Sterling Bancorp (STL) 10-Q 2015 Q1 Quarterly report

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 March 31, 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 May 6, 2015
$0.01 per share	91,129,031

STERLING BANCORP AND SUBSIDIARIES

FORM 10-Q TABLE OF CONTENTS

QUARTERLY PERIOD ENDED MARCH 31, 2015

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets (unaudited) at March 31, 2015 and December 31, 2014	3
	Consolidated Income Statements (unaudited) for the three months ended March 31, 2015 and March 31, 2014	4
	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2015 and March 31, 2014	5
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2015	6
	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and March 31, 2014	7
	Notes to Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4.	Controls and Procedures	63
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	64
Item 1A.	Risk Factors	64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	64
Item 4.	Mine Safety Disclosures	64
Item 5.	Other Information	64
Item 6.	Exhibits	64
	Signatures	65

STERLING BANCORP AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(Dollars in thousands, except share and per share data)

	March 31,			December 31,
	2015			2014
ASSETS:
Cash and due from banks	$	186,701		$	121,520
Securities:
Available for sale, at fair value	1,214,404			1,140,846
Held to maturity, at amortized cost (fair value of $605,144 and $586,346, at March 31, 2015 and December 31, 2014, respectively)	585,633			572,337
Total securities	1,800,037			1,713,183
Loans held for sale	53,737			46,599
Portfolio loans	4,938,906			4,815,641
Allowance for loan losses	(42,884		)	(42,374		)
Portfolio loans, net	4,896,022			4,773,267
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, at cost	68,864			75,437
Accrued interest receivable	21,367			19,301
Premises and equipment, net	45,076			46,156
Goodwill	400,941			388,926
Core deposit and other intangible assets	51,757			43,332
Bank owned life insurance	151,323			150,522
Other real estate owned	8,231			5,867
Other assets	43,459			40,712
Total assets	$	7,727,515		$	7,424,822
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	5,555,946		$	5,212,325
FHLB borrowings	857,138			1,003,209
Other borrowings (repurchase agreements)	25,245			9,846
Senior notes	98,595			98,498
Mortgage escrow funds	5,805			4,167
Other liabilities	104,243			121,577
Total liabilities	6,646,972			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; 98,146,024 shares and 91,246,024 shares issued at March 31, 2015 and December 31, 2014; 91,121,531 and 83,927,572 shares outstanding at March 31, 2015 and December 31, 2014, respectively)	981			912
Additional paid-in capital	943,764			858,489
Treasury stock, at cost (7,024,493 shares at March 31, 2015 and 7,318,452 at December 31, 2014)	(79,530		)	(82,908		)
Retained earnings	220,067			208,958
Accumulated other comprehensive (loss), net of tax (benefit) of ($3,499) at March 31, 2015 and ($7,576) at December 31, 2014	(4,739		)	(10,251		)
Total stockholders’ equity	1,080,543			975,200
Total liabilities and stockholders’ equity	$	7,727,515		$	7,424,822

See accompanying notes to consolidated financial statements.

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STERLING BANCORP AND SUBSIDIARIES

Consolidated Income Statements (unaudited)

(Dollars in thousands, except per share data)

	Three months ended
	March 31,
	2015			2014
Interest and dividend income:
Loans and loan fees	$	55,271		$	50,312
Securities taxable	7,632			7,573
Securities non-taxable	2,867			2,674
Other earning assets	902			766
Total interest and dividend income	66,672			61,325
Interest expense:
Deposits	3,091			2,394
Borrowings	4,714			4,903
Total interest expense	7,805			7,297
Net interest income	58,867			54,028
Provision for loan losses	2,100			4,800
Net interest income after provision for loan losses	56,767			49,228
Non-interest income:
Accounts receivable management / factoring commissions and other fees	3,502			3,500
Mortgage banking income	3,157			2,383
Deposit fees and service charges	3,622			3,904
Net gain on sale of securities	1,534			60
Bank owned life insurance	1,076			729
Investment management fees	360			542
Other	759			1,297
Total non-interest income	14,010			12,415
Non-interest expense:
Compensation and benefits	23,165			25,263
Stock-based compensation plans	1,109			927
Occupancy and office operations	6,580			7,254
Amortization of intangible assets	1,399			2,511
FDIC insurance and regulatory assessments	1,428			1,567
Other real estate owned (income) expense, net	(37		)	61
Merger-related expense	2,455			388
Other	9,822			8,752
Total non-interest expense	45,921			46,723
Income before income tax expense	24,856			14,920
Income tax expense	8,078			4,588
Net income	$	16,778		$	10,332
Weighted average common shares:
Basic	87,839,029			83,497,765
Diluted	88,252,768			83,794,107
Earnings per common share:
Basic	$	0.19		$	0.12
Diluted	0.19			0.12

See accompanying notes to consolidated financial statements.

4

STERLING BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (unaudited)

(Dollars in thousands)

	Three months ended
	March 31,
	2015			2014
Net income	$	16,778		$	10,332
Other comprehensive income, before tax:
Change in unrealized holding gains on securities available for sale	10,378			10,057
Accretion of net unrealized loss on securities transferred to held to maturity	539			313
Reclassification adjustment for net realized gains included in net income	(1,534		)	(60		)
Change in the actuarial gain (loss) of defined benefit plan and post-retirement benefit plans	203			(1,301		)
Total other comprehensive income, before tax	9,586			9,009
Deferred tax expense related to other comprehensive income	(4,074		)	(3,829		)
Other comprehensive income, net of tax	5,512			5,180
Comprehensive income	$	22,290		$	15,512

See accompanying notes to consolidated financial statements.

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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		Treasury stock			Retained earnings			Accumulated other comprehensive (loss) income			Total stockholders’ equity
Balance at January 1, 2015	83,927,572	$	912	$	858,489	$	(82,908	)	$	208,958		$	(10,251	)	$	975,200
Net income	—	—		—		—			16,778			—			16,778
Other comprehensive income	—	—		—		—			—			5,512			5,512
Stock option & other stock transactions, net	208,054	—		279		2,384			72			—			2,735
Restricted stock awards, net	85,905	—		6		994			132			—			1,132
Common equity issued, net of costs of issuance	6,900,000	69		84,990		—			—			—			85,059
Cash dividends declared ($0.07 per common share)	—	—		—		—			(5,873		)	—			(5,873		)
Balance at March 31, 2015	91,121,531	$	981	$	943,764	$	(79,530	)	$	220,067		$	(4,739	)	$	1,080,543

See accompanying notes to consolidated financial statements.

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STERLING BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

	Three months ended
	March 31,
	2015			2014
Cash flows from operating activities:
Net income	$	16,778		$	10,332
Adjustments to reconcile net income to net cash provided by operating activities:
Provisions for loan losses	2,100			4,800
(Gain) net of losses and write-downs on other real estate owned	(487		)	(185		)
Depreciation of premises and equipment	1,633			1,802
Impairment of premises and equipment and leases	312			—
Amortization of intangibles	1,399			2,511
Amortization of low income housing tax credit	50			—
Net gain on sale of securities	(1,534		)	(60		)
Net gain on loans held for sale	(3,157		)	(2,383		)
Net amortization of premium and discount on securities	1,155			1,077
Net amortization of prepayment fees and other amortizable acquisition costs	(790		)	239
Accretion of discount, amortization of premium on borrowings, net	86			75
Restricted stock compensation and ESOP expense	828			692
Stock option compensation expense	281			235
Originations of loans held for sale	(137,538		)	(114,428		)
Proceeds from sales of loans held for sale	111,155			119,946
Increase in cash surrender value of BOLI	(1,076		)	(542		)
Deferred income tax expense (benefit)	2,516			(819		)
Other adjustments (principally net changes in other assets and other liabilities)	(8,926		)	6,705
Net cash (used in) provided by operating activities	(15,215		)	29,997
Cash flows from investing activities:
Purchases of securities:
Available for sale	(237,602		)	(152,101		)
Held to maturity	(28,161		)	(46,526		)
Proceeds from maturities, calls and other principal payments on securities:
Available for sale	41,017			25,545
Held to maturity	14,639			5,984
Proceeds from sales of securities available for sale	115,554			55,778
Loan originations, net	(143,695		)	(118,048		)
Proceeds from sale of loans held for investment	44,020			—
Redemption (purchases) of FHLB and FRB stock, net	6,573			(10,020		)
Proceeds from sales of other real estate owned	997			2,880
Purchases of premises and equipment	(334		)	(918		)
Cash paid for acquisitions, net	(24,670		)	—
Net cash (used in) investing activities	(211,662		)	(237,426		)

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STERLING BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

	Three months ended
	March 31,
	2015			2014
Cash flows from financing activities:
Net increase in transaction, savings and money market deposits	310,430			407,536
Net increase (decrease) in time deposits	33,191			(116,376		)
Net decrease in short-term FHLB borrowings	(151,000		)	—
Advances of term FHLB borrowings	80,000			—
Repayments of term FHLB borrowings	(75,059		)	(219		)
Repayment of other term borrowings	—			(20,263		)
Repayment of debt assumed in acquisition	(4,485		)	—
Net increase (decrease) in repurchase agreements and other short-term borrowings	15,399			(41,587		)
Net increase (decrease) in mortgage escrow funds	1,638			(4,749		)
Stock option transactions	2,758			923
Equity capital raise, net of costs of issuance	85,059			—
Cash dividends paid	(5,873		)	(5,853		)
Net cash provided by financing activities	292,058			219,412
Net increase in cash and cash equivalents	65,181			11,983
Cash and cash equivalents at beginning of period	121,520			152,662
Cash and cash equivalents at end of period	$	186,701		$	164,645
Supplemental cash flow information:
Interest payments	$	9,376		$	8,819
Income tax payments	17,808			4,019
Real estate acquired in settlement of loans	2,874			219
Unsettled securities transactions	—			2,213
Loans transfered from held for investment to held for sale	44,020			—
Acquisitions:
Non-cash assets acquired:
Total loans, net	$	22,307		$	—
Goodwill	11,931			—
Customer list	8,950			—
Premises and equipment, net	219			—
Other assets	56			—
Total non-cash assets acquired	43,463			—
Liabilities assumed:
Other liabilities	19,045			—
Total liabilities assumed	$	19,045		$	—
Net non-cash assets acquired	$	24,418		$	—
Cash and cash equivalents acquired in acquisitions	252			—
Total consideration paid	$	24,670		$	—

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(1) Basis of Financial Statement Presentation

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 and became a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended (“Sterling” or the “Company”).

• Provident Bank converted to a national bank charter.

• Sterling National Bank merged into Provident Bank.

• Provident Bank changed its legal entity name to Sterling National Bank.

• Provident Municipal Bank merged into Sterling National Bank.

We refer to the transactions detailed above collectively 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., a captive insurance company); Sterling National Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries. These subsidiaries included at March 31, 2015: (i) Sterling REIT, Inc., a real estate investment trust that holds 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 ended March 31, 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.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(2) Acquisitions

On February 27, 2015, the Bank acquired 100% of the outstanding common stock of Damian Services Corporation (“Damian”), a payroll services provider located in Chicago, Illinois. In connection with the acquisition, the Bank acquired $22.3 million of outstanding payroll finance loans and assumed $14.6 million of liabilities. The Bank recognized a customer list intangible asset of $9.0 million that will be amortized over its 16 year estimated life, and $11.9 million of goodwill. In the quarter ended March 31, 2015, we recognized a $1.5 million restructuring charge consisting mainly of retention and severance compensation and asset write- downs related ot the consolidation of Damian’s operations.

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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:    

	March 31, 2015
	Available for Sale									Held to Maturity
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Residential MBS:
Agency-backed	$	573,294	$	7,663	$	(633	)	$	580,324	$	142,808	$	4,425	$	(89	)	$	147,144
CMO/Other MBS	80,502		406		(515		)	80,393		57,668		467		(111		)	58,024
Total residential MBS	653,796		8,069		(1,148		)	660,717		200,476		4,892		(200		)	205,168
Other securities:
Federal agencies	117,852		37		(632		)	117,257		131,810		5,749		(186		)	137,373
Corporate	265,486		2,226		(848		)	266,864		5,000		1		—			5,001
State and municipal	128,481		2,822		(126		)	131,177		243,347		9,058		(159		)	252,246
Trust preferred	37,690		822		(123		)	38,389		—		—		—			—
Other	—		—		—			—		5,000		356		—			5,356
Total other securities	549,509		5,907		(1,729		)	553,687		385,157		15,164		(345		)	399,976
Total securities	$	1,203,305	$	13,976	$	(2,877	)	$	1,214,404	$	585,633	$	20,056	$	(545	)	$	605,144

	December 31, 2014
	Available for Sale									Held to Maturity
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized 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

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

The amortized cost and estimated fair value of securities at March 31, 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.

	March 31, 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	$	2,680	$	2,709	$	9,958	$	10,073
One to five years	264,348		265,587		5,548		5,961
Five to ten years	239,986		241,925		212,747		220,150
Greater than ten years	42,495		43,466		156,904		163,792
Total other securities	549,509		553,687		385,157		399,976
Residential MBS	653,796		660,717		200,476		205,168
Total securities	$	1,203,305	$	1,214,404	$	585,633	$	605,144

Sales of securities for the period indicated below were as follows:

	For the three months ended
	March 31,
	2015			2014
Available for sale:
Proceeds from sales	$	115,554		$	55,778
Gross realized gains	1,663			65
Gross realized losses	(129		)	(5		)
Income tax expense on realized net gains	499			18

At March 31, 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.

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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
March 31, 2015
Residential MBS:
Agency-backed	$	62,179	$	(254	)	$	21,077	$	(379	)	$	83,256	$	(633	)
CMO/Other MBS	14,103		(65		)	27,860		(450		)	41,963		(515		)
Total residential MBS	76,282		(319		)	48,937		(829		)	125,219		(1,148		)
Other securities:
Federal agencies	40,154		(74		)	69,839		(558		)	109,993		(632		)
Corporate	62,163		(570		)	15,459		(278		)	77,622		(848		)
State and municipal	11,694		(72		)	3,902		(54		)	15,596		(126		)
Trust preferred	9,645		(123		)	—		—			9,645		(123		)
Total other securities	123,656		(839		)	89,200		(890		)	212,856		(1,729		)
Total	$	199,938	$	(1,158	)	$	138,137	$	(1,719	)	$	338,075	$	(2,877	)
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	)

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

The following table summarizes securities held to maturity 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
Held to maturity
March 31, 2015
Residential MBS:
Agency-backed	$	6,567	$	(89	)	$	—	$	—		$	6,567	$	(89	)
CMO/Other MBS	3,011		(1		)	17,049		(110		)	20,060		(111		)
Total residential MBS	9,578		(90		)	17,049		(110		)	26,627		(200		)
Other securities:
Federal agencies	—		—			14,814		(186		)	14,814		(186		)
State and municipal	16,403		(157		)	120		(2		)	16,523		(159		)
Total other securities	16,403		(157		)	14,934		(188		)	31,337		(345		)
Total	$	25,981	$	(247	)	$	31,983	$	(298	)	$	57,964	$	(545	)
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 March 31, 2015, a total of 97 available for sale securities were in a continuous unrealized loss position for less than 12 months and 48 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 March 31, 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 March 31, 2015, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated income statement.

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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:

	March 31,		December 31,
	2015		2014
Available for sale securities pledged for borrowings, at fair value	$	84,635	$	187,314
Available for sale securities pledged for municipal deposits, at fair value	705,741		550,681
Available for sale securities pledged for customer back-to-back swaps, at fair value	1,891		1,959
Held to maturity securities pledged for borrowings, at amortized cost	207,679		154,712
Held to maturity securities pledged for municipal deposits, at amortized cost	334,298		352,843
Total securities pledged	$	1,334,244	$	1,247,509

(4) Portfolio Loans

The composition of the Company’s loan portfolio, excluding loans held for sale, was the following:

	March 31,			December 31,
	2015			2014
Commercial:
Commercial & industrial	$	1,191,717		$	1,244,555
Payroll finance	181,687			154,229
Warehouse lending	241,434			173,786
Factored receivables	152,354			161,625
Equipment financing	465,250			411,449
Total commercial	2,232,442			2,145,644
Commercial mortgage:
Commercial real estate	1,531,066			1,458,277
Multi-family	385,871			384,544
Acquisition, development & construction	95,567			96,995
Total commercial mortgage	2,012,504			1,939,816
Total commercial and commercial mortgage	4,244,946			4,085,460
Residential mortgage	494,106			529,766
Consumer:
Home equity lines of credit	163,488			163,569
Other consumer loans	36,366			36,846
Total consumer	199,854			200,415
Total portfolio loans	4,938,906			4,815,641
Allowance for loan losses	(42,884		)	(42,374		)
Portfolio loans, net	$	4,896,022		$	4,773,267

Total loans include net deferred loan origination costs of $1,836 at March 31, 2015, and $1,609 at December 31, 2014.

At March 31, 2015, the net recorded amount of loans subject to accounting as purchased with credit impairment was $2,897. Loans acquired in the Provident Merger that were determined to be purchased credit impaired were all considered collateral dependent loans. Therefore, estimated fair value calculations and projected cash flows included only return of principal and no interest income. There was no accretable yield associated with these loans during the three months ended March 31, 2015.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

At March 31, 2015, the Company pledged loans totaling $1,224,090 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 March 31, 2015 and December 31, 2014:

	March 31, 2015
	Current		30-59 days past due		60-89 days past due		90+ days past due		Non- accrual		Total
Commercial & industrial	$	1,176,500	$	7,733	$	2,764	$	—	$	4,720	$	1,191,717
Payroll finance	181,356		206		—		73		52		181,687
Warehouse lending	241,434		—		—		—		—		241,434
Factored receivables	152,109		—		—		—		245		152,354
Equipment financing	463,968		472		500		—		310		465,250
Commercial real estate	1,507,414		8,040		4,431		644		10,537		1,531,066
Multi-family	385,472		—		312		—		87		385,871
Acquisition, development & construction	84,692		4,462		—		—		6,413		95,567
Residential mortgage	474,011		2,128		1,445		123		16,399		494,106
Consumer	190,274		1,812		923		132		6,713		199,854
Total loans	$	4,857,230	$	24,853	$	10,375	$	972	$	45,476	$	4,938,906
Total TDRs included above	$	16,981	$	262	$	420	$	—	$	10,813	$	28,476
Non-performing loans:
Loans 90+ days past due and still accruing											972
Non-accrual loans											45,476
Total non-performing loans											$	46,448

	December 31, 2014
	Current		30-59 days past due		60-89 days past due		90+ days past due		Non- accrual		Total
Commercial & industrial	$	1,232,363	$	6,237	$	920	$	60	$	4,975	$	1,244,555
Payroll finance	154,114		—		—		115		—		154,229
Warehouse lending	173,786		—		—		—		—		173,786
Factored receivables	161,381		—		—		—		244		161,625
Equipment financing	410,483		707		19		—		240		411,449
Commercial real estate	1,433,235		7,982		5,322		452		11,286		1,458,277
Multi-family	383,799		317		—		156		272		384,544
Acquisition, development & construction	89,730		401		451		—		6,413		96,995
Residential mortgage	509,597		2,935		975		—		16,259		529,766
Consumer	191,528		1,110		1,607		—		6,170		200,415
Total loans	$	4,740,016	$	19,689	$	9,294	$	783	$	45,859	$	4,815,641
Total TDRs included above	$	16,238	$	847	$	176	$	—	$	11,427	$	28,688
Non-performing loans:
Loans 90+ days past due and still accruing											$	783
Non-accrual loans											45,859
Total non-performing loans											$	46,642

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Activity in the allowance for loan losses for the three months ended March 31, 2015 and 2014 is summarized below:

	For the three months ended March 31, 2015
	Beginning balance		Charge-offs			Recoveries		Net charge-offs			Provision			Ending balance
Commercial & industrial	$	11,027	$	(842	)	$	101	$	(741	)	$	400		$	10,686
Payroll finance	1,506		(303		)	11		(292		)	686			1,900
Warehouse lending	608		—			—		—			251			859
Factored receivables	1,205		(72		)	19		(53		)	20			1,172
Equipment financing	2,569		(153		)	172		19			103			2,691
Commercial real estate	10,121		(62		)	16		(46		)	1,018			11,093
Multi-family	2,111		(17		)	—		(17		)	196			2,290
Acquisition, development & construction	2,987		—			9		9			(280		)	2,716
Residential mortgage	5,843		(181		)	2		(179		)	(537		)	5,127
Consumer	4,397		(342		)	52		(290		)	243			4,350
Total allowance for loan losses	$	42,374	$	(1,972	)	$	382	$	(1,590	)	$	2,100		$	42,884
Annualized net charge-offs to average loans outstanding														0.13		%

	For the three months ended March 31, 2014
	Beginning balance		Charge-offs			Recoveries		Net charge-offs			Provision			Ending balance
Commercial & industrial	$	6,886	$	(1,164	)	$	74	$	(1,090	)	$	873		$	6,669
Payroll finance	—		—			—		—			610			610
Warehouse lending	—		—			—		—			132			132
Factored receivables	—		(289		)	—		(289		)	668			379
Equipment financing	—		(167		)	—		(167		)	1,473			1,306
Commercial real estate	8,040		(280		)	19		(261		)	1,135			8,914
Multi-family	1,952		—			—		—			—			1,952
Acquisition, development & construction	5,857		(1,260		)	—		(1,260		)	(1,038		)	3,559
Residential mortgage	4,600		(148		)	1		(147		)	112			4,565
Consumer	3,277		(204		)	21		(183		)	835			3,929
Total allowance for loan losses	$	30,612	$	(3,512	)	$	115	$	(3,397	)	$	4,800		$	32,015
Annualized net charge-offs to average loans outstanding														0.34		%

Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Evaluation of impairment is treated the same across all classes of loans on a loan-by-loan basis, except residential mortgage loans and home equity lines of credit with an outstanding balance of $500 or less, which are evaluated for impairment on a homogeneous pool basis. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment of the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure or liquidation is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is generally recognized through a charge-off to the allowance for loan losses. 

When the ultimate collectibility of the total principal of an impaired loan is in doubt and the loan is on non-accrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectibility of the total principal of an impaired loan is

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method.

The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at March 31, 2015:

	Loans evaluated by segment								Allowance evaluated by segment
	Individually evaluated for impairment		Collectively evaluated for impairment		Purchased credit impaired loans		Total  loans		Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance for loan losses
Commercial & industrial	$	4,000	$	1,186,988	$	729	$	1,191,717	$	—	$	10,686	$	10,686
Payroll finance	—		181,687		—		181,687		—		1,900		1,900
Warehouse lending	—		241,434		—		241,434		—		859		859
Factored receivables	—		152,354		—		152,354		—		1,172		1,172
Equipment financing	—		465,250		—		465,250		—		2,691		2,691
Commercial real estate	13,245		1,517,682		139		1,531,066		—		11,093		11,093
Multi-family	—		385,871		—		385,871		—		2,290		2,290
Acquisition, development & construction	11,570		83,997		—		95,567		—		2,716		2,716
Residential mortgage	515		491,562		2,029		494,106		—		5,127		5,127
Consumer	—		199,854		—		199,854		—		4,350		4,350
Total loans	$	29,330	$	4,906,679	$	2,897	$	4,938,906	$	—	$	42,884	$	42,884

There was no amount included in the allowance for loan losses associated with purchased credit impaired loans at March 31, 2015, as there was no further deterioration in the credit quality of these loans since the Provident Merger date.

The following table sets forth loans evaluated for impairment by segment and the allowance evaluated by segment at December 31, 2014:

	Loans evaluated by segment								Allowance evaluated by segment
	Individually evaluated for impairment		Collectively evaluated for impairment		Purchased credit impaired loans		Total  loans		Individually evaluated for impairment		Collectively evaluated for impairment		Total allowance for loan losses
Commercial & industrial	$	4,461	$	1,238,899	$	1,195	$	1,244,555	$	—	$	11,027	$	11,027
Payroll finance	—		154,229		—		154,229		—		1,506		1,506
Warehouse lending	—		173,786		—		173,786		—		608		608
Factored receivables	—		161,625		—		161,625		—		1,205		1,205
Equipment financing	—		411,449		—		411,449		—		2,569		2,569
Commercial real estate	14,423		1,443,714		140		1,458,277		—		10,121		10,121
Multi-family	—		384,544		—		384,544		—		2,111		2,111
Acquisition, development & construction	11,624		85,371		—		96,995		—		2,987		2,987
Residential mortgage	515		527,171		2,080		529,766		—		5,843		5,843
Consumer	—		200,415		—		200,415		—		4,397		4,397
Total loans	$	31,023	$	4,781,203	$	3,415	$	4,815,641	$	—	$	42,374	$	42,374

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

The following table presents loans individually evaluated for impairment by segment of loans at March 31, 2015 and December 31, 2014:

	Commercial & industrial		Commercial real estate		Acquisition, development & construction		Residential mortgage		Total
Loans with no related allowance recorded:
March 31, 2015
Unpaid principal balance	$	4,000	$	13,459	$	12,794	$	515	$	30,768
Recorded investment	4,000		13,245		11,570		515		29,330
December 31, 2014
Unpaid principal balance	4,571		14,635		12,848		515		32,569
Recorded investment	4,461		14,423		11,624		515		31,023

During the quarter ended March 31, 2014, the Company modified its allowance for loan loss policy to generally require a charge-off of the difference between the book balance of a collateral dependent impaired loan and the net value of the collateral securing the loan. As a result, there were no impaired loans with an allowance recorded at March 31, 2015 or December 31, 2014.

The following tables present the average recorded investment and interest income recognized related to loans individually evaluated for impairment by segment for the three months ended March 31, 2015 and March 31, 2014:

	March 31, 2015						March 31, 2014
	YTD average recorded investment		Interest income recognized		Cash-basis interest income recognized		YTD average recorded investment		Interest income recognized		Cash-basis interest income recognized
With no related allowance recorded:
Commercial & industrial	$	3,316	$	—	$	—	$	1,850	$	—	$	—
Factored receivables	—		—		—		992		—		—
Commercial real estate	13,275		67		—		12,512		40		—
Multi-family	—		—		—		264		—		—
Acquisition, development & construction	11,597		57		—		21,940		66		—
Residential mortgage	515		—		—		515		—		—
Total	$	28,703	$	124	$	—	$	38,073	$	106	$	—

There were no impaired loans with an allowance recorded at March 31, 2015 or March 31, 2014. At March 31, 2015 and March 31, 2014 there were no payroll finance, warehouse lending, equipment finance or consumer impaired loans.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Troubled Debt Restructuring:

The following tables set forth the amounts and past due status of the Company’s TDRs at March 31, 2015 and December 31, 2014:

	March 31, 2015
	Current loans		30-59 days past due		60-89 days past due		90+ days past due		Non- accrual		Total
Commercial & industrial	$	226	$	—	$	—	$	—	$	2,065	$	2,291
Equipment financing	389		—		—		—		—		389
Commercial real estate	4,829		262		—		—		—		5,091
Acquisition, development & construction	5,398		—		—		—		6,372		11,770
Residential mortgage	6,139		—		420		—		2,155		8,714
Consumer	—		—		—		—		221		221
Total	$	16,981	$	262	$	420	$	—	$	10,813	$	28,476

	December 31, 2014
	Current loans		30-59 days past due		60-89 days past due		90+ days past due		Non- accrual		Total
Commercial & industrial	$	245	$	—	$	—	$	—	$	2,065	$	2,310
Equipment financing	409		—		—		—		—		409
Commercial real estate	4,833		263		—		—		—		5,096
Acquisition, development & construction	5,487		—		—		—		6,373		11,860
Residential mortgage	5,264		584		176		—		2,768		8,792
Consumer	—		—		—		—		221		221
Total	$	16,238	$	847	$	176	$	—	$	11,427	$	28,688

There were no payroll finance, warehouse lending, factored receivable, or multifamily loans that were TDRs for the periods presented. The Company had outstanding commitments to lend additional amounts of $0 and $0 to customers with loans classified as TDRs as of March 31, 2015 and March 31, 2014, respectively.

There were no loans modified as TDRs that occurred during the three months ended March 31, 2015. The following table presents loans by segment modified as TDRs that occurred during the first three months of 2015 and 2014:

	March 31, 2015					March 31, 2014
		Recorded investment					Recorded investment
	Number	Pre- modification		Post- modification		Number	Pre- modification		Post- modification
Acquisition, development & construction	—	—		—		2	1,060		1,060
Total restructured loans	—	$	—	$	—	2	$	1,060	$	1,060

The TDRs presented above increased the allowance for loan losses by $0 and $0 and resulted in charge-offs of $0 and $0 for the three months ended March 31, 2015 and March 31, 2014, respectively.

There were no TDRs that were modified during the three months ended March 31, 2015 and 2014 that had subsequently defaulted during the period.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans (residential mortgage, homeowner and home equity lines of credit (“HELOC”)), (iv) net charge-offs, (v) non-performing loans (see details above) and (vi) the general economic conditions in the greater New York metropolitan region. The Bank analyzes loans individually by classifying the loans as to credit risk, except residential mortgage loans and consumer loans, which are evaluated on a homogeneous pool basis unless the loan balance is greater than $500. This analysis is performed at least quarterly on all criticized/classified loans. The Bank uses the following definitions of risk ratings:

1 and 2 - These grades include loans that are secured by cash, marketable securities or cash surrender value of life insurance policies.

3 - This grade includes loans to borrowers with strong earnings and cash flow and that have the ability to service debt. The borrower’s assets and liabilities are generally well matched and are above average quality. The borrower has ready access to multiple sources of funding including alternatives such as term loans, private equity placements or trade credit.

4 - This grade includes loans to borrowers with above average cash flow, adequate earnings and debt service coverage ratios. The borrower generates discretionary cash flow, assets and liabilities are reasonably matched, and the borrower has access to other sources of debt funding or additional trade credit at market rates.

5 - This grade includes loans to borrowers with adequate earnings and cash flow and reasonable debt service coverage ratios. Overall leverage is acceptable and there is average reliance upon trade credit. Management has a reasonable amount of experience and depth, and owners are willing to invest available outside capital as necessary.

6 - This grade includes loans to borrowers where there is evidence of some strain, earnings are inconsistent and volatile, and the borrowers’ outlook is uncertain. Generally such borrowers have higher leverage than those with a better risk rating. These borrowers typically have limited access to alternative sources of bank debt and may be dependent upon debt funding for working capital support.

7 - Special Mention (OCC definition) - Other Assets Especially Mentioned (OAEM) are loans that have potential weaknesses which may, if not reversed or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. Such assets constitute an undue and unwarranted credit risk but not to the point of justifying a classification of “Substandard.” The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific asset.

8 - Substandard (OCC definition) - These loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some losses if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

9 - Doubtful (OCC definition)- These loans have all the weakness inherent in one classified as “Substandard” with the added characteristics that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidating procedures, capital injection, perfecting liens or additional collateral and refinancing plans.

10 - Loss (OCC definition) - These loans are charged-off because they are determined to be uncollectible and unbankable assets. This classification does not reflect that the asset has no absolute recovery or salvage value, but rather it is not practical or desirable to defer writing-off this asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are determined to be uncollectible.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Loans that are risk-rated 1 through 6 as defined above are considered to be pass-rated loans. As of March 31, 2015 and December 31, 2014, the risk category of gross loans by segment was as follows:

	March 31, 2015						December 31, 2014
	Special mention		Substandard		Doubtful		Special mention		Substandard
Commercial & industrial	$	3,262	$	6,749	$	24	$	13,060	$	7,730
Payroll finance	6,709		125		—		996		115
Factored receivables	36		1,596		—		34		244
Equipment financing	—		310		—		—		240
Commercial real estate	11,820		25,730		—		12,707		28,194
Multi-family	312		87		—		317		272
Acquisition, development & construction	1,017		16,108		—		1,027		16,016
Residential mortgage	1,445		16,664		—		975		16,402
Consumer	1,456		6,727		132		1,200		6,690
Total	$	26,057	$	74,096	$	156	$	30,316	$	75,903

There were no loans rated loss at March 31, 2015 and no loans rated doubtful or loss at December 31, 2014.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(5) Goodwill and Other Intangible Assets

The changes in goodwill and other intangible assets for the periods presented were as follows:

	March 31,		December 31,
	2015		2014
Goodwill	$	400,941	$	388,926
Other intangible assets:
Core deposits	$	17,683	$	18,473
Customer list	8,851		—
Non-compete agreements	4,398		3,959
Trade name	20,500		20,500
Fair value of below market leases	325		400
	$	51,757	$	43,332

The estimated aggregate future amortization expense for intangible assets remaining as of March 31, 2015 was as follows:

	Amortization expense
Remainder of 2015	$	5,203
2016	6,012
2017	3,617
2018	3,335
2019	2,864
Thereafter	10,226
Total	$	31,257

(6) Deposits

Deposit balances at March 31, 2015 and December 31, 2014 are summarized as follows:

	March 31,		December 31,
	2015		2014
Non-interest bearing demand	$	1,499,161	$	1,481,870
Interest bearing demand	828,731		747,667
Savings	745,495		711,509
Money market	1,980,274		1,790,435
Certificates of deposit	502,285		480,844
Total deposits	$	5,555,946	$	5,212,325

Municipal deposits totaled $1,013,835 and $883,350 at March 31, 2015 and December 31, 2014, respectively. See Note 3. “Securities” for the amount of securities that were pledged as collateral for municipal deposits and other purposes.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Listed below are the Company’s brokered deposits:

	March 31,		December 31,
	2015		2014
Money market	$	100,018	$	75,462
Reciprocal CDAR’s 1	6,152		6,666
CDAR’s one way	79,904		86,530
Total brokered deposits	$	186,074	$	168,658

¹ Certificate of deposit account registry service

(7) Borrowings and Senior Notes

The Company’s borrowings and weighted average interest rates are summarized as follows:

	March 31,				December 31,
	2015				2014
	Amount		Rate		Amount		Rate
By type of borrowing:
FHLB advances and overnight	$	857,138	1.54	%	$	1,003,209	1.37	%
Other borrowings (repurchase agreements)	25,245		0.30		9,846		0.30
Senior notes	98,595		5.98		98,498		5.98
Total borrowings	$	980,978	1.95	%	$	1,111,553	1.77	%
By remaining period to maturity:
Less than one year	$	402,245	0.39	%	$	532,835	0.39	%
One to two years	152,735		0.71		152,760		0.69
Two to three years	255,000		3.54		255,000		3.54
Three to four years	168,595		4.37		168,498		4.38
Greater than five years	2,403		4.92		2,460		4.92
Total borrowings	$	980,978	1.95	%	$	1,111,553	1.77	%

FHLB advances and overnight. As a member of the FHLB, the Bank may borrow up to the amount of eligible mortgages and securities that have been pledged as collateral under a blanket security agreement. As of March 31, 2015 and December 31, 2014, the Bank had pledged residential mortgage and commercial real estate loans totaling $1,224,090 and $1,302,681, respectively. The Bank had also pledged securities to secure borrowings, which are disclosed in Note 3. “Securities.” As of March 31, 2015, the Bank may increase its borrowing capacity by pledging securities and mortgage loans not required to be pledged for other purposes with a collateral value of $507,314.

FHLB borrowings which are putable quarterly at the discretion of the FHLB were $200,000 at March 31, 2015 and December 31, 2014. These borrowings have a weighted average remaining term to the contractual maturity dates of approximately 2.06 and 2.31 years and a weighted average interest rate of 4.23% at March 31, 2015 and December 31, 2014, respectively.

Other borrowings (repurchase agreements). We utilize securities sold under repurchase agreements to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase at March 31, 2015 and December 31, 2014 are secured short-term borrowings that mature in one to 17 days and are generally renewed on a continuous basis. Repurchase agreements are stated at the amount of cash received in connection with these transactions. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The Bank continuously monitors collateral levels and may be required to provide additional collateral based on the fair value of the underlying securities.

Revolving line of credit. On September 5, 2014, the Company entered into a $15,000 revolving line of credit facility with a financial institution that matures on September 5, 2015. The balance was zero at March 31, 2015 and December 31, 2014. The use of proceeds are for general corporate purposes. The line and accrued interest is payable at maturity, and is required to maintain a zero balance for

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

at least 30 days during its term. The line bears interest at one-month LIBOR plus 1.25%. Under the terms of the facility, the Company and the Bank must maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. The Company and the Bank were in compliance with all requirements of the facility at March 31, 2015.

Senior Notes. On July 2, 2013, the Company issued $100,000 principal amount of 5.50% fixed rate senior notes (the “Senior Notes”)through a private placement at a discount of 1.75%. The cost of issuance was $303, and at March 31, 2015 and December 31, 2014 the unamortized discount was $1,404 and $1,502, respectively, which will be accreted to interest expense over the life of the Senior Notes, resulting in an effective yield of 5.98%. Interest is due semi-annually in arrears on January 2 and July 2 until maturity on July 2, 2018. The Senior Notes were issued under an indenture between the Company and U.S. Bank National Association, as trustee.

(8) Derivatives

The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customers to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

The Company pledged collateral to another financial institution in the form of investment securities with an amortized cost of $1,891 and a fair value of $2,004 as of March 31, 2015. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is written into the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Company is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral to swap counterparties in the future in proportion to potential increases in unrealized loss positions.

Summary information as of March 31, 2015 and December 31, 2014 regarding these derivatives is presented below:

	Notional amount			Average maturity (in years)	Weighted average fixed rate		Weighted average variable rate	Fair value
March 31, 2015
3rd party interest rate swap	$	66,868		4.46	4.13	%	1 m Libor +2.36	$	1,874
Customer interest rate swap	(66,868		)	4.46	4.13		1 m Libor +2.36	(1,874		)
December 31, 2014
3rd party interest rate swap	67,551			4.70	4.13		1 m Libor + 2.36	1,332
Customer interest rate swap	(67,551		)	4.70	4.13		1 m Libor + 2.36	(1,332		)

The Company enters into various commitments to sell real estate loans into the secondary market. Such commitments are considered to be derivative financial instruments; however, the fair value of these commitments is not material.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(9) Income Taxes

Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate for the following reasons:

	For the three months ended
	March 31,
	2015			2014
Income before income tax expense	$	24,856		$	14,920
Tax at Federal statutory rate of 35%	8,700			5,224
State and local income taxes, net of Federal tax benefit	875			(210		)
Tax-exempt interest, net of disallowed interest	(984		)	(987		)
BOLI income	(251		)	(190		)
Non-deductible acquisition related costs	140			—
Low income housing tax credits	(54		)	(55		)
Other, net	(348		)	806
Actual income tax expense	$	8,078		$	4,588
Effective income tax rate	32.5		%	30.8		%

Net deferred tax assets totaled $4,804 at March 31, 2015 and $14,857 at December 31, 2014. No valuation allowance was recorded against deferred tax assets at March 31, 2015 as management believes it is more likely than not that all of the deferred tax assets will be realized as they were supported by recoverable taxes paid in prior years. There were no unrecognized tax benefits during any of the reported periods. Interest and/or penalties related to income taxes are reported as a component of other non-interest expense. Such amounts were not significant during the reported periods.

The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2010.

(10) Stock-Based Compensation

The Company has active stock-based compensation plans, as described below.

The Company’s stockholders approved the 2014 Stock Incentive Plan (the “2014 Plan”) on February 20, 2014. The 2014 Plan permits the grant of stock options, stock appreciation rights, restricted stock (both time-based and performance-based), restricted stock units, performance units, deferred stock, and other stock-based awards for up to 3,400,000 shares of common stock. At March 31, 2015 there were 1,654,318 shares available for future grant. The 2014 Plan replaced the Company’s 2012 Stock Incentive Plan (the “2012 Plan”).

Under the 2014 Plan, any shares that are subject to stock options or stock appreciation rights are counted as one share deducted from the 2014 Plan for every one share delivered under those awards. Any shares granted under the 2014 Plan that are subject to awards other than stock options and stock appreciation rights are counted as 3.5 shares deducted from the 2014 Plan for every one share delivered under those awards.

Stock option awards are granted with a fair value equal to the market price of the Company’s common stock at the date of grant. The awards generally vest in equal installments annually on the anniversary date and have total vesting periods ranging from 2 to 5 years and stock options have 10 year contractual terms.

In addition to the 2014 Plan, the Company previously provided awards under its 2011 Employment Inducement Stock Program, which included options to purchase 107,256 shares of common stock and restricted stock awards covering 29,550 shares of common stock, both of which vest in four equal installments through July 2015.

In connection with the Provident Merger, the Company granted 104,152 options at an exercise price of $14.25 per share pursuant to a Registration Statement on Form S-8 under which the Company assumed all outstanding fully vested Legacy Sterling stock options. All

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

of these options expire March 15, 2017. The Company also granted 95,991 shares under the Sterling Bancorp 2013 Employment Inducement Award Plan to certain executive officers of Legacy Sterling. In addition, the Company issued 255,973 shares of restricted stock from shares available under the Company’s 2012 Plan to certain executives of Legacy Sterling. The weighted average grant date fair value was $11.72 per share and the restricted stock awards vest in equal annual installments on the anniversary date over a three-year period.

The following table summarizes the activity in the Company’s active stock-based compensation plans for the three months ended March 31, 2015:

			Non-vested stock awards/stock units outstanding				Stock options outstanding
	Shares available for grant		Number of shares		Weighted average grant date fair value		Number of shares		Weighted average exercise price
Balance at January 1, 2015	1,999,022		643,887		$	11.79	2,040,299		$	11.10
Granted (1)	(403,371	)	110,960		13.21		15,000		13.84
Stock awards vested	—		(36,549	)	11.82		—		—
Exercised	—		—		—		(260,433	)	12.19
Forfeited	64,667		(16,619	)	13.21		(6,500	)	13.03
Canceled/expired	(6,000	)	—		—		—		—
Balance at March 31, 2015	1,654,318		701,679		$	11.97	1,788,366		$	10.96
Exercisable at March 31, 2015							896,353		$	10.16

⁽¹⁾ Reflects certain non-vested stock awards that count as 3.5 shares for each share granted.

The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $4,465 and $2,970, at March 31, 2015.

Proceeds from stock option exercises were $2,758, and $923, for the three months ended March 31, 2015 and 2014, respectively.

The Company uses an option pricing model to estimate the grant date fair value of stock options granted. The weighted average estimated value per option granted was $2.08 for the three months ended March 31, 2015. There were no stock options granted during the three months ended March 31, 2014.

The fair value of options granted was determined using the following weighted average assumptions as of the grant date:

	For the three months
	ended March 31,
	2015		2014
Risk-free interest rate	1.9	%	—	%
Expected stock price volatility	20.9		—
Dividend yield (1)	3.1		—
Expected term in years	5.76		—

⁽¹⁾ Represents the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Stock-based compensation expense associated with stock options and non-vested stock awards and the related income tax benefit was as follows:

	For the three months
	ended March 31,
	2015		2014
Stock options	$	281	$	235
Non-vested stock awards/performance units	828		558
Total	$	1,109	$	793
Income tax benefit	377		244

Unrecognized stock-based compensation expense at March 31, 2015 was as follows:

	March 31, 2015
Stock options	$	1,468
Non-vested stock awards/performance units	6,417
Total	$	7,885

The weighted average period over which unrecognized stock options is expected to be recognized is 1.89 years. The weighted average period over which unrecognized non-vested awards/performance units is expected to be recognized is 1.97 years.

(11) Pension and Other Post Retirement Plans

Net pension (benefit) expense and post-retirement expense, which is recorded in compensation and employee benefits expense in the consolidated income statements, is comprised of the following:

	Pension plan						Other post retirement plans
	For the three months ended						For the three months ended
	March 31,						March 31,
	2015			2014			2015		2014
Service cost	$	—		$	—		$	2	$	11
Interest cost	589			1,377			94		32
Expected return on plan assets	(729		)	(1,701		)	—		—
Amortization of unrecognized actuarial loss	91			48			40		18
Partial settlement charge	—			1,352			—		—
Total (benefit) expense	$	(49	)	$	1,076		$	136	$	61

There were no pension plan assets consisting of Sterling Bancorp common stock at March 31, 2015 or December 31, 2014. The Company does not anticipate that a contribution will be made to the pension plan in 2015. The plan’s over funded status increased to $15,611 at March 31, 2015 compared to $14,290 at December 31, 2014. The over funded status is included in other assets in the consolidated balance sheet.

The Company’s other post retirement plans include a non-qualified Supplemental Executive Retirement Plan (“SERP”) that provides certain officers and executives with supplemental retirement benefits in addition to the benefits provided by the pension plan. The Company contributed $26 and $95 to fund SERP benefits during the three months ended March 31, 2015 and 2014, respectively. Total post retirement plan liabilities were $11,500 at March 31, 2015 and are included in other liabilities in the consolidated balance sheet.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(12) Other Non-interest Expense

Other non-interest expense items are presented in the following table. Components exceeding 1% of the aggregate of total net interest income and total non-interest income are presented separately.

	For the three months ended
	March 31,
	2015		2014
Other non-interest expense:
Professional fees	$	1,915	$	1,500
Data and check processing	2,148		663
Insurance & surety bond premium	648		637
Other	5,111		5,952
Total other non-interest expense	$	9,822	$	8,752

(13) Earnings Per Common Share

The following is a summary of the calculation of earnings per share (“EPS”):

	For the three months ended March 31,
	2015		2014
Net income	$	16,778	$	10,332
Weighted average common shares outstanding for computation of basic EPS (1)	87,839,029		83,497,765
Common-equivalent shares due to the dilutive effect of stock options (2)	413,739		296,342
Weighted average common shares for computation of diluted EPS	88,252,768		83,794,107
Earnings per common share:
Basic	$	0.19	$	0.12
Diluted	0.19		0.12

(1) Includes earned ESOP shares.

(2) Represents incremental shares computed using the treasury stock method.

As of March 31, 2015 and March 31, 2014, 112,891 and 653,146 weighted average common shares that could be exercised under stock options plans were anti-dilutive for the three month periods, respectively. Anti-dilutive shares are not included in determining diluted earnings per share.

(14) Stockholders’ Equity

(a) Regulatory Capital Requirements

In connection with the Provident Merger, the Company became a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended.

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines, and additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk-weighting, and other factors.

The Basel III Capital Rules became effective for Sterling Bancorp and Sterling National Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital (as defined in the regulations), Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined, “RWA”), and of Tier 1 capital to adjusted quarterly average assets (as defined).

The Company’s and the Bank’s Common Equity Tier 1 capital consists of common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion of the allowance for loan losses. Prior to January 1, 2015, the Company’s and the Bank’s Tier 1 capital consisted of total shareholders’ equity excluding accumulated other comprehensive income, goodwill and other intangible assets. 

The Common Equity Tier 1 (beginning in 2015), Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by RWA. RWA is calculated based on regulatory requirements and includes total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-balance-sheet items, among other things.

The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.When fully phased-in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to RWA of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to RWA of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to RWA of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to RWA of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following table presents actual and required capital ratios as of March 31, 2015 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2015 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

	Actual				Minimum capital required - Basel III phase-in schedule				Minimum capital required - Basel III fully phased-in				Required to be considered well capitalized
	Capital amount		Ratio		Capital amount		Ratio		Capital amount		Ratio		Capital amount		Ratio
March 31, 2015
Common equity tier 1 to RWA:
Sterling National Bank	$	739,580	12.92	%	$	257,612	4.50	%	$	400,730	7.00	%	$	372,107	6.50	%
Sterling Bancorp	671,633		9.55		259,039		4.50		402,949		7.00		N/A		N/A
Tier 1 capital to RWA:
Sterling National Bank	739,580		12.92	%	343,483		6.00	%	486,601		8.50	%	457,977		8.00	%
Sterling Bancorp	671,633		11.67		345,385		6.00		489,295		8.50		N/A		N/A
Total capital to RWA:
Sterling National Bank	782,859		13.68	%	457,977		8.00	%	601,095		10.50	%	572,472		10.00	%
Sterling Bancorp	714,912		12.42		460,513		8.00		604,424		10.50		N/A		N/A
Tier 1 leverage ratio:
Sterling National Bank	739,580		10.53	%	280,901		4.00	%	280,901		4.00	%	351,127		5.00	%
Sterling Bancorp	671,633		9.55		281,354		4.00		281,354		4.00		N/A		N/A

The following table presents actual and required capital ratios as of December 31, 2014 for the Bank and the Company under the regulatory capital rules then in effect:

					Regulatory requirements
	Actual				Minimum capital adequacy				Classification as well- capitalized
	Capital amount		Ratio		Capital amount		Ratio		Capital amount		Ratio
December 31, 2014
Tier 1 capital to RWA:
Sterling National Bank	$	651,203	12.00	%	$	216,988	4.00	%	$	325,481	6.00	%
Sterling Bancorp	569,609		10.43		218,405		4.00		N/A		N/A
Total capital to RWA:
Sterling National Bank	693,972		12.79	%	433,975		8.00	%	542,469		10.00	%
Sterling Bancorp	612,378		11.22		436,809		8.00		N/A		N/A
Tier 1 leverage ratio:
Sterling National Bank	651,203		9.39	%	277,534		4.00	%	346,918		5.00	%
Sterling Bancorp	569,609		8.21		277,352		4.00		N/A		N/A

As of March 31, 2015, capital levels at the Bank and the Company exceeded all capital adequacy requirements under the Basel III Capital Rule on a fully phased-in basis. Based on the ratios presented above, capital levels as of March 31, 2015 at the Bank and the Company exceed the minimum levels necessary to be considered “well-capitalized”.

The Bank and the Company are subject to the regulatory capital requirements administered by the Federal Reserve; and for the Bank, the Office of the Comptroller of the Currency. Regulatory authorities can initiate certain mandatory actions if the Bank or the Company fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of March 31, 2015, that the Bank and the Company meet all capital adequacy requirements to which they are subject.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(b) Dividend Restrictions

The Company is mainly dependent upon dividends from the Bank to provide funds for the payment of dividends to stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that fiscal year combined with the retained net profits for the preceding two fiscal years. Under the foregoing dividend restrictions and while maintaining its “well-capitalized” status, at March 31, 2015, the Bank had capacity to pay aggregate dividends of up to $46,003 to the Company without prior regulatory approval.

(c) Capital Raise

On February 11, 2015, the Company completed a public offering of 6.9 million shares of common stock at an offering price of $13.00 per share for gross proceeds of approximately $89.7 million, and net proceeds, after underwriting discounts, commissions and other costs of issuance of $85.1 million.

(d) Stock Repurchase Plans

From time to time, the Company’s board of directors has authorized stock repurchase plans. The Company has 776,713 shares that are available to be purchased under the currently announced stock repurchase program. There were no shares repurchased under the repurchase program during the three months ended March 31, 2015 or March 31, 2014.

(e ) Liquidation Rights

Upon completion of the second-step conversion in January 2004, the Bank established a special “liquidation account” in accordance with Office of Comptroller of the Currency regulations. The account was established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as defined in the plan of conversion) in an amount equal to the greater of (i) the Mutual Holding Company’s (as defined in the plan of conversion) ownership interest in the retained earnings of the Bank as of the date of its latest balance sheet contained in the prospectus, or (ii) the retained earnings of the Bank at the time that the Bank reorganized into the Mutual Holding Company in 1999. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation of the Bank, to a pro rata interest in the liquidation account prior to any payment to the stockholders of the Company. The liquidation account is reduced annually on September 30 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. At March 31, 2015, the liquidation account had a balance of $13,300. Subsequent increases in deposits do not restore such account holder’s interest in the liquidation account. The Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder’s equity below the amount of the liquidation account.

(15) Commitments and Contingencies

(a) Off-Balance-Sheet Financial Instruments

In the normal course of business, the Company enters into various transactions, which in accordance with GAAP are not included in its consolidated balance sheet. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures.

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.  Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. Based on the Company’s credit risk exposure assessment of standby letter of credit arrangements, the arrangements contain security and debt covenants similar to those contained in loan agreements.

The contractual or notional amounts of these instruments, which reflect the extent of the Company’s involvement in particular classes of off-balance sheet financial instruments, are summarized as follows:

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

	March 31,		December 31,
	2015		2014
Loan origination commitments	$	178,262	$	208,486
Unused lines of credit	376,633		332,295
Letters of credit	75,889		83,316

(b) Lease Commitments

The Company leases certain premises and equipment under operating leases with terms expiring through 2033. Included in occupancy and office operations expense was net rent expense of $1,577 and $1,986 during the three months ended March 31, 2015 and 2014, respectively. There has been no significant change in the future minimum lease payments payable by the Company since December 31, 2014. See the Transition Report on Form 10-K filed March 6, 2015 for information regarding these commitments.

(c)Litigation

The Company and the Bank are involved in a number of judicial proceedings concerning matters arising from conducting their business activities. These include routine legal proceedings arising in the ordinary course of business. These proceedings also include actions brought against the Company and the Bank with respect to corporate matters and transactions in which the Company and the Bank were involved. In addition, the Company and the Bank may be requested to provide information or otherwise cooperate with government authorities in the conduct of investigations of other persons or industry groups.

There can be no assurance as to the ultimate outcome of a legal proceeding; however, the Company and the Bank have generally denied, or believe they have meritorious defenses and will deny, liability in all significant litigation pending against us, including the matter described below, and we intend to defend vigorously each case, other than matters we determine are appropriate to be settled. We accrue a liability for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.

On November 25, 2014, an action captioned Graner v. Hudson Valley Holding Corp., et al., Index No. 70348/2014 (Sup. Ct., Westchester Cnty.), was filed on behalf of a putative class of Hudson Valley (as defined below) shareholders against Hudson Valley, its current directors, and Sterling. On January 7, 2015, the plaintiff filed an amended complaint. As amended, the complaint alleges that the Hudson Valley board breached its fiduciary duties by agreeing to the HVB Merger (as defined below) and certain terms of the Merger Agreement and by failing to disclose all material information concerning the HVB Merger to the Hudson Valley shareholders. The complaint further alleges that Sterling aided and abetted those alleged fiduciary breaches. The action sought, among other things, an order enjoining the operation of certain provisions of the Merger Agreement (as defined below), enjoining any shareholder vote on the HVB Merger, as well as other equitable relief and/or monetary damages in the event that the HVB Merger is consummated.

On April 9, 2015, the parties entered into a memorandum of understanding (the ���MOU”) regarding the settlement of the putative class action. Under the terms of the MOU, the Company, Hudson Valley, the other named defendants and the plaintiff reached an agreement in principle to settle the action. Pursuant to the terms of the MOU, the plaintiff agreed to release the defendants from all claims relating to the HVB Merger in exchange for certain additional disclosure to the Hudson Valley shareholders, which disclosure was made on April 13, 2015 by Hudson Valley via filing with the SEC on Form 8-K. Under the terms of the MOU, plaintiff’s counsel also has reserved the right to seek an award of attorneys’ fees and expenses. The settlement is subject to approval by the Court, and, if the Court approves the settlement contemplated by the MOU, the action will be dismissed with prejudice. The settlement will not affect the merger consideration to be paid to Hudson Valley’s shareholders pursuant to, and subject to the conditions set forth in, the Merger Agreement. The Merger Agreement and the HVB Merger were approved by the Company’s stockholders at a special meeting held on April 28, 2015 and by Hudson Valley’s shareholders at a special meeting held on April 30, 2015, and consummation of the HVB Merger remains subject to the satisfaction of the remaining customary conditions set forth in the Merger Agreement. The Company, Hudson Valley and the other defendants deny all of the allegations made by the plaintiff. Nevertheless, the Company, Hudson Valley and the other defendants have agreed to settle the action in order to avoid the costs, disruption and distraction of further litigation.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(16) Fair value measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risk, etc.) or inputs that are derived principally from, or corroborated by, market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair value of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

In general, fair value is based on quoted market prices, when available. If quoted market prices in active markets are not available, fair value is based on internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincide with the Company’s monthly and/or quarterly valuation process.

Investment Securities Available for Sale

The majority of the Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment securities that have a complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are mortgage pass-through securities, state and municipal general obligation or revenue bonds, U.S. agency bullet and callable securities and corporate bonds. Pricing for such instruments is fairly generic and is easily obtained. From time to time, the Company validates, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

At March 31, 2015, we do not believe any of our securities are OTTI; however, we review all of our securities on at least a quarterly basis to assess whether impairment, if any, is OTTI.

Derivatives

The fair values of derivatives are based on valuation models using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counterparty as of the measurement date (Level 2). The Company’s derivatives consist of twelve interest rate swaps. See Note 8. “Derivatives.”

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Commitments to Sell Real Estate Loans

The Company enters into various commitments to sell real estate loans in the secondary market. Such commitments are considered to be derivative financial instruments and therefore are carried at estimated fair value on the consolidated balance sheets. The estimated fair values of these commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell to certain government sponsored agencies. The fair values of these commitments generally result in a Level 2 classification. The fair value of these commitments is not material.

A summary of assets and liabilities at March 31, 2015 measured at estimated fair value on a recurring basis is as follows:

	March 31, 2015
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets:
Investment securities available for sale:
Residential MBS:
Agency-backed	$	580,324	$	—	$	580,324	$	—
CMO/Other MBS	80,393		—		80,393		—
Total residential MBS	660,717		—		660,717		—
Federal agencies	117,257		—		117,257		—
Corporate bonds	266,864		—		266,864		—
State and municipal	131,177		—		131,177		—
Trust preferred	38,389		—		38,389		—
Total other securities	553,687		—		553,687		—
Total investment securities available for sale	1,214,404		—		1,214,404		—
Swaps	1,874		—		1,874		—
Total assets	$	1,216,278	$	—	$	1,216,278	$	—
Liabilities:
Swaps	1,874		—		1,874		—
Total liabilities	$	1,874	$	—	$	1,874	$	—

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

A summary of assets and liabilities at December 31, 2014 measured at estimated fair value on a recurring basis is as follows:

	December 31, 2014
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets:
Investment securities available for sale:
Residential MBS:
Agency-backed	$	533,663	$	—	$	533,663	$	—
CMO/Other MBS	84,838		—		84,838		—
Privately issued CMOs	—		—		—		—
Total residential MBS	618,501		—		618,501		—
Federal agencies	147,156		—		147,156		—
Corporate bonds	204,831		—		204,831		—
State and municipal	132,065		—		132,065		—
Trust preferred	38,293		—		38,293		—
Total investment securities available for sale	522,345		—		522,345		—
Total available for sale securities	1,140,846		—		1,140,846		—
Interest rate caps and swaps	1,332		—		1,332		—
Total assets	$	1,142,178	$	—	$	1,142,178	$	—
Liabilities:
Swaps	1,332		—		1,332		—
Total liabilities	$	1,332	$	—	$	1,332	$	—

The following categories of financial assets are not measured at fair value on a recurring basis, but are subject to fair value adjustments in certain circumstances.

Loans Held for Sale and Impaired Loans

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value as determined by outstanding commitments from investors. Fair value of loans held for sale is determined using quoted prices for similar assets (Level 2 inputs).

When mortgage loans held for sale are sold with servicing rights retained, the carrying value of mortgage loans sold is reduced by the amount allocated to the value of the servicing rights, which is equal to its fair value. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

The Company may record adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with FASB ASC Topic 310 – Receivables, when establishing the allowance for loan losses. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market place and are also based on Level 3 inputs. Impaired loans are evaluated on at least a quarterly basis for additional impairment and their carrying values are adjusted as needed. Loans subject to non-recurring fair value measurements were $29,330 and $37,085 at March 31, 2015 and March 31, 2014, respectively. Changes in fair value recognized as a charge-off on loans held by the Company were $280 and $447 for the three months ended March 31, 2015 and 2014, respectively.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

When valuing impaired loans that are collateral dependent, the Company charges-off the difference between the recorded investment in the loan and the appraised value, which is generally less than 12 months old. A discount for estimated costs to dispose of the asset is used when evaluating the impaired loans.

A summary of impaired loans at March 31, 2015 measured at estimated fair value on a non-recurring basis is the following:

	March 31, 2015
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Commercial real estate	$	1,950	$	—	$	—	$	1,950
Acquisition, development and construction	2,773		—		—		2,773
Total impaired loans measured at fair value	$	4,723	$	—	$	—	$	4,723

A summary of impaired loans at December 31, 2014 measured at estimated fair value on a non-recurring basis is the following:

	December 31, 2014
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Commercial & industrial	$	65	$	—	$	—	$	65
Commercial real estate	1,950		—		—		1,950
Acquisition, development and construction	3,800		—		—		3,800
Total impaired loans measured at fair value	$	5,815	$	—	$	—	$	5,815

Mortgage Servicing Rights

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in net gain on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights. In accordance with FASB ASC Topic 860 - Transfers and Servicing, the Company must record impairment charges on a non-recurring basis, when the carrying value exceeds the estimated fair value. To estimate the fair value of servicing rights, the Company utilizes a third-party, which on a quarterly basis, considers the market prices for similar assets and the present value of expected future cash flows associated with the servicing rights. Assumptions utilized include estimates of the cost of servicing, loan default rates, an appropriate discount rate and prepayment speeds. The determination of fair value of servicing rights relies upon Level 3 inputs. The fair value of mortgage servicing rights at March 31, 2015 and December 31, 2014 were $1,393 and $1,456, respectively.

OREO - Assets Taken in Foreclosure of Defaulted Loans

Assets taken in foreclosure of defaulted loans are initially recorded at fair value less costs to sell when acquired, which establishes a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less costs to sell and are primarily comprised of commercial and residential real estate property and upon initial recognition, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the market place. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. The fair value is derived using Level 3 inputs. Appraisals are reviewed by our credit department, our external loan review consultant and verified by officers in our credit administration area. Assets taken in foreclosure of defaulted loans and facilities held for sale subject to non-recurring fair value measurement were $8,231 and $5,867 at March 31, 2015 and December 31, 2014, respectively. There were no write downs related to changes in fair value recognized through income for those foreclosed assets held by the Company during the three months ended March 31, 2015 and March 31, 2014, respectively.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

Significant Unobservable Inputs to Level 3 Measurements

The following table presents quantitative information about significant unobservable inputs used in the fair value measurements for Level 3 assets at March 31, 2015:

Non-recurring fair value measurements	Fair value		Valuation technique	Unobservable input / assumptions	Range (1) (weighted average)
Impaired loans:
Commercial & industrial	$	—	Appraisal	Adjustments for comparable properties	10.0% -25.0% (14.4%)
Commercial real estate	1,950		Appraisal	Adjustments for comparable properties	22.0% (22.0%)
Acquisition, development & construction	2,773		Appraisal	Adjustments for comparable properties	10.0% - 22.0% (13.5%)
Assets taken in foreclosure:
Residential mortgage	1,181		Appraisal	Adjustments by management to reflect current conditions/selling costs	10.0% - 22.0% (21.6%)
Commercial real estate(2)	3,961		Appraisal	Adjustments by management to reflect current conditions/selling costs	10.0% - 22.0% (22.0%)
Acquisition, development & construction	1,796		Appraisal	Adjustments by management to reflect current conditions/selling costs	10.0% - 22.0% (22.0%)
Mortgage servicing rights	1,393		Third-party	Discount rates	8.3% - 11.3% (9.3%)
			Third-party	Prepayment speeds	100 - 512 (210)

⁽¹⁾ Represents range of discount factors applied to the appraisal to determine fair value. The amounts used for mortgage servicing rights are discounts applied by a third-party valuation provider which the Company believes are appropriate.

⁽²⁾ Excludes $1,293 of commercial properties that are former financial centers held for sale. These assets were not taken in foreclosure and their fair value is determined by third-party appraisals and our internal assessment of the market for this type of real estate.

Fair Values of Financial Instruments

FASB Codification Topic 825 - Financial Instruments, requires disclosure of fair value information for those financial instruments for which it is practicable to estimate fair value, whether or not such financial instruments are recognized in the consolidated statements of financial condition for interim and annual periods. Fair value is the amount for which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

Quoted market prices are used to estimate fair values when those prices are available, although active markets do not exist for many types of financial instruments. Fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with FASB Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.

The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were held for trading purposes) as of March 31, 2015:

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

	March 31, 2015
	Carrying amount			Level 1 inputs			Level 2 inputs			Level 3 inputs
Financial assets:
Cash and due from banks	$	186,701		$	186,701		$	—		$	—
Securities available for sale	1,214,404			—			1,214,404			—
Securities held to maturity	585,633			—			605,144			—
Portfolio loans, net	4,896,022			—			—			4,962,567
Loans held for sale	53,737			—			53,737			—
Accrued interest receivable on securities	9,720			—			9,720			—
Accrued interest receivable on loans	11,647			—			—			11,647
FHLB stock and Federal Reserve Bank stock	68,864			—			—			—
Swaps	1,874			—			1,874			—
Financial liabilities:
Non-maturity deposits	(5,053,661		)	(5,053,661		)	—			—
Certificates of deposit	(502,285		)	—			(502,792		)	—
FHLB borrowings	(857,138		)	—			(873,912		)	—
Other borrowings	(25,245		)	—			(25,245		)	—
Senior notes	(98,595		)				(101,487		)
Mortgage escrow funds	(5,805		)	—			(5,805		)	—
Accrued interest payable on deposits	(208		)	—			(208		)	—
Accrued interest payable on borrowings	(2,904		)	—			(2,904		)	—
Swaps	(1,874		)	—			(1,874		)	—

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

The following is a summary of the carrying amounts and estimated fair value of financial assets and liabilities (none of which were held for trading purposes) as of December 31, 2014:

	December 31, 2014
	Carrying amount			Level 1 inputs			Level 2 inputs			Level 3 inputs
Financial assets:
Cash and due from banks	$	121,520		$	121,520		$	—		$	—
Securities available for sale	1,140,846			—			1,140,846			—
Securities held to maturity	572,337			—			586,346			—
Portfolio loans, net	4,773,267			—			—			4,783,508
Loans held for sale	46,599			—			46,599			—
Accrued interest receivable on securities	7,742			—			7,742			—
Accrued interest receivable on loans	11,559			—			—			11,559
FHLB stock and Federal Reserve Bank stock	75,437			—			—			—
Interest rate caps and swaps	1,332			—			1,332			—
Financial liabilities:
Non-maturity deposits	(4,731,481		)	(4,731,481		)	—			—
Certificates of deposit	(480,844		)	—			(480,621		)	—
FHLB borrowings	(1,003,209		)	—			(1,019,690		)	—
Other borrowings	(9,846		)	—			(9,846		)	—
Senior Notes	(98,498		)				(100,769		)
Mortgage escrow funds	(4,167		)	—			(4,167		)	—
Accrued interest payable on deposits	(329		)	—			(329		)	—
Accrued interest payable on borrowings	(4,354		)	—			(4,354		)	—
Interest rate caps and swaps	(1,332		)	—			(1,332		)	—

The following paragraphs summarize the principal methods and assumptions used by the Company to estimate the fair value of the Company’s financial instruments:

Loans

The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.

FHLB of New York Stock and Federal Reserve Bank Stock

The redeemable carrying amount of these securities with limited marketability approximates their fair value.

Deposits and Mortgage Escrow Funds

In accordance with FASB Codification Topic 825, deposits with no stated maturity (such as demand, money market and saving deposits) are assigned fair values equal to the carrying amounts payable on demand. Certificates of deposit and mortgage escrow funds are segregated by account type and original term, and fair values are estimated by discounting the contractual cash flows. The discount rate for each account grouping is equivalent to the current market rates for deposits of similar type and maturity.

These fair values do not include the value of core deposit relationships that comprise a significant portion of the Company’s deposits. We believe that the Company’s core deposit relationships provide a relatively stable, low-cost funding source that has a substantial value separate from the deposit balances.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

FHLB Borrowings, other borrowings and Senior notes

The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments.

Other Financial Instruments

Other financial assets and liabilities listed in the table above have estimated fair values that approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.

The fair values of the Company’s off-balance-sheet financial instruments described in the “Off-Balance Sheet Financial Instruments” section of Note 15. “Commitments and Contingencies” were estimated based on current market terms (including interest rates and fees), considering the remaining terms of the agreements and the credit worthiness of the counterparties. At March 31, 2015 and December 31, 2014, the estimated fair value of these instruments approximated the related carrying amounts, which were not material.

Accrued interest receivable/payable

The carrying amounts of accrued interest approximate fair value and are classified in accordance with the related instrument.

(17) Recently Issued Accounting Standards Not Yet Adopted

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is currently effective for us on January 1, 2017; however, the FASB recently decided to propose deferring the effective date by one year which would make ASU 2014-09 effective for us on January 1, 2018. We are currently evaluating the potential impact of ASU 2014-09 on our financial statements.

ASU 2014-11, “Transfers and Servicing (Topic 860).” ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 became effective for us on January 1, 2015 and did not have a significant impact on our financial statements. The new disclosures required by ASU 2014-11 are in Note 7. “Borrowings and Senior Notes”.

ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. As permitted, we adopted ASU 2015-01 effective January 1, 2015 and its adoption did not have a significant impact on our financial statements.

ASU 2015-02, “Consolidation (Topic 810) – Amendments to the Consolidation Analysis.” ASU 2015-02 implements changes to both the variable interest consolidation model and the voting interest consolidation model. ASU 2015-02 (i) eliminates certain criteria that must be met when determining when fees paid to a decision maker or service provider do not represent a variable interest, (ii) amends the criteria for determining whether a limited partnership is a variable interest entity and (iii)  eliminates the presumption that a general partner controls a limited partnership in the voting model. ASU 2015-02 will be effective for us on January 1, 2016 and is not expected to have a significant impact on our financial statements.

ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance

41

for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 will be effective for us on January 1, 2016, though early adoption is permitted. ASU 2015-03 is not expected to have a significant impact on our financial statements.

ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 will be effective for us on January 1, 2016 and is not expected to have a significant impact on our financial statements.

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(18) Accumulated Other Comprehensive (Loss) Income

Components of accumulated other comprehensive (loss) income (“AOCI”) were as follows as of the dates shown below:

	March 31,			December 31,
	2015			2014
Net unrealized holding gain on available for sale securities	$	11,099		$	2,256
Related income tax (expense)	(4,717		)	(959		)
Available for sale securities AOCI, net of tax	6,382			1,297
Net unrealized holding loss on securities transferred to held to maturity	(8,099		)	(8,638		)
Related income tax benefit	3,442			3,671
Securities transferred to held to maturity AOCI, net of tax	(4,657		)	(4,967		)
Net unrealized holding loss on retirement plans	(11,242		)	(11,445		)
Related income tax benefit	4,778			4,864
Retirement plans AOCI, net of tax	(6,464		)	(6,581		)
Accumulated other comprehensive loss	$	(4,739	)	$	(10,251	)

The following table presents the changes in each component of accumulated other comprehensive income for the three months ended March 31, 2015 and 2014:

	Net unrealized holding gain (loss) on AFS securities			Net unrealized holding gain (loss) on securities transferred to held to maturity			Net unrealized holding gain (loss) on retirement plans			Total
Three months ended March 31, 2015
Balance beginning of the period	$	1,297		$	(4,967	)	$	(6,581	)	$	(10,251	)
Other comprehensive gain before reclassification	4,203			—			—			4,203
Amounts reclassified from AOCI	882			310			117			1,309
Total other comprehensive income	5,085			310			117			5,512
Balance at end of period	$	6,382		$	(4,657	)	$	(6,464	)	$	(4,739	)
Three months ended March 31, 2014
Balance beginning of the period	$	(11,395	)	$	(5,659	)	$	(2,411	)	$	(19,465	)
Other comprehensive gain before reclassification	5,713			—			—			5,713
Amounts reclassified from AOCI	35			180			(748		)	(533		)
Total other comprehensive income (loss)	5,748			180			(748		)	5,180
Balance at end of period	$	(5,647	)	$	(5,479	)	$	(3,159	)	$	(14,285	)
Location in statement of operations where reclassification from AOCI is included	Net gain (loss) on sale of securities			Interest income on securities			Compensation and benefits expense

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Notes to Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

(19) Subsequent Events

Merger with Hudson Valley Holding Corp.

On November 5, 2014, the Company announced it had entered into a definitive merger agreement with Hudson Valley Holding Corp. (NYSE: HVB). In the merger, which is a stock-for-stock transaction valued at approximately $541,444 based on the closing price of Sterling common stock on November 4, 2014, Hudson Valley Holding Corp. shareholders will receive a fixed ratio of 1.92 shares of Sterling common stock for each share of Hudson Valley Holding Corp. common stock. Upon closing, Sterling shareholders will own approximately 70% of stock in the combined company and Hudson Valley Holding Corp. shareholders will own approximately 30%. On a pro forma combined basis, for the three months ended March 31, 2015, the companies had revenue of $150,751 and $24,964 in net income. Upon completion of the merger, the combined company is expected to have $11,169,815 in total assets, $6,868,469 in total portfolio loans, and total deposits of $8,414,758.

On April 30, 2015, the Company filed Amendment No. 3 to its registration statement on Form S-4, that included historical and pro forma information regarding Hudson Valley Holding Corp. and the Company, which is required in connection with the merger.

On April 28, 2015, the stockholders of Sterling Bancorp approved the merger. On April 30, 2015, the stockholders of Hudson Valley Holding Corp. also approved the merger. The merger also requires approvals from the Federal Reserve and the Office of the Comptroller of the Currency; management currently anticipates the transaction will be consummated in the second quarter of 2015.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

We make statements in this report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other financial, business or strategic matters regarding or affecting Sterling that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “target,” “estimate,” “forecast,” “project” by future conditional verbs such as “will,” “should,” “would,” “could” or “may,” or by variations of such words or by similar expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of management and the information available to management at the time that these disclosures were prepared.

Forward-looking statements are subject to numerous assumptions, risks (both known and unknown) and uncertainties, and other factors which change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Because forward-looking statements are subject to assumptions, risks, uncertainties, and other factors actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from our historical performance.

The factors described in our Transition Report on Form 10-K filed March 6, 2015 under Item 1A, Risk Factors, or otherwise described in our filings with the Securities and Exchange Commission, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations expressed in our forward-looking statements, including but not limited to:

• our Company’s ability to successfully implement growth, expense reduction and other strategic initiatives and to integrate and fully realize cost savings and other benefits we estimate in connection with acquisitions generally;

• a deterioration in general economic conditions, either nationally, internationally, or in our market areas, including extended declines in the real estate market and constrained financial markets;

• the possibility that the benefits anticipated from the HVB Merger will not be fully realized, the possibility the HVB Merger may not close, and other risks in connection with the proposed transaction and integration of Hudson Valley;

• we anticipate that as a result of the HVB Merger the Bank’s total assets will exceed $10 billion, which will make the Bank subject to regulatory oversight by the Consumer Financial Protection Bureau (“CFPB”); the Bank will also become subject to provisions of the Durbin Amendment which will impact the Bank’s debit card interchange fees;

• our use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; and

• our success at managing the risks involved in the foregoing and managing our business.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

The following commentary presents management’s discussion and analysis of financial condition and results of operations and is intended to assist the reader in understanding our financial condition and results of operations. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes included in Part I, Item 1 of this report and with our audited consolidated financial statements and the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2014 Transition Report on Form 10-K, filed with SEC on March 6, 2015. Operating results discussed herein are not necessarily indicative of the results of any future period. Tax-equivalent adjustments are the result of increasing income from tax-exempt securities by an amount equal to the federal taxes that would be paid if the income were fully taxable based on a 35.0% marginal effective income tax rate.

Overview and Management Strategy

Sterling and its principal subsidiary, the Bank, specializes in the delivery of service and solutions to business owners, their families and consumers within the communities we serve through teams of dedicated and experienced relationship managers. The Bank offers a complete line of commercial, business and consumer banking products and services. Our financial condition and results of operations are discussed herein on a consolidated basis with the Bank and certain other subsidiaries. References to we, us, or the Company may signify the Bank, depending on the context.

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We focus our efforts on generating core deposit relationships, and originating high quality commercial and industrial, commercial real estate, residential mortgage and other consumer loans mainly for our held-for-investment portfolio. We also utilize excess funding to purchase and hold investment securities. Our ability to gather low cost, core deposits allows us to compete for, and originate loans at an interest rate spread over our cost of funding and generate attractive risk-adjusted returns. Our strategic objectives include generating sustainable growth in revenues and earnings by increasing new client acquisitions, expanding existing client relationships, improving asset quality and increasing operating efficiency. To achieve these goals, we are focusing on specific target markets, which include small and middle market commercial clients and consumers, expanding our delivery and distribution channels; creating a high productivity performance culture; controlling our operating costs and proactively managing enterprise risk. Our goal is to create a full service commercial bank that achieves top-tier performance on return on equity, return on assets and earnings per share.

The Bank targets the following geographic markets: the New York Metro Market, which includes Manhattan, the boroughs and Long Island; and the New York Suburban Market, which consists of Rockland, Orange, Sullivan, Ulster, Putnam, Westchester and other counties in New York and Bergen County and other counties in northern New Jersey. Our specialty lending businesses, which include asset-based lending, factoring, payroll finance, equipment finance, residential mortgage warehouse lending, residential mortgage banking and municipal finance also generate loans and deposits in other markets across the United States. We believe the Bank operates in an attractive footprint that presents us with significant opportunities to execute our strategy. Based on data from Oxxford Information Technology, we estimate the total number of small-to-middle market businesses in our immediate footprint exceeds 550,000.

As of March 31, 2015,  the Company had 21 commercial relationship teams and 32 financial centers. During the three months ended March 31, 2015, the Company continued its financial center consolidation strategy and exited two locations. The Company intends to re-allocate capital and resources from these consolidations to continue executing its differentiated, single point of contact distribution strategy to our core target of small and middle market commercial and consumer clients. We anticipate we will continue to grow our number of commercial relationship teams by 3 - 5 teams annually and will continue to reduce our financial center locations through additional consolidations.

Recent Developments

On February 11, 2015, the Company issued 6,900,000 shares of its $0.01 par value common stock to institutional investors at $13.00 per share. The offering was made pursuant to a Registration Statement on Form S-3 filed with the Securities and Exchange Commission on February 4, 2015. The Company received proceeds net of underwriting discounts, commissions and expenses of $85.1 million. The net proceeds will be used for general corporate purposes and the funding of potential acquisitions of specialty commercial lending businesses, including the acquisition of Damian Services Corporation (the “Damian Acquisition”), a payroll finance services provider, which closed on February 27, 2015.

On April 28, 2015, our stockholders voted to approve our pending merger (the “HVB Merger”) with Hudson Valley Holding Corp. (“Hudson Valley”). The HVB Merger is consistent with our strategy of expanding in the greater New York metropolitan region and beyond and building a diversified company with significant commercial and consumer banking capabilities. We believe the HVB Merger will create a larger, more efficient and more profitable bank by combining our differentiated team-based distribution channels with Hudson Valley’s strong presence and deposit base in Westchester County. We anticipate that the HVB Merger will allow us to accelerate loan growth, increase our ability to gather low cost core deposits and generate substantial cost savings and revenue enhancement opportunities.

Results in the quarter ended March 31, 2015 reflect the ongoing execution of our strategy and the positive impact the Provident Merger integration has had on our operating efficiency. During the quarter, our core operating efficiency ratio was 56.4%, which represented an improvement of 504 basis points relative to the quarter ended March 31, 2014. We anticipate we will continue to identify and execute additional operating efficiencies related to the Provident Merger and will be able to achieve the anticipated operating efficiencies in the HVB Merger.

Critical Accounting Policies

Our accounting and reporting policies are prepared in accordance with GAAP and conform to general practices within the banking industry. Accounting policies considered critical to our financial results include the allowance for loan losses, accounting for goodwill and other intangible assets, accounting for deferred income taxes and the recognition of interest income.

Allowance for Loan Losses. The methodology for determining the allowance for loan losses is considered by the Company to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. We evaluate our loans at least quarterly, review their risk components, the carrying value of loans as a part of that evaluation and the

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STERLING BANCORP AND SUBSIDIARIES

allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

Business Combinations. The Company accounts for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.

Goodwill, Trade Names and Other Intangible Assets. The Company accounts for goodwill, trade names and other intangible assets in accordance with GAAP, which, in general, requires that goodwill and trade names not be amortized, but rather that they be tested for impairment at least annually. The Company assesses qualitative factors to determine whether it is more likely than not (i.e., a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances (e.g., macroeconomic conditions, industry and market considerations, overall financial performance and other relevant Company-specific events). If, after assessing the totality of events or circumstances such as those described above, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. Testing for impairment of goodwill, trade names and other intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

We also use judgment in the valuation of other intangible assets. A core deposit base intangible asset has been recorded for core deposits (defined as checking, money market and savings deposits) that were acquired in acquisitions that were accounted for as purchase business combinations. The core deposit base intangible asset has been recorded using the assumption that the acquired deposits provide a more favorable source of funding than more expensive wholesale borrowings. An intangible asset has been recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. If we find these deposits have a shorter life than was estimated, we will write down the asset by expensing the amount that is impaired.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.

Interest income. Interest income on loans, securities and other interest-earning assets is accrued monthly unless the Company considers the collection of interest to be doubtful. Loans are placed on non-accrual status upon the earlier of (i) when payments are contractually past due 90 days or more, or (ii) when we have determined that the borrower is unlikely to meet contractual principal or interest obligations, unless the assets are well secured and in the process of collection. At such time, unpaid interest is reversed by charging interest income for interest in the current fiscal year or the allowance for loan losses with respect to prior year income. Interest payments received on non-accrual loans (including impaired loans) are not recognized as income unless future collections are reasonably assured. Loans are returned to accrual status when collectability is no longer considered doubtful. Loans the Company acquired in mergers are initially recorded at fair value which involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. The Company continues to evaluate reasonableness of expectations for the timing and amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired.

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Selected financial condition data, income statement data, per share data, performance ratios, capital ratios, and asset quality data and ratios for the comparable periods was as follows:

	At or for the three months ended March 31,
	2015		2014
	(Dollars in thousands)
Selected financial condition data:
Period end:
Total assets	$	7,727,515	$	6,924,419
Loans, net (3)	4,896,022		4,212,339
Securities available for sale	1,214,404		1,233,310
Securities held to maturity	585,633		527,265
Deposits	5,555,946		5,211,724
Borrowings	980,978		634,516
Stockholders’ equity	1,080,543		936,466
Average:
Total assets	$	7,438,314	$	6,747,546
Loans, net (3)	4,806,766		4,042,702
Securities available for sale	1,172,422		1,201,681
Securities held to maturity	575,765		509,327
Deposits	5,350,287		5,059,019
Borrowings	955,677		660,486
Stockholders’ equity	1,031,809		934,304
Selected income statement data:
Interest and dividend income	$	66,672	$	61,325
Interest expense	7,805		7,297
Net interest income	58,867		54,028
Provision for loan losses	2,100		4,800
Net interest income after provision for loan losses	56,767		49,228
Non-interest income	14,010		12,415
Non-interest expense	45,921		46,723
Income before income tax expense	24,856		14,920
Income tax expense	8,078		4,588
Net income	$	16,778	$	10,332
Per share data:
Basic earnings per share	$	0.19	$	0.12
Diluted earnings per share	0.19		0.12
Dividends declared per share	0.07		0.07
Tangible book value per share	6.89		5.97
Common shares outstanding:
Weighted average shares basic	87,839,029		83,497,765
Weighted average shares diluted	88,252,768		83,794,107

_________________________

See legend on the following page.

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STERLING BANCORP AND SUBSIDIARIES

	At or for the three months ended March 31,
	2015			2014
	(Dollars in thousands)
Performance ratios:
Return on average assets	0.91		%	0.62		%
Return on average equity	6.6			4.5
Net interest margin (1)	3.64			3.76
Core operating efficiency ratio(2)	56.4			61.4
Capital ratios (Company):
Equity to total assets at end of period	13.98		%	13.52		%
Average equity to average assets	13.87			13.85
Common equity Tier 1 to risk-weighted assets (“RWA”)	11.67			—
Tier 1 capital to RWA	11.67			11.14
Total capital to RWA	12.42			11.80
Tier 1 leverage ratio	9.55			8.72
Capital ratios (Bank):
Common equity Tier 1 to RWA	12.92		%	—		%
Tier 1 capital to RWA	12.92			12.63
Total capital to RWA	13.68			13.29
Tier 1 leverage ratio	10.53			9.83
Asset quality data and ratios:
Allowance for loan losses	$	42,884		$	32,015
Non-performing loans (“NPLs”)	46,448			60,271
Non-performing assets (“NPAs”)	54,679			69,546
Net charge-offs	1,590			3,397
NPAs to total assets	0.71		%	1.00		%
NPLs to total loans (3)	0.94			1.42
Allowance for loan losses to non-performing loans	92			53
Allowance for loan losses to total loans (3)	0.87			0.75
Net charge-offs to average loans	0.13			0.34

_________________________

(1) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. Net interest income is commonly presented on a tax-equivalent basis. This is to the extent that some component of the institution’s net interest income will be exempt from taxation (e.g., was received as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios.

(2) The core operating efficiency ratio is a non-GAAP measure and is reconciled on page 60.

(3) Excludes loans held for sale.

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STERLING BANCORP AND SUBSIDIARIES

Results of Operations

The Company reported net income of $16.8 million, or $0.19 per diluted common share for the three months ended March 31, 2015, compared to net income of $10.3 million, or $0.12 per common share in the same period a year ago.

The table below summarizes the Company’s results of operations on a tax-equivalent basis. Tax equivalent adjustments are the result of increasing income from tax-free securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.

Selected income statement data, return on average assets, return on average common equity and dividends per common share for the comparable periods follow:

	For the three months ended
	March 31,
	2015			2014
	(Dollars in thousands)
Tax equivalent net interest income	$	60,411		$	55,468
Less tax equivalent adjustment	(1,544		)	(1,440		)
Net interest income	58,867			54,028
Provision for loan losses	2,100			4,800
Non-interest income	14,010			12,415
Non-interest expense	45,921			46,723
Income before income tax expense	24,856			14,920
Income tax expense	8,078			4,588
Net income	$	16,778		$	10,332
Earnings per common share - basic	$	0.19		$	0.12
Earnings per common share - diluted	0.19			0.12
Dividends per common share	0.07			0.07
Return on average assets	0.91		%	0.62		%
Return on average equity	6.9			4.5
Average equity to average assets	13.87			13.85

Details of the changes in the various components of net income are further discussed below:

Net Interest Income is the the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company’s largest source of revenue, representing 80.8% and 81.3% of total revenue in the three months ended March 31, 2015 and 2014, respectively. Net interest margin is the ratio of taxable equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest bearing liabilities impact net interest income and net interest margin.

The Company is primarily funded by core deposits, and non-interest bearing demand deposits are a significant source of our funding. This low cost funding base has had a positive impact on the Company’s net interest income and net interest margin and is expected to do so in a rising interest rate environment.

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

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	For the three months ended March 31,
	2015								2014
	Average balance			Interest			Yield/Rate		Average balance			Interest			Yield/Rate
	(Dollars in thousands)
Interest earning assets:
Commercial loans	$	4,074,841		$	47,755		4.75	%	$	3,299,705		$	42,254		5.19	%
Consumer loans	200,504			2,111			4.27	%	199,834			2,168			4.40	%
Residential mortgage loans	531,422			5,405			4.12	%	543,163			5,890			4.40	%
Total net loans (1)	4,806,767			55,271			4.66	%	4,042,702			50,312			5.05	%
Securities taxable	1,379,861			7,632			2.24	%	1,386,538			7,573			2.22	%
Securities non-taxable	368,326			4,411			4.86	%	324,470			4,114			5.14	%
Interest earning deposits	113,152			40			0.14	%	183,397			121			0.27	%
FRB and FHLB Stock	68,316			862			5.12	%	47,947			645			5.46	%
Total securities and other earning assets	1,929,655			12,945			2.72	%	1,942,352			12,453			2.60	%
Total interest earning assets	6,736,422			68,216			4.11	%	5,985,054			62,765			4.25	%
Non-interest earning assets	701,892								762,492
Total assets	$	7,438,314							$	6,747,546
Interest bearing liabilities:
Demand deposits	$	775,714		$	140		0.07	%	$	761,409		$	158		0.08	%
Savings deposits (2)	766,448			302			0.16	%	613,131			211			0.14	%
Money market deposits	1,851,839			2,019			0.44	%	1,461,774			1,405			0.39	%
Certificates of deposit	452,594			630			0.56	%	582,580			620			0.43	%
Total interest bearing deposits	3,846,595			3,091			0.33	%	3,418,894			2,394			0.28	%
Senior notes	98,532			1,472			5.98	%	98,155			1,466			5.97	%
Other borrowings	857,145			3,242			2.00	%	562,331			3,437			2.48	%
Total interest bearing liabilities	4,802,272			7,805			0.66	%	4,079,380			7,297			0.73	%
Non-interest bearing deposits	1,503,692								1,640,125
Other non-interest bearing liabilities	100,541								93,737
Total liabilities	6,406,505								5,813,242
Stockholders’ equity	1,031,809								934,304
Total liabilities and stockholders’ equity	$	7,438,314							$	6,747,546
Net interest rate spread (3)							3.45	%							3.52	%
Net interest earning assets (4)	$	1,934,150							$	1,905,674
Net interest margin				60,411			3.64	%				55,468			3.76	%
Less tax equivalent adjustment				(1,544		)						(1,440		)
Net interest income				$	58,867							$	54,028
Ratio of interest earning assets to interest bearing liabilities	140.3		%						146.7		%

____________________________________________

(1) Includes the effect of net deferred loan origination fees and costs, allowance for loan losses, and non-accrual loans. Includes prepayment fees and late charges.

(2) Includes club accounts and interest bearing mortgage escrow balances.

(3) Net interest rate spread represents the difference between the tax equivalent yield on average interest earning assets and the cost of average interest bearing liabilities.

(4) Net interest earning assets represents total interest earning assets less total interest bearing liabilities.

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The following table presents the dollar amount of changes in interest income (on a fully tax equivalent basis) and interest expense for the major categories of our interest earning assets and interest bearing liabilities. Information is provided for each category of interest earning assets and interest bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

	For the three months ended March 31,
	2015 vs. 2014
	Increase (Decrease) due to						Total increase
	Volume			Rate			(decrease)
	(Dollars in thousands)
Interest earning assets:
Commercial loans	$	9,377		$	(3,876	)	$	5,501
Consumer loans	7			(64		)	(57		)
Residential mortgage loans	(123		)	(362		)	(485		)
Securities taxable	(28		)	87			59
Securities tax exempt	535			(238		)	297
Interest earning deposits	(36		)	(45		)	(81		)
FRB and FHLB Stock	261			(44		)	217
Total interest earning assets	9,993			(4,542		)	5,451
Interest bearing liabilities:
Interest bearing demand deposits	3			(21		)	(18		)
Savings deposits	57			34			91
Money market deposits	414			200			614
Certificates of deposit	(157		)	167			10
Senior notes	11			(5		)	6
Other borrowings	1,158			(1,353		)	(195		)
Total interest bearing liabilities	1,486			(978		)	508
Less tax equivalent adjustment	188			(84		)	104
Change in net interest income	$	8,319		$	(3,480	)	$	4,839

Tax equivalent net interest income increased $4.9 million to $60.4 million for the three months ended March 31, 2015 compared to

$55.5 million for the three months ended March 31, 2014. The increase was the result of an increase in average loan and deposit balances due to organic growth generated by our commercial banking teams. The average volume of interest earning assets increased $751.4 million, or 12.6% for the three months ended March 31, 2015 relative to the comparable year earlier period. The tax equivalent net interest margin decreased 12 basis points to 3.64% for the quarter from 3.76% in the first quarter of 2014. The decrease in net interest margin was mainly due to a decrease in the yield on interest earning assets, which was 4.11% in the three months ended March 31, 2015 compared to 4.25% in the three months ended March 31, 2014. The cost of interest bearing liabilities declined to 0.66% for the three months ended March 31, 2015 compared to 0.73% for the three months ended March 31, 2014.

The average balance of loans outstanding increased $764.1 million, or 18.9% in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. Over the past 12 months, the Company has sold approximately $85.0 million in residential mortgage loans that were previously held for investment as the Company is repositioning its earning assets composition in anticipation of the HVB merger. Loans accounted for 71.4% of average interest earning assets in the three months ended March 31, 2015 compared to 67.5% in the comparable year ago period. The average yield on loans was 4.66% in the first quarter of 2015 compared to 5.05% in the comparable period a year ago. Accretion on loans from prior acquisitions was $926 thousand and $3.0 million in the three months ended March 31, 2015 and 2014, respectively.

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Tax equivalent interest income on securities increased $356 thousand, to $12.0 million in the three months ended March 31, 2015 compared to $11.7 million for the three months ended March 31, 2014. This was mainly the result of an increase of approximately $37.2 million in the average balance of securities. The tax equivalent yield on securities was 2.79% in the first quarter of 2015 compared to 2.77% in the first quarter of 2014. The increase in tax equivalent yield on securities in 2015 was mainly due to an increase in the proportion of tax exempt securities to total securities which comprised 21.1% of average securities in the first quarter of 2015 compared to 19.0% in the first quarter of 2014.

Average deposits increased $291.3 million and were $5.4 billion in the three months ended March 31, 2015 compared to $5.1 billion for the three months ended March 31, 2014. Average interest bearing deposits increased $427.7 million in the first quarter of 2015 compared to the first quarter of 2014. Average non-interest bearing deposits decreased $136.4 million and were $1.5 billion for the three months ended March 31, 2015 compared to $1.6 billion for the three months ended March 31, 2014. The average cost of interest bearing deposits was 0.33% in the first quarter of 2015 compared to 0.28% in the first quarter of 2014. The average cost of total deposits was 0.23% in the first quarter of 2015 compared to 0.19% in the first quarter of 2014.

Average borrowings increased $295.2 million to $955.7 million in the three months ended March 31, 2015 compared to $660.5 million in the same period a year ago. The increase in average borrowings in 2015 was used to fund growth in earning assets. The average cost of borrowings was 2.00% for the first quarter of 2015 compared to 3.01% in the first quarter of 2014. The decline in the average cost of borrowings between the periods was mainly due to an increase in short-term FHLB borrowings as a percentage of total average borrowings.

Provision for Loan Losses. The provision for loan losses is determined by the Company as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level that is the Company’s best estimate of probable incurred credit losses inherent in the outstanding loan portfolio. In the three months ended March 31, 2015 and March 31, 2014, the provision for loan losses was $2.1 million and $4.8 million, respectively. The level of provision for the quarter ended March 31, 2014 was impacted by the Provident Merger and the volume of loans that became subject to the Company’s allowance for loan losses. See the section captioned “Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets - Provision for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.

Non-interest income. The components of non-interest income were as follows:

	For the three months ended
	March 31,
	2015		2014
	(Dollars in thousands)
Accounts receivable management / factoring commissions and other related fees	$	3,502	$	3,500
Mortgage banking income	3,157		2,383
Deposit fees and service charges	3,622		3,904
Net gain on sale of securities	1,534		60
Bank owned life insurance	1,076		542
Investment management fees	360		729
Other	759		1,297
Total non-interest income	$	14,010	$	12,415

Non-interest income was $14.0 million for the three months ended March 31, 2015 compared to $12.4 million in the same period a year ago. Included in non-interest income is net gain on sale of securities which were $1.5 million and $60 thousand for the three months ended March 31, 2015 and 2014, respectively. Net gain on sale of securities is impacted significantly by changes in market interest rates and strategies we use to manage liquidity and interest rate risk. Excluding net gain on sale of securities, non-interest income was $12.5 million for the first quarter of 2015 compared to $12.4 million for the first quarter of 2014. The main drivers of growth between the first quarter of 2014 and 2015 were an increase in mortgage banking income and an increase in the cash surrender value of bank owned life insurance. These increases were offset by decreases in deposit fees and service charges and investment management fees. Our goal is to grow non-interest income excluding securities gains to over 20% of net interest income plus non-interest income excluding securities gains. This ratio was 17.5% for the first quarter of 2015 compared to 18.6% for the same period in 2014.

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Accounts receivable management / factoring commissions and other related fees represents fees generated in our factoring and payroll finance businesses. In factoring, we receive a nonrefundable factoring fee, which is generally a percentage of the factored receivables or sales volume and is designed to compensate us for the bookkeeping and collection services provided and, if applicable, the credit review of the client’s customer and assumption of customer credit risk. In payroll finance, we provide outsourcing support services for clients in the temporary staffing industry. We generate fee income in exchange for providing full back-office, payroll, tax and accounting services to independently-owned temporary staffing companies. Accounts receivable management / factoring commissions and other related fees were $3.5 million for first quarter of 2015 and 2014.

Mortgage banking income represents residential mortgage banking and mortgage brokerage business conducted through loan production offices located principally in New York City and through our financial centers. The Provident Merger substantially increased our mortgage banking volume; mortgage banking revenue was $3.2 million in the first quarter of 2015 compared to $2.4 million in the first quarter of 2014. Mortgage origination volumes increased mainly due to increased refinancing activity given decreases in the level of market interest rates. In the first quarter of 2015, the Company sold $44.0 million of residential mortgage loans with the objective of rebalancing the Company’s earning assets in anticipation of teh HVB Merger. These loans were previously held for investment and recorded a gain on sale of approximately $390 thousand.

Deposit fees and service charges were $3.6 million for the first quarter of 2015, which represents a 7.2% decrease compared to $3.9 million for the same period a year ago. Revenues from deposit fees have lagged the growth rate in average deposit balances we experienced as a result of the Provident Merger and organic deposit growth. This is the result of a shift in the mix of our deposit balances to a greater proportion of commercial deposits versus retail deposits, as deposits gathered by our commercial banking teams are generally higher balance deposits but generate lower levels of fees and service charges than retail deposits.

Net gain on sale of securities income represents the profits earned from sale of securities from our available for sale investment securities portfolio. In the first quarter of 2015 the Company sold several securities with the objective of repositioning its investment securities portfolio in anticipation of the HVB Merger; the Company realized a net gain on sale of the securities given the decrease in market interest rates during the quarter.

Bank owned life insurance (“BOLI”) income represents the change in the cash surrender value of life insurance policies owned by the Bank. BOLI income was $1.1 million for the first quarter of 2015 compared to $542 thousand in the same period a year ago. The increase in BOLI income between the two periods was mainly due to a purchase of BOLI of approximately $30 million in October 2014.

Investment management fees principally represent fees from the sale of mutual funds and annuities and were $360 thousand in the first quarter of 2015 compared to $729 thousand in the first quarter of 2014. We have recently re-branded our investment management fee products and have been transitioning the delivery of our investment management business through new distribution channels.

Other non-interest income principally includes loan servicing revenues, miscellaneous loan fees earned, letter of credit fees and title insurance revenues. Other non-interest income declined $538 thousand to $759 thousand for the first calendar quarter of 2015 compared to $1.3 million for the same period a year ago. The decrease was mainly due to a decrease in title insurance revenues.

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Non-interest expense. The components of non-interest expense were as follows:

	Three months ended
	March 31,
	2015			2014
	(Dollars in thousands)
Compensation and employee benefits	$	23,165		$	25,263
Stock-based compensation plans	1,109			927
Occupancy and office operations	6,580			7,254
Amortization of intangible assets	1,399			2,511
FDIC insurance and regulatory assessments	1,428			1,567
Other real estate owned (gain) expense	(37		)	61
Merger-related expense	2,455			388
Other	9,822			8,752
Total non-interest expense	$	45,921		$	46,723

Non-interest expense for the first quarter of 2015 was $45.9 million, a $0.8 million decrease compared to $46.7 million for the first quarter of 2014. The changes in the individual components of non-interest expense are discussed below.

Compensation and employee benefits expense was $23.2 million for the first quarter of 2015 compared to $25.3 million for the first quarter of 2014. We had 921 full time equivalent employees (“FTE”) at March 31, 2014 compared to 840 FTE at March 31, 2015. The decline in the total number of personnel between the periods was the result of the successful integration of the Provident Merger, and was impacted by the addition of 31 FTE resulting from the Damian Acquisition, which was completed on February 27, 2015.

Stock-based compensation plan expense was $1.1 million in the first quarter of 2015 compared to $927 thousand in the first quarter of 2014. The increase in 2015 compared to 2014 was mainly due to the increase in personnel and stock awards granted in connection with the Provident Merger. For additional information related to the Company’s employee benefit plans and stock-based compensation, see Note 10. “Stock-Based Compensation” in the consolidated financial statements included elsewhere in this report.

Occupancy and office operations expense was $6.6 million in the first quarter of 2015 compared to $7.3 million in the first quarter of 2014. The decrease between the periods was mainly due to a reduction in the total number of facilities as a result of the consolidation of several financial centers and back office locations and a decrease in software maintenance expense due to the change to our new core banking systems provider.

Amortization of intangible assets mainly includes amortization of core deposit intangible assets, customer lists and non-compete agreements. Amortization of intangible assets was $1.4 million in the three months ended March 31, 2015 and was $2.5 million in the three months ended March 31, 2014. During the three months ended March 31, 2014, amortization of the Provident Merger non-compete agreements was $1.5 million compared to $540 thousand for the three months ended March 31, 2015. In addition, core deposit intangible asset amortization declined from $1.0 million for the three months ended March 31, 2014 to $789 thousand for the three months ended March 31, 2015. Partially offsetting these declines was amortization related to the customer list acquired in the Damian Acquisition, which was $99 thousand for the period. See Note 5. “Goodwill and Other Intangible Assets” in the Consolidated Financial Statements included elsewhere in this Report.

FDIC insurance and regulatory assessments expense was $1.4 million for the first quarter of 2015 compared to $1.6 million for the first quarter of 2014.

Other real estate owned (“OREO”) expense includes maintenance costs, taxes, insurance, write-downs (subsequent to any write-down at the time of foreclosure or transfer to OREO), and gains and losses from the disposition of OREO. OREO includes real estate assets that have been foreclosed and financial center locations that are held for sale. The net OREO benefit was $37 thousand for the three months ended March 31, 2015 compared to OREO expense of $61 thousand in the three months ended March 31, 2014.

Merger-related expense was $2.5 million in the first quarter of 2015 compared to $388 thousand in the first quarter of 2014. In the first quarter of 2015 we incurred $1.8 million in charges for legal fees, severance and retention, and fixed asset impairments associated with

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the Damian Acquisition. We also incurred approximately $660 thousand of charges associated with the pending HVB Merger, which consisted mainly of professional fees and severance compensation.

Other non-interest expense for the three months ended March 31, 2015 was $9.8 million compared to $8.8 million for the three months ended March 31, 2014. See Note 12, “Other Non-Interest Expense” in the Consolidated Financial Statements for a listing of the significant components. The increase was mainly caused by an increase in professional fees and data processing expenses. The increase in data processing expense was a result of the commencement of a data processing contract with our new core banking systems provider.

Income Tax expense was $8.1 million for the three months ended March 31, 2015 compared to income tax expense of $4.6 million for the three months ended March 31, 2014, which represented an effective income tax rate of 32.5% and 30.8%, respectively. The effective income tax rates differed from the 35% federal statutory rate during the periods primarily due to the effect of tax exempt income from securities and BOLI income.

Portfolio Loans

The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the periods indicated.

	March 31,					December 31,
	2015					2014
	Amount			%		Amount			%
	(Dollars in thousands)
Commercial:
Commercial & industrial (“C&I”)	$	1,191,717		24.1	%	$	1,244,555		25.8	%
Payroll finance	181,687			3.7		154,229			3.2
Warehouse lending	241,434			4.9		173,786			3.6
Factored receivables	152,354			3.1		161,625			3.4
Equipment finance	465,250			9.4		411,449			8.5
Total commercial	2,232,442			45.2		2,145,644			44.5
Commercial mortgage:
Commercial real estate	1,531,066			31.0		1,458,277			30.3
Multi-family	385,871			7.8		384,544			8.0
Acquisition, development & construction	95,567			1.9		96,995			2.0
Total commercial mortgage	2,012,504			40.7		1,939,816			40.3
Residential mortgage	494,106			10.1		529,766			11.0
Consumer	199,854			4.0		200,415			4.2
Total portfolio loans	4,938,906			100.0	%	4,815,641			100.0	%
Allowance for loan losses	(42,884		)			(42,374		)
Total portfolio loans, net	$	4,896,022				$	4,773,267

Overview. Net total loans increased $122.8 million to $4.9 billion at March 31, 2015, compared to $4.8 billion at December 31, 2014. At March 31, 2015, commercial loans comprised 45.2% of the loan portfolio compared to 44.5% at December 31, 2014. Commercial mortgage loans comprised 40.7% and 40.3% of the loan portfolio at March 31, 2015 and December 31, 2014, respectively.

Commercial loans increased $86.8 million, or 4.0%, during the first quarter of 2015. The main drivers of commercial loan growth were the equipment finance and warehouse lending businesses. Higher residential mortgage refinancing volume due to the lower interest rate environment in the first quarter of 2015 benefited warehouse lending balances which increased by 38.9% over the prior quarter end.

C&I loans and factored receivables declined in the first quarter of 2015 due mainly to seasonal factors, which impact origination volumes and outstanding balances in these businesses. The Company acquired approximately $22.3 million of payroll finance receivables in connection with the Damian Acquisition.

Residential mortgage loans declined $35.7 million to $494.1 million at March 31, 2015 compared to $529.8 million at December 31, 2014 as we sold $44.0 million of residential mortgage loans that were previously held for investment. These loans were sold with the objective of rebalancing our earning assets in anticipation of the HVB Merger.

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Delinquent Loans, Troubled Debt Restructuring, Impaired Loans, Other Real Estate Owned and Classified Assets

Past Due, Non-Performing Loans, Non-Performing Assets (Risk Elements). The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

	March 31,			December 31,
	2015			2014
	(Dollars in thousands)
Non-accrual loans:
Commercial & industrial	$	4,720		$	4,975
Payroll finance	52			—
Factored receivables	245			244
Equipment finance	310			240
Commercial real estate	10,537			11,286
Multi-family	87			272
Acquisition, development & construction	6,413			6,413
Residential mortgage	16,399			16,259
Consumer	6,713			6,170
Accruing loans past due 90 days or more	972			783
Total non-performing loans	46,448			46,642
OREO	8,231			5,867
Total non-performing assets	$	54,679		$	52,509
TDRs accruing and not included above	$	17,663		$	17,261
Ratios:
Non-performing loans to total loans	0.94		%	0.97		%
Non-performing assets to total assets	0.71			0.71

Nonperforming assets include non-accrual loans, accruing loans past due 90 days or more and OREO. At March 31, 2015, non-accrual loans were $45.5 million and loans 90 days past due and still accruing interest which were well secured and in the process of collection were $972 thousand. Non-accrual loans declined $383 thousand from December 31, 2014 due to collections, charge-offs and transfer to OREO. Loans past due 90 days or more and still accruing increased $189 thousand. Total non-performing loans (“NPLs”) declined $194 thousand at March 31, 2015 to $46.4 million compared to $46.6 million at December 31, 2014.

TDRs. The Company has formally modified loans to certain borrowers who experienced financial difficulty. If the terms of the modification include a concession, as defined by GAAP, the loan is considered a troubled debt restructuring (“TDR”), which is also considered an impaired loan. Nearly all of these loans are secured by real estate. Total TDRs were $28.5 million at March 31, 2015, of which $10.8 million were non-accrual and $17.7 million were performing according to terms and accruing interest income. TDRs still accruing interest income are loans modified for borrowers that have experienced financial difficulties but are performing in accordance with the terms of their loan prior to the modification. Loan modification concessions may include actions such as extension of maturity date or the lowering of interest rates and monthly payments. As of March 31, 2015, there were no commitments to lend additional funds to borrowers with loans that have been modified.

OREO. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO until such time as it is sold. In addition, financial centers that were closed or consolidated due to the Provident Merger that are held for sale are also classified as OREO. When real estate is transfered to OREO, it is recorded at fair value less costs to sell. If the fair value less cost to sell is less than the loan balance, the difference is charged against the allowance for loan losses. If the fair value of a financial center that we hold for sale is less than its prior carrying value, we recognize a charge included in other operating expense to reduce the recorded value of the investment to fair value, less costs to sell. At March 31, 2015, we had 28 OREO properties with a recorded balance of $8.2 million. After transfer to OREO, we regularly update the fair value of the property. Subsequent declines in fair value are charged to current earnings and included in other non-interest expense as part of OREO expense.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality such as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as

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“doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted and are charged-off. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as “special mention”. As of March 31, 2015, we had $26.1 million of assets designated as “special mention”.

Our determination as to the classification of our assets and the amount of our loan loss allowance are subject to review by our regulators, which can order the establishment of an additional valuation allowance. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at March 31, 2015, classified assets consisted of loans of $74.3 million and OREO of $8.2 million.

Allowance for Loan Losses.

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries, loan documentation exceptions among other factors. See Note 4. “Portfolio Loans” in the notes to Consolidated Financial Statements included elsewhere in this report for further information regarding the allowance for loan losses.

The allowance for loan losses increased from $42.4 million at December 31, 2014 to $42.9 million at March 31, 2015, as the provision for loan losses exceeded net charge-offs by $510 thousand. The allowance for loan losses at March 31, 2015 represented 92.3% of non-performing loans and 0.87% of the total loan portfolio. At December 31, 2014, the allowance for loan losses represented 90.8% of non-performing loans and 0.88% of the total loan portfolio.

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (excluding loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

	March 31, 2015						December 31, 2014
	Allowance for loan losses		Loan balance		% of total loans		Allowance for loan losses		Loan balance		% of total loans
	(Dollars in thousands)
Commercial & industrial	$	10,686	$	1,191,717	24.1	%	$	11,027	$	1,244,555	25.8	%
Payroll finance	1,900		181,687		3.7		1,506		154,229		3.2
Warehouse lending	859		241,434		4.9		608		173,786		3.6
Factored receivables	1,172		152,354		3.1		1,205		161,625		3.4
Equipment finance	2,691		465,250		9.4		2,569		411,449		8.5
Commercial real estate	11,093		1,531,066		31.0		10,121		1,458,277		30.3
Multi-family	2,290		385,871		7.8		2,111		384,544		8.0
Acquisition, development & construction	2,716		95,567		1.9		2,987		96,995		2.0
Residential mortgage	5,127		494,106		10.1		5,843		529,766		11.0
Consumer	4,350		199,854		4.0		4,397		200,415		4.2
Total	$	42,884	$	4,938,906	100.0	%	$	42,374	$	4,815,641	100.0	%

Impaired Loans. A loan is impaired when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loan values are based on one of three measures: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is less than its recorded investment, the Bank’s practice is to write-down the

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STERLING BANCORP AND SUBSIDIARIES

loan against the allowance for loan losses so the recorded investment matches the impaired value of the loan. Impaired loans generally include a portion of non-performing loans and accruing and performing TDR loans. At March 31, 2015, we had $29.3 million in impaired loans compared to $31.0 million at December 31, 2014. The decline between March 31, 2015 and December 31, 2014 consisted mainly of a decrease in impaired loan balances in CRE and C&I loan categories. Impaired CRE loans declined $1.2 million mainly due to the transfer to OREO of one property. Impaired C&I loans declined by $461 thousand mainly due to one loan in which collateral was liquidated and applied to the principal balance of the loan.

Purchased Credit Impaired Loans. We acquired $13.2 million of loans in the Provident Merger that were classified as purchased credit impaired loans. Net of the fair value adjustment, at December 31, 2014, the net balance of these loans was $3.4 million and at March 31, 2015, the net balance was $2.9 million.

Provision for Loan Losses. We recorded $2.1 million in loan loss provision for the three months ended March 31, 2015 compared to $4.8 million for the three months ended March 31, 2014. Net charge-offs for the three months ended March 31, 2015 were $1.6 million, or 0.13% of average loans on an annualized basis, compared to net charge-offs of $3.4 million, or 0.34% of average loans on an annualized basis for the three months ended March 31, 2014.

Changes in Financial Condition between March 31, 2015 and December 31, 2014

Total assets increased $302.7 million, or 4.1%, to $7.7 billion at March 31, 2015, compared to $7.4 billion at December 31, 2014. This increase was mainly due to the following:

• Total portfolio loans increased by $123.3 million, or 2.6%, (or 10.4% on an annualized basis) to $4.9 billion at March 31, 2015, compared to $4.8 billion at December 31, 2014. In addition to organic growth, portfolio loans increased approximately $22.3 million as a result of the Damian Acquisition. Also in the three months ended March 31, 2015, we sold $44.0 million of residential loans that were previously held for investment.

• Total investment securities increased by $86.9 million, or 5.1%, to $1.8 billion at March 31, 2015, compared to $1.7 billion at December 31, 2014.

• Cash and cash equivalents increased by $65.2 million to $186.7 million at March 31, 2015, compared to $121.5 million at December 31, 2014.

Total liabilities increased $197.4 million, or 3.06%, to $6.6 billion at March 31, 2015, compared to $6.4 billion at December 31, 2014. This increase was mainly due to the following:

• Total deposits increased $343.6 million, or 6.6%, to $5.6 billion at March 31, 2015, compared to $5.2 billion at December 31, 2014. Our retail, commercial and municipal transaction, money market and savings accounts were $5.0 billion, which represented 89.2% of our total deposit balances.

• FHLB borrowings declined $146.1 million, to $857.1 million at March 31, 2015, compared to $1.0 billion at December 31, 2014.

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Supplemental Reporting of Non-GAAP Financial Measures

Results for the first quarter of 2015 were impacted by pre-tax charges of $4.1 million that were mainly incurred in connection with the Damian Acquisition, the pending acquisition of Hudson Valley, the consolidation of our financial centers and amortization of non-compete agreements. Excluding the impact of these items, and net gain on sale of securities and related income tax impact, net income was $18.5 million, or $0.21 per diluted share.

The following tables show the reconciliation of the tangible equity ratio, core net income, core earnings per share, and core operating efficiency ratio for the periods presented. The Company provides this supplemental reporting of non-GAAP financial measures as management believes this information is useful to investors.

	As of March 31,
	2015			2014
The following table shows the reconciliation of stockholders’ equity to tangible equity and the tangible equity ratio:
Total assets	$	7,727,515		$	6,924,419
Goodwill and other intangibles	(452,698		)	(437,727		)
Tangible assets	7,274,817			6,486,692
Stockholders’ equity	1,080,543			936,466
Goodwill and other intangibles	(452,698		)	(437,727		)
Tangible stockholders’ equity	627,845			498,739
Common stock outstanding at period end	91,121,531			83,544,307
Tangible equity as a % of tangible assets	8.63		%	7.69		%
Tangible book value per share	$	6.89		$	5.97
The Company believes that tangible equity is useful as a tool to help assess the Company’s capital position.

	For the three months ended March 31,
	2015			2014
The following table shows the reconciliation of core net income and core earnings per share:
Income before income tax expense	$	24,856		$	14,920
Income tax expense	8,078			4,588
Net income	16,778			10,332
Net gain on sale of securities	(1,534		)	(60		)
Merger-related expense	2,455			388
Charge for asset write-downs, banking systems conversion, retention and severance	971			678
Charge on benefit plan settlement	—			1,486
Amortization of non-compete agreements and acquired customer lists	660			1,497
Total charges	2,552			3,989
Income tax benefit	(829		)	(1,227		)
Total non-core charges net of taxes	1,723			2,762
Core net income	$	18,501		$	13,094
Weighted average diluted shares	88,252,768			83,794,107
Diluted EPS as reported	$	0.19		$	0.12
Core diluted EPS (excluding total charges)	0.21			0.16
The Company believes the presentation of its core net income and core earnings per shared is useful to help assess the Company’s profitability.

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	For the three months ended March 31,
	2015			2014
The following table shows the reconciliation of the core operating efficiency ratio:
Net interest income	$	58,867		$	54,028
Non-interest income	14,010			12,415
Total net revenue	72,877			66,443
Tax equivalent adjustment on securities interest income	1,544			1,440
Net gain on sale of securities	(1,534		)	(60		)
Core total revenue	72,887			67,823
Non-interest expense	45,921			46,723
Merger-related expense	(2,455		)	(388		)
Charge for asset write-downs, banking systems conversion, retention and severance	(971		)	(678		)
Charge on benefit plan settlement	—			(1,486		)
Amortization of intangible assets	(1,399		)	(2,511		)
Core non-interest expense	41,096			41,660
Core operating efficiency ratio	56.4		%	61.4		%
The Company believes the core operating efficiency ratio is useful to help assess the Company’s core operating performance.

Liquidity and Capital Resources

Capital. The Company’s stockholders’ equity was $1.1 billion at March 31, 2015, an increase of $105.3 million relative to December 31, 2014. The increase was mainly the result of a common equity raise of $89.7 million (gross proceeds), which the Company completed in February 2015. The increase was also due to net income of $16.8 million, an increase in other comprehensive income of $5.5 million and stock option exercises and stock-based compensation of $3.9 million. These increases were partially offset by dividends declared of $5.9 million.

The Company paid a $0.07 dividend per common share in the first quarter of 2015 and the Board of Directors declared a dividend of $0.07 per common share on April 29, 2015 which is payable May 21, 2015 to our holders as of the record date of May 11, 2015.

On February 11, 2015, the Company completed a public offering of 6.9 million shares of common stock at an offering price of $13.00 per share for gross proceeds of approximately $89.7 million, and net proceeds, after underwriting discounts, commissions and other costs of issuance of $85.1 million. The net proceeds from the offering were contributed as equity capital to the Bank; the use of proceeds is intended for general corporate purposes including the acquisition of commercial specialty lending businesses. The Company used a portion of the proceeds of the offering to fund the Damian Acquisition.

Basel III Capital Rules. In July 2013, the Company’s primary federal regulators published final rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules are discussed in the Requirement Section in Note 14. “Stockholders’ Equity” in the Consolidated Financial Statements”

Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of the Company’s liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company’s operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. The Company seeks to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on the Company’s balance sheet. The Company’s liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets.

Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale, cash flow from securities held to maturity and maturities of securities held to maturity.

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STERLING BANCORP AND SUBSIDIARIES

Our ability to access liabilities in a timely fashion is provided by access to funding sources which include core deposits, federal funds purchased and repurchase agreements. The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in the Company’s asset/liability management process. The Company regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic activity, volatility in the financial markets, unexpected credit events or other significant occurrences. These scenarios are incorporated into the Company’s contingency funding plan, which provides the basis for the identification of the Company’s liquidity needs. As of March 31, 2015, management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, including the Basel III liquidity framework, which, if implemented, would have a material adverse effect on the Company.

At March 31, 2015, the Bank had $186.6 million in cash on hand and unused borrowing capacity at the FHLB of $507.3 million. In addition, the Bank may purchase additional federal funds from other institutions and enter into additional repurchase agreements.

The Company is a bank holding company and does not conduct operations. Its primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. At March 31, 2015, the Bank had capacity to pay up to $46.0 million of dividends to the Company. At March 31, 2015, the Company had cash on hand of $18.2 million, and $15.0 million available under a revolving line of credit facility.

In September 2014, the Company entered into a $15.0 million revolving line of credit facility with a third-party financial institution that matures on September 5, 2015. The use of proceeds are for general corporate purposes. The facility has not been used and requires the Company and the Bank to maintain certain ratios related to capital, non-performing assets to capital, reserves to non-performing loans and debt service coverage. The Company and the Bank were in compliance with all requirements at March 31, 2015.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Management believes that our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to limit the exposure of our net interest income to changes in market interest rates. The Bank’s Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment, and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. A committee of the Board reviews ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.

We actively evaluate interest rate risk in connection with our lending, investing, and deposit activities. We emphasize the origination of commercial real estate loans, commercial & industrial loans, residential fixed-rate mortgage loans that are repaid monthly and bi-weekly, and adjustable-rate residential and consumer loans. Depending on market interest rates and our capital and liquidity position, we may retain all of the fixed-rate, fixed-term residential mortgage loans that we originate or we may sell or securitize all, or a portion of such longer-term loans, generally on a servicing-released basis. We also invest in shorter term securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities may help us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments.

Management monitors interest rate sensitivity primarily through the use of a model that simulates net interest income (“NII”) under varying interest rate assumptions. Management also evaluates this sensitivity using a model that estimates the change in the Company’s and the Bank’s economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The model assumes estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem reasonable, based on historical experience during prior interest rate changes.

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Estimated Changes in EVE and NII. The table below sets forth, as of March 31, 2015, the estimated changes in our (1) EVE that would result from the designated instantaneous changes in the forward rate curves, and (2) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied on as indicative of actual results.

Interest rates	Estimated		Estimated change in EVE					Estimated		Estimated change in NII
(basis points)	EVE		Amount			Percent		NII		Amount			Percent
	(Dollars in thousands)
+300	$	955,138	$	(33,235	)	(3.4	)%	$	278,935	$	32,600		13.2	%
+200	975,788		(12,585		)	(1.3	)	268,316		21,981			8.9
+100	988,982		609			0.1		257,113		10,778			4.4
0	988,373		—			—		246,335		—			—
-100	953,733		(34,640		)	(3.5	)	227,671		(18,664		)	(7.6	)

The table above indicates that at March 31, 2015, in the event of an immediate 200 basis point increase in interest rates, we would expect to experience a (1.3)% decrease in EVE and a 8.9% increase in NII. Due to the current level of interest rates, management is unable to reasonably model the impact of decreases in interest rates on EVE and NII beyond -100 basis points.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and NII require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The EVE and NII table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the re-pricing characteristics of specific assets and liabilities. Accordingly, although the EVE and NII table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes that market interest rates may have on our net interest income. Actual results will likely differ.

During the first quarter of 2015, the federal funds target rate remained in a range of 0.00 - 0.25% as the Federal Open Market Committee (“FOMC”) did not change the target overnight lending rate. U.S. Treasury yields in the two year maturities decreased 11 basis points from 0.67% to 0.56% in the three months ended March 31, 2015 while the yield on U.S. Treasury 10-year notes decreased 23 basis points from 2.17% to 1.94% over the same three month period. The decrease in rates on longer-term maturities coupled with the smaller decrease in rates on the short-term maturities resulted in a flatter 2-10 year treasury yield curve at March 31, 2015 relative to December 31, 2014. During the first quarter of 2015, the FOMC reaffirmed its view that the current 0.00 - 0.25% target range for federal funds remains appropriate. However, the FOMC did change its forward guidance stating that this change does not indicate that the FOMC has decided on the timing of the initial increase in the target range.

Item 4. Controls and Procedures

The Company’s management, including the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in our reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is: (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls 

There were no changes in the Company’s internal controls over financial reporting during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II

Item 1. Legal Proceedings

The “Litigation” section of Note 15. “Commitments and Contingencies” in the Consolidated Financial Statements included in Part I, Item 1 is incorporated herein by reference.

Item 1A. Risk Factors

For information regarding factors that could affect our business, results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A of our Transition Report on Form 10-K filed March 6, 2015. There has been no material change in those risk factors.

The risks described in our Transition Report on Form 10-K are not the only risks that we encounter. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, results of operations, financial condition and/or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosure

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

Exhibit Number	Description
31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Calculation Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

Sterling Bancorp

Date:	May 8, 2015	By:	/s/ Jack Kopnisky
			Jack Kopnisky
			President, Chief Executive Officer and Director
			(Principal Executive Officer)
Date:	May 8, 2015	By:	/s/ Luis Massiani
			Luis Massiani
			Senior Executive Vice President and Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)

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