The following commentary presents management's discussion and analysis of the financial condition and results of operations of Sterling Bancorp (the "parent company"), a financial holding company under the Gramm-Leach-Bliley Act of 1999, and its subsidiaries, principally Sterling National Bank. Throughout this discussion and analysis, the term the "Company" refers to Sterling Bancorp and its subsidiaries and the term the "bank" refers to Sterling National Bank and its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and supplemental data contained elsewhere in this quarterly report and the Company's annual report on Form 10-K for the year ended December 31, 2008. Certain reclassifications have been made to prior years' financial data to conform to current financial statement presentations.

OVERVIEW

The Company provides a broad range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, factoring/accounts receivable management services, deposit services, trade financing, equipment leasing, trust and estate administration and investment management services. The Company has operations in the New York metropolitan area and conducts business throughout the United States. The general state of the U.S. economy and, in particular, economic and market conditions in the metropolitan New York area have a significant impact on loan demand, the ability of borrowers to repay these loans and the value of any collateral securing these loans and may also affect deposit levels. Accordingly, future general economic conditions are a key uncertainty that management expects will materially affect the Company's results of operations.

For the nine months ended September 30, 2009, the bank's average earning assets represented approximately 97.7% of the Company's average earning assets. Loans represented 61.1% and investment securities represented 36.8% of the bank's average earning assets for the first nine months of 2009.

The Company's primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Company is not able to predict market interest rate fluctuations, and its asset-liability management strategy may not prevent interest rate changes from having a material adverse effect on the Company's results of operations and financial condition.

Although management endeavors to minimize the credit risk inherent in the Company's loan portfolio, it must necessarily make various assumptions and judgments about the collectibility of the loan portfolio based on its experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for loan losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income.

There is intense competition in all areas in which the Company conducts its business. The Company competes with banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions. Many of these competitors have substantially greater resources and lending limits and provide a wider array of banking services. To a limited extent, the Company also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. Competition is based on a number of factors, including prices, interest rates, service, availability of products and geographic location.

INCOME STATEMENT ANALYSIS

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company's primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders' equity. Net interest spread is the difference between the average rate earned, on a tax-equivalent basis, on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets ("net interest margin") is calculated by dividing tax-equivalent net interest income by average interest-earning assets. Generally, the net interest margin will exceed the net interest spread because a portion of interest-earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders' equity. The increases (decreases) in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are provided in the Rate/Volume Analysis shown on pages 47 and 48. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown on pages 45 and 46.

Comparison of the Three Months Ended September 30, 2009 and 2008

The Company reported net income available to common shareholders for the three months ended September 30, 2009 of $1.8 million, representing $0.10 per share calculated on a diluted basis, compared to $3.8 million, or $0.21 per share calculated on a diluted basis, for the third quarter of 2008. The $2.0 million decrease in net income available to common shareholders was primarily due to a $5.0 million increase in the provision for loans losses, a $1.5 million increase in noninterest expenses and a $0.6 million increase in dividends and accretion related to the preferred shares issued to the U.S. Treasury under the TARP Capital Purchase Program, which more than offset a $4.5 million increase in noninterest income, a $0.3 million increase in net interest income and a lower provision for income taxes.

Net Interest Income
Net interest income, on a tax-equivalent basis, was $22.3 million for the third quarter of 2009 compared to $21.8 million for the 2008 period. Net interest income benefitted from higher average loan balances, lower interest-bearing deposit balances and lower cost of funding. Partially offsetting those benefits was the impact of lower yields on loans and investment securities, lower investment securities outstanding and higher borrowed funds balances. The net interest margin, on a tax-equivalent basis, was 4.53% for the third quarter of 2009 compared to 4.46% for the 2008 period. The net interest margin was impacted by the lower interest rate environment in 2009, the higher level of noninterest-bearing demand deposits and the effect of higher average loans outstanding.

Interest earned on the loan portfolio decreased to $18.0 million for the third quarter of 2009 from $20.4 million in the prior year period. Average loan balances amounted to $1,189.0 million, an increase of $16.3 million from an average of $1,172.7 million in the prior year period. The increase in average loans, primarily due to the Company's business development activities, accounted for a $0.2 million increase in interest earned on loans. The decrease in the yield on the loan portfolio to 6.25% for the third quarter of 2009 from 6.99% for the 2008 period was primarily attributable to the lower interest rate environment in 2009 and the mix of average outstanding balances among the components of the loan portfolio.

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $8.8 million for the third quarter of 2009 from $9.5 million in the prior year period. Average outstandings decreased to $726.9 million (36.8% of average earning assets) for the third quarter of 2009 from $755.4 million (38.8% of average earning assets) in the prior year period. The decrease reflects the impact of the Company's asset/liability management strategy designed to shorten the average life of the portfolio. The average life of the securities portfolio was approximately 4.6 years at September 30, 2009 compared to 7.1 years at September 30, 2008. The average yield in the investment securities portfolio decreased to 4.87% from 5.01% reflecting the impact of the above referenced asset/liability management strategy coupled with calls of higher yielding securities.

Total interest expense decreased by $3.5 million for the third quarter of 2009 from $8.3 million for the 2008 period, primarily due to the impact of lower rates paid for interest-bearing deposits and borrowings and lower interest-bearing deposits.

Interest expense on deposits decreased to $2.8 million for the third quarter of 2009 from $5.1 million for the 2008 period, due to decreases in the cost of those funds and lower balances. The average rate paid on interest-bearing deposits was 1.23%, which was 84 basis points lower than the prior year period. The decrease in average cost of deposits reflects the lower interest rate environment during 2009. Average interest-bearing deposits were $903.9 million for the third quarter of 2009 compared to $976.7 million for the prior year period, reflecting the Company's strategy to reduce reliance on higher-priced deposits.

Interest expense on borrowings decreased to $1.9 million for the third quarter of 2009 from $3.2 million for the 2008 period, primarily due to lower rates paid for borrowed funds coupled with the benefit (reflected in the volume change) derived from the elimination of funding through dealer repurchase agreements and short-term Federal Home Loan Bank borrowings partially offset by increased short-term borrowings from the Federal Reserve Bank (reflected in the volume change). The average rate paid for borrowed funds was 1.58%, which was 107 basis points lower than the prior year period. The decrease in the average cost of borrowings reflects the lower interest rate environment in 2009. Average borrowings increased to $490.8 million for the third quarter of 2009 from $482.4 million in the prior year period, reflecting greater reliance by the Company on wholesale funding.

Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed under "Asset Quality" on page 38), the provision for loan losses for the third quarter of 2009 was $7.0 million, compared to $2.0 million for the prior year period. Factors affecting the larger provision for the third quarter of 2009 included further deterioration of economic conditions during the quarter, a $4.3 million increase in net charge-offs, a $13.0 million increase in nonaccrual loans and growth in the loan portfolio.

Noninterest Income
Noninterest income increased to $11.7 million for the third quarter of 2009 from $7.2 million in the 2008 period. The increase principally resulted from the benefit derived from securities gains recognized in the 2009 third quarter compared to securities losses recognized in the 2008 period. Also contributing to the increase were higher income related to accounts receivable management and factoring services, higher mortgage banking income and higher service charges on deposit accounts. In connection with an asset liability management program designed to reduce the average life of the investment securities portfolio, the Company sold in the third quarter approximately $82 million of securities with a weighted average life of approximately 3 years at a gain of $1.2 million. The Company expects to reinvest a significant portion of the proceeds in securities with an average life of less than two years. The 2008 amount was reduced by an other-than-temporary impairment charge for a debt security. The charge, which resulted from management's regular review of the valuation of the investment portfolio, amounted to approximately $1.2 million and reduced the carrying amount of the security to $2.6 million. Commissions and other fees earned from accounts receivable management and factoring services were higher primarily due to the impact of the acquisition of the business of DCD Finance Inc. on April 6, 2009. Partially offsetting that benefit was the impact of reduced volume of billing by clients providing temporary staffing. The increase in mortgage banking income was due to higher volume of loans sold.

Noninterest Expenses
Noninterest expenses for the third quarter of 2009 increased $1.5 million when compared to the 2008 period. The increase was primarily due to the impact of the acquisition of the business of DCD Finance Inc. on April 6, 2009 and higher deposit insurance and pension costs. Partially offsetting those increases was a reduction in professional fees. The increase in deposit insurance cost was primarily due to the significant increase in quarterly FDIC premium rates. On September 29, 2009, the FDIC amended its plan for returning the Deposit Insurance Fund ("DIF") to its statutorily mandated minimum reserve ratio within eight years by, among other things, increasing assessment rates by a uniform three basis points effective January 1, 2011. In conjunction with the amended plan, the FDIC proposed a rule that would require insured institutions to prepay their estimated quarterly assessments through December 31, 2012 to strengthen the cash position of the DIF. The proposed rule would require the cash prepayment on December 30, 2009. The bank estimates that its prepayment would be approximately $8.0 million.

Provision for Income Taxes
The provision for income taxes for the third quarter of 2009 decreased to $1.2 million from $1.5 million for the third quarter of 2008. The decrease was primarily due to the lower level of pre-tax income in the 2009 period.

Comparison of the Nine Months Ended September 30, 2009 and 2008

The Company reported net income available to common shareholders for the nine months ended September 30, 2009 of $4.7 million, representing $0.26 per share calculated on a diluted basis, compared to $12.0 million, or $0.66 per share calculated on a diluted basis, for the first nine months of 2008. The $7.3 million decrease in net income available to common shareholders was primarily due to a $13.9 million increase in the provision for loan losses, a $4.4 million increase in noninterest expenses and a $2.1 million increase in dividends and accretion related to the preferred shares issued to the U.S. Treasury under the TARP Capital Purchase Program, which more than offset a $8.9 million increase in noninterest income, a $1.6 million increase in net interest income and a lower provision for income taxes.

Net Interest Income
Net interest income, on a tax-equivalent basis, was $65.4 million for the first nine months of 2009 compared to $63.4 million for the 2008 period. Net interest income benefitted from higher average loan balances, lower interest-bearing deposit balances and lower cost of funding. Partially offsetting those benefits was the impact of lower yield on loans and investment securities, lower investment securities balances and higher borrowed funds balances. The net interest margin, on a tax-equivalent basis, was 4.58% for the first nine months of 2009 compared to 4.53% for the 2008 period. The net interest margin was impacted by the lower interest rate environment in 2009, the lower level of noninterest-bearing demand deposits and the effect of higher average loans outstanding.

Total interest income, on a tax-equivalent basis, aggregated $80.2 million for the first nine months of 2009, down $9.6 million from the 2008 period. The tax-equivalent yield on interest-earning assets was 5.64% for the first nine months of 2009 compared to 6.45% for the 2008 period.

Interest earned on the loan portfolio decreased to $53.8 million for the first nine months of 2009 from $61.2 million for the prior year period. Average loan balances amounted to $1,185.0 million, an increase of $54.7 million from an average of $1,130.3 million in the prior year period. The increase in average loans, primarily due to the Company's business development activities, accounted for a $2.7 million increase in interest earned on loans. The yield on the loan portfolio decreased to 6.32% for the first nine months of 2009 from 7.46% for the 2008 period, which was primarily attributable to the lower interest rate environment in 2009 and the mix of average outstanding balances among the components of the loan portfolio.

Total interest expense decreased by $11.6 million for the first nine months of 2009 from $26.5 million for the 2008 period, primarily due to the impact of lower rates paid for interest-bearing deposits and borrowings and lower interest-bearing deposit balances.

Interest expense on deposits decreased to $9.1 million for the first nine months of 2009 from $17.1 million for the 2008 period, primarily due to a decrease in the cost of those funds. The average rate paid on interest-bearing deposits was 1.35%, which was 96 basis points lower than the prior year period. The decrease in average cost of deposits reflects the lower interest rate environment during 2009. Average interest-bearing deposits were $902.4 million for the first nine months of 2009 compared to $990.8 million for the prior year period, reflecting the Company's strategy to reduce reliance on higher-priced certificates of deposit.

Interest expense on borrowings decreased to $5.8 million for the first nine months of 2009 from $9.3 million for the 2008 period, primarily due to lower rates paid for borrowed funds coupled with the benefit (reflected in the volume change) derived from the elimination of funding through dealer repurchase agreements partially offset by increased short-term borrowings from the Federal Reserve Bank (reflected in the volume change). The average rate paid for borrowed funds was 1.60%, which was 135 basis points lower than the prior year period. The decrease in the average cost of borrowings reflects the lower interest rate environment in 2009. Average borrowings increased to $482.9 million for the first nine months of 2009 from $421.8 million in the prior year period, reflecting greater reliance by the Company on wholesale funding.

Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed under "Asset Quality" on page 38), the provision for loan losses for the first nine months of 2009 was $20.0 million, compared to $6.1 million for the prior year period. Factors affecting the larger provision for the first nine months of 2009 included further deterioration of economic conditions during that period, a $11.8 million increase in net charge-offs, a $13.0 million increase in nonaccrual loans and growth in the loan portfolio.

Noninterest Income
Noninterest income increased to $33.3 million for the first nine months of 2009 from $24.5 million in the 2008 period. The increase principally resulted from securities gains recognized in the 2009 period compared to securities losses recognized in the 2008 period. Also contributing to the increase were higher income related to accounts receivable management and factoring services, higher mortgage banking income, and higher service charges on deposit accounts. In connection with an asset liability management program designed to reduce the average life of the investment securities portfolio, the Company sold approximately $206 million of securities with a weighted average life of approximately 3.5 years. The Company expects to reinvest a significant portion of the proceeds in securities with an average life of less than two years. The 2008 amount was reduced by other-than-temporary impairment charges which resulted from management's regular review of the investment portfolio. One charge, taken in the second quarter of 2008 for a single-issuer, investment grade trust preferred security, amounted to approximately $0.5 million and reduced the carrying amount of the security to $0.5 million. A second charge, taken in the third quarter of 2008 for a debt security, amounted to approximately $1.2 million and reduced the carrying amount of the security to $2.6 million. Commissions and other fees earned from accounts receivable management and factoring services were higher primarily due to the impact of the acquisition of the business of DCD Finance Inc. on April 6, 2009. Partially offsetting that benefit was the impact of reduced volume of billing by clients providing temporary staffing. The increase in mortgage banking income was due to higher volume of loans sold.

Noninterest Expenses
Noninterest expenses for the first nine months of 2009 increased $4.4 million when compared to the 2008 period. The increase was primarily due to the impact of the acquisition of the business of DCD Finance Inc. on April 6, 2009 and higher deposit insurance and pension costs.

The increase in deposit insurance cost was due to a special assessment levied in the 2009 second quarter by the FDIC on all insured depository institutions totaling 5 basis points of each institution's total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. The special assessment is part of the FDIC's effort to rebuild the DIF. Deposit insurance expense during the nine months ended September 30, 2009 included a $1.0 million accrual related to the special assessment. Also contributing to the increase in deposit insurance costs was the significant increase in quarterly FDIC premium rates. On September 29, 2009, the FDIC amended its plan for rebuilding the DIF. Under the amended plan, the FDIC increased assessment rates by a uniform three basis points effective January 1, 2011 and will not impose additional special assessments in 2009. In conjunction with the amended plan, the FDIC proposed a rule that would require insured institutions to prepay the cash position of the DIF. The proposed rule would require the cash prepayment on December 30, 2009. The bank estimates that its prepayment would be approximately $8.0 million.

The increase in pension expense was primarily the result of weaker return on plan assets during 2008. The Company's defined benefit retirement plan was closed to new members effective as of January 3, 2007. There have been no new participants in the Company's SERP. The defined benefit plan was replaced by an enhanced 401(k) contribution for new employees. The Company still has funding obligations related to the defined benefit retirement and SERP plans and will recognize retirement expense related to these plans in future years, which will be dependent on the return earned on plan assets, the level of interest rates, salary increases, employee turnover and other factors.

Provision for Income Taxes
The provision for income taxes for the first nine months of 2009 decreased to $3.9 million from $6.5 million for the first nine months of 2008. The decrease was primarily due to the lower level of pre-tax income in the 2009 period.

Securities
At September 30, 2009, the Company's portfolio of securities totaled $722.6 million, of which obligations of U.S. government corporations and government-sponsored enterprises amounted to $502.3 million, (69.5% of total investment securities), corporate debt securities amounted to $147.7 million (20.4% of total investment securities) and obligations of states and political securities amounted to $67.1 million (9.3% of total investment securities). The Company has the intent and ability to hold to maturity securities classified as "held to maturity". These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. The gross unrealized gains and losses on "held to maturity" securities were $12.5 million and $0.3 million, respectively. Securities classified as "available for sale" may be sold in the future, prior to maturity. These securities are carried at estimated fair value. Net aggregate unrealized gains or losses on these securities are included in a valuation allowance account and are shown net of taxes, as a component of shareholders' equity. Given the generally high credit quality of the portfolio, management expects to realize all of its investment upon market recovery or the maturity of such instruments and thus believes that any impairment in value is interest rate related and therefore temporary. "Available for sale" securities included gross unrealized gains of $5.3 million and gross unrealized losses of $1.4 million. After reviewing all investment securities the Company holds in order to determine if the decline in the fair value of any security appears to be other-than-temporary, management expects to realize all of its investment upon the maturity of such instruments and, thus, believes that any fair value impairment is temporary. Management has made an evaluation it is not more likely than not that the Company would be required to sell before anticipated recovery of the full carrying value of its investment.

In connection with an asset liability management program designed to reduce the average life of the investment securities portfolio, the Company sold approximately $206 million of securities with a weighted average life of approximately 3.5 years during the first nine months of 2009. The Company expects to reinvest a significant portion of the proceeds in securities with an average life of less than two years.

The following table presents information regarding the average life and yields of certain available for sale ("AFS") and held to maturity ("HTM") securities:

                                                   Weighted Average Life           Weighted Average Yield
. . .