

 
(10
)
 

 
156

Restricted stock awards, net
(37,665
)
 

 

 
3,657

 
(868
)
 

 

 
2,789

Cash dividends declared ($0.07 per common share)

 

 

 

 

 
(15,739
)
 

 
(15,739
)
Cash dividends declared ($16.25 per preferred share)

 
(201
)
 

 

 

 
(1,993
)
 

 
(2,194
)
Balance at September 30, 2018
225,446,089

 
$
138,627

 
$
2,299

 
$
3,773,164

 
$
(51,973
)
 
$
694,861

 
$
(118,675
)
 
$
4,438,303

See accompanying notes to consolidated financial statements.

7

Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)


 
Nine months ended
 
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
332,763

 
$
126,319

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provisions for loan losses
35,500

 
14,000

Net (gain) loss from write-downs and sales of other real estate owned
(796
)
 
1,647

Depreciation of premises and equipment
15,214

 
6,639

Asset write-downs, retention and severance compensation and other restructuring charges
13,132

 
603

Amortization of intangible assets
17,782

 
6,582

Amortization of low income housing tax credits
3,732

 
414

Net loss on sale of securities
5,902

 
274

Net gain on loans held for sale
(25
)
 
(952
)
Net gain on sale of premises and equipment
(11,800
)
 
(1
)
Net amortization of premiums on securities
29,759

 
16,635

Amortization of premium on certificates of deposit
(4,850
)
 

Net accretion of purchase discount and amortization of net deferred loan costs
(85,129
)
 
(10,515
)
Net accretion of debt issuance costs and amortization of premium on borrowings
(1,081
)
 
410

Restricted stock compensation expense
9,299

 
5,456

Stock option compensation expense
5

 
146

Originations of loans held for sale
(52,919
)
 
(5,159
)
Proceeds from sales of loans held for sale
27,148

 
48,000

Increase in cash surrender value of bank owned life insurance
(11,591
)
 
(4,442
)
Deferred income tax expense (benefit)
45,589

 
(1,933
)
Other adjustments (principally net changes in other assets and other liabilities)
(79,631
)
 
(16,760
)
Net cash provided by operating activities
288,003

 
187,363

Cash flows from investing activities:
 
 
 
Purchases of securities:
 
 
 
Available for sale
(753,638
)
 
(1,017,426
)
Held to maturity
(140,976
)
 
(619,649
)
Proceeds from maturities, calls and other principal payments on securities:
 
 
 
Available for sale
271,558

 
164,598

Held to maturity
135,327

 
64,158

Proceeds from sales of securities available for sale
117,810

 
15,247

Proceeds from sales of securities held to maturity
254

 

Portfolio loan originations, net
10,619

 
(900,269
)
Portfolio loans purchased
(37,668
)
 
(94,912
)
Proceeds from sale of loans held for investment

 
28,990

Purchases of FHLB and FRB stock, net
(67,343
)
 
(56,178
)
Proceeds from sales of other real estate owned
16,786

 
5,182

Purchases of premises and equipment
(16,369
)
 
(5,699
)
Proceeds from bank owned life insurance
2,950

 
50

Proceeds from sale of premises and equipment
35,261

 

Purchases of low income housing tax credits
(3,655
)
 
(8,260
)
Cash paid for acquisition, net
(484,385
)
 

Net cash (used in) investing activities
(913,469
)
 
(2,424,168
)

8

Table of Contents
STERLING BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)


 
Nine months ended
 
September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Net increase in transaction, savings and money market deposits
$
786,541

 
$
992,573

Net increase (decrease) in certificates of deposit
136,162

 
(17,394
)
Net (decrease) increase in short-term FHLB borrowings
(555,000
)
 
200,000

Advances of term FHLB borrowings
2,975,000

 
1,975,000

Repayments of term FHLB borrowings
(2,500,000
)
 
(950,000
)
Repayment of Senior Notes
(77,000
)
 

Net (decrease) increase in other borrowings
(7,274
)
 
171,761

Net (decrease) increase in mortgage escrow funds
(25,689
)
 
5,576

Proceeds from stock option exercises
556

 
1,193

Cash dividends paid - common stock
(47,171
)
 
(28,347
)
Cash dividends paid - preferred stock
(6,581
)
 

Net cash provided by financing activities
679,544

 
2,350,362

Net decrease in cash and cash equivalents
54,078

 
113,557

Cash and cash equivalents at beginning of period
479,906

 
293,646

Cash and cash equivalents at end of period
$
533,984

 
$
407,203

Supplemental cash flow information:
 
 
 
  Interest payments
$
165,306

 
$
57,357

  Income tax payments
23,445

 
67,625

Real estate acquired in settlement of loans
11,630

 
4,907

Loans transferred from held for investment to held for sale

 
28,990

 
 
 
 
Acquisitions:
 
 
 
Non-cash assets acquired:
 
 
 
Total loans, net
$
442,884

 
$

Goodwill
36,094

 

Premises and equipment, net
379

 

Other assets
7,071

 

Total non-cash assets acquired
486,428

 

Liabilities assumed:
 
 
 
Other liabilities
4,884

 

Total liabilities assumed
4,884

 

 
 
 
 
Net non-cash assets acquired
481,544

 

Cash and cash equivalents received in acquisitions
20,508

 

Total consideration paid
$
502,052

 
$


See accompanying notes to consolidated financial statements.

9

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


(1) Basis of Financial Statement Presentation

(a) Nature of Operations
Sterling Bancorp (the “Company”) is a Delaware corporation, a bank holding company and a financial holding company headquartered in Montebello, New York that owns all of the outstanding shares of common stock of Sterling National Bank (the “Bank”), its principal subsidiary. The Bank is a full-service regional bank specializing in the delivery of services and solutions to business owners, their families and consumers within the communities it serves through teams of dedicated and experienced relationship managers.

(b) Basis of Presentation
The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of the Company and all other entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies the Company follows conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the banking industry, which include regulatory reporting instructions.

The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2017, included in our Annual Report on Form 10-K, as filed with the SEC on March 1, 2018 (the “2017 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Certain items in prior financial statements have been reclassified to conform to the current presentation. These reclassifications had no impact on previously reported net income.

(c) Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, expense and contingencies at the date of the financial statements. Actual results could differ significantly from these estimates, particularly the allowance for loan losses and the status of contingencies, and are subject to change.

(d) Adoption of New Accounting Standards
The Company adopted the following new accounting standards effective January 1, 2018:

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (the “New Revenue Standard”), (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of non-financial assets, such as other real estate owned (“OREO”). The Company adopted the New Revenue Standard using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the New Revenue Standard, while prior period amounts continue to be reported in accordance with legacy GAAP. The adoption of the New Revenue Standard did not result in a significant change to the accounting for any in-scope revenue streams. As such, no cumulative effect adjustment was recorded. The majority of the Company’s revenues come from interest income and other sources, including loans and securities, that are outside the scope of the New Revenue Standard. The Company’s services that fall within the scope of the New Revenue Standard are primarily included within non-interest income in the consolidated income statements and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of the New Revenue Standard include deposit fees and services charges, accounts receivable management / factoring commissions and other fees, investment management fees and the sale of OREO, which is included within OREO, net expense. See Note 13. “Non-Interest Income and Other Non-Interest Expense” for further discussion on the Company’s accounting policies for revenue sources within the scope of the New Revenue Standard.

Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities (the “New Fair Value Standard”), makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. The New Fair Value Standard requires equity investments to be measured at fair value with changes in fair value recognized in net income; however, the Company owned no assets subject to this

10

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

portion of the New Fair Value Standard. The New Fair Value Standard also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. As a result of the adoption of the New Fair Value Standard, the Company modified its calculation used to estimate the fair value of portfolio loans. See Note 17. “Fair Value Measurements” for further discussion of the Company’s methodology. The New Fair Value Standard had no impact to the consolidated balance sheets or income statements.

ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the “New Retirement Standard”), requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are presented as a component of other non-interest expense. The adoption of this standard resulted in the reclassification of $328 from compensation and benefits to other non-interest expense for the nine months ended September 30, 2017.

ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (the “AOCI Standard”), allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the stranded tax effects caused by the revaluation of estimated deferred taxes resulting from the enactment of the Tax Cuts and Jobs Act of 2017. As a result of the adoption of the AOCI Standard the Company reduced AOCI and increased retained earnings by $5,129 in the nine months ended September 30, 2018 related to unrealized losses on securities available for sale, securities transferred to held to maturity and a net actuarial loss on defined benefit retirement plans. As a result of the adoption of the AOCI standard, the Company will release such income tax effects only when the entire portfolio to which the underlying items are liquidated, sold or extinguished. The adoption of the AOCI Standard did not impact total stockholders’ equity or the consolidated income statements for any period.

(2) Acquisitions

Advantage Funding Management Co., Inc. (“Advantage Funding”)
On April 2, 2018, the Bank acquired 100% of the outstanding common stock of Advantage Funding (the “Advantage Funding Acquisition”). The total consideration in the transaction was $502,052 and was paid in cash on the closing date. Advantage Funding is a provider of commercial vehicle and transportation financing services based in Lake Success, NY. Advantage Funding had total outstanding loans and leases of $457,638 on the acquisition date consisting mainly of fixed rate assets. The fair value of these loans was $442,844. The Bank paid a premium on the gross loans and leases receivable of 4.5% or $20,300. In the nine months ended September 30, 2018, we recorded a $4,396 restructuring charge consisting mainly of professional fees, retention and severance compensation, systems integration expense and facilities consolidation. This charge is included in charge for asset write-downs, retention and severance on the consolidated income statement. The Advantage Funding Acquisition is consistent with our strategy of growing commercial loans and increasing the proportion of commercial loans in our loan portfolio. The operations of the business will be fully integrated into our equipment finance business line.

Astoria Merger
On October 2, 2017, Astoria Financial Corporation (“Astoria”) merged with and into the Company (the “Astoria Merger”). Under the terms of the Astoria Merger agreement, Astoria shareholders received 0.875 shares of the Company’s common stock for each share of Astoria common stock, which resulted in the issuance of 88,829,776 shares of the Company’s common stock. Based on the Company’s closing stock price per share of $24.65 on September 29, 2017, the aggregate consideration was $2,189,687, which included cash in lieu of fractional shares. Consistent with the Company’s strategy, the primary reason for the Astoria Merger was the expansion of the Company’s geographic footprint in the Greater New York metropolitan region, including Long Island.

The assets acquired and liabilities assumed were accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of October 2, 2017 based on management’s best estimate using the information available as of the Astoria Merger date. The Astoria Merger resulted in the recognition of loans of $9,209,398, deposits of $9,044,061 and goodwill of $883,291.

Accounting guidance identifies the measurement period for the Astoria Merger as the period that is required to identify and measure the fair value of the identifiable assets acquired and the liabilities assumed. The measurement period ends when the Company has all of the information that the Company arranged to obtain and that is known to be obtainable. The measurement period ended October 2, 2018. During the third quarter of 2018 the Company completed the final tax returns related to Astoria’s business and operations

11

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

through October 1, 2017. After completion of these tax returns, the Company reduced income tax balances and goodwill by $6,214, which finalized all purchase accounting adjustments for the Astoria Merger.

(3) Securities

A summary of amortized cost and estimated fair value of securities as of September 30, 2018 and December 31, 2017 is presented below. The term “MBS” refers to mortgage-backed securities and the term “CMOs” refers to collateralized mortgage obligations. Both of these terms are further defined in Note 17. “Fair Value Measurements”.    
 
September 30, 2018
 
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
$
2,303,793

 
$
2

 
$
(96,604
)
 
$
2,207,191

 
$
326,950

 
$
33

 
$
(13,656
)
 
$
313,327

CMOs/Other MBS
603,692

 
2

 
(27,642
)
 
576,052

 
29,015

 

 
(1,328
)
 
27,687

Total residential MBS
2,907,485

 
4

 
(124,246
)
 
2,783,243

 
355,965

 
33

 
(14,984
)
 
341,014

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
338,764

 

 
(21,031
)
 
317,733

 
58,960

 

 
(440
)
 
58,520

Corporate
512,221

 
408

 
(9,303
)
 
503,326

 
68,563

 
391

 
(1,045
)
 
67,909

State and municipal
244,267

 
135

 
(5,460
)
 
238,942

 
2,340,990

 
1,350

 
(81,727
)
 
2,260,613

Other

 

 

 

 
18,250

 
29

 
(255
)
 
18,024

Total other securities
1,095,252

 
543

 
(35,794
)
 
1,060,001

 
2,486,763

 
1,770

 
(83,467
)
 
2,405,066

Total securities
$
4,002,737

 
$
547

 
$
(160,040
)
 
$
3,843,244

 
$
2,842,728

 
$
1,803

 
$
(98,451
)
 
$
2,746,080


 
December 31, 2017
 
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
$
2,171,044

 
$
1,570

 
$
(21,965
)
 
$
2,150,649

 
$
355,013

 
$
978

 
$
(2,504
)
 
$
353,487

CMOs/Other MBS
656,514

 
31

 
(7,142
)
 
649,403

 
33,496

 
26

 
(760
)
 
32,762

Total residential MBS
2,827,558

 
1,601

 
(29,107
)
 
2,800,052

 
388,509

 
1,004

 
(3,264
)
 
386,249

Other securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Federal agencies
409,322

 

 
(9,326
)
 
399,996

 
58,640

 
949

 

 
59,589

Corporate
147,781

 
1,421

 
(976
)
 
148,226

 
56,663

 
1,255

 
(103
)
 
57,815

State and municipal
264,310

 
1,380

 
(1,892
)
 
263,798

 
2,342,927

 
12,396

 
(10,900
)
 
2,344,423

Other

 

 

 

 
15,750

 
83

 

 
15,833

Total other securities
821,413

 
2,801

 
(12,194
)
 
812,020

 
2,473,980

 
14,683

 
(11,003
)
 
2,477,660

Total securities
$
3,648,971

 
$
4,402

 
$
(41,301
)
 
$
3,612,072

 
$
2,862,489

 
$
15,687

 
$
(14,267
)
 
$
2,863,909



12

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

The amortized cost and estimated fair value of securities at September 30, 2018 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 MBS are shown separately since they are not due at a single maturity date.
 
September 30, 2018
 
Available for sale
 
Held to maturity
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Remaining period to contractual maturity:
 
 
 
 
 
 
 
One year or less
$
22,244

 
$
22,260

 
$
92,954

 
$
92,982

One to five years
207,237

 
204,204

 
115,470

 
114,545

Five to ten years
759,223

 
732,965

 
476,895

 
467,936

Greater than ten years
106,548

 
100,572

 
1,801,444

 
1,729,603

Total securities with a stated maturity date
1,095,252

 
1,060,001

 
2,486,763

 
2,405,066

Residential MBS
2,907,485

 
2,783,243

 
355,965

 
341,014

Total securities
$
4,002,737

 
$
3,843,244

 
$
2,842,728

 
$
2,746,080


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,
 
2018
 
2017
 
2018
 
2017
Available for sale:
 
 
 
 
 
 
 
Proceeds from sales
$

 
$
5,015

 
$
117,810

 
$
15,247

Gross realized gains (1)

 
1

 
82

 
7

Gross realized losses (1)
(3
)
 
(22
)
 
(5,910
)
 
(281
)
Income tax benefit on realized net losses
(1
)
 
(7
)
 
(1,224
)
 
(89
)
Held to maturity: (2)
 
 
 
 
 
 
 
Proceeds from sale
$

 
$

 
$
254

 
$

Gross realized loss (1)
(53
)
 

 
(74
)
 

Income tax expense on realized loss
(11
)
 

 
(15
)
 


(1) Gross realized gains and losses includes securities called prior to maturity.
(2) In the nine months ended September 30, 2018, the Company sold a security that was held to maturity due to a decline in the credit rating and other evidence of deterioration of the issuer’s creditworthiness.

At September 30, 2018 and December 31, 2017, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity, other than the U.S. federal government and its agencies.


13

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and 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, 2018
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,110,789

 
$
(38,095
)
 
$
1,095,722

 
$
(58,509
)
 
$
2,206,511

 
$
(96,604
)
CMOs/Other MBS
543,311

 
(26,005
)
 
32,546

 
(1,637
)
 
575,857

 
(27,642
)
Total residential MBS
1,654,100

 
(64,100
)
 
1,128,268

 
(60,146
)
 
2,782,368

 
(124,246
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
204,358

 
(11,154
)
 
113,375

 
(9,877
)
 
317,733

 
(21,031
)
Corporate
355,696

 
(6,520
)
 
55,695

 
(2,783
)
 
411,391

 
(9,303
)
State and municipal
144,619

 
(2,703
)
 
77,621

 
(2,757
)
 
222,240

 
(5,460
)
Total other securities
704,673

 
(20,377
)
 
246,691

 
(15,417
)
 
951,364

 
(35,794
)
Total securities
$
2,358,773

 
$
(84,477
)
 
$
1,374,959

 
$
(75,563
)
 
$
3,733,732

 
$
(160,040
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
1,349,217

 
$
(10,550
)
 
$
486,948

 
$
(11,415
)
 
$
1,836,165

 
$
(21,965
)
CMOs/Other MBS
605,200

 
(6,064
)
 
36,107

 
(1,078
)
 
641,307

 
(7,142
)
Total residential MBS
1,954,417

 
(16,614
)
 
523,055

 
(12,493
)
 
2,477,472

 
(29,107
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
243,476

 
(1,955
)
 
156,520

 
(7,371
)
 
399,996

 
(9,326
)
Corporate
65,056

 
(397
)
 
15,268

 
(579
)
 
80,324

 
(976
)
State and municipal
97,307

 
(757
)
 
56,324

 
(1,135
)
 
153,631

 
(1,892
)
Total other securities
405,839

 
(3,109
)
 
228,112

 
(9,085
)
 
633,951

 
(12,194
)
Total securities
$
2,360,256

 
$
(19,723
)
 
$
751,167

 
$
(21,578
)
 
$
3,111,423

 
$
(41,301
)


14

 STERLING BANCORP AND SUBSIDIARIES 
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and 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, 2018
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
200,871

 
$
(7,022
)
 
$
110,986

 
$
(6,634
)
 
$
311,857

 
$
(13,656
)
CMOs/Other MBS
3,333

 
(69
)
 
24,354

 
(1,259
)
 
27,687

 
(1,328
)
Total residential MBS
204,204

 
(7,091
)
 
135,340

 
(7,893
)
 
339,544

 
(14,984
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
58,520

 
(440
)
 

 

 
58,520

 
(440
)
Corporate
47,519

 
(1,045
)
 

 

 
47,519

 
(1,045
)
State and municipal
1,482,745

 
(51,225
)
 
637,296

 
(30,502
)
 
2,120,041

 
(81,727
)
Other
10,745

 
(255
)
 

 

 
10,745

 
(255
)
Total other securities
1,599,529

 
(52,965
)
 
637,296

 
(30,502
)
 
2,236,825

 
(83,467
)
Total securities
$
1,803,733

 
$
(60,056
)
 
$
772,636

 
$
(38,395
)
 
$
2,576,369

 
$
(98,451
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Agency-backed
$
136,679

 
$
(572
)
 
$
74,303

 
$
(1,932
)
 
$
210,982

 
$
(2,504
)
CMOs/Other MBS
10,314

 
(129
)
 
20,160

 
(631
)
 
30,474

 
(760
)
Total residential MBS
146,993

 
(701
)
 
94,463

 
(2,563
)
 
241,456

 
(3,264
)
Other securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate
16,560

 
(103
)