Sterling Bancorp
Annual Report 2011

Plain-text annual report

Sterling Bancorp Sterling national Bank 2011 ANNuAl RepoRt St r e ngt h. P er for m a nc e. oPP ort u nit y. Sterling National Bank branch located at 622 third Avenue, New York, New York. Co R p o R At e p Ro F I l e Sterling Bancorp (NYSE: STL) is a New York City-based financial corporation with assets of $2.5 billion. Since 1929, Sterling National Bank, the Company’s principal banking subsidiary, has successfully served the needs of businesses, professionals and individuals in the NY metropolitan area and beyond. Sterling is well-known for its high-touch, hands-on approach to customer service and a special focus on serving the business community. Sterling provides clients with a full range of depository and cash management services and a broad portfolio of financing solutions—including working capital lines, accounts receivable and inventory financing, factoring, trade financing, payroll funding and processing, equipment financing, commercial and residential mortgages and mortgage warehouse lines of credit. A M E SS AG E FRO M O U R CH A I R M A N A N D P R E SI D EN T Strength, performance and opportunity are the key factors that powered Sterling’s progress in 2011—and are driving our prospects for the future. During the past year, we demonstrated strength by significantly increasing profits and expanding our capital foundation. Our results were distinguished by solid performance, reflected in growth Sterling has grown and prospered through volatile market cycles due to strategic plans that have positioned the Company well for the challenges and opportunities of a changing financial landscape. across virtually every area of the business and sound asset quality. We continued to build on the opportunity presented by our focused business strategy and reputation for provid- ing exceptional service in a dynamic market: the New York metropolitan area and beyond. billion Business Growth and Capital Strength Sterling experienced robust growth in 2011, as our longtime commitment to meeting the financial needs of our clients and customers led to expanding relationships and market share gains. Loans in portfolio rose 12% from the prior year to nearly $1.5 billion. Our loan volume benefitted from solid demand for our range of financial products and services, including our traditional offerings as well as our more recently introduced mortgage warehouse finance product. Deposits grew 14% to about $2.0 billion, largely reflecting million million the growth in our business relationships. Noninterest-bearing demand deposits, a cost- effective funding source, increased significantly and represented 39% of total deposits at year-end. Total assets increased 6% and approached $2.5 billion. To further fortify our capital base to support continued growth, we completed a success- ful common stock offering in March 2011, bringing the total gross proceeds raised during the past two years to approximately $108 million. As a result of these common stock offerings and our retention of earnings, we fully redeemed the TARP preferred shares and warrants while maintaining capital in excess of the regulatory “well capitalized” standards. Financial Performance Our growing volume of business with existing and new clients, balanced and diversified income sources and improved asset quality contributed to a strong increase in earnings for 2011. Net income available to common shareholders more than tripled as compared to the prior year, to $15.5 million. Net income available to common shareholders per diluted share increased to $0.51 from $0.18, with the 2011 per share amount reflecting a higher share count due to the common stock offerings. 1 Sterling’s 2011 results reflected several positive factors. Our double-digit loan growth drove an increase in net interest income and higher fee income from accounts receivable management and other related activities. Funding costs were well managed, also contrib- uting to the higher net interest income. We continued to manage expenses effectively, resulting in only a 3% increase in noninterest expense compared to the previous year, while at the same time growing our business. Also, the provision for loan losses decreased, reflecting improved credit metrics. Positioned for Opportunity Sterling has grown and prospered through volatile market cycles due to strategic plans that have positioned the Company well for the challenges and opportunities of a changing financial landscape. Our business banking model, breadth of products, and commitment to client satisfaction are vital elements of our market positioning. Sterling’s rock-solid commitment to our market has led directly to new customer relationships and expanded business with existing clients. 2 A future of opportunity. From our founding in 1929, we have been focused on serving the New York metropolitan market and beyond. This is an exceptionally attractive, dynamic and resilient market. Simply stated, we believe it is the best banking market in the country. The region is home to hundreds of thousands of small to midsized businesses, creating strong demand for our financial products and services. Another advantage we enjoy in capturing growth opportunities is our business banking strategy, designed to serve small to midsized businesses and their owners and employees, among others. Our products and services, and particularly our corporate culture, are closely aligned with the needs of this market. We continue to expand our capacity to serve our market by augmenting our business development teams. Sterling’s rock-solid commitment to our market has led directly to new customer relationships and expanded business with existing clients. Our unparalleled commitment to attentive, hands-on service—delivered by a talented and dedicated team of professionals—is another factor in our ability to capitalize on opportu- nities. Clients and prospects in our target segment often report they feel commoditized and underserviced by other financial institutions and have found Sterling’s individualized solutions and exceptional service a distinguishing strength and real competitive advantage. Something as simple and courteous as personally answering telephone calls is emblematic of Sterling’s dedication to delivering “high-touch” service and unfettered access to senior decision-makers. Our customers readily refer prospects to Sterling, possibly the greatest testament to their own level of satisfaction. 3 Pictured (forward-facing) left to right: Eliot S. Robinson, Executive Vice President; John C. Millman, President; Howard M. Applebaum, Executive Vice President; Louis J. Cappelli, Chairman; Michael Bizenov, Executive Vice President; John W. Tietjen, Executive Vice President; Dale C. Fredston, Executive Vice President. Continuing Momentum Sterling’s greatest opportunities still lie ahead of us. We are building our future on an exceptionally strong base: an experienced and motivated team with a deep commitment to exceptional service, a broad portfolio of financial solutions, the know-how that comes from meeting the needs of our marketplace for decades, and the capital and liquidity to support our growth. We thank our clients and shareholders for their confidence, our Board of Directors for their sound judgment, and our team of banking professionals for their talent and energy. We are translating our strength, performance and opportunity into continued profitable growth and increasing shareholder value. Sincerely, Louis J. Cappelli Chairman and Chief Executive Officer John C. Millman President 4 B o ard of D ire c to r s Hon. Robert Abrams Member, Stroock & Stroock & Lavan LLP; former Attorney General of the State of New York Joseph M. Adamko Former Managing Director, Manufacturers Hanover Trust Company (now J.P. Morgan Chase & Co.) Louis J. Cappelli Chairman and Chief Executive Officer of the Company; Chairman of Sterling National Bank Hon. Fernando Ferrer Partner, Mercury Public Affairs, LLC; Co-Chairman, IGR Group; former Bronx Borough President Sterling Banco r p O f ficer s Dr. Allan F. Hershfield President, Resources for the 21st Century; former President of Fashion Institute of Technology Henry J. Humphreys Sovereign Military Order of Malta: Counselor-Permanent Observer (Mission to the United Nations); former Chancellor and Chief Operating Officer (American Association) Robert W. Lazar Senior Advisor, Teal, Becker & Chiaramonte, CPA’s, PC; and Chair, University at Albany School of Business Advisory Board, former Senior Advisor, Independent Bankers Association of New York State, and former President/Chief Executive Officer of New York Business Development Corporation Carolyn Joy Lee Partner at Jones Day; former Chair of the Tax Section of the New York State Bar Association; former Chair of the State and Local Tax Committee of the New York City Bar John C. Millman President of the Company; President and Chief Executive Officer of Sterling National Bank Hon. Eugene T. Rossides Former Assistant Secretary, United States Treasury Department; Retired Senior Partner, Rogers & Wells LLP (now Clifford Chance US LLP) Honorary Director Walter Feldesman Louis J. Cappelli Chairman of the Board and Chief Executive Officer John W. Tietjen Executive Vice President and Chief Financial Officer Dale C. Fredston Senior Vice President and General Counsel Debra A. Ashton Corporate Secretary John C. Millman President Howard M. Applebaum Senior Vice President Seth H. Ugelow Senior Vice President and Controller Sterling N ati o nal Bank O f fice s 650 Fifth Avenue New York, NY 10019-6108 (212) 757-3300 500 Seventh Avenue New York, NY 10018-4502 (212) 575-4410 108-01 Queens Boulevard Forest Hills, NY 11375-4840 (718) 275-6500 89-04 Sutphin Boulevard Jamaica, NY 11435-3720 (718) 725-0325 425 Park Avenue New York, NY 10022-3506 (212) 935-1440 512 Seventh Avenue New York, NY 10018-4603 (212) 354-2265 138-21 Queens Boulevard Briarwood, NY 11435-2694 (718) 657-2660 98 Cuttermill Road Great Neck, NY 11021-3006 (516) 466-4554 622 Third Avenue New York, NY 10017-6722 (212) 490-9813 42 Broadway, 4th Floor New York, NY 10004-1617 (212) 356-6501 30-30 47th Avenue Long Island City, NY 11101-3450 (718) 383-6012 310 Crossways Park Drive Woodbury, NY 11797-2016 (516) 682-8410 31 West 27th Street, 7th Floor New York, NY 10004-1617 (212) 935-5790 1 Executive Boulevard Yonkers, NY 10701-6822 (914) 964-5252 5 Sterling N ati o nal Bank O f ficer s Louis J. Cappelli Chairman John C. Millman President and Chief Executive Officer Executive Vice Presidents Howard M. Applebaum Michael Bizenov Dale C. Fredston Eliot S. Robinson John W. Tietjen Senior Vice Presidents Kenneth E. Cohen Joseph Costanza John Fitzpatrick Jeffrey S. Fliegel John C. Gallo Jesse D. Honigberg Patricia E. Hrotko Leonard M. Imperiale Benjamin S. Katz Neal B. Krumper John P. La Lota Stephen M. Leavenworth Monica S. Lercher Anthony V. Migliorino Wayne G. Miller David Minder Samuel T. Nicoletti Robert Nisi Steven A. Orenstein Patricia Robins Leonard Rudolph Michael J. Scheller Keith Smith Mindy F. Stern Gayle A. Surak Seth H. Ugelow Michael Vasami Divisional Officers and First Vice Presidents Jennifer N. DeModna Harry S. Feder Thomas M. Frankel Marie Giunto Anthony M. Grosso Mary Guitard Qasim Hanafi* Steven Hebert Richard W. Karras* Gregory S. Keramis^ Kim Kuhlman* Connie M. Leardi Kenneth A. Lee Charles I. Derr Joseph DeVito Daniel J. Doody Dawn Eastman Marilena Eatman Bruce D. Ferguson Ronald Ferraro Richard L. Friedman Craig B. Galletto Helen Galpin Peter E. Gardner James H. Garnets Steven A. Georgeson David M. Hammond Michael E. Hawkins Gail Heldke Rosemarie Henry John J. Howe David C. Johnson Kevin Johnson Paulette F. Johnson Sheila Kashkin Jeffrey A. Kelly Mary Jane Lerias Mary Anne E. Lindenbaum Michael J. Madeo Murray R. Markowitz Riki I. McBride Francisco A. Merced-Cancel Deborah Montemarano* Michael D. Moran* Edward Nugent Richard K. Orr^ Eddie Othman John R. O’Toole Angel Quinones Edward Robinson John R. Rosado Charles Ross Robert A. Schnitzer Karen Schoenfeld* Norman Scott Paul Seidenwar Yvonne V. Shand Gene Sica* Lloyd J. Streisand* Vivian Tarnowski ^Division EVP *Division SVP Richard J. Kruse Jorge LaCourt Peter J. La Monica Janie Leung Carol R. Lieber Winter Ma Joseph Mallozzi Thomas Martingale Kathleen L. McEntee Ryan P. McGinnis John G. McGraw Joann Medeiros Mireya E. Mera Michelle D. Mishaw Robert J. Mocerino Patricia O. Mungo Janet Neman Robert E. Nuytkens Gregory V. Pellitteri Diana M. Principe Frank R. Reda Barbara A. Riordan Anna M. Roina Rocco J. Russo Michael Samuels Idalia Sanchez John A. Saraniti Eric Schachter Christopher J. Scola Peter Sforzo Jacqueline Shirian Maribel Simancas Wing K. Siu Albert C. Snyder Aimee R. Spennato Andrew M. Spitz Barrett S. Stokes Michelle Tawdeen Carol A. Taylor Frank Tumbarello Petros Vlitas Debra Washington Mary S. Winfield Joanne L. Wong Martin K. Zalewski Edward Zekraus Sadia Affrin Denice Aloi-McConnell Ronald J. Bongiovanni Leszek K. Borysiak Thomas M. Braunstein William H. Breitman Paula Cappello Patricia Cavallaro Louis Cenname Anthony J. Colao* Salvatore F. Costa Francis L. DeFranco* Adam E. Dejak Dawn E. DeLuca Vice Presidents Michael Aglialoro Lidia L. Alarcon Cristian Anghel Gennaro Anzalone Debra A. Ashton Fabian A. Atocha Darlene S. Barzilay Michelle Bascetta Shepherd Baum Christine M. Bentley Todd P. Brown Robert Capalbo Jack Chan Joseph L. Civitella Paul A. Colontino Lisa Conner Andrea P. Contreras Ildiko A. Csuma Anthony Daddezio Renu Dalessandro Norka Del Rios Jordana M. DelVecchio Barbara DeMarco 6 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2011 Commission File No. 1-5273-1 STERLING BANCORP (Exact name of Registrant as specified in its charter) New York (State or other jurisdiction of incorporation or organization) 650 Fifth Avenue, New York, N.Y. (Address of principal executive offices) 13-2565216 (I.R.S. Employer Identification No.) 10019-6108 (Zip Code) (212) 757-3300 (Registrant’s telephone number, including area code) SecuritieS regiStered PurSuant to Section 12(b) of the act: title of each claSS Common Shares, $1 par value per share Cumulative Trust Preferred Securities 8.375% (Liquidation Amount $10 per Preferred Security) of Sterling Bancorp Trust I and Guarantee of Sterling Bancorp with respect thereto name of each exchange on which regiStered New York Stock Exchange New York Stock Exchange SecuritieS regiStered PurSuant to Section 12(g) of the act: none Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [✓] Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [✓] 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 12 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 [✓] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [✓] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [ ] Accelerated Filer [✓] Non-Accelerated Filer [ ] Smaller Reporting Company [ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] ] No [✓] On June 30, 2011, the aggregate market value of the common equity held by non-affiliates of the Registrant was $279,253,917. The Registrant has one class of common shares, of which 30,924,832 shares were outstanding at February 23, 2012. (1) Portions of Sterling Bancorp’s definitive Proxy Statement to be filed pursuant to Regulation 14A are incorporated by reference in Part III. documentS incorPorated bY reference T A B L E O F C O N T E N T S PART I Item 1. BUSINESS Item 1A. RISK FACTORS Item 1B. UNRESOLVED STAFF COMMENTS Item 2. PROPERTIES Item 3. LEGAL PROCEEDINGS Item 4. MINE SAFETY DISCLOSURES Item 4A. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS PART II AND ISSUER PURCHASES OF EQUITY SECURITIES Item 6. SELECTED FINANCIAL DATA Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Item 9A. CONTROLS AND PROCEDURES Item 9B. OTHER INFORMATION Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 11. EXECUTIVE COMPENSATION PART III Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV SIGNATURES Exhibits Submitted in a Separate Volume. Page 1 15 26 26 26 27 27 27 28 28 28 57 116 116 118 119 119 119 119 119 120 123 P A R T I item 1. bu SineSS The disclosures set forth in this item are qualified by ITem 1A. RIsk FAcToRs on pages 15–26 and the section cap- tioned “FoRwARd-LookIng sTAT emenTs A nd FAcToRs ThAT couLd AFFecT FuTuRe ResuLTs” on page 30 and other cautionary statements set forth else- where in this report. Sterling Bancorp (the “parent company” or the “Registrant”) is a bank holding company and a financial holding company as defined by the Bank Holding Company Act of 1956, as amended (the “BHCA”), which was organized in 1966. Sterling Bancorp and its subsidiaries derive substantially all of their revenue and income from providing banking and related financial services and products to customers primarily in New York, New Jersey and Connecticut (the “New York metropolitan area”). Throughout this report, the terms the “Company” or “Sterling” refer to Sterling Bancorp and its consolidated subsidiaries, while the terms the “parent com- pany” or the “Registrant” refer to Sterling Bancorp but not its subsidiaries. The Company has operations in the New York metropolitan area and conducts business throughout the United States. The parent company owns, directly or indirectly, all of the outstanding shares of Sterling National Bank (the “bank”), its principal subsidiary, and all of the outstanding shares of Sterling Banking Corporation and Sterling Bancorp Trust I (the “trust”). Sterling National Mortgage Company, Inc. (“SNMC”), Sterling Factors Corporation (“Factors”), Sterling Trade Services, Inc. (“Trade Services”), Sterling Resource Funding Corp. (“Resource Funding”) and Sterling Real Estate Holding Company, Inc. are wholly-owned subsidiaries of the bank. The operations of SNMC, Factors and Resource Funding were merged into the bank as of July 1, 2011, October 1, 2011 and January 1, 2012, respectively. These actions were taken to simplify marketing and business devel- opment efforts, present a unified service offering to custom- ers and streamline organizational structure. Also, as of January 26, 2012, business activities of Trade Services ceased and the subsidiary was liquidated and its activities were con- solidated into the bank. Although Sterling Bancorp is a corporate entity, legally sepa- rate and distinct from its affiliates, bank holding companies such as Sterling Bancorp are generally required to act as a source of financial strength for their subsidiary banks. The principal source of Sterling Bancorp’s income is dividends from its subsid- iaries. There are certain regulatory restrictions on the extent to which these subsidiaries can pay dividends or otherwise supply funds to Sterling Bancorp. See the section captioned “SUPERVISION AND REGULATION” for further discus- sion of these matters. On April 3, 2009, Factors, a subsidiary of the bank, acquired substantially all of the assets and customer lists of DCD Capital, LLC and DCD Trade Services, LLC. The acquired assets and customer lists are now operating as a division of Factors under the name Sterling Trade Capital. In September 2006, the Company sold the business conducted by Sterling Financial Services (“Sterling Financial”). In accord- ance with U.S. GAAP, the assets, liabilities and earnings/loss of the business conducted by Sterling Financial have been shown separately as discontinued operations. For purposes of the following discussion, average balances, averages rates, income and expenses associated with Sterling Financial have been excluded from continuing operations and reported separately for all periods presented. During the latter half of 2011, the Company combined its operating segments into one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on the manner in which it supports the other activities of the Company. For example, lending is dependent upon the ability of the bank to fund itself with retail deposits and other bor- rowings and to manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. The Company derives a substantial portion of its reve- nue and income from providing banking and related financial services and products to customers located primarily in the New York metropolitan area. The financial information in this report reflects the single segment through which the Company conducts its business. buSineSS o PerationS The Bank Sterling National Bank was organized in 1929 under the National Bank Act and commenced operations in New York City. The bank maintains twelve offices in New York: nine offices in New York City (six branches and an international banking facility in Manhattan and three branches in Queens); two branches in Nassau County (one in Great Neck and the other in Woodbury, New York) and one branch in Yonkers, New York. The executive office is located at 650 Fifth Avenue, New York, New York. The bank provides a broad range of banking and financial products and services, including business and consumer lending, asset-based financing, residential mortgage warehouse fund- ing, factoring/accounts receivable management services, equipment financing, commercial and resi dential mortgage lending and brokerage, deposit services, and trade financing. p a g e 1 For the year ended December 31, 2011, the bank’s average earning assets represented approximately 98.9% of the Company’s average earning assets. Loans represented 59.8% and investment securities represented 35.7% of the bank’s average earning assets in 2011. commercial Lending, Asset-Based Financing, Residential mortgage warehouse Funding, and Factoring/Accounts Receivable management. The bank provides loans to small and medium-sized businesses. The businesses are diversified across industries, including commercial, industrial and finan- cial companies, and government and non-profit entities. Loans generally range in size up to $20 million and can be tailored to meet customers’ specific long- and short-term needs, and include secured and unsecured lines of credit, business installment loans, business lines of credit, and debtor-in-possession financing. Loans are often collateralized by assets, such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other assets. The bank provides financing and human resource business process outsourcing support services, exclusively for the tem- porary staffing industry. The bank provides full back-office, computer, tax and accounting services, as well as financing, to independently-owned staffing companies located through- out the United States. The average contract term is 18 months for approximately 200 staffing companies. The bank offers residential mortgage warehouse funding services to mortgage bankers. Such funding consists of a line of credit (a “warehouse line”) used by the mortgage banker as a form of temporary financing during the period between the closing of a mortgage loan until its sale into the second- ary market, which period typically lasts from 15 to 30 days. The bank provides warehouse lines in amounts ranging from $5 million to $20 million to an approved client base, which as of December 31, 2011, consisted of approximately 15 mortgage bankers operating nationally. The warehouse lines are secured by high quality first mortgage loans, which include conventional FannieMae and FreddieMac, jumbo and FHA loans. The bank provides accounts receivable management services. The purchase of a client’s accounts receivable is traditionally known as “factoring” and results in payment by the client of a nonrefundable factoring fee, which is generally a percentage of the factored receivables or sales volume and is designed to compensate for the bookkeeping and collection services pro- vided and, if applicable, its credit review of the client’s cus- tomer and assumption of customer credit risk. When the bank “factors” (i.e., purchases) an account receivable from a client, it records the receivable as an asset (included in “Loans held in portfolio, net of unearned discounts”), records a lia- bility for the funds due to the client (included in “noninterest- bearing demand deposits”) and credits to noninterest income the nonrefundable factoring fee (included in “Accounts receivable management/factoring commissions and other fees”). The bank also may advance funds to its client prior to the collection of receivables, charging interest on such advances (in addition to any factoring fees) and normally sat- isfying such advances by the collection of receivables. The accounts receivable factored are primarily for clients engaged in the apparel and textile industries. As of December 31, 2011, the outstanding loan balance (net of unearned discounts) for commercial and industrial lending, asset-based financing, residential mortgage warehouse fund- ing and factored receivables was $1,042.5 million, represent- ing approximately 68.5% of the bank’s total loan portfolio. There are no industry concentrations in the commercial and industrial loan portfolio that exceed 10% of gross loans. Approximately 68% of the bank’s loans are to borrowers located in the New York metropolitan area. The bank has no foreign loans. equipment Financing. The bank offers equipment financing services in the New York metropolitan area and across the United States through direct leasing programs, third-party sources and vendor programs. The bank finances full payout leases for various types of business equipment, written on a recourse basis—with personal guarantees of the principals, with terms generally ranging from 24 to 60 months. At December 31, 2011, the outstanding balance (net of unearned discounts) for equipment financing receivables was $150.8 million, with a remaining average term of 35 months, repre- senting approximately 9.9% of the bank’s total loan portfolio. Residential and commercial mortgages. The bank’s real estate loan portfolio consists of real estate loans on one-to- four family residential properties, multi-family residential properties and nonresidential commercial properties. The residential mortgage banking and brokerage business is con- ducted through offices located principally in New York. Residential mortgage loans, substantially all of which are for single-family residences, are focused on conforming credit, government insured FHA and other high-quality loan products and are originated primarily in the New York metropolitan area, Virginia and other mid-Atlantic states, almost all of these for resale. In addition, the Company retains in portfolio fixed and floating rate residential mortgage loans, primarily on properties located in the New York metropolitan area, which were originated by its mortgage banking subsidiary. Commercial real estate lending, including financing on multi-family p a g e 2 residential properties and nonresidential commercial proper- ties, is offered on income-producing investor properties and owner-occupied properties, professional co-ops and condos. At December 31, 2011, the outstanding loan balance for real estate mortgage loans was $299.4 million, representing approximately 19.7% of the bank’s total loans outstanding. deposit services. The bank attracts deposits from customers located primarily in the New York metropolitan area, offering a broad array of deposit products, including checking accounts, money market accounts, negotiable order of with- drawal (“NOW”) accounts, savings accounts, rent security accounts, retirement accounts, and certificates of deposit. The bank’s deposit services include account management and information, disbursement, reconciliation, collection and concentration, ACH and others designed for specific business purposes. The deposits of the bank are insured to the extent permitted by law pursuant to the Federal Deposit Insurance Act, as amended. Trade Finance. Through its international division and inter- national banking facility, the bank offers financial services to its customers and correspondents in the world’s major financial centers. These services consist of financing import and export transactions, issuing letters of credit, processing documentary collections and creating banker’s acceptances. In addition, active bank account relationships are main- tained with leading foreign banking institutions in major financial centers. Foreign activities of the Company are not considered to be material with predominantly all revenues and assets attribut- able to customers located in the United States. As of December 31, 2011, there were no loans to or deposits from customers located outside the United States. The composition of total revenues (interest income and non- interest income) of the bank and its subsidiaries for the three most recent fiscal years was as follows: Years Ended December 31, Interest and fees on loans Interest and dividends on investment securities Noninterest income Other 2011 2010 2009 52% 49% 48% 16 31 1 18 33 — 22 29 1 100% 100% 100% comPetition There is intense competition in all areas in which the Company conducts its business. As a result of the deregulation of the financial services industry under the Gramm-Leach- Bliley Act of 1999, 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 may have higher lending limits and provide a wider array of banking services than the Company does. To a limited extent, the Company also competes with other provid- ers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. The Company generally competes on the basis of level of customer service, responsiveness to customer needs, availability and pricing of products, and geographic location. SuP erViSion and regulation General The banking industry is highly regulated. Statutory and regu- latory controls are designed primarily for the protection of depositors and the banking system, and not for the purpose of protecting the shareholders of the parent company. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the bank and the Company. It is intended only to briefly summarize some material provi- sions. Changes in applicable law or regulation, and in their interpretation and application by regulatory agencies, cannot be predicted, but they may have a material effect on the busi- ness and results of the Company. The parent company is a bank holding company and a finan- cial holding company under the BHCA and is subject to supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Sterling is also subject to the dis- closure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as administered by the Securities and Exchange Commission (the “SEC”). Sterling Bancorp is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “STL” and is subject to the rules of the NYSE for listed companies. At December 31, 2011, the Company had 515 full-time equivalent employees, consisting of 240 officers and 275 supervisory and clerical employees. The bank considers its relations with its employees to be satisfactory. As a national bank, the bank is principally subject to the super- vision, examination and reporting requirements of the Office of the Comptroller of the Currency (the “OCC”), as well as the Federal Deposit Insurance Corporation (the “FDIC”). Insured p a g e 3 banks, including the bank, are subject to extensive regulation of many aspects of their business. These regulations relate to, among other things: (a) the nature and amount of loans that may be made by the bank and the rates of interest that may be charged; (b) types and amounts of other investments; (c) branching; (d) permissible activities; (e) reserve require- ments; and (f) dealings with officers, directors and affiliates. Sterling Banking Corporation is subject to supervision and regu- lation by the New York State Department of Financial Services (formerly the Banking Department of the State of New York). Bank Holding Company Regulation The BHCA requires the prior approval of the Federal Reserve Board for the acquisition by a bank holding com- pany of 5% or more of the voting stock or substantially all of the assets of any bank or bank holding company. Also, under the BHCA, bank holding companies are prohibited, with cer- tain exceptions, from engaging in, or from acquiring 5% or more of the voting stock of any company engaging in, activi- ties other than (1) banking or managing or controlling banks, (2) furnishing services to or performing services for their sub- sidiaries, or (3) activities that the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. As discussed below under “Financial Holding Company Regu- lation,” the Gramm-Leach-Bliley Act of 1999 amended the BHCA to permit a broader range of activities for bank holding companies that qualify as “financial holding companies.” Financial Holding Company Regulation The Gramm-Leach-Bliley Act: •   allows bank holding companies, the depository institu- tion subsidiaries of which meet management, capital and the Community Reinvestment Act (the “CRA”) standards, to engage in a substantially broader range of non-banking financial activities than was previously permissible, includ- ing (a) insurance underwriting and agency, (b) making merchant banking investments in commercial companies, (c) securities underwriting, dealing and market making, and (d) sponsoring mutual funds and investment companies; •   allows  insurers  and  other  financial  services  companies  to  acquire banks; and •   establishes  the  overall  regulatory  structure  applicable  to  bank holding companies that also engage in insurance and securities operations. In order for a bank holding company to engage in the broader range of activities that are permitted by the Gramm-Leach- Bliley Act, (1) the bank holding company and all of its deposi- tory institution subsidiaries must be and remain “well capitalized” and “well managed” and have received at least a satisfactory CRA rating, and (2) it must file a declaration with the Federal Reserve Board that it elects to be a “finan- cial holding company.” Requirements and standards to remain “well capitalized” are discussed below. To maintain financial holding company status, the bank must have at least a “satisfactory” rating under the CRA. Under the CRA, during examinations of the bank, the OCC is required to assess the bank’s record of meeting the credit needs of the communities serviced by the bank, including low- and moderate-income communities. Banks are given one of four ratings under the CRA: “outstand- ing,” “satisfactory,” “needs to improve” or “substantial non- compliance.” The bank received a rating of “outstanding” on the most recent exam completed by the OCC. Pursuant to an election made under the Gramm-Leach-Bliley Act, the parent company has been designated as a financial holding company. As a financial holding company, Sterling may conduct, or acquire a company (other than a U.S. depos- itory institution or foreign bank) engaged in, activities that are “financial in nature,” as well as additional activi ties that the Federal Reserve Board determines (in the case of incidental activities, in conjunction with the United States Department of the Treasury (the “U.S. Treasury”)), are incidental or comple- men tary to financial activities, without the prior approval of the Federal Reserve Board. Under the Gramm-Leach-Bliley Act, activities that are financial in nature include insurance, securities underwriting and dealing, merchant banking, and spon soring mutual funds and investment companies. Under the merchant banking authority added by the Gramm-Leach- Bliley Act, financial holding companies may invest in compa- nies that engage in activities that are not otherwise permissible “financial” activities, subject to certain limitations, including that the financial holding company makes the investment with the intention of limiting the investment duration and does not manage the company on a day-to-day basis. Generally, financial holding companies must continue to meet all the requirements for financial holding company status in order to maintain the ability to undertake new activities or acquisitions that are financial in nature and the ability to con- tinue those activities that are not generally permissible for bank holding companies. If the parent company ceases to so qualify, it would be required to obtain the prior approval of the Federal Reserve Board to engage in non-banking activities or to acquire more than 5% of the voting stock of any company that is engaged in non-banking activities. With certain excep- tions, the Federal Reserve Board can only provide prior approval to applications involving activities that it had previously deter- mined, by regulation or order, are so closely related to banking as to be properly incident thereto. Such activities are more limited than the range of activities that are deemed “financial in nature.” p a g e 4 Dodd-Frank Act On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act has resulted, and will continue to result, in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. The Dodd-Frank Act’s provisions that have received the most pub- lic attention generally have been those applying to or more likely to affect larger institutions. However, it contains numerous other provisions that affect all banks and bank holding companies, identified below. The Dodd-Frank Act includes provisions that, among other things: •   Centralize  responsibility  for  consumer  financial  protec- tion by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examin- ing and enforcing compliance with federal consumer pro- tection laws. •   Restrict the preemption of state law by federal law and dis- allow subsidiaries and affiliates of national banks, such as the bank, from availing themselves of such preemption. •   Apply  the  same  leverage  and  risk-based  capital  require- ments that apply to insured depository institutions to most bank holding companies. •   Require the OCC to seek to make its capital requirements  for national banks, such as Sterling National Bank, counter- cyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction. •   Require  financial  holding  companies,  such  as  the  parent  company, to be well capitalized and well managed. Bank holding companies and banks must also be both well capi- talized and well managed in order to acquire banks located outside their home state. •   Implement  corporate  governance  revisions,  including  with  regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions. •   Make permanent the $250 thousand limit for federal deposit  insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100 thousand to  $250 thousand and provide unlimited federal deposit insur- ance  until  December  31,  2012  for  non-interest  bearing  demand transaction accounts at all insured depository institutions. •   Repeal the federal prohibitions on the payment of interest on  demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. •   Prohibit  banking  entities  from  engaging  in  proprietary  trading or acquiring or retaining an interest in a private equity or hedge fund (the “Volcker Rule”). •   Change  the  assessment  base  for  federal  deposit  insurance  from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling and the size of the Deposit Insurance Fund (the “DIF”), and increase the floor applicable to the size of the DIF. •   Increase  the  authority  of  the  Federal  Reserve  to  examine  the Company and its non-bank subsidiaries. In October 2011, federal regulators proposed rules to imple- ment the Volcker Rule that included an extensive request for comments on the proposal, with a due date of February 13, 2012. The proposed rules are highly complex, and many aspects of the Volcker Rule remain unclear. We are analyzing how the proposed rules would affect us and, as proposed, do not anticipate that the Volcker Rule will have a material effect on the operations of the Company, as the Company does not engage in the businesses prohibited by the Volcker Rule. The Company may incur costs if it is required to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such costs are not expected to be material. However, the full impact on us will not be known with cer- tainty until the rules are finalized and we have designed and implemented our compliance and related programs. The Volcker Rule provisions are scheduled to take effect no later than July 2012, and companies will be required to come into compliance within two years after the effective date (subject to possible extensions). Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The environment in which banking organizations will operate after the finan- cial crisis, including legislative and regulatory changes affect- ing capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen. The specific impact of the Dodd-Frank Act on our current activities or new financial activities we may con- sider in the future, our financial performance and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory develop- ments. Many aspects of the Dodd-Frank Act are subject to rule- making and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. We will continue to assess our business, risk management, and compli- ance practices to conform to developments in the regulatory environment. p a g e 5 Payment of Dividends The parent company depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the bank. Various legal restrictions limit the extent to which the bank can fund the parent company and its nonbank subsidiaries. All national banks are limited in the payment of dividends with- out the approval of the OCC to an amount not to exceed the net profits (as defined) for that year-to-date combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing restrictions, and while maintaining its “well capitalized” status, as of December 31, 2011, the bank could pay dividends of approximately $47.1 million to the parent company, without obtaining regulatory approval. This is not necessarily indicative of amounts that may be paid or are available to be paid in future periods. Under the Federal Deposit Insurance Corporation Improve- ment Act of 1991 (“FDICIA”), a depository institution, such as the bank, may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapital- ized. The payment of dividends by the parent company and the bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying divi- dends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. those transactions to be on an arm’s-length basis. In general, these regulations require that any “covered transactions” between a subsidiary bank and its parent company or the non- bank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and sur- plus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization including, for example, the requirement that the 10% of capital limit on these transac- tions apply to financial subsidiaries as well. “Covered trans- actions” are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affil- iate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated per- sons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limita- tions on the amount of credit extended to such persons, indi- vidually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. Banks are subject to prohibitions on certain tying arrange- ments. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution. Transactions with Affiliates Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Regulations promulgated by the Federal Reserve Board limit the types and amounts of these transactions (including loans due and extensions of credit from their U.S. bank subsidiaries) that may take place and generally require Capital Adequacy As a bank holding company, the parent company is subject to consolidated regulatory capital requirements administered by the Federal Reserve Board. The bank is subject to similar capital requirements administered by the OCC. The federal regulatory authorities’ risk-based capital guidelines are based upon  the  1988  capital  accord  (“Basel  I”)  of  the  Basel  p a g e 6 Committee. The Basel Committee is a committee of central banks and bank supervisors/regulators from the major indus- trialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervi- sory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For pur- poses of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commit- ments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in tiers, depending on type: •   core capital (Tier 1). Currently, Tier 1 capital includes common equity, retained earnings, qualifying non-cumula- tive perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries, and, under existing standards, a limited amount of qualifying trust preferred securities, and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill, most intangible assets and certain other assets. •   supplementary capital (Tier 2). Currently, Tier 2 capital includes, among other things, perpetual preferred stock not meeting the Tier 1 definition, qualifying mandatory con- vertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations. The Dodd-Frank Act applies the same leverage and risk-based capital requirements that apply to insured depository institu- tions to bank holding companies such as the Company, which, among other things as applied to the Company, going forward will preclude the Company from including in Tier 1 capital trust preferred securities or cumulative preferred stock, if any, issued on or after May 19, 2010 and to deduct, over three years beginning January 1, 2013, all trust pre- ferred securities (including trust preferred securities issued by Sterling Bancorp Trust I) from the Company’s Tier 1 capital. As of the date of this report the Company did not have any trust preferred securities issued on or after May 19, 2010 or any cumulative preferred stock outstanding. As a bank holding company, the parent company is currently required to maintain Tier 1 capital and “total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit). National banks are required to maintain similar capi- tal levels under capital adequacy guidelines. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. The elements currently com- prising Tier 1 capital and Tier 2 capital and the minimum Tier 1 capital and total capital ratios may in the future be subject to change, as discussed in greater detail below. Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for financial holding companies and national banks that have the highest supervisory rating. All other financial holding companies and national banks are required to maintain a minimum leverage ratio of 4.0%, unless a dif- ferent minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt cor- rective action, its leverage ratio must be at least 5.0%. The bank regulatory agencies have encouraged banking organiza- tions, including healthy, well-run banking organizations, to operate with capital ratios substantially in excess of the stated ratios required to maintain “well capitalized” status. This has resulted from, among other things, current economic conditions, the global financial crisis and the likelihood, as described below, of increased formal capital requirements for banking organizations. In light of the foregoing, the Company and the bank expect that they will maintain capital ratios substantially in excess of these ratios. In 2004, the Basel Committee published a new capital accord (“Basel II”) to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk—an internal rat- ings-based approach tailored to individual institutions’ cir- cumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guide- lines. Basel II also sets capital requirements for operational risk and refines the existing capital requirements for market risk exposures. In the United States, regulators have required the advanced approaches of Basel II to be implemented only by certain large or internationally active banking organizations, or “core banks”—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet for- eign exposures of $10 billion or more. Other U.S. banking organizations can elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but they are not required to apply them. The rule also allows a bank- ing organization’s primary federal supervisor to determine p a g e 7 that the application of the rule would not be appropriate in light of the bank’s asset size, level of complexity, risk profile, or scope of operations. The Company is not required to com- ply with the advanced approaches of Basel II. The Dodd-Frank Act requires the Federal Reserve Board, the OCC and the FDIC to adopt regulations imposing a continuing “floor” of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capi- tal regulations resulting from Basel III (see below) otherwise would permit lower requirements. In December 2010, the Federal Reserve Board, the OCC and the FDIC issued a joint notice of proposed rulemaking that would implement this requirement. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III.” Basel III, when implemented by the U.S. bank- ing agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substan- tially more capital, with a greater emphasis on common equity. The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requir- ing that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations. When fully phased-in on January 1, 2019, Basel III will require banks to maintain (i) as a newly adopted international stand ard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased-in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets 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 risk- weighted assets 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) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to bal- ance sheet exposures plus certain off-balance sheet exposures (as the average for each quarter of the month-end ratios for the quarter). Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when bank regulatory agencies deter- mine that excess aggregate credit growth has become associ- ated with a build-up of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%). The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and counter- cyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensa- tion based on the amount of the short fall. The implementation of the Basel III capital framework will com- mence on January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios: •   3.5% CET1 to risk-weighted assets. •   4.5% Tier 1 capital to risk-weighted assets. •   8.0% Total capital to risk-weighted assets. Management believes, as of December 31, 2011, that the par- ent company and the bank would meet all capital adequacy requirements under the Basel III capital framework on a fully phased-in basis if such requirements were currently effective. The Basel III final framework provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the pur- poses of determining regulatory capital ratios. Under the Basel III capital framework, the effects of accumulated other comprehensive items are not excluded, which could result in significant variations in level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s investment securities portfolio. Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20% per year). 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 p a g e 8 period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Although the U.S. banking agencies have not yet published a notice of proposed rulemaking to implement Basel III in the United States, they have indicated informally that rules imple- menting the Basel III capital framework will be published for comment during the first half of 2012. As of the date of this report, the application of the Basel III liquidity framework to bank holding companies with less than $50 billion of total consolidated assets is less certain. Accordingly, the regulations ultimately adopted and made applicable to the Company may be different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capi- tal or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity. Liquidity Requirements Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervi- sory matter, without required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity mea- sures historically applied by banks and regulators for man- agement and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the bank- ing entity maintains an adequate level of unencumbered high- quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking enti- ties over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The Basel III liquidity framework contemplates that the LCR will be subject to an observation period continuing through mid-2013 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard on January 1, 2015. Similarly, it contemplates that the NSFR will be subject to an observation period through mid-2016 and, subject to any revisions resulting from the analyses con- ducted and data collected during the observation period, implemented as a minimum standard by January 1, 2018. These new standards are subject to further rulemaking and their terms may well change before implementation. Prompt Corrective Action The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capi- talized,” “adequately capitalized,” “undercapitalized,” “sig- nificantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital mea- sures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio. A bank will be: (i) “well capitalized” if the insti tution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk- based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the insti- tution has a total risk-based ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically under- capitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An insti- tution may be downgraded to, or deemed to be in, a capital category that is lower than that indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2011, the Company and the bank were “well capitalized,” based on the ratios and guidelines described above. A bank’s capital cate- gory is determined solely for the purpose of applying prompt cor rective action regulations, and the capital category may not constitute an accurate representation of the bank’s over all financial condition or prospects for other purposes. The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a div- idend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital resto- ration plan. The agencies may not accept such a plan without p a g e 9 determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital res- toration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such a capital restoration plan. The aggre- gate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository insti- tution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. Support of the Bank Federal Reserve Board policy historically required a bank holding company to serve as a source of financial and mana- gerial strength to its subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. As a result, the Federal Reserve Board may require the parent company to stand ready to use its resources to provide adequate capital funds to its banking subsidiaries during periods of financial stress or adversity. This support may be required at times by the Federal Reserve Board even though not expressly required by regulation and even though the parent company may not be in a financial position to provide such support. In addi- tion, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The BHCA provides that, in the event of a bank hold- ing company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. Further more, under the National Bank Act, if the capital stock of the bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assess- ment upon the parent company. If the assessment is not paid within three months, the OCC could order a sale of the capi- tal stock of the bank held by the parent company to make good the deficiency. FDIC Insurance The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that, as described below, takes into account, among other things, a bank’s capi- tal level and supervisory rating (its “CAMELS rating”). Under the Federal Deposit Insurance Reform Act of 2005, which became law in 2006, the bank received a one-time assessment credit that can be applied against future premi- ums through 2010, subject to certain limitations. Any increase in insurance assessments could have an adverse impact on the earnings of insured institutions, including the bank. The bank paid a deposit insurance premium in 2011 amounting to $2.1 million. In addition, the bank is required to make payments for the servicing of obligations of the Financing Corporation (“FICO”) issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. The bank paid a FICO assessment in 2011 amounting to $183 thousand. The FICO annualized assessment rate for the first quarter of 2012 is 0.66 cents per $100 of deposits. On November 17, 2009, the FDIC implemented a final rule requiring insured institutions to prepay their estimated quar- terly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Such prepaid assessments were collected by the FDIC on December 30, 2009, along with each institution’s quarterly risk-based deposit insurance assessment for the third quarter of 2009. As of December 31, 2011, $2.9 million in pre-paid deposit insurance is included in “Other assets” in the accompanying consolidated balance sheet. In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required. In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for non-interest-bearing transaction accounts. The separate coverage for non-interest-bearing trans- action accounts became effective on December 31, 2010 and terminates on December 31, 2012. On April 1, 2011, assessment base changed from total domestic deposits to average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd- Frank Act. Additionally, the initial base assessment rate schedule was revised effective April 1, 2011 to range from 5 to 35 basis points on an annualized basis (basis points representing cents p a g e 1 0 per $100). After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. The potential adjustments to an institution’s initial base assessment rate include (i) a potential decrease of up to 5 basis points for certain long-term unsecured debt (“unsecured debt adjustment”) and, except for well-capitalized institutions with a CAMELS rating of 1 or 2, (ii) (except for well-capitalized institutions with a CAMELS rating of 1 or 2) a potential increase of up to 10 basis points for brokered deposits in excess of 10% of domestic deposits (“bro- kered deposit adjustment”). As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, a new adjustment for depository institution debt was instituted whereby an institution will pay an additional premium equal to 50 basis points on every dollar (above 3% of an insti- tution’s Tier 1 capital) of long-term, unsecured debt held that was issued by another insured depository institution (excluding debt guaranteed under the Temporary Liquidity Guarantee Program). Either an increase in the risk category of the bank or adjustments to the base assessment rates could have a material adverse effect on our earnings. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any appli- cable law, regulation, rule, order, or condition imposed by the FDIC. In its resolution of the problems of an insured depository insti- tution in default or in danger of default, the FDIC is generally required to satisfy its obligations to insured depositors at the least possible cost to the DIF. In addition, the FDIC may not take any action that would have the effect of increasing the losses to the deposit insurance fund by protecting depositors for more than the insured portion of deposits or creditors other than depositors. Incentive Compensation The Dodd-Frank Act requires U.S. financial regulators, includ- ing the Federal Reserve Board, to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at certain regulated entities, including bank holding compa- nies and national banks, having at least $1 billion in total assets, that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compen- sation arrangements. The initial version of these regulations was proposed by the U.S. financial regulators in February 2011 and the regulations may become effective in 2012. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which we may structure compensation for our executives and directors, and require us to adopt additional policies and procedures. In  June  2010,  the  Federal  Reserve,  OCC  and  FDIC  issued  comprehensive final guidance on incentive compensation pol- icies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The incentive compensation guidelines, which cover all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, are based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corpo- rate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regu- lations under the Dodd-Frank Act, discussed above. The Federal Reserve will review, as part of the regular, risk- focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s super- visory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organiza- tion’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. In addition, in the first half of 2011, the SEC adopted rules con- cerning say-on-pay votes and golden parachute compensation arrangements. These rules require us to make enhanced dis- closures to the SEC, and require us to provide our shareholders with a nonbinding say-on-pay vote to approve the compensation of the named executive officers, a non-binding vote to determine how often the say-on-pay vote will occur and, in certain circum- stances, a non-binding vote to approve, and proxy disclosure of, golden parachute compensation arrangements. p a g e 1 1 The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of Sterling and its subsidiaries to hire, retain and motivate its and their key employees. and, in some circumstances, allow consumers to prevent dis- closure of certain personal information to a nonaffiliated third party. The privacy provisions of the Gramm-Leach- Bliley Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Depositor Preference The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have pri- ority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in pay- ment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution. Liability of Commonly Controlled Institutions The FDIA provides that a depository institution insured by the FDIC can be held liable by the FDIC for any loss incurred, or reasonably expected to be incurred, in connection with the default of a commonly controlled FDIC-insured depository institution or in connection with any assistance provided by the FDIC to a commonly controlled institution “in danger of default” (as defined in the FDIA). Community Reinvestment Act The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new activity permitted by the BHCA, or to acquire any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed transaction. Financial Privacy In accordance with the Gramm-Leach-Bliley Act, federal bank- ing regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public infor- mation about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers Anti-Money Laundering Initiatives and the USA Patriot Act A major focus of governmental policy on financial institu- tions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regu- lations by imposing significant new compliance and due dili- gence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury has issued a number of implement- ing regulations which apply to various requirements of the USA Patriot Act to financial institutions such as the Company. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financ- ing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including the imposition of enforcement actions and civil monetary penalties. Office of Foreign Assets Control Regulation The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”), take many different forms. Generally, however, they contain one or more of the following elements: (i) restric- tions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assis- tance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nation als of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, with- drawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, financial and reputational consequences. p a g e 1 2 Legislative Initiatives and Regulatory Reform From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regula- tions, would have on the financial condition or results of oper- ations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company. As a result of the continued volatility and instability in the financial system, the Congress, the bank regulatory authorities and other government agencies have called for or proposed additional regulation and restrictions on the activities, prac- tices and operations of banks and their holding companies. The Congress and the federal banking agencies have broad authority to require all banks and holding companies to adhere to more rigorous or costly operating procedures, corporate governance procedures, or to engage in activities or practices which they would not otherwise elect. We cannot predict whether or in what form further legislation and/or regulations may be adopted or the extent to which Sterling’s business may be affected thereby. Safety and Soundness Standards Federal banking agencies promulgate safety and soundness standards relating to, among other things, internal controls, information systems and internal audit systems, loan docu- mentation, credit underwriting, interest rate exposure, asset growth, compensation, fees, and benefits. With respect to internal controls, information systems and internal audit sys- tems, the stand ards describe the functions that adequate internal controls and information systems must be able to perform, including: (i) monitoring adherence to prescribed policies; (ii) effective risk management; (iii) timely and accurate financial, operations, and regulatory reporting; (iv) safeguarding and managing assets; and (v) compliance with applicable laws and regulations. The standards also include requirements that: (i) those performing internal audits be qualified and independent; (ii) internal controls and informa- tion systems be tested and reviewed; (iii) corrective actions be adequately documented; and (iv) results of an audit be made available for review of management actions. In addition, fed- eral banking agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. See “Prompt corrective Action” above. If an institu- tion fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. Consequences of Non-compliance with Supervision or Regulation Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organiza- tions and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. The bank and its “institution-affiliated parties,” including its directors, management, employees, agents, independent contrac- tors, consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a govern- ment agency. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance and cease-and- desist orders. Such orders may, among other things, require affirmative action to correct any harm resulting from a viola- tion or practice, including restitution, reimbursement, indem- nifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate. Under provisions of the federal securities laws, a determination by a court or regulatory agency that certain violations have p a g e 1 3 occurred at a company or its affiliates can result in fines, res- titution, a limitation of permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infrac- tions and violations can also affect a public company in its timing and ability to expeditiously issue new securities into the capital markets. Selected con Solidated Stati Stical information I. Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential The information appears on pages 48 and 49 in “MAN- AGEMENT’S DISCUSSION AND ANALYSIS OF FINAN- CIAL CONDITION AND RESULTS OF OPERATIONS.” Investment Portfolio II. A summary of the Company’s investment securities by type with related carrying values at the end of each of the three most recent fiscal years appears beginning on page 39 in “MANAGEMENT’S DISCUSSION AND A NALYSIS OF F I NA NC I A L C ON DI T ION A N D R E S U LT S OF OPERATIONS.” Information regarding book values and range of maturities by type of security and weighted average yields for totals of each category appears on pages 40 and 42 in “MANAGEMENT’S DISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF OPERATIONS.” III. Loan Portfolio A table setting forth the composition of the Company’s loan portfolio, net of unearned discounts, at the end of each of the five most recent fiscal years appears beginning on page 42 in “MAN AGEMENT’S DISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF OPERATIONS.” A table setting forth the maturities and sensitivity to changes in interest rates of the Company’s commercial and industrial loans at December 31, 2011 appears on page 42 in “MANAGE- MENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” It is the policy of the Company to consider all customer requests for extensions of original maturity dates (rollovers), whether in whole or in part, as though each was an application for a new loan subject to standard approval criteria, including credit evaluation. Additional information appears under “Loan Portfolio” beginning on page 41 in “MANAGE- MENT’S DISCUS SION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and under “Loans” in Note 1 and in Note 5 of the Company’s consolidated financial statements. A table setting forth the aggregate amount of domestic nonaccrual, past due and restructured loans of the Company at the end of each of the five most recent fiscal years appears on page 43 in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”; there were no foreign loans accounted for on a nonaccrual basis. Information regarding loans that have undergone a troubled debt restructuring and impaired loans is presented under “Loans and Allowance for Loan Losses” in Note 5 of the Company’s consolidated financial statements. Loan concentration information is presented in Note 5 of the Company’s consolidated financial statements. Information regarding Federal Reserve and Federal Home Loan Bank stock is presented in Note 1 of the Company’s consolidated financial statements. IV. Summary of Loan Loss Experience A summary of loan loss experience appears in Note 5 of the Company’s con solidated financial statements and beginning on page 42 under “Asset Quality” in “MANAGEMENT’S DISCUSSION AND A NALYSIS OF F INANCIAL CON- DITION AND RESULTS OF OPERATIONS.” A table set- ting forth certain information with respect to the Company’s loan loss experience for each of the five most recent fiscal years appears on page 45 in “MANAGEMENT’S DISCUS- SION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” The Company considers its allowance for loan losses to be ade- quate based upon the size and risk characteristics of the out- standing loan portfolio at December 31, 2011. Net losses within the loan portfolio are not, however, statistically predict- able and are subject to various external factors that are beyond the control of the Company. Consequently, changes in condi- tions in the next twelve months could result in future provisions for loan losses varying from the provision recorded in 2011. A table presenting the Company’s allocation of the allowance at the end of each of the five most recent fiscal years appears on page 47 in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” This allocation is based on estimates by management that may vary based on management’s evalua- tion of the risk characteristics of the loan portfolio. The amount allocated to a particular loan category may not necessarily be indicative of actual future charge-offs in that loan category. V. Deposits Average deposits and average rates paid for each of the three most recent years are presented on page 48 in “MAN AGEMENT’S DISCUSSION AND A NALYSIS OF F INANCIAL CON- DITION AND RESULTS OF OPERATIONS.” p a g e 1 4 Outstanding time certificates of deposit issued from domestic and foreign offices and interest expense on domestic and foreign deposits are presented in Note 7 of the Company’s consolidated financial statements. The table providing selected information with respect to the Company’s deposits for each of the three most recent fiscal years appears on page 47 in “MANAGEMENT’S DISCUS- SION AND A NALYSIS OF F INANCIAL CONDITION AND RESULTS OF OPERATIONS.” Interest expense for the three most recent fiscal years is presented in Note 7 of the Company’s consolidated finan- cial statements. VI. Return on Assets and Equity The Company’s returns on average total assets and average shareholders’ equity, dividend payout ratio and average share- holders’ equity to average total assets for each of the five most recent years is presented in “SELECTED FINANCIAL DATA” on page 29. VII. Short-Term Borrowings Balance and rate data for significant categories of the Company’s short-term borrowings for each of the three most recent years is presented in Note 8 and in Note 9 of the Company’s consolidated financial statements. information a Vailable on our web S ite The Company’s Internet address is www.sterlingbancorp.com and the investor relations section of our web site is located at www.sterlingbancorp.com/ir/investor.cfm. The Company makes available free of charge, on or through the investor relations section of the Company’s web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Also posted on the Company’s web site, and available in print upon request of any shareholder to our Investor Relations Department, are the Charters for our Board of Directors’ Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee, our Corporate Governance Guidelines, our Method for Interested Persons to Communicate with Non-Management Directors, our policy on excessive or luxury expenditures and a Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time period required by the SEC and the NYSE, the Company will post on our web site any amend- ment to the Code of Business Conduct and Ethics and any waiver applicable to our senior financial officers, as defined in the Code, or our executive officers or directors. In addition, information concerning purchases and sales of our equity secu- rities by our executive officers and directors is posted on our web site. The contents of the Company’s web site are not incor- porated by reference into this annual report on Form 10-K. item 1a. r iSk factorS An investment in the parent company’s common shares is subject to risks inherent to the Company’s business. The most significant risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on, or that man- agement currently deems less significant, may also impair the Company’s business, financial condition or results of operations. This report is qualified in its entirety by these risk factors. If any of the following risks adversely affect the Company’s business, financial condition or results of operations, the value of the parent company’s common shares could decline signifi- cantly and you could lose all or part of your investment. riSkS r elated t o t he c omPanY’S b uSineSS The Company’s Business May Be Adversely Affected by Conditions in the Financial Markets and Economic Conditions Generally From December 2007 through June 2009, the United States experienced a recession and a slowing of economic activity. Business activity across a wide range of industries and regions was greatly reduced. The real estate sector, and the related segments of the construction business sector, were particu- larly severely affected. Local governments and many busi- nesses were in serious difficulty, due to the lack of consumer spending and the lack of liquidity in the credit markets. Unemployment had increased significantly. Since mid-2007, and particularly during the second half of 2008 and the first half of 2009, the financial services indus- try and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in home prices and the val- ues of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all asset classes, including equities. p a g e 1 5 The U.S. financial system has stabilized, but internationally, the weakness of certain foreign banks and the increasing danger of sovereign defaults has led to continuing high levels of uncer- tainty and volatility in the international financial markets. In particular, concerns about the European Union’s sovereign debt crisis have also caused uncertainty for financial markets globally. Such risks could indirectly affect the Company by affecting its hedging or other counterparties, as well as the Company’s customers with European businesses or assets denominated in the euro or companies in the Company’s market with European businesses or affiliates. Although economic conditions have improved, certain sectors, such as real estate and manufacturing, remain weak and unemployment remains high. Despite the actions of the U.S. Government and the Federal Reserve Board, both with respect to monetary policy, fiscal policy and increased regula- tions meant to restore investor confidence, the overall busi- ness environment in 2011 was adverse for many households and businesses in the United States and worldwide. The Company’s financial performance generally, and in par- ticular the ability of borrowers to pay interest on and repay the principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where the Company operates, in the New York metropolitan area and in the United States as a whole. A favorable business environment is generally charac- terized by, among other factors, economic growth, efficient capi- tal markets, low inflation, high business and investor confidence and strong business earnings. Unfavorable or uncertain eco- nomic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other factors. The business environment in the New York metro- politan area, the United States and worldwide has improved since the recession, but there can be no assurance that these conditions will continue to improve in the near term. A slowing of improvement or a return to deteriorating economic condi- tions could adversely affect the credit quality of the Company’s loans, business results of operations and financial condition. Continued Market Volatility May Adversely Impact Our Business, Financial Condition and Results of Operations and Our Ability to Manage Risk The capital and credit markets experienced unprecedented volatility and disruption during the 2008 financial crisis. Under these extreme conditions, our hedging and other risk management strategies may not be as effective at mitigating securities trading losses as they would be under less volatile market conditions. Further market volatility could produce downward pressure on our stock price and credit availability without regard to our underlying financial strength. The broad decline in stock prices throughout the financial ser- vices industry, which has also affected our common shares, could require a goodwill impairment test. A substantial good- will impairment charge could have an adverse impact on our results of operations. Severe market events have historically been difficult to predict, however, and we could realize sig- nificant losses if unprecedented extreme market events were to reoccur. For a discussion of risk, see “ASSET/LIABILITY MANAGEMENT” beginning on page 50 in “MANAGE- MENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” If mar- kets experience further upheavals, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to manage risk and on our business, financial condition and results of operations. We May Experience Write-downs of Investment Securities that We Own and Other Losses Related to Volatile and Illiquid Market Conditions, Reducing Our Earnings We maintain an investment securities portfolio of various holdings, types and maturities. These securities are generally classified as available for sale and, consequently, are recorded on our balance sheet at fair value with unrealized gains or losses reported as a component of accumulated other compre- hensive income, net of tax. Our portfolio includes residential mortgage-backed securities, agency notes, municipal obliga- tions and corporate debt securities, the values of which are subject to market price volatility to the extent unhedged. This volatility affects the amount of our capital. In addition, if such investments suffer credit losses, we may recognize the credit losses as an other-than-temporary impairment which could impact our revenue in the quarter in which we recog- nize the losses. If we experience losses related to our invest- ment securities portfolio in the future, it could ultimately adversely affect our results of operations and capital levels. For information regarding our investment securities portfo- lio, see “BALANCE SHEET ANALYSIS—Securities” begin- ning on page 38 and for information regarding the sensitivity of and risks asso ciated with the market value of portfolio investments and interest rates, refer to “ASSET/LIABILITY MANAGEMENT—Market Risk” beginning on page 50, both of which are in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” Improvements in Economic Indicators Disproportionately Affecting the Financial Services Industry May Lag Improvements in the General Economy The improvement of certain economic indicators, such as unemployment and real estate asset values and rents, may p a g e 1 6 nevertheless continue to lag behind the overall economy. These economic indicators typically affect certain industries, such as real estate and financial services, more significantly. For example, improvements in commercial real estate funda- mentals typically lag broad economic recovery by 12 to 18 months. The Company’s clients include entities active in these industries. Furthermore, financial services companies with a substantial lending business are dependent upon the ability of their borrowers to make debt service payments on loans. Should unemployment or real estate asset values fail to recover for an extended period of time, the Company could be adversely affected. The Company Is Subject to Interest Rate Risk The Company’s earnings and cash flows are largely depen- dent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general eco- nomic conditions and policies of various governmental and reg- ulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Although management believes it has implemented effective asset and liability management strategies to reduce the poten- tial effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. For further discussion related to the Company’s management of interest rate risk, see “ASSET/LIABILITY MANAGEMENT” beginning on page 50 in “MANAGE- MENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” The Company Is Subject to Lending Risk There are inherent risks associated with the Company’s lend- ing activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those throughout the United States. Increases in interest rates and/or a return to weakening economic conditions could adversely impact the ability of borrowers to repay outstand- ing loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applica- ble laws and regulations could subject the Company to regu- latory enforcement action that could result in the assessment of significant civil money penalties against the Company. In addi- tion, under various laws and regulations relating to mortgage lending and terms of various agreements the Company is a party to, the Company may be required to repurchase loans or indem- nify loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults. As of December 31, 2011, approximately 60.8% of the Company’s loan portfolio consisted of commercial and industrial, factored receivables, construction and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because the Company’s loan portfolio contains a significant number of commercial and industrial, construction and com- mercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations. Further, if repurchase and indem- nity demands with respect to the Company’s loan portfolio increase, its liquidity, results of operations and financial con- dition will be adversely affected. For further discussion related to commercial and industrial, construction and com- mercial real estate loans, see “Loan Portfolio” beginning on page 41 in “MANAGEMENT’S D ISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” The Company’s Allowance for Loan Losses May Be Insufficient The Company maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing p a g e 1 7 portfolio of loans. The allowance, in the judgment of man- agement, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry con- centrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regu- latory conditions; and unidentified losses inherent in the cur- rent loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and trends, all of which may undergo material changes. Continuing deteriora- tion of economic conditions affecting borrowers, new infor- mation regarding existing loans, identification of additional problem loans and other factors, both within and outside the Company’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodi- cally review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge- offs in future periods exceed the allowance for loan losses, the Company will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possi- bly, capital, and may have a material adverse effect on the Company’s financial condition and results of operations. For further discussion related to the Company’s process for determining the appropriate level of the allowance for loan losses, see “Asset Quality” beginning on page 42 in “M ANAGEMEN T’S D ISCUSSION AN D A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF OPERATIONS.” The Company May Not Be Able to Meet the Cash Flow Requirements of Its Depositors and Borrowers or Meet Its Operating Cash Needs to Fund Corporate Expansion and Other Activities Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by the board of directors. The overall liquidity position of the bank and the parent company are regularly monitored to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Funding sources include Federal funds purchased, securities sold under repurchase agreements and non-core deposits. The bank is a member of the Federal Home Loan Bank of New York, which provides funding through advances to members that are collateralized with mortgage-related assets. The Company maintains a portfolio of securities that can be used as a secondary source of liquidity. The bank also can borrow through the Federal Reserve Bank’s discount window. If the Company is unable to access any of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows, and level of regulatory- qualifying capital. For further discussion, see “Liquidity Risk” beginning on page 52 in “MANAGEMENT’S DISCUSSION AND A NALYSIS OF F INANCIAL CONDITION AND RESULTS OF OPERATIONS.” The Parent Company Relies on Dividends from Its Subsidiaries The parent company is a separate and distinct legal entity from its subsidiaries. It receives dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the parent company’s common shares and principal of and interest on its debt. Various federal and/or state laws and reg- ulations limit the amount of dividends that the bank and cer- tain non-bank subsidiaries may pay to the parent company. Also, the parent company’s right to participate in a distribu- tion of assets upon a subsidiary’s liquidation or reorganiza- tion is subject to the prior claims of the subsidiary’s creditors. In the event the bank is unable to pay dividends to the parent company, the parent company may not be able to service debt, pay obligations or pay dividends on the parent compa- ny’s common shares. The inability of the parent company to receive dividends from the bank could have a material adverse effect on the Company’s business, financial condition and results of operations. See “SUPERVISION AND REGULA- TION” on pages 3–14 and Note 16 of the Company’s con- solidated financial statements. The Company May Need to Raise Additional Capital in the Future and Such Capital May Not Be Available When Needed or at All The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquid- ity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate significantly. The Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of the Company’s control, and the Company’s financial performance. Economic conditions and the loss of confidence in financial institutions may increase the Company’s cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve Bank’s discount window. p a g e 1 8 The Company cannot assure that such capital will be avail- able on acceptable terms or at all. Any occurrence that may limit the Company’s access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the bank or counterparties participating in the capital markets, or a downgrade of the parent company or the bank’s ratings, may adversely affect the Company’s capital costs and its abil- ity to raise capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institu- tions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on the Company’s liquidity business, financial condi- tion and results of operations. The Company Is Subject to a Variety of Operational Risks, Including Reputational Risk, Legal and Compliance Risk, the Risk of Fraud or Theft by Employees or Outsiders The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from its actual or alleged conduct in any number of activities, including lending prac- tices, corporate governance and acquisitions and from actions taken by government regulators and community organiza- tions in response to those activities. The 2008 financial crisis and current political and public sentiment regarding financial institutions have resulted in a significant amount of adverse media coverage of financial institutions. Harm to our reputa- tion can result from numerous sources, including adverse publicity arising from events in the financial markets, our perceived failure to comply with legal and regulatory require- ments, the purported actions of our employees or alleged financial reporting irregularities involving ourselves or our competitors. Additionally, a failure to deliver appropriate standards of service and quality or a failure to appropriately describe our products and services can result in customer dis- satisfaction, lost revenue, higher operating costs and litiga- tion. Actions by the financial services industry generally or by other members of or individuals in the financial services industry can also negatively impact our reputation. For example, public perception that some consumers may have been treated unfairly by financial institutions has damaged the reputation of the financial services industry as a whole. Negative public opinion can adversely affect its ability to attract and keep customers and can expose the Company to litigation and regulatory action. Actual or alleged conduct by the Company can result in negative public opinion about its other business. Negative public opinion could also affect its credit ratings, which are important to its access to unsecured wholesale borrowings. Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon auto- mated systems to record and process its transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunica- tions outages), which may give rise to disruption of service to customers and to financial loss or liability. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as the Company is) and to the risk that its (or its vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a dimin- ished ability of the Company to operate its business, potential liability to clients, reputational damage and regulatory inter- vention, which could adversely affect its business, financial condition and results of operations, perhaps materially. The Company Relies on Other Companies to Provide Key Components of Its Business Infrastructure Third parties provide key components of the Company’s busi- ness infrastructure, for example, system support, Internet connections and network access. While the Company has selected these third-party vendors carefully, it does not con- trol their actions. Any problems caused by these third parties, including those resulting from their failure to provide services for any reason or their poor performance of services, could adversely affect its ability to deliver products and services to its customers and otherwise conduct its business. Replacing these third-party vendors could also entail significant delay and expense. p a g e 1 9 The Company Is Subject to Environmental Liability Risk Associated with Lending Activities A portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic sub- stances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expense and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. Future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclo- sure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations. The Company’s Profitability Depends Significantly on Local and Overall Economic Conditions The Company’s success depends significantly on the eco- nomic conditions of the communities it serves and the general economic conditions of the United States. The Company has operations in New York City and the New York metropolitan area, and conducts business in Virginia and other mid-Atlantic states and throughout the United States. The economic condi- tions in these areas and throughout the United States have a significant impact on the demand for the Company’s prod- ucts and services as well as the ability of the Company’s cus- tomers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources. Poor economic conditions, whether caused by reces- sion, inflation, unemployment, changes in securities markets, acts of terrorism, outbreak of hostilities or other interna- tional or domestic occurrences, acts of God or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company’s financial condition and results of operations. The Company May Be Adversely Affected by the Soundness of Other Financial Institutions Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit, or derivative, if any, exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results of operations. Severe Weather, Natural Disasters or Other Acts of God, Acts of War or Terrorism and Other External Events Could Significantly Impact the Company’s Business Severe weather, natural disasters or other acts of God, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct busi- ness. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstand- ing loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations. The Company Operates in a Highly Competitive Industry and Market Area The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and commu- nity banks within the various markets the Company operates. Additionally, various out-of-state banks have entered the mar- ket areas in which the Company currently operates. The Company also faces competition from many other types of financial institutions, including, without limitation, savings and loan associations, credit unions, finance companies, bro- kerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consoli- dation. Also, technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. For example, consumers can maintain funds that would have his- torically been held as bank deposits in brokerage accounts or p a g e 2 0 mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly with- out the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company does. The Company’s ability to compete successfully depends on a number of factors, including, among other things: •   The ability to develop, maintain and build upon customer  relationships based on top quality service, high ethical standards and safe, sound assets. •   The ability to expand the Company’s market position. •   The  scope,  relevance  and  pricing  of  products  and  services  offered to meet customer needs and demands. •   The  rate  at  which  the  Company  introduces  new  products  and services relative to its competitors. •   Customer satisfaction with the Company’s level of service. •   Industry and general economic trends. Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations. The Company Is Subject to Extensive Government Regulation and Supervision The Company, primarily through the parent company and the bank and certain non-bank subsidiaries, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect deposi- tors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company’s lending practices, capital structure, invest- ment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, insti- tuted major changes to the banking and financial institutions’ regulatory regimes, currently and in the near future, in light of the recent performance of and government intervention in the financial services sector. U.S. regulatory agencies—bank- ing, securities and commodities—are steadily publishing notices of proposed regulations required by the Dodd-Frank Act, and new bodies created by the Dodd-Frank Act (includ- ing the Financial Stability Oversight Council and the Consumer Financial Protection Bureau) are commencing operations. The related findings of various regulatory and commission studies, the interpretations issued as part of the rulemaking process and the final regulations that are issued with respect to various elements of the new law may cause changes that impact the profitability of our business activities and require that we change certain of our business practices and plans. Other changes to statutes, regulations or regula- tory policies, including changes in interpretation or imple- mentation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See “SUPERVISION AND REGULATION” on pages 3–14. Increases in FDIC Insurance Premiums May Adversely Affect the Company’s Earnings Since 2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund. In addition, the permanent increase of insured amount of deposit accounts up to $250,000 from $100,000 per each customer and the temporary unlim- ited insurance of noninterest-bearing demand transaction accounts have placed additional stress on the Deposit Insurance Fund. In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC has increased assessment rates of insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted fund. The Company is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures the Company may be required to pay even higher FDIC pre- miums than the recently increased levels. Additionally, the failure by the parent company or the bank to maintain its “well capitalized” status could also lead to higher FDIC p a g e 2 1 assessments. Such increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact its earnings. The Company’s Controls and Procedures May Fail or Be Circumvented The Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumven- tion of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s busi- ness, results of operations and financial condition. The Company May Be Subject to a Higher Effective Tax Rate if Sterling Real Estate Holding Company, Inc. Fails to Qualify as a Real Estate Investment Trust (“REIT”) Sterling Real Estate Holding Company Inc. (“SREHC”) oper- ates as a REIT for federal income tax purposes. SREHC was established to acquire, hold and manage mortgage assets and other authorized investments to generate net income for dis- tribution to its shareholders. For an entity to qualify as a REIT, it must satisfy the following six asset tests under the Internal Revenue Code each quarter: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includ- ible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includ- ible under the 75% test or securities of taxable REIT subsid- iaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 25% of its total assets. At December 31, 2011, SREHC met all six quarterly asset tests. Also, a REIT must satisfy the following two gross income tests each year: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources quali- fying for the 75% test plus dividends, interest, and gains from the sale of securities. In addition, a REIT must distribute at least 90% of its taxable income for the taxable year, exclud- ing any net capital gains, to maintain its non-taxable status for federal income tax purposes. For 2011, SREHC had met the two annual income tests and the distribution test. If SREHC fails to meet any of the required provisions and, therefore, does not qualify to be a REIT, the Company’s effective tax rate would increase. The Company Would Be Subject to a Higher Effective Tax Rate if Sterling Real Estate Holding Company, Inc. Is Required to Be Included in a New York Combined Return New York State tax law generally requires a REIT that is majority-owned by a New York State bank to be included in the bank’s combined New York State tax return. The Company believes that it qualifies for the small-bank exception to this rule. If, contrary to this belief, Sterling Real Estate Holding Company, Inc. were required to be included in the Company’s New York State combined tax return, the Company’s effec- tive tax rate would increase. Under the small-bank exception, dividends received by the bank from SREHC, a real estate investment trust, are subject to a 60% dividends-received deduction, which results in only 40% of the dividends being subject to New York State tax. Currently, the New York City banking corporation tax operates in the same manner in this respect. The possible reform of the New York State franchise and banking corporation tax laws mentioned below could require SREHC to file a combined New York State return with the Company and substantially eliminate the benefit of the 60% dividends-received deduction by caus- ing generally all of SREHC’s income to be subject to New York State tax as part of the Company’s combined return. Possible New York State Legislative Changes May Negatively Affect the Amount of Taxes We Pay in Future Years The New York State Department of Taxation and Finance developed, and released to the public in 2010 and 2011, a detailed proposal to reform the New York State corporate franchise and banking laws. If that released proposal were enacted, it would substantially alter how the Company and the bank are taxed in New York State, including substantially elimi- nating the benefit of the 60% dividends-received deduction. In December 2011, New York State Governor Cuomo created the New York State Tax Reform and Fairness Commission, with a mandate to conduct a comprehensive and objective review of the State’s taxation policy and consider ways to eliminate tax loopholes, promote administration efficiency and enhance tax collection and enforcement. The Commission members have not yet been appointed and it is not possible to predict what the results of the Commission’s work will be, and what impact, if any, the Commission’s results will have. Nor is it possible to predict whether any tax legislation that would impact the Company and the bank’s effective p a g e 2 2 New York State (and New York City) tax rates will be pro- posed or enacted. The Recent Repeal of Federal Prohibitions on Payment of Interest on Demand Deposits Could Increase the Company’s Interest Expense All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act beginning on July 21, 2011. As a  result, some financial institutions commenced offering inter- est on demand deposits to compete for customers. The Company does not yet know what interest rates other institu- tions may offer as the market rates begin to increase. The Company’s interest expense will increase and its net interest margin will decrease if it begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on the Company’s business, financial condition and results of operations. New Lines of Business or New Products and Services May Subject the Company to Additional Risks The Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources but it may take time for revenues to develop. Initial timetables for the introduction and development of new lines of business and/or new prod- ucts or services may not be achieved and price and profitabil- ity targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to manage these risks successfully in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition. Potential Acquisitions May Disrupt the Company’s Business and Dilute Shareholder Value The Company seeks merger or acquisition partners that are compatible and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, econo- mies of scale or expanded services. Acquiring other banks, businesses or branches involves various risks commonly asso- ciated with acquisitions, including, among other things: •   Potential exposure to unknown or contingent liabilities of  the target company. •   Exposure to potential asset quality issues of the target company. •   Difficulty  and  expense  of  integrating  the  operations  and  personnel of the target company. •   Potential disruption to the Company’s business. •   Potential  diversion  of  the  Company’s  management  time  and attention. •   The  possible  loss  of  key  employees  and  customers  of  the  target company. •   Difficulty in estimating the value of the target company. •   Potential  changes  in  banking  or  tax  laws  or  regulations  that may affect the target company. The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisi- tion discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. To the extent we enter into an agreement to acquire an entity, there can be no guarantee that the transaction will close when anticipated, or at all. In particular, at times we must seek federal regulatory approvals before we can acquire another organization, which can delay or disrupt such acquisitions. Acquisitions typically involve the payment of a premium over book and market val- ues, and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or other pro- jected benefits from an acquisition could have a material adverse effect on the Company’s financial condition and results of operations. The Company May Not Be Able to Attract and Retain Skilled People The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense, and the Company may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The Company has employment agree- ments with two of its senior officers. p a g e 2 3 Our ability to attract and retain key executives and other employees may be hindered as a result of regulations applica- ble to incentive compensation and other aspects of our com- pensation programs promulgated by the Federal Reserve and other regulators in the United States, regulations on incentive compensation to be promulgated by various U.S. regulators pursuant to the Dodd-Frank Act and other existing and potential regulations. These regulations, which include and are expected to include mandatory deferral and clawback requirements, do not and will not apply to some of our com- petitors and to other institutions with which we compete for talent. Our ability to recruit and retain key talent may be adversely affected by these regulations. If the Company’s Information Systems Experience an Interruption or Breach in Security that Results in a Loss of Confidential Client Information or Impacts Our Ability to Provide Services to Our Clients, Our Business and Results of Operations May Be Adversely Affected The Company relies heavily on communications and infor- mation systems to conduct its business. The security of our computer systems, software and networks, and those func- tions that we may outsource, may be vulnerable to breaches, hacker attacks, unauthorized access and misuse, computer viruses and other cyber security risks and events that could result in failures or disruptions in our business, customer relationship management, general ledger, deposit and loan systems. Our businesses that rely heavily on technology are particularly vulnerable to security breaches and technology disruptions. Breaches of security may occur through inten- tional or unintentional acts by those having authorized or unauthorized access to our or our clients’ or counterparties’ confidential information, including employees and custom- ers, as well as hackers. A breach of security that results in the loss of confidential client information may require us to reim- burse clients for data and credit monitoring efforts and would be costly and time-consuming, and may negatively impact our results of operations and reputation. Additionally, secu- rity breaches or disruptions of our information system could impact our ability to provide services to our clients, which could expose us to liability for damages, result in the loss of customer business, damage our reputation, subject us to reg- ulatory scrutiny or expose us to civil litigation, any of which could have a material adverse effect on our financial condi- tion and results of operations. Certain security breaches or other cyber incidents may remain undetected for an extended period of time, which may amplify the damages to our clients and/or us arising from such breaches or incidents. In addi- tion, the failure to upgrade or maintain our computer sys- tems, software and networks, as necessary, could also make us susceptible to breaches and unauthorized access and mis- use. There can be no assurance that any such failures, inter- ruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. We may be required to expend significant additional resources to mod- ify, investigate or remediate vulnerabilities or other exposures arising from information systems security risks. The Company Depends on the Accuracy and Completeness of Information About Customers and Counterparties In deciding whether to extend credit or enter into other trans- actions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial infor- mation. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial infor- mation could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations. The Company Continually Encounters Technological Change The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The Company’s future success depends, in part, upon its ability to address the needs of customers by using technology to provide prod- ucts and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s opera- tions. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to implement effectively new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to keep pace successfully with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations. The Company Is Subject to Claims and Litigation Pertaining to Fiduciary Responsibility and Lender Liability From time to time, customers make claims and take legal action pertaining to the Company’s performance of its fidu- ciary responsibilities. Whether customer claims and legal action related to the Company’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company they may result in significant financial liability and/or adversely affect the market perception of the Company p a g e 2 4 and its products and services as well as impact customer demand for those products and services. Any fiduciary liabil- ity or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations. In addition, in recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. Substantial legal liability or significant regulatory action against the Company or its subsidiaries could materially adversely affect its business, financial condition or results of operations and/or cause significant harm to its reputation. The Company’s Reported Financial Results Depend on Management’s Selection of Accounting Methods and Certain Assumptions and Estimates The Company’s accounting policies and methods are funda- mental to the methods by which the Company records and reports its financial condition and results of operations. Its management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report its financial condition and results. In some cases, man- agement must select the accounting policy or method to apply from two or more alternatives, any of which may be reason- able under the circumstances, yet may result in its reporting materially different results than would have been reported under a different alternative. Certain accounting policies are critical to presenting its finan- cial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include: the allowance for credit losses; the determination of fair value for financial instruments; the valuation of goodwill and other intan- gible assets; the accounting for pension and post-retirement benefits and the accounting for income taxes. Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of the following: significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided; recognize significant impairment on its good- will and other intangible asset balances; or significantly increase its accrued tax liability. Changes in the Company’s Accounting Policies or in Accounting Standards Could Materially Affect How the Company Reports Its Financial Results and Condition From time to time, the Financial Accounting Standards Board (“FASB”) and SEC change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the Company restating prior period financial statements. riSkS aSS ociated w ith t he Parent c omPanY’S common S hareS The Parent Company’s Share Price Can Be Volatile Share price volatility may make it more difficult to resell the parent company’s common shares when desired and at an attractive price. The parent company’s share price can fluctu- ate significantly in response to a variety of factors, including, among other factors: •   Actual  or  anticipated  variations  in  quarterly  results  of  operations. •   Recommendations by securities analysts. •  Expectation of or actual equity dilution. •   Operating and share price performance of other companies  that investors deem comparable to the Company. •   News reports relating to trends, concerns and other issues  in the financial services industry. •   Perceptions  in  the  marketplace  regarding  the  Company  and/or its competitors. •   New technology used, or services offered, by competitors. •   Significant acquisitions or business combinations, strategic  partnerships, joint ventures or capital commitments by or involving the Company or its competitors. •  Failure to integrate acquisitions or realize anticipated bene- fits from acquisitions. •   Changes in government regulation. •   Geopolitical conditions such as acts or threats of terrorism  or military conflicts. General market fluctuations, industry factors and general economic and political conditions and events, such as eco- nomic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the parent company’s share price to decrease regardless of operating results. p a g e 2 5 The Trading Volume in the Parent Company’s Common Shares Is Less Than That of Other Larger Financial Services Companies Although the parent company’s common shares are listed for trading on the NYSE, the trading volume in its common shares is less than that of other larger financial services com- panies. A public trading market having the desired character- istics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the parent company’s common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the trading volume of the parent company’s common shares, significant sales of the parent company’s common shares, or the expectation of these sales, could cause the parent company’s share price to fall. An Investment in the Parent Company’s Common Shares Is Not an Insured Deposit The parent company’s common shares are not bank deposits and, therefore, are not insured against loss by the Federal Deposit Insurance Corporation, any other deposit insurance fund or by any other public or private entity. Investment in the parent company’s common shares are inherently risky for the reasons described in this “Risk Factors” section and else- where in this report and is subject to the same market forces that affect the price of common shares in any company. As a result, if you acquire the parent company’s common shares, you may lose some or all of your investment. The Parent Company’s Certificate of Incorporation and By-Laws as Well as Certain Banking Laws May Have an Anti-Takeover Effect Provisions of the parent company’s certificate of incorpora- tion and by-laws, and federal banking laws, including regula- tory approval requirements, could make it more difficult for a third party to acquire the parent company, even if doing so would be perceived to be beneficial to the parent company’s shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combina- tion, which, in turn, could adversely affect the market price of the parent company’s common shares. The Parent Company May Not Pay Dividends on Its Common Shares Holders of shares of the parent company’s common shares are only entitled to receive such dividends as its board of directors may declare out of funds legally available for such payments. Although the parent company has historically declared cash dividends on its common shares, it is not required to do so and may reduce or eliminate its common share dividend in the future. This could adversely affect the market price of its common shares. Future Issuances of Additional Common Shares or Other Equity Securities Could Result in Dilution of Ownership of the Parent Company’s Existing Shareholders The parent company may from time to time explore capital raising opportunities and may determine to issue additional common shares or other equity securities to increase its capi- tal, support growth, or to make acquisitions. We intend to take advantage of favorable market conditions to increase our capital. Further, the parent company may issue stock options or other stock grants to retain and motivate its employees. These issuances of equity securities could dilute the voting and economic interests of its existing shareholders. item 1b. unre SolVed S taff comment S None. item 2. P roPertieS The principal office of the Company occupies one floor at 650 Fifth Avenue, New York, N.Y., consisting of approximately 14,400 square feet. The lease for this office expires April 30, 2016. Rental commitments to the expiration date approxi- mate $3.8 million. At December 31, 2011, the bank also maintains operating leases for ten branch offices, the international banking facil- ity, and additional space in New York City, Nassau, Suffolk and Westchester counties (New York) with an aggregate of approximately 135 thousand square feet. Effective in 2011, certain lease agreements terminated and the bank has entered into new agreements for additional space, bringing the amount of space committed to an aggregate of approximately 135 thousand square feet. The aggregate office rental com- mitments for these premises, including the new space under lease in 2011, approximates $44.0 million. These leases have expiration dates ranging from 2012 through 2025 with vary- ing renewal options. The bank owns free and clear (not sub- ject to a mortgage) a building in which it maintains a branch located in Forest Hills, Queens, N.Y. item 3. legal P roceedingS In the normal course of business there are various legal pro- ceedings pending against the Company. Management, after consulting with counsel, is of the opinion that there should be no material liability with respect to such proceedings and accordingly no provision has been made in the Company’s consolidated financial statements. During the 2011 fourth quarter, the Company recorded a charge related to the settle- ment of certain litigation. p a g e 2 6 item 4. mine S afetY di ScloSureS Not applicable. item 4 a. SubmiSSion of matter S to a V ote of S ecuritY holder S No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. executiVe officer S of the regi Strant This table sets forth information regarding the parent company’s executive officers: Name of Executive Title Louis J. Cappelli John C. Millman John W. Tietjen Howard M. Applebaum Eliot S. Robinson Chairman of the Board and Chief Executive Officer, Director President, Director Executive Vice President and Chief Financial Officer Senior Vice President Executive Vice President of Sterling National Bank Age 81 69 67 53 69 Held Executive Office Since 1967 1986 1989 2002 1998 All executive officers who are employees of the parent company are elected annually by the Board of Directors and serve at the pleasure of the Board. The executive officer who is not an employee of the parent company is elected annually by, and serves at the pleasure of, the Board of Directors of the bank. There are no arrangements or understandings between any of the foregoing executive officers and any other person or persons pursuant to which he was selected as an executive officer. The Company’s 2011 Domestic Company Section 303A Annual CEO Certification was filed (without qualifications) with the NYSE. P A R T I I item 5. market for the regi Strant ’S common e QuitY, related Shareholder matter S and iSSuer PurchaSeS of e QuitY S ecuritieS The parent company’s common shares are traded on the NYSE under the symbol “STL.” Information regarding the quarterly prices of the common shares is presented in Note 25 on page 114. Information regarding the average common shares outstanding and dividends per common share is presented in the Consolidated Statements of Income on page 59. Information regarding the Company’s stock incentive plans is presented in Note 17 on page 96. Information regarding legal restrictions on the ability of the bank to pay dividends is presented in Note 16 on page 96. Although such restrictions do not apply to the payment of divi- dends by the parent company to its shareholders, such dividends may be limited by other factors, such as the requirement to maintain adequate capital under the risk-based capital regulations described in Note 22 beginning on page 110. As of February 23, 2012, there were 1,218 shareholders of record of our common shares. During the fiscal years ended December 31, 2011 and 2010, the following dividends were declared on our common shares: Cash Dividends Per Share First Quarter Second Quarter Third Quarter Fourth Quarter Total 2011 $ 0.09 0.09 0.09 0.09 $ 0.36 2010 $ 0.09 0.09 0.09 0.09 $ 0.36 The Board of Directors initially authorized the repurchase of common shares in 1997 and since then has approved increases in the number of common shares that the parent company is authorized to repurchase. The latest increase was announced on February 15, 2007, when the Board of Directors increased the Company’s authority to repurchase common shares by an addi- tional 800,000 shares. This increased the Company’s authority to repurchase shares to approximately 933,000 common shares. Under its share repurchase program, the Company buys back common shares from time to time. The Company did not repur- chase any of its common shares during the fourth quarter of 2011. At December 31, 2011, the maximum number of shares that may yet be repurchased under the share repurchase program was 870,963. p a g e 2 7 For information regarding securities authorized for issuance under the Company’s equity compensation plan, see Item 12 on page 119. The following performance graph compares for the fiscal years ended December 31, 2007, 2008, 2009, 2010 and 2011 (a) the yearly cumulative total shareholder return (i.e., the change in share price plus the cumulative amount of dividends, assuming dividend reinvestment, divided by the initial share price, expressed as a percentage) on Sterling’s common shares, with (b) the cumulative total return of the Standard & Poor’s 500 Stock Index, and with (c) the cumulative total return on the KBW Regional Banks Index (a market-capitalization weighted bank-stock index): Sterling Bancorp S&P 500 KBW Regional Bank Index item 6. Selected financial data 12/06 100.00 100.00 100.00 12/07 72.81 105.49 78.03 12/08 79.20 66.46 63.55 12/09 43.17 84.05 49.48 12/10 65.77 96.71 59.58 12/11 56.63 98.75 56.51 The information appears on page 29. All such information should be read in conjunction with the consolidated financial state- ments and notes thereto and discussions of factors that may materially affect the comparability of information and material uncertainties in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS” on page 30. item 7. management ’S di ScuSS ion and analYSiS of financial condition and re SultS of o PerationS The information appears on pages 30–56 and supplementary quarterly data appears in Note 25 of the Company’s consolidated financial statements. All such information should be read in conjunction with the consolidated financial statements and the notes thereto. item 7a. QuantitatiVe and Q ualitatiVe di ScloSureS about market ri Sk The information appears on pages 50–54 under the caption “ASSET/LIABILITY MANAGEMENT.” All such information should be read in conjunction with the consolidated financial statements and notes thereto. p a g e 2 8 Sterling Bancorp S E L E C T E D F I N A N C I A L D A T A [ 1 ] (dollars in thousands except per share data) 2011 2010 2009 2008 2007 SummarY of oPerationS Total interest income Total interest expense Net interest income Provision for loan losses Net securities gains Other-than-temporary losses Noninterest income, excluding net securities gains and $ $ 97,064 12,987 84,077 12,000 1,726 — other-than-temporary losses Noninterest expenses Income before taxes Provision for income taxes Income from continuing operations Loss from discontinued operations, net of tax Net income Dividends on preferred shares and accretion Net income available to common shareholders Income from continuing operations available to common shareholders Per average common share—basic —diluted Net income available to common shareholders Per average common share—basic —diluted Dividends per common share Year end balance SheetS Interest-bearing deposits with other banks Investment securities Loans held for sale Loans held in portfolio, net of unearned discounts Total assets Noninterest-bearing demand deposits Savings NOW and money market deposits Time deposits Short-term borrowings Advances—FHLB and long-term debt Shareholders’ equity aVerage balance SheetS Interest-bearing deposits with other banks Investment securities Loans held for sale Loans held in portfolio, net of unearned discounts Total assets Noninterest-bearing demand deposits Savings NOW and money market deposits Time deposits Short-term borrowings Advances—FHLB and long-term debt Shareholders’ equity ratioS Return on average total assets Return on average shareholders’ equity Dividend payout ratio Average shareholders’ equity to average total assets Net interest margin (tax-equivalent basis) Loans/assets, year end[2] Net charge-offs/loans, year end[3] Nonperforming loans/loans, year end[2] Allowance/loans, year end[3] Allowance/nonaccrual loans 97,190 15,583 81,607 28,500 3,928 — 43,705 91,556 9,184 2,158 7,026 — 7,026 2,589 4,437 0.18 0.18 0.18 0.18 0.36 40,503 789,315 32,049 1,314,234 2,360,457 570,290 562,207 615,267 60,894 169,947 222,742 31,960 768,184 35,354 1,227,049 2,244,569 489,184 564,061 559,203 112,207 158,351 213,153 $ 105,920 19,295 86,625 27,900 5,561 — $ 118,071 33,388 84,683 8,325 — (1,684) $ 121,433 47,560 73,873 5,853 188 — 38,589 88,545 14,330 4,908 9,422 — 9,422 2,773 6,649 0.37 0.37 0.37 0.37 0.56 36,958 737,065 33,889 1,195,415 2,165,609 546,337 592,015 442,315 131,854 155,774 161,950 36,804 719,485 41,225 1,154,041 2,114,221 441,087 562,780 375,742 271,075 174,981 158,225 34,984 84,476 25,182 9,176 16,006 — 16,006 102 15,904 0.89 0.88 0.89 0.88 0.76 13,949 793,924 23,403 1,184,585 2,179,101 464,585 564,205 329,034 363,404 175,774 160,480 5,727 744,169 23,286 1,120,362 2,066,628 427,105 522,807 451,031 279,840 163,479 119,791 35,224 79,478 23,954 8,560 15,394 (795) 14,599 — 14,599 0.84 0.82 0.79 0.78 0.76 980 618,490 23,756 1,152,796 1,979,650 501,023 467,446 524,189 205,418 65,774 121,071 3,033 582,327 43,919 1,049,206 1,875,615 424,425 498,827 556,869 131,573 44,130 124,140 42,334 94,345 21,792 4,196 17,596 — 17,596 2,074 15,522 0.51 0.51 0.51 0.51 0.36 126,448 677,871 43,372 1,473,309 2,493,297 765,800 565,423 657,848 65,798 148,507 220,821 93,561 830,968 27,954 1,351,407 2,508,184 596,608 596,007 729,053 77,143 155,332 224,820 0.70% 7.83 63.21 8.96 3.92 60.83 0.69 0.42 1.36 315.02 0.31% 3.30 126.29 9.50 4.25 57.03 2.25 0.49 1.39 274.50 0.45% 5.95 107.52 7.48 4.63 56.77 1.95 1.46 1.66 110.54 0.77% 0.82% 13.36 85.43 5.80 4.60 55.44 0.54 0.61 1.35 218.00 12.40 89.35 6.62 4.48 59.43 0.50 0.54 1.31 236.33 [1] All data presented is from continuing operations unless indicated otherwise. certain reclassifications have been made to prior years’ financial data to con- form to current financial statement presentations. [2] In this calculation, the term “loans” means loans held for sale and loans held in portfolio. [3] In this calculation, the term “loans” means loans held in portfolio. p a g e 2 9 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Sterling Bancorp The following commentary presents management’s discus sion and analysis of the financial condition and results of opera- tions of Sterling Bancorp, a financial holding company under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999, and its subsidiaries, princi- pally Sterling National Bank. Throughout this discussion and analysis, the term the “Company” refers to Sterling Bancorp and its consolidated subsidiaries and the term the “bank” refers to Sterling National Bank and its consolidated subsid- iaries, while the term the “parent company” refers to Sterling Bancorp but not its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and selected financial data contained elsewhere in this annual report. Certain reclassifications have been made to prior years’ financial data to conform to current financial statement presentations. Throughout management’s discus- sion and analysis of financial condition and results of opera- tions, dollar amounts in tables are presented in thousands, except per share data. forward -looking Statement S and factorS that could a ffect f uture r eSultS Certain statements contained or incorporated by reference in this annual report on Form 10-K, including but not limited to, statements concerning future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses and plans and objectives for future operations, change in laws and regulations applicable to the Company, adequacy of funding sources, actuarial expected benefit payment, valu- ation of foreclosed assets, our ability to hold to maturity securities designated as held to maturity, regulatory and eco- nomic environment and other statements contained herein regarding matters that are not historical facts, are “forward- looking statements” as defined in the Securities Exchange Act of 1934. These statements are not historical facts but instead are subject to numerous assumptions, risks and uncertainties, and represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and out- side our control. Any forward-looking statements the Company may make speak only as of the date on which such statements are made. Our actual results and financial position may differ materially from the anticipated results and financial condi- tion indicated in or implied by these forward-looking state- ments, and the Company makes no commitment to update or revise forward-looking statements in order to reflect new information or subsequent events or changes in expectations. Factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: inflation, interest rates, market and monetary fluctuations; geopolitical developments including acts of war and terrorism and their impact on economic condi- tions; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; changes, particularly declines, in general eco- nomic conditions and in the local economies in which the Company operates; the financial condition of the Company’s borrowers; competitive pressures on loan and deposit pricing and demand; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); changes in accounting principles, policies and guidelines; the risks and uncertainties described in ITEM 1A. RISK FACTORS on pages 15–26; other risks and uncertainties described from time to time in press releases and other public filings; and the Company’s performance in managing the risks involved in any of the foregoing. The foregoing list of important factors is not exclusive, and the Company will not update any forward-looking statement, whether written or oral, that may be made from time to time. recent m arket d eV eloPmentS In response to the financial crises affecting the banking sys- tem and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to EESA, the United States Department of the Treasury (the “U.S. Treasury”) was given the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the Secretary of the Department of the Treasury announced that the U.S. Treasury will purchase equity stakes in a wide variety of banks and thrifts. Under the program, known as the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, from the $700 billion authorized by EESA, the U.S. Treasury made $250 billion of capital available to U.S. financial institutions in the form of preferred shares. In conjunction with the purchase of preferred shares, the U.S. Treasury received, from participating finan- cial institutions, warrants to purchase common shares with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the U.S. Treasury’s standards for executive p a g e 3 0 compensation and corporate governance for the period dur- ing which the U.S. Treasury holds equity issued under the TARP Capital Purchase Program. On December 23, 2008, the Company elected to participate in the TARP Capital Purchase Program, under which the Company issued pre- ferred shares and a warrant to purchase common shares to the U.S. Treasury. In the second quarter of 2011, the Company repurchased in full the preferred shares and the warrant to purchase common shares. On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG Program was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by the Secretary of the Department of Treasury (after consultation with the President), as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLG Program (as amended from time to time thereafter) the FDIC would (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by partici- pating institutions and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts (“IOLA”) accounts held at participating FDIC-insured institutions. The transaction account guaran- tee program described in clause (ii) expired on June 30, 2010. Coverage under the TLG Program was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranged from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage was 10 basis points per quarter on amounts in covered accounts exceeding $250,000. The Company elected to opt out of the debt guarantee program under the TLG Program. On February 10, 2009, the Treasury Secretary announced a new comprehensive financial stability plan which included: (i) a capital assistance program that has invested in convertible preferred stock of certain qualifying institutions, (ii) a con- sumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset- backed securities issuances, (iii) a public-private investment fund intended to leverage public and private capital with pub- lic financing to purchase legacy “toxic assets” from financial institutions, and (iv) assistance for homeowners to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs. In order to restore the depleted Deposit Insurance Fund and maintain a sound reserve ratio, the FDIC imposed higher base assessment rates and special one-time assessments and required prepayment of deposit insurance premium. The FDIC stated that, after its semi-annual reviews, it may further increase assessment rates or take other actions to bring the Deposit Insurance Fund’s reserve ratio back to a desirable level. In June of 2009, the Obama administration proposed a wide range of regulatory reforms that included, among other things, proposals (i) that federal bank regulators require loan originators or sponsors to retain part of the credit risk of securitized exposures, (ii) for the creation of a federal con- sumer financial protection agency that would, among other things, be charged with applying consistent regulations to similar products (such as imposing certain notice and consent requirements on consumer overdraft lines of credit), (iii) that there be comprehensive regulation of OTC derivatives, (iv) that the controls on the ability of banking institutions to engage in transactions with affiliates be tightened, and (v) that financial holding companies be required to be “well cap- italized” and “well managed” on a consolidated basis. On October 22, 2009, the Federal Reserve Board issued a comprehensive proposal on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The proposal covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group. In November 2009, the FDIC implemented a final rule requir- ing insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. On July 21, 2010, President Obama signed into law Dodd- Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act has resulted, and will continue to result, in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. Certain provisions of the Dodd-Frank Act that affect all banks and bank hold- ing companies include: (i) creation of the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer protection laws; (ii) limitation on the preemption of state banking law by federal law; (iii) application of the same leverage and risk- based capital requirements that apply to insured depository institutions to most bank holding companies; (iv) making capital requirements for national banks counter-cyclical; (v) imposition of “well capitalized” and “well managed” require- ments to bank holding companies and restricting out-of-state acquisition by bank holding companies and banks that do not p a g e 3 1 meet such standards; (vi) implementation of corporate gover- nance revisions, (vii) making permanent the federal deposit insurance limit per customer and implementing certain mea- sures to strengthen the Deposit Insurance Fund (the “DIF”), (viii) repeal of the federal prohibition on the payment of inter- est on demand deposits, (ix) prohibition on banking entities from engaging in proprietary trading or acquiring or retain- ing an interest in a private equity or hedge fund (the “Volcker Rule”), and (x) increase of the Federal Reserve’s supervisory authority, among others. In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for noninterest-bearing transaction accounts. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III.” Basel III, when implemented by the U.S. bank- ing agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substan- tially more capital, with a greater emphasis on common equity. Also in December 2010, the Federal Reserve Board, the OCC and the FDIC issued a joint notice of proposed rule- making that would impose a continuing “floor” of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III (see below) otherwise would permit lower requirements. Pursuant to the Dodd-Frank Act, the initial version of regula- tions prohibiting incentive-based payment arrangements at certain regulated entities that encourage inappropriate risks by providing an executive officer, employee, director or prin- cipal shareholder with excessive compensation, fees or bene- fits or that could lead to material financial loss to the entity and requiring enhanced disclosure to regulators of incentive- based compensation arrangements was proposed by the U.S. financial regulators in February 2011, and the regulations may become effective in 2012. In the first half of 2011, the SEC adopted rules concerning say- on-pay votes and golden parachute compensation arrange- ments. These rules require us to make enhanced disclosures to the SEC, and require us to provide our shareholders with a nonbinding say-on-pay vote to approve the compensation of the named executive officers, a non-binding vote to deter- mine how often the say-on-pay vote will occur and, in certain circumstances, a non-binding vote to approve, and proxy dis- closure of, golden parachute compensation arrangements. In October 2011, federal regulators proposed rules to imple- ment the Volcker Rule. The proposed rules are highly com- plex, and many aspects of the Volcker Rule remain unclear. The Volcker Rule provisions are scheduled to take effect no later than July 2012. For more detailed discussion on recent legislative and regula- tory developments, see “SUPERVISION AND REGULATION” on pages 3–14. critical a ccounting PolicieS and eS timateS The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. generally accepted accounting principles (“U.S. GAAP”). In preparing the consolidated financial statements, management has made estimates, assumptions and judgments based on information available as of the date of the financial statements; accord- ingly, as this information changes, the financial statements may reflect different estimates, assumptions and judgments. Certain policies inherently have greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materi- ally different than originally reported. Estimates, assump- tions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation allowance to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the infor- mation used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily avail- able. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circum- stances. The Company adjusts such estimates and assump- tions when the Company believes facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign cur- rency and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could dif- fer significantly from these estimates. Changes in those esti- mates resulting from continuing changes in the economic environment will be reflected in the financial statements in the future periods. p a g e 3 2 The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. The most sig- nificant accounting policies followed by the Company are presented in Note 1 begin ning on page 64. The accounting for factoring transactions also is discussed under “BUSINESS OPERA TIONS —The Bank—Commercial Lending, Asset- Based Financing, Residential Mortgage Warehouse Lending and Factoring/Accounts Receivable Management” on pages 1 and 2. The Company has identified its policies on the valuation of securities, the allowance for loan losses and income tax liabili- ties to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and could be subject to revision as new information becomes available. Additional information on these policies can be found in Note 1 to the consolidated financial statements. Management utilizes various inputs to determine the fair value of its securities portfolio. Fair value of securities is based upon market prices, where available (Level 1 inputs). If such quoted market prices are not available, fair value is based upon market prices determined by an outside, indepen- dent entity that primarily uses, as inputs, observable market- based parameters (Level 2 inputs). 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 creditworthi- ness, among other things, as well as unobservable parameters (Level 3 inputs). Any such valuation adjustments are applied consistently over time. The Company’s valuation methodolo- gies may produce a fair value calculation that may not be indicative of net realized value or reflective of future fair val- ues. 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. Additional discussion of valuation methodologies is presented in Note 21 of the Company’s con- solidated financial statements. A periodic review is conducted by management to determine if the decline in the fair value of any security appears to be other-than-temporary. Factors considered in determining whether the decline is other-than-temporary include, but are not limited to: the length of time and the extent to which fair value has been below cost; the financial condition and near- term prospects of the issuer; and the Company’s intent to sell. If the decline is deemed to be other-than-temporary, and the Company does not have the intent to sell, and will not likely be required to sell, the security is written down to new cost basis and the resulting credit component of the loss is reported in noninterest income and the remainder of the loss is recorded in shareholders’ equity. If the Company intends to sell or will be required to sell, the full amount of the other- than-temporary impairment is recorded in noninterest income. Additional discussion of management’s evaluation process and other-than-temporary-impairment charges is pre- sented in Note 1 and in Note 4. The allowance for loan losses represents management’s esti- mate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be suscep- tible to significant change. The methodology used to deter- mine the allowance for loan losses is outlined in Note 1 to the consolidated financial statements and a discussion of the fac- tors driving changes in the amount of the allowance for loan losses is included under the caption “Asset Quality” begin- ning on page 42. The objectives of accounting for income taxes are to recog- nize the amount of taxes payable or refundable for the cur- rent year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of oper- ations. In connection with determining its income tax provi- sion under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification”) Topic 740: Income Taxes, the Company maintains a reserve related to certain tax positions and strategies that management believes contain an element of uncertainty. The Company evaluates each of its tax positions and strategies periodically to determine whether the reserve continues to be appropriate. Additional discussion on the accounting for income taxes is presented in Note 1 and in Note 19 of the Company’s con- solidated financial statements. p a g e 3 3 oV erView The Company provides a broad range of financial products and services, including business and consumer loans, com- mercial and residential mortgage lending and brokerage, asset-based financing, factoring/accounts receivable manage- ment services, trade financing, equipment financing and deposit 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 New York metropolitan 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. On April 3, 2009, Sterling Factors Corporation, a subsidiary of the bank, acquired substantially all of the assets and customer lists of DCD Capital, LLC and DCD Trade Services, LLC. The acquired assets and customer lists are now operating as a division under the name Sterling Trade Capital. In 2011, the bank’s average earning assets represented approx- imately 98.9% of the Company’s average earning assets. Loans represented 59.8% and investment securities repre- sented 35.7% of the bank’s average earning assets in 2011. The Company’s primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Federal Reserve Board influences the general mar- ket rates of interest, including the deposit and loan rates offered by many financial institutions. The Company’s loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, remained at 3.25% during 2011, 2010 and 2009. The intended federal funds rate, which is the cost of immediately available overnight funds, remained at zero to 0.25% during 2011, 2010 and 2009. The Company’s balance sheet has historically been asset sensitive, meaning that earning assets generally reprice more quickly than interest-bearing liabilities. Therefore, the Company’s net interest margin is likely to increase in sustained periods of rising interest rates and decrease in sustained periods of declining interest rates. The Company is not able to predict market interest rate fluctuations and its asset/liability man- agement 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 collect- ibility 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 ser vices. 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, services, availability of products and geographic location. The Company regularly evaluates acquisition opportunities and conducts due diligence activities in connection with pos- sible acquisitions. As a result, acquisition discussions, and in some cases negotiations, regularly take place and future acquisitions could occur. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments 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. income Statement a nalYSiS 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 compo- sition of assets, liabilities and shareholders’ equity. Net inter- est spread is the difference between the average rate earned, on a tax-equivalent basis, on interest-earning assets and the aver- age 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 p a g e 3 4 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 page 49. Information as to the components of interest income and interest expense and average rates is provided in the AVERAGE BALANCE SHEETS shown on page 48. comPariSon of the YearS 2011 and 2010 The Company reported net income available to common shareholders for 2011 of $15.5 million, representing $0.51 per share calculated on a diluted basis, compared to $4.4 mil- lion, or $0.18 per share calculated on a diluted basis, for 2010. The $11.1 million increase in net income available to common shareholders was primarily due to a $2.5 million increase in net interest income, a $16.5 million decrease in the provision for loan losses and a $0.5 million decrease 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 $3.6 million decrease in noninterest income, a $2.8 million increase in noninterest expenses and a $2.0 million higher provision for income taxes. Net Interest Income Net interest income, on a tax-equivalent basis, was $87.5 mil- lion for 2011 compared to $84.2 million for 2010. Net interest income benefited from higher average loan and investment securities balances and lower cost of funding. Partially offset- ting those benefits was the impact of lower yield on loans and investment securities and higher interest-bearing deposit bal- ances. The net interest margin, on a tax-equivalent basis, was 3.92% for 2011 compared to 4.25% for 2010. The net inter- est margin was impacted by the lower interest rate environ- ment in 2011, the higher level of noninterest-bearing demand deposits and the effect of higher average loans outstanding. Total interest income, on a tax-equivalent basis, aggregated $100.5 million for 2011, compared to $99.8 million from 2010. The tax-equivalent yield on interest-earning assets was 4.51% for 2011 compared to 5.04% for 2010. Interest earned on the loan portfolio increased to $73.2 mil- lion for 2011 from $70.1 million for the prior year period. Average loan balances amounted to $1,379.4 million, an increase of $117.0 million from an average of $1,262.4 mil- lion in the prior year period. The increase in average loans, primarily due to the Company’s business development activi- ties, accounted for a $7.2 million increase in interest earned on loans. The yield on the loan portfolio decreased to 5.65% for 2011 from 5.98% for 2010 period, which was primarily attributable to the lower interest rate environment in 2011 and the mix of average outstanding balances among the com- ponents of the loan portfolio. Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $26.7 million for 2011 from $29.2 million in 2010. Average outstandings increased to $831.0 million (35.9% of average earning assets) for 2011 from $768.2 mil- lion (37.1% of average earning assets) in 2010. The average yield on investment securities decreased to 3.21% for 2011 from 3.80% in 2010. The change in both balances and yield reflect the impact of the Company’s asset/liability manage- ment strategy designed to shorten the average life of the port- folio to position itself for rising interest rates in the future as well as maintain liquidity to grow the loan portfolio. The short-term part of the strategy was implemented by the sale of available for sale securities, principally mortgage backed securities with longer term average lives offset by the pur- chase of short-term corporate debt. The long-term part of the strategy was implemented through the purchase of obliga- tions of U.S. government corporations and government spon- sored enterprises and obligations of state and political subdivisions with maturities up to 15 years. Total interest expense decreased by $2.6 million for 2011 from $15.6 million for the 2010 period, primarily due to the impact of lower rates paid, coupled with lower balances for borrowings partially offset by the impact of higher interest- bearing deposit balances. Interest expense on deposits decreased to $8.4 million for 2011 from $9.6 million for the 2010 period, due to a decrease in the cost of those funds partially offset by the impact of higher interest-bearing deposit balances. The average rate paid on interest-bearing deposits was 0.64%, which was 21 basis points lower than the prior year period. The decrease in average cost of deposits reflects the impact of deposit pricing strategies and the Company’s purchase of certificates of deposit from the Certificate of Deposit Account Registry Service (“CDARS”) and various listing services which pro- vided certificate of deposit balances at lower rates. Average interest-bearing deposits were $1,325.1 million for 2011 com- pared to $1,123.3 million for 2010, reflecting the impact of the Company’s business development activities as well as funds received from CDARS and various listing services. Interest expense on borrowings decreased to $4.5 million for 2011 from $6.0 million for 2010 period, primarily due to lower cost of those funds, partially offset by the impact of the changes in mix. The average rate paid for borrowed funds was 1.96%, which was 26 basis points lower than the prior- year period. The decrease in the average cost of borrowings reflects the lower interest rate envi ronment in 2011. During p a g e 3 5 the 2011 first quarter, the bank restructured a portion of its Federal Home Loan Bank fixed rate advances by repaying $100 million of existing borrowings and replacing them with $100 million of lower cost, floating rate advances. This trans- action resulted in $4.2 million in prepayment penalties that were deferred and will be recognized in interest expense as an adjustment to the cost of these borrowings in future periods. The existing borrowings were a combination of fixed rate and amortizing advances with an average cost of 2.58% and an average duration of 3.2 years. The new borrowings are all floating-rate advances with a current average cost of 1.5%, including the deferred adjustment, with an average duration of three months. The relevant accounting treatment for this transaction was provided by ASC 470-50. This transaction was executed as an earnings and interest rate risk strategy, resulting in lower FHLB advance costs and a reduction of average duration. Average borrowings decreased to $232.5 mil- lion for 2011 from $270.6 million in the prior-year period, reflect- ing lesser 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” beginning on page 42), the provision for loan losses for 2011 was $12.0 million, compared to $28.5 million for 2010. Factors affect- ing the lower provision for the year of 2011 included current economic conditions and a lower level of net charge-offs and lower nonaccrual loan balances. The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio qual- ity, present economic, and political and regulatory condi- tions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and infor- mation available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. financial institutions was primarily due to a single borrower who provides financing to real estate projects that was down- graded during 2011 to substandard. Noninterest Income Noninterest income decreased to $44.1 million for 2011 from $47.6 million in the 2010 period. The decrease principally resulted from securities gains recognized in the 2011 period compared to securities gains recognized in the 2010 period. Also contributing to the decrease was lower mortgage bank- ing and deposit service charge income partially offset by higher income related to accounts receivable management and factoring services. Securities gains declined and reflected a modification of the asset/liability management program commenced in 2009 that was designed to reduce the average life of the investment securities portfolio which was replaced by the strategy that was described under Net Interest Income on page 35. The Company sold approximately $170.9 million of securities with a weighted average life of about 2.9 years. The proceeds were used to fund loan growth or were rein- vested in obligations of state and political subdivisions and U.S. government agencies with maturities of approximately 18 years and 5 years, respectively, and in short-term corpo- rate securities. The decrease in mortgage banking income was primarily due to lower volume of loans sold as well as a charge taken in the fourth quarter for incurred and probable repurchase obligations. Deposit service charges were lower primarily due to higher balances maintained in customer accounts. Commissions and other fees earned from accounts receivable management and factoring services were higher primarily due to the impact of increased volumes at our fac- toring unit and billings by clients providing temporary staffing. Noninterest Expenses Noninterest expenses for 2011 increased $2.8 million when compared to 2010. The increase was primarily due to the impact of higher personnel and occupancy expenses reflect- ing the Company’s continued investment in the franchise. Additionally, in the fourth quarter, the Company recorded a charge related to the settlement of certain litigation and recognized an expense related to the write-down of certain assets to realizable value. During 2011, the allowance for loan losses increased $1.8 million from $18.2 million at December 31, 2010, principally due to increases in the allowance allocated to residential real estate mortgages ($1.0 million) and loans to nondepository financial institutions ($0.8 million). The increase in the allowance allocated to residential real estate mortgages was primarily due to higher levels of nonaccrual loans. The increase in the allowance allocated to loans to nondepository Provision for Income Taxes The provision for income taxes for 2011 increased to $4.2 mil- lion, reflecting an effective tax rate of 19.3%, compared with $2.2 million for 2010, reflecting an effective tax rate of 23.5%. The higher provision was due to the higher level of taxable income, the impact of which was partially offset by the net ben- efit recognized, in the fourth quarter as the result of the comple- tion of federal tax audits for the periods 2002 through 2009. p a g e 3 6 comPariSon of the YearS 2010 and 2009 The Company reported net income available to common shareholders for 2010 of $4.4 million, representing $0.18 per share calculated on a diluted basis, compared to $6.6 million, or $0.37 per share calculated on a diluted basis, for 2009. The $2.2 million decrease in net income available to common shareholders was primarily due to a $8.7 million decrease in interest income, a $3.0 million increase in noninterest expenses and a $0.6 million increase in the provision for loan losses, which more than offset a $3.5 million increase in non- interest income, a $3.7 million decrease in interest expense, a $2.8 lower provision for income taxes and a reduction of $0.2 million decrease in dividends and accretion related to the preferred shares issued to the U.S. Treasury under the TARP Capital Purchase Program. Net Interest Income Net interest income, on a tax-equivalent basis, was $84.2 million for 2010 compared to $87.6 million for 2009. Net interest income benefited from higher average loan and investment securities balances, lower borrowings and lower cost of funding. Partially offsetting those benefits was the impact of lower yields on loans and investment securities, coupled with higher interest-bearing deposit balances. The net interest margin, on a tax-equivalent basis, was 4.25% for 2010 compared to 4.63% for 2009. The net interest margin was impacted by the lower interest rate environment in 2010, the higher level of noninterest-bearing demand deposits and the effect of higher average loans and investment securities outstanding. Total interest income, on a tax-equivalent basis, aggregated $99.8 million for 2010, down $7.2 million from 2009. The tax-equivalent yield on interest-earning assets was 5.04% for 2010 compared to 5.65% for 2009. Interest earned on the loan portfolio decreased to $70.1 mil- lion for 2010 from $71.8 million for the prior year period. Average loan balances amounted to $1,262.4 million, an increase of $67.1 million from an average of $1,195.3 million in the prior year period. The increase in average loans, pri- marily due to the Company’s business development activities, accounted for a $3.7 million increase in interest earned on loans. The yield on the loan portfolio decreased to 5.98% for 2010 from 6.38% for 2009 period, which was primarily attributed to the mix of average outstanding balances among the components of the loan portfolio. Interest earned on the securities portfolio, on a tax-equiva- lent basis, decreased to $29.2 million for 2010 from $34.6 million in 2009. Average outstandings increased to $768.2 million (37.1% of average earning assets) for 2010 from $719.5 million (36.7% of average earning assets) in 2009. The average yield on investment securities decreased to 3.80% for 2010 from 4.80% in 2009. The decrease in both balances and yield reflect the impact of the Company’s asset/ liability management strategy designed to shorten the average life of the portfolio to position the Company for rising interest rates in future periods while taking advantage of the current uptick in long-term rates. The short-term part of the strategy was implemented through the sale of available for sale securi- ties, principally mortgage-backed securities, with longer-term average lives offset by the purchase of short-term corporate debt and obligations of U.S. government corporations and government-sponsored enterprises. The long-term part of the strategy was implemented through the purchase of obliga- tions of state and political subdivisions with maturities of approximately 10 years. Total interest expense decreased by $3.7 million for 2010 from $19.3 million for 2009 period, primarily due to the impact of lower rates paid, coupled with lower balances for borrowings, partially offset by the impact of higher interest- bearing deposit balances. Interest expense on deposits decreased to $9.6 million for 2010 from $11.9 million for the 2009 period, primarily due to a decrease in the cost of those funds. The average rate paid on interest-bearing deposits was 0.85%, which was 42 basis points lower than the prior-year period. The decrease in average cost of interest-bearing deposits reflects the impact of deposit pricing strategies and the Company’s purchase of certificates of deposit from CDARS which provided deposit balances at lower rates than paid for traditional certificate of deposit products. Average interest-bearing deposits were $1,123.3 million for 2010 compared to $938.5 million for 2009, reflecting an increase in certificates of deposit, largely to the CDARS program which is a lower cost product than traditional certificates of deposit. Interest expense on borrowings decreased to $6.0 million for 2010 from $7.4 million for 2009 primarily due to lower bal- ances partially offset by the impact of changes in mix. Average borrowings decreased to $270.6 million for 2010 from $446.1 million in the prior-year period, reflecting a lesser reliance by the Company on wholesale borrowed funds. The change in mix resulted in an increase in the blended cost of borrowing to 2.22% from 1.66%. Provision for Loan Losses In light of recent economic developments and continued eco- nomic uncertainty, during the third quarter of 2010 the Company decided, after consultation with external profes- sionals and regulators, to implement an accelerated resolution of certain categories of nonaccrual loans. As a result, net p a g e 3 7 charge-offs during 2010 of loans to small business borrowers (primarily in the lease financing portfolio) increased $6.3 million when compared to the comparable 2009 period. Based on management’s continuing evaluation of the loan portfolio (discussed under “Asset Quality” beginning on page 42), the provision for loan losses for 2010 was $28.5 million, compared to $27.9 million for the prior-year period. The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio qual- ity, present economic, and political and regulatory condi- tions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and infor- mation available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Com pany’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. During 2010, the allowance for loan losses decreased primar- ily due to a reduction in the allowance allocated to lease financing receivables, partially offset by increases in the allowance allocated to commercial and industrial loans, fac- tored receivables, real estate residential mortgage, and real estate commercial mortgage and real estate construction and land development. The allowance allocated to lease financing receivables decreased primarily as a result of the lower level of lease financing receivables nonaccrual balances. The increase of the allowance allocated to commercial and indus- trial loans was primarily the result of the unsteady economic recovery resulting in higher charge-offs in 2010 compared to 2009 partially offset by lower nonaccrual levels at December 31, 2010 compared to December 31, 2009. The allowance allocated to factored receivables increased based on the con- tinued weakening in the consumer sectors resulting in higher charge-offs in 2010 compared to 2009. The increase in the allowance allocated to real estate residential mortgage loans was primarily due to the persistent decline in residential real estate values coupled with an increase in the specific valua- tion allowance for impaired residential mortgage loans. As a result of the disruption in the commercial real estate markets, resulting in an increase in nonaccrual levels and higher spe- cific reserves for classified loans at December 31, 2010 when compared to December 31, 2009, the allowance allocated to real estate commercial mortgage and to real estate construc- tion and land development was increased. Noninterest Income Noninterest income increased to $47.6 million for 2010 from $44.2 million in 2009. The increase principally resulted from higher income related to accounts receivable management and factoring services offset partly by lower mortgage bank- ing income and securities gains. Commissions and other fees earned from accounts receivable management and factor- ing services were higher primarily due to the impact of increased volumes at our factoring unit and billings by clients providing temporary staffing also contributed to the improved level of fee income. Mortgage banking declined due to a lower volume of loans closed and a change in the mix of products being sold. Securities gains declined and reflected a modifica- tion of the asset liability management program commenced in 2009 that was designed to reduce the average life of the investment securities portfolio which was replaced by the strategy that was described under Net Interest Income on page 35. The Company sold approximately $165.8 million of securities with a weighted average life of approximately 2.4 years. Noninterest Expenses Noninterest expenses were $91.6 million for 2010, compared to $88.5 million in 2009, primarily reflecting higher compen- sation and occupancy expenses related to the growth of the business and increased business development activities. Provision for Income Taxes The provision for income taxes for 2010 decreased to $2.2 million from $4.9 million for 2009. The decrease was pri- marily due to lower taxable income and a lower effective income tax rate in the 2010 period (23.5%) compared to the 2009 period (34.2%). The decrease in the effective tax rate was primarily related to the higher proportion of tax-exempt income achieved in 2010 compared to 2009 coupled with a lower level of pre-tax income. balance Sheet a nalYSiS Securities At December 31, 2011, the Company’s portfolio of securities totaled $677.9 million, of which obligations of U.S. govern- ment corporations and government-sponsored enterprises amounted to $301.1 million which is approximately 44.4% of the total. The Company has the intent and ability to hold to maturity securities classified as held to maturity, at which time it will receive full value for these securities. These secu- rities are carried at cost, adjusted for amortization of premi- ums and accretion of discounts. The gross unrealized gains and losses on held to maturity securities were $17.9 million p a g e 3 8 and $-0-, respectively. Securities classified as available for sale may be sold in the future, prior to maturity. These securities are carried at fair value. Net aggregate unrealized gains or losses on these securities are included, 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. Avail able for sale securities included gross unrealized gains of $3.2 million and gross unrealized losses of $5.0 million. As of December 31, 2011, management does not have the intent to sell any of the securities classified as avail- able for sale in the table on page 40 and management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The following table sets forth the composition of the Com pany’s investment securities by type, with related carrying values at the end of each of the three most recent fiscal years: December 31, 2011 2010 2009 Balances % of Total Balances % of Total Balances % of Total Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal National Mortgage Association) CMOs (Federal Home Loan Mortgage Corporation) CMOs (Government National Mortgage Association) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal Farm Credit Bank Total obligations of U.S. government corporations and government- sponsored enterprises Obligations of state and political subdivisions—New York bank qualified Single issuer, trust preferred securities Corporate debt securities Equity and other securities Total marketable securities Debt securities issued by foreign governments $ 3,942 28,213 5,667 49,148 23,719 4,230 0.58% 4.16 0.84 7.25 3.50 0.62 $ 7,504 47,422 7,290 78,822 40,628 5,052 0.95% 6.01 0.92 9.98 5.15 0.64 $ 13,740 22,698 9,048 125,673 71,715 13,146 1.86% 3.08 1.23 17.05 9.73 1.78 114,919 16.95 186,718 23.65 256,020 34.73 105,482 45,094 35,374 251 301,120 160,503 27,059 173,307 15,882 677,871 — 15.56 6.65 5.22 0.04 44.42 23.68 3.99 25.57 2.34 100.00 — 115,133 24,932 92,479 15,109 434,371 157,013 3,933 189,058 4,940 789,315 — 14.59 3.16 11.72 1.91 55.03 19.89 0.50 23.95 0.63 100.00 — 116,603 102,799 29,418 14,899 519,739 83,337 4,483 129,200 56 736,815 250 15.82 13.95 3.99 2.02 70.51 11.31 0.61 17.53 0.01 99.97 0.03 Total $ 677,871 100.00% $ 789,315 100.00% $ 737,065 100.00% The following table presents information regarding the average life and yields of certain available for sale (“AFS”) and held to maturity (“HTM”) securities: December 31, 2011 Residential mortgage-backed securities Agency notes (with original call dates ranging between 3 and 36 months) Corporate debt securities Obligations of state and political subdivisions [1] Tax equivalent Weighted Average Life Weighted Average Yield AFS HTM 2.1 years 1.0 years 1.5 years 5.4 years 3.2 years 1.0 years — 6.9 years AFS 1.83% 0.62 2.52 5.68[1] HTM 4.61% 1.49 — 5.82[1] p a g e 3 9 The following tables present information regarding securities available for sale and securities held to maturity at December 31, 2011, based on contractual maturity. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The average yield on obligations of state and political subdivisions securities is presented on a tax-equivalent basis. Amortized Cost Fair Value Weighted Average Yield $ 21,642 $ 21,739 1.86% 5,666 2,137 38 98 5,667 2,211 37 98 29,581 29,752 501 101 376 251 501 102 383 251 1.08 3.30 6.18 0.96 1.82 0.50 0.30 1.00 1.10 30,810 30,989 1.78 1,623 1,230 3,895 14,423 21,171 1,639 1,278 4,297 15,563 22,777 5.28 4.98 5.49 5.84 5.69 28,506 27,059 6.17 36,945 34,650 54,772 45,929 3,255 369 36,845 34,371 54,306 44,248 3,169 368 175,920 173,307 15,322 15,882 $ 271,729 $270,014 1.54 2.26 2.87 2.97 4.13 4.36 2.52 2.43 2.89 Available for sale Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal Home Loan Mortgage Corporation) CMOs (Government National Mortgage Association) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Due after 1 year but within 5 years Federal Home Loan Bank Due within 1 year Federal Home Loan Mortgage Corporation Due after 1 year but within 5 years Federal Farm Credit Bank Due after 1 year but within 5 years Total obligations of U.S. government corporations and government- sponsored enterprises Obligations of state and political institutions Due within 1 year Due after 1 year but within 5 years Due after 5 years but within 10 years Due after 10 years Total obligations of state and political institutions Single-issuer trust preferred securities Due after 10 years Corporate debt securities Due within 6 months Due after 6 months but within 1 year Due after 1 year but within 2 years Due after 2 years but within 5 years Due after 5 years but within 10 years Due after 10 years Total corporate debt securities Equity and other securities Total available for sale p a g e 4 0 Held to maturity Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal National Mortgage Association) CMOs (Federal Home Loan Mortgage Corporation) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Due after 1 year but within 5 years Due after 5 years but within 10 years Due after 10 years Federal Home Loan Bank Due after 1 year but within 5 years Due after 5 years but within 10 years Federal Home Loan Mortgage Corporation Due after 1 year but within 5 years Due after 5 years but within 10 years Total obligations of U.S. government corporations and government- sponsored enterprises Obligations of state and political institutions Due within 5 years but within 10 years Due after 10 years Total obligations of state and political institutions Total held to maturity Carrying Value Fair Value Weighted Average Yield $ 3,942 $ 4,134 5.78% 6,474 46,937 23,682 4,132 85,167 15,000 19,995 69,986 5,000 39,992 10,000 24,991 6,779 50,714 25,351 4,735 91,713 15,077 20,024 70,083 5,003 40,023 10,006 25,025 4.71 4.44 4.37 6.48 4.60 1.83 1.93 1.41 1.00 1.18 1.00 1.92 270,131 276,954 2.47 2,203 2,437 135,523 146,384 137,726 148,821 $ 407,857 $ 425,775 5.18 5.83 5.82 3.60 Loan Portfolio A management objective is to maintain the quality of the loan portfolio. The Company seeks to achieve this objective by maintain- ing rigorous underwriting standards coupled with regular evaluation of the creditworthiness of and the designation of lending limits for each borrower. The portfolio strategies include seeking industry and loan size diversification in order to minimize credit exposure and originating loans in markets with which the Company is familiar. The Company’s commercial and industrial loan and factored receivables portfolios represent approximately 52% of all loans. Loans in this category are typically made to individuals and small and medium-sized businesses in amounts generally up to $20 million. Loans to nondepository financial institutions, which include the Company’s residential mortgage warehouse funding product and loans to finance companies, represent approximately 16% of all loans. The Company’s equipment financing port- folio, which consists of finance leases for various types of business equipment, represents approximately 10% of all loans. The Company’s real estate loan portfolios, which represent approximately 21% of all loans, are secured by mortgages on real prop- erty located principally in the states of New York, New Jersey, Connecticut, Virginia and North Carolina. Sources of repay- ment are from the borrower’s operating profits, cash flows and liquidation of pledged collateral. Based on underwriting standards, loans and leases may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equip- ment, inventory and real property. The collateral securing any loan or lease may depend on the type of loan and may vary in value based on market conditions. Loans to borrowers located in the states of New York and New Jersey represent approxi- mately 51% and 14%, respectively, of all loans. Loans to borrowers located in any other state do not exceed 10% of all loans. p a g e 4 1 The following table sets forth the composition of the Company’s loans held for sale and loans held in portfolio, net of unearned discounts, at the end of each of the five most recent fiscal years; there were no foreign loans outstanding at the end of each of the five most recent fiscal years. December 31, 2011 2010 2009 2008 2007 Balances % of Total Balances % of Total Balances % of Total Balances % of Total Balances % of Total Domestic Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate Residential mortgage— portfolio Residential mortgage— held for sale Commercial mortgage Construction and land development Loans to individuals Loans to depository institutions $ 624,124 41.15% $ 618,223 45.92% $ 550,285 44.76% $ 531,471 44.00% $ 518,265 44.05% 246,587 171,831 150,782 16.26 11.33 9.94 112,882 161,789 144,235 8.38 12.02 10.72 35,591 139,927 195,056 2.90 11.38 15.87 N/A 89,145 255,743 — 7.38 21.17 N/A 80,007 249,702 — 6.80 21.22 170,153 11.22 127,695 9.49 124,681 10.14 142,135 11.76 129,465 11.00 43,372 85,825 13,621 10,376 10 2.86 5.66 0.90 0.68 — 32,049 96,991 25,624 11,370 15,425 2.38 7.20 1.90 0.84 1.15 33,889 92,614 24,277 12,984 20,000 2.76 7.53 1.97 1.06 1.63 23,403 96,883 25,249 18,959 25,000 1.94 8.02 2.09 1.57 2.07 23,756 99,093 37,161 12,103 27,000 2.02 8.42 3.16 1.03 2.30 Total $ 1,516,681 100.00% $ 1,346,283 100.00% $ 1,229,304 100.00% $ 1,207,988 100.00% $ 1,176,552 100.00% Based on contractual maturity date, the following table sets forth information regarding the Company’s commercial and indus- trial, factored receivables and construction and land development loans, as of December 31, 2011: Commercial and industrial Factored receivables Real estate—construction and land development Due One Year or Less $516,214 172,082 13,030 Due One to Five Years $87,992 — 591 Due After Five Years $21,857 — — Total Gross Loans $626,063 172,082 13,621 All commercial and industrial loans due after one year have predetermined interest rates. All real estate—construction and land development loans due after one year have floating or adjustable interest rates. Asset Quality Intrinsic to the lending process is the possibility of loss. In times of economic slowdown, the risk of loss inherent in the Company’s portfolio of loans may increase. While management endeavors to minimize this risk, it recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio which in turn depend on current and future economic conditions, the financial condition of borrowers, the realization of collateral, and the credit management process. Nonaccrual loans at December 31, 2011 decreased $286 thousand compared to December 31, 2010. This primarily reflected decreases of $180 thousand and $522 thousand in commercial and industrial loans and lease financing receivables, respectively, partially offset by an increase of $377 thousand in residential real estate mortgage loans. Net loan charge-offs in 2011 were $19.4 million lower than those in 2010 (primarily reflecting decreases in net charge-offs of $15.6 million for lease financing receivables and $4.1 million for commercial and industrial loans partially offset by a $0.8 million increase for residential real estate mortgage loans). A worsening of existing economic conditions will likely result in levels of charge-offs and nonaccrual loans that will be higher than those in the historical levels. p a g e 4 2 The following table sets forth the amount of domestic nonaccrual and past due loans of the Company at the end of each of the five most recent fiscal years; there were no foreign loans accounted for on a nonaccrual basis. At December 31, 2011, approximately $6.4 million of equipment financing receivables and residential real estate loans were troubled debt restructurings. See Note 5 beginning on page 77 for additional discussion. Loans contractually past due 90 days or more as to principal or interest and still accruing are loans that are both well-secured or guaranteed by financially responsible third parties and are in the process of collection. December 31, Gross loans Nonaccrual loans Commercial and industrial Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Total nonaccrual loans Past due 90 days or more (other than the above) Restructured loans (other than the above) 2011 2010 2009 2008 2007 $ 1,534,779 $ 1,365,296 $ 1,254,946 $ 1,245,263 $ 1,249,128 $ 834 — 370 1,991 3,124 — 39 6,358 165 5,851 $ 1,014 $ 4,231 $ — 892 1,614 3,124 — — 6,644 314 5,829 — 11,960 1,786 — — — 17,977 1,194 5,176 816 — 3,387 3,078 — — 63 7,344 821 70 $ 610 — 2,571 2,786 — — 416 6,383 1,329 — Total $ 12,374 $ 12,787 $ 24,347 $ 8,235 $ 7,712 Interest income that would have been earned on nonaccrual loans outstanding Applicable interest income actually realized on nonaccrual loans outstanding Nonaccrual and past due loans as a percentage $ $ 780 200 $ $ 902 $ 1,463 204 $ 743 $ $ 731 321 $ $ 655 222 of total gross loans 0.43% 0.51% 1.53% 0.66% 0.62% Interest income that would have been earned in 2011 on restructured loans amounted to $582 thousand. Interest income actu- ally realized in 2011 on restructured loans was $335 thousand. At December 31, 2011, commercial and industrial nonaccruals represented 0.13% of commercial and industrial loans. There were 2 loans made to borrowers located in 1 state with balances ranging between approximately $39.0 thousand and $794.9 thousand. At December 31, 2011, equipment financing nonaccruals represented 0.25% of lease financing receivables. The lessees of the equipment are located in 6 states. There were 11 leases ranging between approximately $0.3 thousand and $110.0 thousand. The value of the underlying collateral related to lease financing nonaccruals varies depending on the type and condition of equipment. While most leases are written on a recourse basis, with personal guarantees of the principals, the current value of the collateral is often less than the lease financing balance. Collection efforts include repossession and/or sale of leased equip- ment, payment discussions with the lessee, the principals and/or guarantors, and obtaining judgments against the lessee, the principals and/or guarantors. The balance is charged off at the earlier of the date when the lease is past due 120 days or the date when it is determined that collection efforts are no longer productive. Factors considered in determining whether collection efforts are no longer productive include any amounts currently being collected, the status of discussions or negotiations with the lessee, the principal and/or guarantors, the cost of continuing efforts to collect, the status of any foreclosure or other legal actions, the value of the collateral, and any other pertinent factors. At December 31, 2011, residential real estate nonaccruals represented 1.17% of residential real estate loans held in portfolio. There were 12 loans ranging between approximately $0.3 thousand and $658.0 thousand secured by properties located in 4 states. p a g e 4 3 At December 31, 2011, commercial real estate nonaccruals represented 3.64% of commercial real estate loans. There was one loan for $745.3 thousand and another for $2.4 million secured by property located in 1 state. At December 31, 2011, other real estate owned consisted of 6 properties valued between $100.0 thousand and $554.6 thousand located in 3 states. 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 losses methodology includes allowance allocations calculated in accordance with FASB Codification Topic 310, Receivables and allowance allocations calculated in accordance with FASB Codification Topic 450, contingencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogenous pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for 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 nonaccrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries, among other factors. The provi- sion for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. See Note 5—Loans and Allowance for Loan Losses in the accompanying notes to consolidated financial statements included elsewhere in this report for further details regarding the methodology for estimating the appropriate level of the allowance for loan losses. At December 31, 2011, the ratio of the allowance to loans held in portfolio, net of unearned discounts, was 1.36% and the allowance was $20.0 million. Loans 90 days past due and still accruing amounted to $165 thousand. At such date, the Company’s nonaccrual loans amounted to $6.4 million; $3.7 million of such loans were judged to be impaired within the scope of FASB Codification Topic 310, Receivables, and had a valuation allowance totaling $1.1 million, which is included within the overall allowance for loan losses. Based on the foregoing, as well as management’s judgment as to the current risks inherent in loans held in port folio, the Company’s allowance for loan losses was deemed adequate to absorb all probable losses on specifically known and other credit risks associated with the portfolio as of December 31, 2011. Net losses within loans held in portfolio are not statistically predictable and changes in conditions in the next twelve months could result in future provisions for loan losses varying from the provision taken in 2011. We did not have any potential problem loans, which are loans that are currently performing under present loan repayment terms but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of the borrowers to continue to comply with the present repayment terms. p a g e 4 4 The following table sets forth certain information with respect to the Company’s loan loss experience for each of the five most recent fiscal years: Years Ended December 31, 2011 2010 2009 2008 2007 Average loans held in portfolio, net of unearned discounts, during year $ 1,351,407 $ 1,227,049 $ 1,154,041 $ 1,120,362 $ 1,049,206 Allowance for loan losses: Balance at beginning of year Charge-offs: Commercial and industrial Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Total charge-offs Recoveries: Commercial and industrial Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Total recoveries Subtract: Net charge-offs Provision for loan losses Less loss on transfers to other real estate owned $ 18,238 $ 19,872 $ 16,010 $ 15,085 $ 16,288 2,909 358 8,266 1,266 — — 30 7,212 665 22,509 351 129 — 231 4,945 514 19,115 312 — — — 2,610 581 3,886 58 — — — 2,620 243 3,345 215 — — 67 12,829 31,097 24,886 7,135 6,490 146 79 2,255 165 — — — 312 239 902 — — — 48 1,042 63 345 102 — — — 2,645 1,501 1,552 10,184 12,000 25 29,596 28,500 538 23,334 27,900 704 297 26 294 61 — — 69 747 6,388 8,325 1,012 219 31 316 30 — — 110 706 5,784 5,853 1,272 Balance at end of year $ 20,029 $ 18,238 $ 19,872 $ 16,010 $ 15,085 Ratio of net charge-offs to average loans held in portfolio, net of unearned discounts, during year 0.75% 2.41% 2.02% 0.57% 0.55% p a g e 4 5 The following table presents the Company’s allocation of the allowance for loan losses. This allocation is based on estimates by management and may vary from year to year based on management’s evaluation of the risk characteristics of the loan portfolio. The amount allocated to a particular loan category of the Company’s loans held in portfolio may not necessarily be indicative of actual future charge-offs in that loan category. December 31, 2011 2010 2009 2008 2007 % of Loans in each category to total loans held in portfolio Amount % of Loans in each category to total loans held in portfolio Amount % of Loans in each category to total loans held in portfolio Amount % of Loans in each category to total loans held in portfolio Amount % of Loans in each category to total loans held in portfolio Amount Domestic Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage (portfolio) Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions Unallocated $ 7,647 1,369 1,450 3,515 42.36% $ 7,454 564 16.74 1,424 11.66 3,423 10.24 3,490 2,151 11.55 5.83 2,497 2,275 165 104 — 138 0.92 0.70 — — 310 119 46 126 8.59 12.31 10.97 9.72 7.38 1.95 0.87 1.17 — 47.04% $ 6,082 46.03% $ 5,530 — 933 6,130 — 2.98 11.70 16.32 971 10,249 44.87% $ 5,655 — 1,083 5,398 — 7.52 21.59 44.96% — 6.94 21.66 1,646 560 10.43 7.75 2,355 674 12.00 8.18 1,988 613 11.23 8.60 149 2.03 1.09 80 — 1.67 — 135 175 88 88 37 2.13 1.60 2.11 — 183 15 54 96 3.22 1.05 2.34 — Total $ 20,029 100.00% $ 18,238 100.00% $19,872 100.00% $ 16,010 100.00% $ 15,085 100.00% During 2011, the allowance for loan losses increased $1.8 million from $18.2 million at December 31, 2010 principally due to increases in the allowance allocated to real estate residential mortgages ($1.0 million) and loans to nondepository financial institu- tions ($0.8 million). The increase in the allowance allocated to residential real estate mortgages was primarily due to higher levels of nonaccrual loans. The increase in the allowance allocated to loans to nondepository financial institutions was primar- ily due to higher loan balances in this category. During 2010, the allowance for loan losses decreased $1.6 million from $19.9 million at December 31, 2009 primarily due to a reduction in the allowance allocated to lease financing receivables ($6.8 million) partially offset by increases in the allowance allocated to commercial and industrial loans ($1.4 million), factored receivables ($0.5 million), real estate residential mortgage loans ($0.9 million), and real estate commercial mortgage loans ($1.7 million) and real estate construction and land develop- ment loans ($0.2 million). The allowance allocated to lease financing receivables decreased primarily as a result of the lower level of lease financing receivables nonaccrual balances. The increase of the allowance allocated to commercial and industrial loans was primarily the result of the unsteady economic recovery. The allowance to factored receivables increased based on the continued weakening in the consumer sectors. The increase in the allowance allocated to real estate residential mortgage loans was primarily due to the persistent decline in residential real estate values. As a result of the disruption in the commercial real estate markets, the allowance allocated to real estate commercial mortgage loans and to real estate construction and land devel- opment loans was increased. During 2009, the allowance for loan losses increased because of increases in the allowance allocated to lease financing receivables and in the allowance allocated to commercial and industrial loans, partially offset by a reduction in the allowance allocated to real estate-residential mortgage loans. The allowance allocated to lease financing receivables increased primarily as a result of increased losses experienced in that category in 2009 compared to 2008 partially offset by a decrease in the specific valuation allowance for impaired loans. The impact of the increase in nonaccrual lease financing receivables at December 31, 2009 com- pared to December 31, 2008 was mitigated by decreasing levels of nonaccruals in that category in the third and fourth quarters of 2009 compared to the second quarter of 2009. The allowance allocated to commercial and industrial loans increased due to increased losses experienced in that category in 2009 compared to 2008 and higher nonaccrual levels in that category at December 31, 2009 compared to December 31, 2008 partially offset by a decrease in the specific valuation allowance for impaired loans. p a g e 4 6 The allowance allocated to real estate-residential mortgage loans decreased primarily due to lower nonaccrual loan balances at December 31, 2009 compared to December 31, 2008 coupled with a decrease in the specific valuation allowance for impaired loans. During the fourth quarter of 2009 the level of the allowance for loan losses benefited from a recovery of $0.9 million on a loan charged off in a prior period. Deposits A significant source of funds are customer deposits, consisting of demand (noninterest-bearing), NOW, savings, money market and time deposits (principally certificates of deposit). The following table provides certain information with respect to the Company’s deposits at the end of each of the three most recent fiscal years: December 31, 2011 2010 2009 Domestic Demand NOW Savings Money Market Time deposits less than $100 thousand Time deposits greater than $100 thousand Balances % of Total Balances % of Total Balances % of Total $ 765,800 38.50% $ 570,290 32.63% $ 546,332 34.56% 177,495 18,566 369,362 116,049 541,799 8.93 0.93 18.57 5.83 27.24 200,521 18,931 342,755 126,834 488,433 11.47 1.08 19.61 7.26 27.95 266,343 17,497 308,175 140,678 301,057 16.85 1.11 19.50 8.90 19.04 Total domestic deposits 1,989,071 100.00 1,747,764 100.00 1,580,082 99.96 Foreign Demand Time deposits greater than $100 thousand Total foreign deposits Total deposits — — — — — — — — — — — — 5 580 585 — 0.04 0.04 $ 1,989,071 100.0% $ 1,747,764 100.0% $ 1,580,667 100.00% The Company began participating in the Certificate of Deposit Account Registry Service (“CDARS”) on January 22, 2009. CDARS deposits totaled approximately $164.5 million at December 31, 2011 and averaged approximately $224.6 million for the year ended December 31, 2011. CDARS deposits totaled approximately $180.7 million at December 31, 2010 and averaged approximately $184.2 million for the year ended December 31, 2010. Scheduled maturities of time deposits at December 31, 2011 were as follows: 2012 2013 and later Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2011 were as follows: Due within 3 months or less Due after 3 months and within 6 months Due after 6 months and within 12 months Due after 12 months $ 608,442 49,406 $ 657,848 $ 220,594 197,561 95,593 28,051 $ 541,799 Fluctuations of balances in total or among categories at any date can occur based on the Company’s mix of assets and liabilities, as well as on customers’ balance sheet strategies. Historically, however, average balances for deposits have been relatively stable. Information regarding these average balances for the three most recent fiscal years is presented on page 48. p a g e 4 7 C O N S O L I D A T E D A V E R A G E B A L A N C E S H E E T S A N D A N A L Y S I S O F N E T I N T E R E S T E A R N I N G S [ 1 ] Sterling Bancorp Years Ended December 31, 2011 2010 2009 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate aSSetS Interest-bearing deposits with other banks Investment securities Available for sale—taxable Held to maturity—taxable Tax-exempt[2] Federal Reserve and Federal Home Loan Bank stock Loans, net of unearned discounts[3] $ 93,561 $ 227 0.24% $ 31,960 $ 75 0.23% $ 36,804 $ 85 0.23% 351,348 322,312 157,308 8,788 8,078 9,784 8,770 1,379,361 374 73,241 2.50 2.51 6.22 4.27 5.65 394,635 252,915 120,634 8,617 1,262,403 10,863 10,879 7,422 448 70,104 2.75 4.30 6.15 5.20 5.98 350,069 320,655 48,761 9,487 1,195,266 16,575 15,070 2,907 516 71,788 4.73 4.70 5.96 5.45 6.38 total intereSt-earning aSSetS 2,312,660 100,492 4.51% 2,071,164 99,791 5.04% 1,961,042 106,941 5.65% Cash and due from banks Allowance for loan losses Goodwill Other total aSSetS liabilitieS and ShareholderS’ eQuitY Interest-bearing deposits 39,734 (19,951) 22,901 152,840 $ 2,508,184 36,810 (21,668) 22,901 135,362 $ 2,244,569 31,118 (19,107) 22,901 118,267 $ 2,114,221 Domestic Savings NOW Money market Time Foreign Time $ 18,474 210,443 367,090 729,053 8 372 2,475 5,583 0.04% $ 0.18 0.67 0.77 18,631 209,197 336,233 558,886 11 472 2,805 6,297 0.06% $ 0.23 0.83 1.13 18,012 211,121 333,647 375,164 18 620 3,252 7,993 0.10% 0.29 0.97 2.13 1.09 1.27 Total interest-bearing deposits 1,325,060 8,438 0.64 1,123,264 9,588 — — — 317 3 1.09 0.85 578 6 938,522 11,889 Borrowings Securities sold under agreements to repurchase—customers Securities sold under agreements to repurchase—dealers Federal funds purchased Commercial paper Short-term borrowings—FHLB Short-term borrowings—FRB Short-term borrowings—other Advances—FHLB Long-term borrowings—subordinated debentures Total borrowings 42,911 5,186 10,926 14,454 3,666 129,558 25,774 232,475 186 0.43 47,674 229 0.48 72,892 353 0.48 66 14 43 2 2,144 2,094 4,549 1.27 0.13 0.30 0.07 1.66 8.38 1.96 5,618 33,192 14,718 — 3,699 7,306 132,577 25,774 270,558 44 74 45 — 9 18 3,482 2,094 5,995 0.79 0.22 0.30 — 0.25 0.25 2.63 8.38 2.22 — 25,075 13,107 3,411 154,726 1,864 149,207 25,774 446,056 — 51 67 11 398 — 4,432 2,094 7,406 — 0.21 0.51 0.31 0.26 — 2.97 8.38 1.66 Total interest-bearing liabilities 1,557,535 12,987 0.83% 1,393,822 15,583 1.12% 1,384,578 19,295 1.39% Noninterest-bearing demand deposits 596,608 — 489,184 — 441,087 — Total including noninterest-bearing demand deposits Other liabilities Total Liabilities Shareholders’ equity total liabilitieS and ShareholderS’ eQuitY Net interest income/spread Net yield on interest-earning assets Less: Tax-equivalent adjustment Net interest income 2,154,143 12,987 0.61% 1,883,006 15,583 0.83% 1,825,665 19,295 1.06% 129,221 2,283,364 224,820 148,410 2,031,416 213,153 $ 2,508,184 $ 2,244,569 130,331 1,955,996 158,225 $2,114,221 87,505 3.68% 84,208 3.92% 87,646 4.26% 3.92% 4.25% 4.63% 3,428 $ 84,077 2,601 $ 81,607 1,021 $ 86,625 [1] The average balances of assets, liabilities and shareholders’ equity are computed on the basis of daily averages. Average rates are presented on a tax-equivalent basis. certain reclassifications have been made to prior period amounts to conform to current presentation. [2] Interest on tax-exempt securities included herein is presented on a tax-equivalent basis. [3] Includes loans held for sale and loans held in portfolio; all loans are domestic. nonaccrual loans are included in amounts outstanding and income has been included to the extent earned. p a g e 4 8 C O N S O L I D A T E D R A T E / V O L U M E A N A L Y S I S [ 1 ] Sterling Bancorp Increase (Decrease) from Years Ended, intereSt income December 31, 2010 to December 31, 2011 December 31, 2009 to December 31, 2010 Volume Rate Total[2] Volume Rate Total[2] (in thousands) Interest-bearing deposits with other banks $ 149 $ 3 $ 152 $ (10) $ — $ (10) Investment securities Available for sale—taxable Held to maturity—taxable Tax-exempt Total Federal Reserve and Federal Home Loan Bank stock (1,134) 2,484 2,277 3,627 (941) (5,285) 85 (6,141) (2,075) (2,801) 2,362 1,901 (2,987) 4,419 (7,613) (1,204) 96 (5,712) (4,191) 4,515 (2,514) 3,333 (8,721) (5,388) 8 (82) (74) (45) (23) (68) Loans, net of unearned discounts[3] 7,188 (4,051) 3,137 3,723 (5,407) (1,684) total intereSt income $ 10,972 $ (10,271) $ 701 $ 7,001 $ (14,151) $ (7,150) intereSt exPenSe Interest-bearing deposits Domestic Savings NOW Money market Time Foreign Time $ — $ (3) $ 3 241 1,618 (103) (571) (2,332) (3) (100) (330) (714) $ 1 (7) 25 $ (8) $ (7) (141) (472) (148) (447) 2,965 (4,661) (1,696) (3) — (3) (3) — (3) Total interest-bearing deposits 1,859 (3,009) (1,150) 2,981 (5,282) (2,301) Borrowings Securities sold under agreements to repurchase—customers Securities sold under agreements to repurchase—dealers Federal funds purchased Commercial paper Short-term borrowings—FHLB Short-term borrowings—FRB Short-term borrowings—other Advances—FHLB Total borrowings (21) (3) (37) (2) — (9) (7) (77) (156) (22) 25 (23) — — — (9) (43) 22 (60) (2) — (9) (16) (1,261) (1,290) (1,338) (1,446) (124) 44 20 8 (11) (375) — (469) (907) — — 3 (30) — (14) 18 (481) (504) (124) 44 23 (22) (11) (389) 18 (950) (1,411) total intereSt exPenSe $ 1,703 $ (4,299) $ (2,596) $ 2,074 $ (5,786) $ (3,712) net intereSt income $ 9,269 $ (5,972) $ 3,297 $ 4,927 $ (8,365) $ (3,438) [1] Amounts are presented on a tax-equivalent basis. [2] The change in interest income and interest expense due to a combination of both volume and rate have been allocated to the change due to volume and the change due to rate in proportion to the relationship of the change due solely to each. The change in interest expense for foreign time deposits and short-term borrowings—FRB has been allocated entirely to the volume variance. [3] Includes loans held for sale and loans held in portfolio; all loans are domestic. nonaccrual loans have been included in the amounts outstanding and income has been included to the extent earned. p a g e 4 9 aSSet/ liabilitY management The Company’s primary earnings source is its net interest income; therefore, the Company devotes significant time and has invested in resources to assist in the management of inter- est rate risk and asset quality. The Company’s net interest income is affected by changes in market interest rates, and by the level and composition of interest-earning assets and interest- bearing liabilities. The Company’s objectives in its asset/ liability management are to utilize its capital effectively, to provide adequate liquidity and to enhance net interest income, without taking undue risks or subjecting the Company unduly to interest rate fluctuations. The Company takes a coordinated approach to the manage- ment of its liquidity, capital and interest rate risk. This risk management process is governed by policies and limits estab- lished by senior management which are reviewed and approved by the Asset/Liability Committee. This committee, which is comprised of members of senior management, meets to review, among other things, economic conditions, interest rates, yield curve, cash flow projections, expected customer actions, liq- uidity levels, capital ratios and repricing characteristics of assets, liabilities and financial instruments. Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates, foreign exchange rates and equity prices. The Company’s prin- cipal market risk exposure is interest rate risk, with no material impact on earnings from changes in foreign exchange rates or equity prices. Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing char- acteristics of assets and liabilities. The Company monitors the interest rate sensitivity of its balance sheet positions by examin- ing its near-term sensitivity and its longer-term gap position. In its management of interest rate risk, the Company utilizes several financial and statistical tools including traditional gap analysis and sophisticated income simulation models. A traditional gap analysis is prepared based on the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities for selected time bands. The mis- match between repricings or maturities within a time band is commonly referred to as the “gap” for that period. A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite result on the net interest margin. However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and other factors that could have an impact on interest rate sensitivity or net interest income. The Company utilizes the gap analysis to complement its income simulations modeling, primarily focusing on the longer-term structure of the balance sheet. The Company’s balance sheet structure is primarily short-term in nature with a substantial portion of assets and liabilities repricing or maturing within one year. The Company’s gap analysis at December 31, 2011, presented on page 56, indi- cates that net interest income would increase during periods of rising interest rates and decrease during periods of falling interest rates, but, as mentioned above, gap analysis may not be an accurate predictor of net interest income. p a g e 5 0 As part of its interest rate risk strategy, the Company may use financial instrument derivatives to hedge the interest rate sen- sitivity of assets. The Company has written policy guidelines, approved by the Board of Directors, governing the use of financial instruments, including approved counterparties, risk limits and appropriate internal control procedures. The credit risk of derivatives arises principally from the potential for a counterparty to fail to meet its obligation to settle a contract on a timely basis. As of December 31, 2011, the Company was not a party to any financial instrument derivative agreement. The Company utilizes income simulation models to comple- ment its traditional gap analysis. While the Asset/Liability Committee routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also utilizes addi- tional tools to monitor potential longer-term interest rate risk. The income simulation models measure the Company’s net interest income volatility or sensitivity to interest rate changes utilizing statistical techniques that allow the Company to consider various factors which impact net interest income. These factors include actual maturities, estimated cash flows, repricing characteristics, deposits growth/retention and, most importantly, the relative sensitivity of the Company’s assets and liabilities to changes in market interest rates. This rela- tive sensitivity is important to consider as the Company’s core deposit base has not been subject to the same degree of interest rate sensitivity as its assets. The core deposit costs are inter- nally managed and tend to exhibit less sensitivity to changes in interest rates than the Company’s adjustable rate assets whose yields are based on external indices and generally change in concert with market interest rates. The Company’s interest rate sensitivity is determined by iden- tifying the probable impact of changes in market interest rates on the yields on the Company’s assets and the rates that would be paid on its liabilities. This modeling technique involves a degree of estimation based on certain assumptions that management believes to be reasonable. Utilizing this process, management projects the impact of changes in inter- est rates on net interest margin. The Company has estab- lished certain policy limits for the potential volatility of its net interest margin assuming certain levels of changes in market interest rates with the objective of maintaining a stable net interest margin under various probable rate sce- narios. Man agement generally has maintained a risk position well within the policy limits. As of December 31, 2011, the model indicated the impact of a 100 and 200 basis point parallel and pro rata rise in rates over 12 months would approximate a 2.4% ($2.8 million) and a 5.0% ($6.0 million) increase in net interest income, respectively, while the impact of a 25 basis point decline in rates over the same period would approximate a 0.8% ($0.9 million) decline from an unchanged rate environment. The likelihood of a decrease in interest rates beyond 25 basis points as of December 31, 2011 was considered to be remote given then-current interest rate levels. As of December 31, 2010, the model indicated the impact of a 100 and 200 basis point parallel and pro rata rise in rates over 12 months would approximate a 3.4% ($3.7 million) and a 6.8% ($7.2 million) increase in net interest income, respectively, while the impact of a 25 basis point decline in rates over the same period would approximate a 0.9% ($1.0 million) decline from an unchanged rate environ- ment. The likelihood of a decrease in interest rates beyond 25 basis points as of December 31, 2010 was considered to be remote given then-current interest rate levels. p a g e 5 1 The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/ replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot provide any assurances as to the predictive nature of these assump- tions, including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of chang- ing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other variables. Furthermore, the sensitivity analysis does not reflect actions that the Asset/Liability Committee might take in responding to or anticipating changes in interest rates. The shape of the yield curve can cause downward pressure on net interest income. In general, if and to the extent that the yield curve is flatter (i.e., the differences between interest rates for different maturities are relatively smaller) than previously anticipated, then the yield on the Company’s interest-earning assets and its cash flows will tend to be lower. Management believes that a relatively flat yield curve could continue to affect adversely the Company’s results in 2012. Liquidity Risk Liquidity is the ability to meet cash needs arising from changes in various categories of assets and liabilities. Liquidity is con- stantly monitored and managed at both the parent company and the bank levels. Liquid assets consist of cash and due from banks, interest-bearing deposits in banks and Federal funds sold and securities available for sale. Primary funding sources include core deposits, capital markets funds and other money market sources. Core deposits include domestic noninterest- bearing and interest-bearing retail deposits, which histori- cally have been relatively stable. The parent company and the bank believe that they have significant unused borrowing capacity. Contingency plans exist which we believe could be implemented on a timely basis to mitigate the impact of any dramatic change in market conditions. The parent company depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the bank. Such sources have been adequate to meet the parent company’s cash requirements throughout its history. Various legal restrictions limit the extent to which the bank can supply funds to the parent company and its non-bank subsidiaries. All national banks are limited in the payment of dividends without the approval of the Comptroller of the Currency to an amount not to exceed the net profits (as defined) for the year to date combined with its retained net profits for the preceding two calendar years (see Note 16 on page 96). p a g e 5 2 In December 2008, under the U.S. Treasury’s TARP Capital Purchase Program, we issued to the U.S. Treasury 42,000 of the parent company’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, liquidation preference of $1,000 per share (“Series A Preferred Shares”) and a 10-year warrant to purchase up to 516,817 of the parent company’s common shares. On April 27, 2011, the parent company paid $42.4 million to the U.S. Treasury for the repurchase in full of the Series A Preferred Shares. As a result of this action, the Series A Preferred Shares were redeemed in full, eliminating an annual dividend of $2.1 million. In this connection, in determining net income available to common shareholders, the Company recognized in the sec- ond quarter of 2011 a $1.2 million charge for accelerated accretion which represents the difference between the carrying value and the liquidation value for the repurchased Series A Preferred Shares. On May 18, 2011, the parent company paid approxi- mately $0.95 million to the U.S. Treasury to repurchase the 10-year warrant in full. The parent company’s repurchase of the warrant concluded its participation in the TARP Capital Purchase Program. At December 31, 2011, the parent company’s short-term debt, consisting principally of commercial paper used to finance ongo- ing current business activities, was approximately $14.5 million. The parent company had cash, interest-bearing deposits with banks and other current assets aggregating $45.6 million. The parent company also has back-up credit lines with banks of $19.0 million. Since 1979, the parent company has had no need to use available back-up lines of credit. off balance Sheet arrangementS, commitmentS, guaranteeS, and contractual obligationS The following table summarizes the Company’s contractual obligations and other commitments to make future payments as of December 31, 2011. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. Loan commitments and standby letters of credit are presented at contractual amounts; however, since many of these commitments are expected to expire unused or only partially used, the total amounts of these commitments do not necessarily reflect future cash requirements. Contractual Obligations Long-Term Debt[1] Operating Leases Payments Due by Period Less than Total 1 Year 1–2 Years 2–3 Years 3–4 Years 4–5 Years After 5 Years $ 148,507 $ 21,468 $ 994 $ 271 $ — $ 100,000 $ 25,774 44,923 4,518 4,482 4,747 4,550 3,789 22,837 Total Contractual Cash Obligations $ 193,430 $ 25,986 $ 5,476 $ 5,018 $ 4,550 $ 103,789 $ 48,611 [1] Based on contractual maturity date. Other Commercial Commitments Residential Loans Commercial Loans Total Loan Commitments Standby Letters of Credit Other Commercial Commitments Amount of Commitment Expiration Per Period Total Less than 1 Year 1–2 Years 2–3 Years 3–4 Years 4–5 Years $ 55,164 $ 55,164 $ — $ — $ — $ 20,316 75,480 27,770 61,780 12,223 67,387 21,709 61,550 8,093 8,093 6,061 — — — — — — — — — After 5 Years $ — — — — 230 $ 230 — — — — — — Total Commercial Commitments $ 165,030 $ 150,646 $14,154 $ — $ — $ p a g e 5 3 Financial Instruments with Off-Balance-Sheet Risk In the normal course of business the Company enters into various transactions, which in accordance with accounting principles generally accepted in the United States, are not included in its consolidated balance sheets. 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 recog- nized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. The Company also holds certain assets which are not included in its con- solidated balance sheets including assets held in fiduciary or custodial capacity on behalf of its trust customers and certain col- lateral funds resulting from acting as an agent in its securities lending program. Commitments to Extend Credit 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 con- tingent upon customers maintaining specific credit standards at the time of loan funding. Commitments to extend credit out- standing at December 31, 2011 are included in the table above. Standby Letters of Credit Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a cus- tomer 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 is funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby let- ter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Standby letters of credit outstanding at December 31, 2011 are included in the table above. The Company holds primarily cash or cash equivalents as collateral supporting these commitments. The Company is obligated under certain unfunded benefit plans to make payments to individuals upon their retirement. While the Company is not aware of any near term plans for retirement of executive officers at this time, actuarial expected benefit payments are disclosed in Note 18 beginning on page 98 based on eligibility. While past performance is not a guarantee of future performance, management believes that the parent company’s funding sources (including div idends from all its subsidiaries) and the bank’s funding sources will be adequate to meet their liquidity requirements in the future. The liquidity position of the parent company and the bank is regularly monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. 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, which if implemented, would have a material adverse effect on the Company. p a g e 5 4 caP ital The Company and the bank are subject to risk-based capital regulations which quantitatively measure capital against risk- weighted assets, including certain off-balance sheet items. These regulations define the elements of the Tier 1 and Tier 2 com- ponents of total capital and establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for capital adequacy purposes. Sup plementing these regulations is a leverage requirement. This requirement establishes a minimum leverage ratio (at least 3% or 4%, depending upon an institution’s regulatory status), which is calculated by dividing Tier 1 capital by adjusted quarterly average assets (after deducting goodwill). Information regarding the Company’s and the bank’s risk-based capital at December 31, 2011 and December 31, 2010 is presented in Note 22 beginning on page 110. In addition, the bank is subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) which imposes a number of mandatory supervisory measures. Among other matters, FDICIA established five cap ital categories ranging from “well capital- ized” to “critically undercapitalized.” Such classifications are used by regulatory agencies to determine a bank’s deposit insurance premium, approval of applications authorizing institutions to increase their asset size or otherwise expand business activities or acquire other institutions. Under FDICIA, a “well capitalized” bank must maintain minimum leverage, Tier 1 and total capital ratios of 5%, 6% and 10%, respectively. The Federal Reserve Board applies comparable tests for holding companies such as the Company. At December 31, 2011, the Company and the bank exceeded the requirements for “well capitalized” institutions under the tests pursuant to FDICIA and of the Federal Reserve Board. The bank regulatory agencies have encouraged banking organizations, including healthy, well-run banking organizations, to oper- ate with capital ratios substantially in excess of the stated ratios required to maintain “well capitalized” status. This has resulted from, among other things, current economic conditions, the global financial crisis and the likelihood, as described below, of increased formal capital requirements for banking organizations. In light of the foregoing, the Company and the bank expect that they will maintain capital ratios substantially in excess of these ratios. The elements currently comprising Tier 1 capital and Tier 2 capital, the minimum Tier 1 capital and total capital ratios and the minimum leverage ratio may in the future be subject to change, as discussed in greater detail under the caption “SUPERVISION AND REGULATION” beginning on page 3. imPact of i nflation and c hanging PriceS The Company’s financial statements included herein have been prepared in accordance with U.S. GAAP, which require the Company to measure financial position and operating results primarily in terms of historical dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than do changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things, as fur- ther discussed under the caption “RISKS RELATED TO THE COMPANY’S BUSINESS” beginning on page 15 and under the caption “ASSET/LIABILITY MANAGEMENT” beginning on page 50. recentlY iSSued a ccounting PronouncementS See “Adoption of new Accounting standards” and “newly Issued not Yet effective standards” in Note 1 of the Company’s consolidated financial statements for information regarding recently issued accounting pronouncements and their expected impact on the Company’s consolidated financial statements. p a g e 5 5 C O N S O L I D A T E D I N T E R E S T R A T E S E N S I T I V I T Y Sterling Bancorp To mitigate the vulnerability of earnings to changes in interest rates, the Company manages the repricing characteristics of assets and liabilities in an attempt to control net interest rate sensitivity. Management attempts to confine significant rate sensitivity gaps predominantly to repricing intervals of a year or less, so that adjustments can be made quickly. Assets and liabilities with prede termined repricing dates are classified based on the earliest repricing period. Based on the interest rate sensitivity analysis shown below, the Company’s net interest income would increase during periods of rising interest rates and decrease during periods of falling interest rates. aSSetS Interest-bearing deposits with other banks Investment securities Commercial and industrial loans Equipment financing receivables Factored receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction loans Loans to individuals Loans to nondepository institutions Loans to depository institutions Noninterest-earning assets and allowance for loan losses Repricing Date 3 Months or Less More than 3 Months to 1 Year More than 1 Year to 5 Years More than 5 Years to 10 Years Over 10 Years Nonrate Sensitive Total $ 126,448 69,443 482,449 328 172,082 26,711 17,596 — 8,950 199,899 10 $ — $ — $ — $ — $ 183,965 65,196 7,721 — 49,737 15,428 13,030 532 23,328 — 145,612 77,629 104,030 — 35,615 39,854 591 894 23,306 — 25,159 789 52,058 — 33,359 12,947 — — — — 253,692 — 2,553 — 68,103 — — — 54 — — $ 126,448 677,871 — 624,124 (1,939) 150,782 (15,908) 171,831 (251) 213,525 — 85,825 — 13,621 — 10,376 — 246,587 — 10 — — — — — — 172,297 172,297 Total Assets 1,103,916 358,937 427,531 124,312 324,402 154,199 2,493,297 liabilitieS and ShareholderS’ eQuitY Interest-bearing deposits Savings NOW Money market Time—domestic Securities sold under agreements to repurchase—customers Securities sold under agreements to repurchase—dealers Commercial paper Advances—FHLB Long-term borrowings—subordinated debentures Noninterest-bearing liabilities and shareholders’ equity Total Liabilities and Shareholders’ Equity — — 267,745 249,245 — — — 359,197 18,566 177,495 101,617 49,406 47,313 — — — 13,485 100,000 5,000 — 20,000 — — — — — — 2,733 — — 677,788 384,197 349,817 — — — — — — — — — — — — — — — — — — — 25,774 — — — — — — — — — 18,566 177,495 369,362 657,848 47,313 5,000 13,485 122,733 25,774 — 1,055,721 1,055,721 25,774 1,055,721 2,493,297 Net Interest Rate Sensitivity Gap $ 426,128 $ (25,260) $ 77,714 $124,312 $ 298,628 $ (901,522) $ Cumulative Gap at December 31, 2011 $ 426,128 $490,868 $478,582 $602,894 $ 901,522 Cumulative Gap at December 31, 2010 $ 377,384 $308,139 $289,256 $468,057 $ 786,799 Cumulative Gap at December 31, 2009 $ 215,345 $223,572 $238,762 $348,921 $ 707,012 $ $ $ — $ — $ — $ — — — — p a g e 5 6 item 8. financial Statement S and SuPP lementarY data The Company’s consolidated financial statements as of December 31, 2011 and 2010 and for each of the years in the three-year period ended December 31, 2011, and the statements of condition of Sterling National Bank as of December 31, 2011 and 2010, notes thereto and the Reports of Independent Registered Public Accounting Firms thereon appear on pages 58–115. p a g e 5 7 C O N S O L I D A T E D B A L A N C E S H E E T S Sterling Bancorp December 31, aSSetS Cash and due from banks Interest-bearing deposits with other banks Securities available for sale (at estimated fair value; pledged: $146,429 in 2011 and $95,311 in 2010) Securities held to maturity (pledged: $206,282 in 2011 and $212,606 in 2010) (estimated fair value: $425,775 in 2011 and $400,453 in 2010) Total investment securities Loans held for sale Loans held in portfolio, net of unearned discounts Less allowance for loan losses Loans, net Federal Reserve and Federal Home Loan Bank stock, at cost Customers’ liability under acceptances Goodwill Premises and equipment, net Other real estate Accrued interest receivable Cash surrender value of life insurance policies Other assets Total assets liabilitieS and ShareholderS’ eQ uitY Noninterest-bearing demand deposits Savings, NOW and money market deposits Time deposits Total deposits Securities sold under agreements to repurchase—customers Securities sold under agreements to repurchase—dealers Federal funds purchased Commercial paper Short-term borrowings—other Advances—FHLB Long-term borrowings—subordinated debentures Total borrowings Acceptances outstanding Accrued interest payable Due to factored clients Accrued expenses and other liabilities Total liabilities Commitments and contingent liabilities Shareholders’ Equity Preferred shares, Series A, $5 par value per share; $1,000 liquidation value. Authorized 644,389 shares; issued -0- and 42,000 shares, respectively Common shares, $1 par value per share. Authorized 50,000,000 shares; issued 35,225,110 and 31,138,545 shares, respectively Warrant to purchase common shares Capital surplus Retained earnings Accumulated other comprehensive loss Common shares in treasury at cost, 4,300,278 and 4,297,782 shares, respectively Total shareholders’ equity Total liabilities and shareholders’ equity see notes to consolidated Financial statements. p a g e 5 8 2011 2010 (dollars in thousands, except per share data) $ 31,046 126,448 $ 26,824 40,503 270,014 390,080 407,857 677,871 43,372 1,473,309 20,029 1,453,280 8,486 4 22,901 23,625 1,929 6,838 53,446 44,051 399,235 789,315 32,049 1,314,234 18,238 1,295,996 9,365 — 22,901 15,909 182 8,280 51,512 67,621 $ 2,493,297 $ 2,360,457 $ 765,800 565,423 657,848 $ 570,290 562,207 615,267 1,989,071 1,747,764 47,313 5,000 — 13,485 — 122,733 25,774 214,305 4 1,064 — 68,032 23,016 5,000 15,000 14,388 3,490 144,173 25,774 230,841 — 1,314 91,543 66,253 2,272,476 2,137,715 — 40,602 35,225 — 270,869 15,523 (14,216) (86,580) 220,821 31,139 2,615 236,437 11,392 (12,887) (86,556) 222,742 $ 2,493,297 $ 2,360,457 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Sterling Bancorp Years Ended December 31, intereSt i ncome Loans Investment securities Available for sale—taxable Held to maturity—taxable Tax exempt Federal Reserve and Federal Home Loan Bank stock Deposits with other banks Total interest income intereSt e xP enSe Deposits Savings, NOW and Money Market Time Securities sold under agreements to repurchase—customers Securities sold under agreements to repurchase—dealers Federal funds purchased Commercial paper Short-term borrowings—FHLB Short-term borrowings—FRB Short-term borrowings—other Advances—FHLB Long-term borrowings—subordinated debentures Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses nonintere St i ncome Accounts receivable management/factoring commissions and other fees Service charges on deposit accounts Trade finance income Other customer related service charges and fees Mortgage banking income Trust fees Income from life insurance policies Securities gains Loss on other real estate owned Other income Total noninterest income nonintereSt e xP enSeS Salaries Employee benefits Total personnel expense Occupancy and equipment expenses, net Advertising and marketing Professional fees Communications Deposit insurance Other expenses Total noninterest expenses Income before income taxes Provision for income taxes Net income Dividends on preferred shares and accretion Net income available to common shareholders Average number of common shares outstanding Basic Diluted Net income available to common shareholders, per average common share Basic Diluted Dividends per common share see notes to consolidated Financial statements. p a g e 5 9 2011 2010 2009 (dollars in thousands, except per share data) $73,241 $70,104 $ 71,788 8,788 8,079 6,358 371 227 97,064 2,855 5,583 186 66 14 43 — — 2 2,144 2,094 12,987 84,077 12,000 72,077 24,381 5,654 2,222 943 6,315 53 1,140 1,726 — 1,626 44,060 43,748 13,898 57,646 13,248 2,792 5,219 1,756 2,747 10,937 94,345 21,792 4,196 17,596 2,074 10,863 10,879 4,824 445 75 97,190 3,288 6,300 229 44 74 45 — 9 18 3,482 2,094 15,583 81,607 28,500 53,107 23,572 6,250 2,264 777 8,164 329 1,138 3,928 (64) 1,275 47,633 41,586 12,220 53,806 12,296 3,381 5,464 1,691 3,809 11,109 91,556 9,184 2,158 7,026 2,589 16,575 15,070 1,889 513 85 105,920 3,890 7,999 353 — 51 67 11 398 — 4,432 2,094 19,295 86,625 27,900 58,725 18,320 5,943 1,891 929 9,476 450 1,098 5,561 (32) 514 44,150 39,875 12,293 52,168 11,278 3,167 5,147 1,665 4,153 10,967 88,545 14,330 4,908 9,422 2,773 $15,522 $ 4,437 $ 6,649 30,038,047 30,038,047 24,492,279 24,495,044 18,104,619 18,126,333 $ 0.51 0.51 0.36 $ 0.18 0.18 0.36 $ 0.37 0.37 0.56 Sterling Bancorp C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E I N C O M E Years Ended December 31, Net income Other comprehensive (loss) income, net of tax: Unrealized gains (losses) on securities: Unrealized holding (losses) gains on available for sale securities and other investments, arising during the year Reclassification adjustment for gains included in net income Pension liability adjustment—net actuarial (losses) gains Reclassification adjustment for amortization of: Prior service cost Net actuarial losses Other comprehensive (loss) income Comprehensive income see notes to consolidated Financial statements. 2011 2010 2009 $ 17,596 (dollars in thousands) $ 7,026 $ 9,422 (180) (958) (2,006) 35 1,780 (1,329) 2,101 (2,145) (1,940) 36 1,460 (488) 3,039 (3,037) 1,935 36 1,887 3,860 $ 16,267 $ 6,538 $ 13,282 p a g e 6 0 C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y Sterling Bancorp 2011 2010 2009 (dollars in thousands) $ 40,602 (42,000) 1,398 $ 40,113 — 489 $ 39, 440 — 673 $ — $ 40,602 $ 40,113 $ 31,139 4,025 61 $ 22,227 8,625 287 $ 22,203 — 24 $ 35,225 $ 31,139 $ 22,227 $ 2,615 (2,615) $ 2,615 — $ 2,615 — $ — $ 2,615 $ 2,615 $ 236,437 32,429 (61) — 394 1,670 $ 178,734 56,256 — 1,190 257 — $ 178,417 — — 185 132 — $ 270,869 $ 236,437 $ 178,734 $ 11,392 17,596 (11,122) (945) (1,398) $ 15,828 7,026 (8,873) (2,100) (489) $ 19,088 9,422 (10,131) (1,878) (673) $ 15,523 $ 11,392 $ 15,828 $ (12,887) $ (12,399) $ (16,259) 3,860 (1,329) (488) $ (14,216) $ (12,887) $ (12,399) $ (86,556) $ (85,168) $ (85,024) (144) (1,388) (24) $ (86,580) $ (86,556) $ (85,168) $ 222,742 (1,921) $ 161,950 60,792 $ 160,480 1,470 $ 220,821 $ 222,742 $ 161,950 Years Ended December 31, Preferred S hareS Balance at beginning of year Redemption Discount accretion Balance at end of year common S hareS Balance at beginning of year Common shares issued—public offering Common shares issued under stock incentive plan Balance at end of year warrant to PurchaSe common S hareS Balance at beginning of year Repurchase Balance at end of year caP ital SurPluS Balance at beginning of year Common shares issued—public offering Restricted shares issued Common shares issued under stock incentive plan and related tax benefits Stock option compensation expense Repurchase of warrants Balance at end of year retained earningS Balance at beginning of year Net income Cash dividends paid—common shares Cash dividends paid—preferred shares Discount accretion on Series A preferred shares Balance at end of year accumulated other c omPrehenSiVe lo SS Balance at beginning of year Other comprehensive (loss)/income, net of tax Balance at end of year trea SurY S hareS Balance at beginning of year Surrender of shares issued under stock incentive plan Balance at end of year total ShareholderS ’ eQ uitY Balance at beginning of year Net changes during the year Balance at end of year see notes to consolidated Financial statements. p a g e 6 1 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Sterling Bancorp Years Ended December 31, oPerating actiVitieS Net income Adjustments to reconcile income from continuing operations to net cash (used in) provided by operating activities: Provision for loan losses Depreciation and amortization of premises and equipment Securities gains Income from life insurance policies, net Deferred income tax provision (benefit) Proceeds from sale of loans Gains on sales of loans, net Originations of loans held for sale Amortization of premiums on investment securities Accretion of discounts on investment securities Decrease (Increase) in accrued interest receivable (Decrease) Increase in accrued interest payable (Decrease) Increase in due to factored clients Increase (Decrease) in accrued expenses and other liabilities Increase in other assets Loss on OREO Net cash (used in) provided by operating activities inVeSting actiVitieS Purchase of premises and equipment Net increase in interest-bearing deposits with other banks Net (increase) decrease in loans held in portfolio Net decrease (increase) in short-term factored receivables Proceeds from sale of other real estate Proceeds from calls/sales of securities—available for sale Proceeds from calls of securities—held to maturity Proceed from sales of securities—held to maturity Proceeds from prepayments, redemptions or maturities of securities—held to maturity Proceeds from redemptions of Federal Home Loan Bank Stock Purchases of securities—held to maturity Proceeds from prepayments, redemptions or maturities—available for sale Purchases of securities—available for sale Purchases of Federal Home Loan Bank stock Cash paid in acquisition Net cash (used in) provided by investing activities financing actiVitieS Net increase in noninterest-bearing demand deposits Net increase (decrease) in savings, NOW, money market deposits Net increase in time deposits Net decrease in Federal funds purchased Net increase (decrease) in securities sold under agreements to repurchase Net (decrease) increase in commercial paper and other short-term borrowings (Decrease) Increase in long-term borrowings Proceeds from exercise of stock options Proceeds from issuance of common shares Cash dividends paid on common shares Cash dividends paid on preferred shares Net redemption of preferred shares and common share warrants Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks Cash and due from banks—beginning of year Cash and due from banks—end of year Supplemental disclosure of cash flow information: Interest paid Income taxes paid Loans held for sale transferred to portfolio Loans in portfolio transferred to other real estate Due to brokers on purchases of securities held to maturity see notes to consolidated Financial statements. p a g e 6 2 2011 2010 2009 (dollars in thousands) $ 17,596 $ 7,026 $ 9,422 12,000 3,256 (1,726) (625) 2,079 370,681 (6,335) (376,674) 8,914 (467) 1,442 (250) (91,543) 623 (1,219) — (62,248) (10,972) (85,945) (181,334) 11,007 193 275,428 322,500 2,141 47,567 1,089 (379,731) 335,663 (477,139) (210) — (139,743) 28,500 2,436 (3,928) (1,135) (2,430) 493,147 (8,176) (484,395) 6,993 (559) 721 23 9,142 8,742 (8,139) 64 48,032 (8,687) (3,545) (126,361) (21,862) 1,259 486,191 142,380 — 64,327 977 (209,964) 210,749 (744,344) (1,860) — (210,740) 27,900 2,195 (5,561) (1,388) (6,344) 618,857 (9,480) (619,863) 2,269 (1,350) (85) (755) 31,780 (10,150) (6,707) 32 30,772 (1,149) (23,009) 13,778 (30,729) 1,654 395,632 40,000 — 82,059 4,725 (211,552) 132,043 (378,790) (503) (21,333) 2,826 195,510 3,216 42,581 (15,000) 24,297 (4,393) (21,440) — 36,454 (11,122) (945) (42,945) 206,213 4,222 26,824 $ 31,046 23,953 (29,808) 172,952 (26,000) 6,968 (51,928) 14,173 403 64,881 (8,873) (2,100) — 164,621 1,913 24,911 $ 26,824 81,752 27,810 113,281 (90,000) (23,286) (118,264) (20,000) 197 — (10,131) (1,878) — (40,519) (6,921) 31,832 $ 24,911 $ 13,237 5,748 1,004 2,048 943 $ 15,559 4,011 1,264 533 4,998 $ 20,051 5,759 — 2,069 — C O N S O L I D A T E D S T A T E M E N T S O F C O N D I T I O N Sterling National Bank December 31, aSSetS Cash and due from banks Interest-bearing deposits with other banks Securities available for sale (at estimated fair value; pledged: $146,429 in 2011 and $95,311 in 2010) Securities held to maturity (pledged: $206,282 in 2011 and $212,606 in 2010) (estimated fair value: $425,775 in 2011 and $400,453 in 2010) Total investment securities Loans held for sale Loans held in portfolio, net of unearned discounts Less allowance for loan losses Loans, net Federal Reserve and Federal Home Loan bank stock, at cost Customers’ liability under acceptances Goodwill Premises and equipment, net Other real estate Accrued interest receivable Cash surrender value of life insurance policies Other assets Total assets liabilitieS and Shareholder’S eQ uitY Noninterest-bearing demand deposits Savings, NOW and money market deposits Time deposits Total deposits Securities sold under agreements to repurchase—customers Securities sold under agreements to repurchase—dealers Federal funds purchased Short-term borrowings—other Advances—FHLB Acceptances outstanding Accrued interest payable Due to factored clients Accrued expenses and other liabilities Total liabilities Commitments and contingent liabilities Shareholder’s Equity Common shares, $50 par value per share; Authorized and issued, 358,526 shares Capital surplus Undivided profits Accumulated other comprehensive loss Total shareholder’s equity Total liabilities and shareholder’s equity see notes to consolidated Financial statements. p a g e 6 3 2011 2010 (dollars in thousands, except per share data) $ 31,034 126,448 $ 26,792 40,503 261,442 383,994 407,857 669,299 43,372 399,235 783,229 32,049 1,463,182 20,029 1,298,864 18,238 1,443,153 1,280,626 8,486 4 1,742 23,622 1,929 6,642 48,838 53,136 9,365 — 1,742 15,902 182 8,109 47,408 73,133 $ 2,457,705 $ 2,319,040 $ 786,673 567,021 657,848 $ 607,914 565,653 615,267 2,011,542 47,313 5,000 — — 122,733 4 1,062 — 64,807 1,788,834 23,016 5,000 15,000 3,490 144,173 — 1,306 91,543 61,018 2,252,461 2,133,380 17,926 51,263 146,888 (10,833) 205,244 17,926 51,263 125,983 (9,512) 185,660 $ 2,457,705 $ 2,319,040 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Sterling Bancorp note 1. SummarY of Significant a ccounting PolicieS Sterling Bancorp is a financial holding company, pursuant to an election made under the Gramm-Leach-Bliley Act of 1999. Throughout the notes, the term the “Company” refers to Sterling Bancorp and its consolidated subsidiaries and the term the “bank” refers to Sterling National Bank and its con- solidated subsidiaries, while the term the “parent company” refers to Sterling Bancorp but not its subsidiaries. The Company provides a full range of financial products and ser- vices, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, factoring/accounts receivable management ser- vices, trade financing, equipment financing, and deposit ser- vices. The Company has operations principally in New York and conducts business throughout the United States. The Company’s financial statements are prepared in accord- ance with U.S. generally accepted accounting principles (“U.S. GAAP”), which, effective for all interim and annual periods ending after September 15, 2009, principally consist of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification”). FASB Codification Topic 105: generally Accepted Accounting Principles establishes the FASB Codification as the source of authoritative accounting principles recognized by FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”), under author- ity of federal securities laws, are also sources of authoritative guidance for SEC registrants. All guidance contained in the FASB Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the FASB Codification is superseded and deemed non-authoritative. The following summarizes the significant accounting policies of the Company with specific references to the FASB Codification. (a) Basis of Presentation The consolidated financial statements include the accounts of the parent company and its subsidiaries, principally the bank, after elimination of intercompany transactions. Generally, U.S. GAAP requires that all entities in which a company has a controlling financial interest be consolidated. The Company determines whether it has a controlling finan- cial interest in an entity by first evaluating whether it holds ownership of a majority voting interest. However, certain entities may not have voting interests or decision-making abilities because the controlling financial interest is achieved through other arrangements. These variable interest entities (“VIEs”) may still require consolidation even though equity investors do not have the typical characteristics of a control- ling financial interest or do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support. A controlling financial interest in a VIE is present when an enterprise has the power to direct the activities that most significantly impact the entity’s finan- cial performance and an obligation to absorb a majority of the entity’s expected losses or receive a majority of the entity’s expected return. The enterprise with a controlling financial interest, known as the primary beneficiary, consoli- dates the VIE. The parent company’s wholly-owned subsid- iary, Sterling Bancorp Trust I, is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Company’s consolidated financial statements. (b) General Accounting Policies The preparation of financial statements in accordance with U.S. GAAP requires management to make assumptions and estimates which impact the amounts reported in those state- ments and are, by their nature, subject to change in the future as additional information becomes available or as circumstances vary. Actual results could differ from management’s current estimates, as a result of changing conditions and future events. The current economic environment has increased the degree of uncertainty inherent in these significant estimates. Several accounting estimates are particularly critical and are suscepti- ble to significant near-term change, including the allowance for loan losses and asset impairment judgments, such as other-than-temporary declines in the value of securities and the accounting for income taxes. The judgments used by man- agement in applying these critical accounting policies may be affected by a further and prolonged deterioration or lack of significant improvement in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan portfolio, in light of the fac- tors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect outstanding principal may result in increased loan losses. The Company evaluates subsequent events through the date that the financial statements are issued. Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current presentation. Throughout the notes, dollar amounts presented in tables are in thousands, except per share data. p a g e 6 4 (c) Adoption of New Accounting Standards Accounting Standards Update (“ASU”) No. 2010-20, “Receivables (Topic 310)—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide dis- closures designed to facilitate financial statement users’ eval- uation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is ana- lyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggre- gated by portfolio segment, the level at which an entity devel- ops and documents a systematic method for determining its allowance for credit losses, and class of financing receivables, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll-for- ward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans and credit quality indicators. This guidance became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a report- ing period. Disclosures that relate to activity during a report- ing period were required for the Company’s financial statements that include periods beginning on or after January 1, 2011. The effect of adopting this new guidance did not have a material impact on the Company’s financial statements. ASU No. 2010-28, “Intangibles-Goodwill and Other (Topic 350 )—When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force).” ASU 2010-28 modifies Step 1 of the goodwill impair- ment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In deter- mining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impair- ment may exist. The qualitative factors are consistent with the existing guidance which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The provisions of this guidance were effective for the Company beginning January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s financial statements. ASU No. 2011-02, “Receivables (Topic 310)—A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modifi- cation of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of trou- bled debt restructurings. In evaluating whether a restructur- ing constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructur- ing constitutes a concession; and (b) the debtor is experienc- ing financial difficulties. ASU 2011-02 was effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s financial statements. d) Newly Issued Not Yet Effective Standards ASU No. 2011-03, “Transfers and Servicing (Topic 860)— Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral main- tenance guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company’s financial statements. ASU No. 2011-04, “Fair Value Measurement (Topic 820)— Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements. ASU No. 2011-05, “Comprehensive Income (Topic 220)— Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, p a g e 6 5 ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was elimi- nated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a sig- nificant impact on the Company’s financial statements. ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350)—Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles-Goodwill and Other,” so that entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., Step 1 of the goodwill impairment test). If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two- step impairment test would be required. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed beginning after December 15, 2011, with early adoption permitted. The Company will adopt ASU 2011-08 effective with its annual period ending December 31, 2011 and such adoption is not expected to have a material impact on the Company’s finan- cial statements. ASU No. 2011-11, “Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet”, to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities bor- rowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial posi- tion and/or subject to master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have significant impact on the Company’s financial statements. ASU 2011-12 “Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require pre- sentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accu- mulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 is effective for annual and interim periods beginning after December 15, 2011 and is not expected to have a significant impact on the Company’s financial statements. (e) Investment Securities Securities are designated at the time of acquisition as avail- able for sale or held to maturity. Securities that the Company will hold for indefinite periods of time and that might be sold in the future as part of efforts to manage interest rate risk or in response to changes in interest rates, changes in prepayment risk, changes in market conditions or changes in economic factors are classified as available for sale and carried at esti- mated fair values. Net aggregate unrealized gains or losses are reported, net of taxes, as a component of shareholders’ equity through other comprehensive income. Securities that the Company has the positive intent and ability to hold to maturity are designated as held to maturity and are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts over the period to maturity. Interest income includes the amortization of purchase premiums and accretion of purchase discounts. Gains and losses realized on sales of securities are determined on the specific identifica- tion method and are reported in noninterest income. Securities pledged as collateral are disclosed parenthetically in the Consolidated Balance Sheets if the secured party has the right by contract or custom to sell or repledge the collat- eral. Securities are pledged by the Company to secure trust and public deposits, securities sold under agreements to repurchase, advances from the FHLB and for other purposes required or permitted by law. A periodic review is conducted by management to determine if the decline in the fair value of any security appears to be other- than-temporary. Factors considered in determining whether the decline is other-than-temporary include, but are not limited to: the length of time and the extent to which fair value has been below cost; the financial condition and near-term pros- pects of the issuer; and the Company’s intent to sell. If the decline is deemed to be other-than-temporary, and the Company does not have the intent to sell and will not likely be required to sell, the security is written down to a new cost basis and the resulting credit component of the loss is reported in noninterest income and the remainder of the loss is p a g e 6 6 recorded in shareholders’ equity. If the Company intends to sell or will be required to sell, the full amount of the other-than- temporary impairment is recorded in noninterest income. (f) Loans Loans (including factored accounts receivable), other than those held for sale, are reported at their principal amount outstanding, net of unearned discounts and unamortized nonrefundable fees and direct costs associated with their origination or acquisition. Interest earned on loans is credited to income based on loan principal amounts outstanding at appropriate interest rates. Origination and other nonrefund- able fees net of direct costs and discounts on loans (excluding factored accounts receivable) are credited to income over the terms of the loans using a method that results in an approxi- mately constant effective yield. Nonrefundable fees on the purchase of accounts receivable are credited to “Accounts receivable management/factoring commissions and other fees” at the time of purchase, which, based on our analysis, does not produce results that are materially different from the results under the amortization method specified in FASB Codification Topic 310: Receivables. Mortgage loans held for sale, including deferred fees and costs, are reported at the lower of cost or fair value as determined by outstanding commitments from investors or current inves- tor yield requirements calculated on the aggregate loan basis and are included under the caption “Loans held for sale” in the Consolidated Balance Sheets. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to income. Mortgage loans, including servicing rights, are sold without recourse. Gains or losses resulting from sales of mortgage loans, net of unamortized deferred fees and costs, are recognized when the proceeds are received from investors and are included under the caption “Mortgage banking income” in the Consolidated Statements of Income. In connection with its mortgage banking activities, the Company has commitments to fund loans held for sale and commitments to sell loans which are considered derivative instruments under FASB Codification Topic 815: derivatives and hedging. The fair values of these free-standing derivative instruments were immaterial at December 31, 2011 and 2010. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Loans for which the borrower has been given a concession through a modification of terms and for which the borrower is experiencing financial difficul- ties are considered troubled debt restructurings and classified o n t h e va lu e b a s e d p r e s e nt as impaired. Under the provisions of FASB Codification Topic 310: Receivables, individually identified impaired loans are m e a s u r e d of payments expected to be received, using the historical effec- tive loan rate as the discount rate. Alternatively, measurement may also be based on observable market prices; or, for loans that are solely dependent on the collateral for repayment, measurement may be based on the fair value of the collateral. If the recorded investment in the impaired loan exceeds fair value, a valuation allowance is required as a component of the allowance for loan losses. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or por- tions thereof, are charged off when deemed uncollectible. Nonaccrual loans are those on which the accrual of interest has ceased. Loans, including loans that are individually identified as being impaired under FASB Codification Topic 310: Receivables, are generally placed on nonaccrual status imme- diately if, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days or more and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Interest income is recognized on non- accrual loans only to the extent received in cash. How ever, where there is doubt regarding the ultimate collectibility of the loan principal, cash receipts, whether designated as prin- cipal or interest, are thereafter applied to reduce the carrying value of the loan. Loans are restored to accrual status only when interest and principal payments are brought current and future payments are reasonably assured. (g) 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 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 allowance for loan losses includes allowance allocations calculated in accordance with FASB Codification Topic 310: Receivables and allowance allocations calculated in accordance with FASB Codification Topic 450: contingencies. Further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses is presented in Note 5—Loans and Allowance for Loan Losses. p a g e 6 7 (h) Federal Reserve and Federal Home Loan Bank Stock The bank is required to maintain a minimum level of invest- ment in Federal Home Loan Bank of New York (“FHLB”) stock based on specific percentages of its outstanding mort- gages, total assets or FHLB advances. FHLB and Federal Reserve Bank (“FRB”) stocks are restricted because they may only be sold to another member institution of the FHLB or FRB at their par values. Due to restrictive terms, and the lack of a readily determinable market value, FHLB and FRB stocks are shown separately in the Consolidated Balance Sheets, carried at cost and evaluated for ultimate recovery of par value. (i) Goodwill and Other Intangible Assets Goodwill, representing the excess of the purchase price over the fair value of net assets of businesses acquired, reflected in the Consolidated Balance Sheets arose from the parent com- pany’s acquisition of the bank (in 1968) and the acquisition of Sterling Resource Funding Corp (in 2006). Effective January 1, 2002, the Company adopted the provisions of FASB Codification Topic 350: Intangibles— goodwill and other, under which goodwill is deemed to have an indefinite useful life and therefore is not amortized, and the Company is required to complete an annual assessment for any impair- ment of goodwill. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Company has selected December 31 as the date to perform the annual impairment testing. The impairment would be treated as an expense in the income statement. There was no impairment expense recorded in 2011, 2010 or 2009. Goodwill is the only intangible asset with an indefinite life on our balance sheet and is tested for impairment using either a qualitative method or a two-step approach under ASU 2011-08 that initially involves the estimation of its respective fair value. If the fair value of a reporting unit is less than the car- rying value of the reporting unit, a goodwill impairment loss would be recognized as a charge to expense for any excess of the goodwill carrying amount over its implied fair value. Other intangible assets consist of acquired customer con- tracts and assets arising from a purchase of assets as of April 6, 2009. They were initially measured at fair value and then amortized on a straight-line method over their estimated use- ful life of 2 years. (j) Premises and Equipment Premises and equipment, excluding land, are stated at cost less accumulated depreciation or amortization as applicable. Land is reported at cost. Depreciation is computed on a straight-line basis and is charged to noninterest expense over the estimated useful lives of the related assets. Useful lives are 7 years for furniture, fixtures and equipment, between 3 and 7 years for ATMs, computer hardware and software, and 10 years for building improvements. Amortization of leasehold improvements is charged to noninterest expense over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Maintenance, repairs and minor improvements are charged to noninterest expenses as incurred. (k) Foreclosed Assets Assets acquired through or instead of loan foreclosure are held for sale and are initially recorded at fair value less esti- mated selling costs when acquired, establishing a new cost basis. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjec- tive in nature and may be adjusted in the future because of changes in economic conditions. (l) Cash Surrender Value of Life Insurance Policies The bank invested in Bank Owned Life Insurance (“BOLI”) policies to fund certain future employee benefit costs. In addition, the parent company and the bank own endorse ment split-dollar life insurance policies on certain key executives. The cash surrender value, net of surrender charges, of these insurance policies is recorded in the Consolidated Balance Sheets under the caption “Cash surrender value of bank owned and other life insurance policies.” Changes in the cash surrender value, net of surrender charges, of BOLI policies are recorded in the Consolidated Statements of Income under the caption “Income from bank owned life insurance poli- cies.” Changes in the cash surrender value, net of surrender charges, of the endorsement split-dollar life insurance policies are netted against premium expense in the Consolidated Statements of Income under the caption “Employee Benefits.” (m) Repurchase Agreements The Company sells certain securities under agreements to repurchase and receives cash as collateral. The agreements are treated as collateralized financing transactions and the obligations to repurchase securities sold are reflected as a liability in the accompanying Consolidated Balance Sheets. The carrying value of the securities underlying the agree- ments remains reflected as an asset. (n) Derivative Financial Instruments The Company may be required to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative. p a g e 6 8 (o) Impact of Current Economic Conditions Current economic conditions, including illiquid credit mar- kets, volatile equity, foreign currency and energy markets, and reduced consumer spending, have combined to increase risk and uncertainty across industries. The Company consid- ers the current economic conditions and their impact on the financial results and operations of the Company discussed above, including the determination of fair value of investment securities or derivative financial instruments the Company holds, the establishment of allowance for loan losses, the impairment of any asset and any other amounts reported in the financial statements of the Company that may be affected in the near term. (p) Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Deferred income tax expense (benefit) is determined by recognizing deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of deferred tax assets is assessed and a valua- tion allowance provided for that portion of the assets for which it is more likely than not that it will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates and will be adjusted for the effects of future changes in tax laws or rates, if any. For income tax purposes, the parent company files: a con- solidated Federal income tax return; combined New York City and New York State income tax returns; and separate state income tax returns for its out-of-state subsidiaries. The par- ent company, under tax sharing agreements, either pays or col- lects current income taxes due to or due from its subsidiaries. Starting in 2009, New York State Tax law generally requires a REIT that is majority owned by a New York State bank to be included in the bank’s combined New York State tax return. The Company believes that it qualifies for the small-bank ex- ception to this rule. If, contrary to this belief, Sterling Real Estate Holding Company, Inc. were required to be included in the Company’s New York State combined tax return, the Company’s effective tax rate would increase. Under the small-bank exception, dividends received by the bank from SREHC, a real estate investment trust, are subject to a 60% dividends-received deduction, which results in only 40% of the dividends being subject to New York State tax. Currently, the New York City banking corporation tax oper- ates in the same manner in this respect. The possible reform of the New York State franchise and banking corporation tax laws mentioned under “ITEM 1A. RISK FACTORS—RISKS RELATED TO THE COMPANY’S BUSINESS—Possible New York State Legislative Changes May Negatively Affect the Amount of Taxes We Pay in Future Years” could eliminate the benefit of the 60% dividends-received deduction or other- wise increase the Company and the bank’s effective New York State (and New York City) tax rates. (q) Statements of Cash Flows For purposes of reporting cash flows, cash and cash equiva- lents include cash and amounts due from banks. Net cash flows are reported for customer loan and deposit transac- tions, interest-bearing deposits in other financial institutions, federal funds purchased and repurchase agreements. (r) Stock Incentive Plan At December 31, 2011, the Company had a share-based employee compensation plan, which is described more fully in Note 17. Employee stock options generally expire ten years from the date of grant and become non-forfeitable one year from date of grant, although if necessary to qualify to the maximum extent possible as incentive stock options, these options become exercisable in annual installments. Director non- qualified stock options generally expire five years from the date of grant and become non-forfeitable and become exer- cisable in four annual installments starting one year from the date of grant. Share-based compensation is recognized in compensation expense as described more fully in Note 17 over the period from the date of grant to the date on which the options become non-forfeitable. (s) Earnings Per Common Share Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding participating securi- ties. Participating securities include non-vested share awards such as awards of restricted shares of common shares. Non- vested share awards are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as holders of the Company’s com- mon shares. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock option compensation using the treasury stock method. p a g e 6 9 (t) Disclosures About Segments of an Enterprise and Related Information “Segment Reporting” topic of the FASB Accounting Standards Codification establishes standards for the way business enter- prises report information about operating segments and establishes standards for related disclosure about products and services, geographic areas and major customers. The statement requires that a business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. During the latter half of 2011, the Company combined its operating segments into one reportable segment, “Community Banking.” All of the Company’s activities are interrelated and each activity is dependent and assessed based on the manner in which it supports the other activities of the Company. For example, lending is dependent upon the ability of the bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. Accordingly, all significant operat- ing decisions are based upon analysis of the Company as one operating segment or unit. The Company derives a substantial portion of its revenue and income from providing banking and related financial services and products to customers located primarily in the New York metropolitan area. The financial information in this report reflects the single segment through which the Company conducts its business. note 2. caSh and d ue from bankS The Company maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risks. The bank is required to maintain average reserves, net of vault cash, on deposit with the Federal Reserve Bank of New York against outstanding domestic deposits and certain other liabilities. The reserves maintained, which are reported in cash and due from banks, were $124.6 million and $34.6 million at December 31, 2011 and 2010, respectively. Average required reserves during 2011 and 2010 were $4.6 million and $5.2 million, respectively. Beginning on October 9, 2008, the Federal Reserve started to pay interest on required reserve balances and excess balances. For the years ended December 31, 2011, 2010 and 2009, the Company received interest from the Federal Reserve amounting to $228 thousand, $76 thousand and $87 thousand, respectively. note 3. mone Y m arket i nVeStmentS The Company’s money market investments include interest-bearing deposits with other banks and Federal funds sold. The following table presents information regarding money market investments. Years Ended December 31, Interest-bearing deposits with other banks At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate earned —Range of interest rates earned 2011 2010 2009 $126,448 $40,503 $36,958 0.25% 0.25% 0.24% 3 Days 262,940 93,561 7 Days 66,858 31,960 5 Days 78,603 36,804 0.24% 0.23% 0.23% 0.03–0.90% 0.06–1.50% 0.06–0.25% p a g e 7 0 note 4. inVeStment SecuritieS The amortized cost and fair value of securities available for sale are as follows: December 31, 2011 Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal Home Loan Mortgage Corporation) CMOs (Government National Mortgage Association) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal Farm Credit Bank Total obligations of U.S. government corporations and government-sponsored enterprises Obligations of state and political institutions—New York bank qualified Single-issuer trust preferred securities Corporate debt securities Equity and other securities Total December 31, 2010 Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal Home Loan Mortgage Corporation) CMOs (Government National Mortgage Association) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal Farm Credit Bank Total obligations of U.S. government corporations and government-sponsored enterprises Obligations of state and political institutions—New York bank qualified Single-issuer trust preferred securities Corporate debt securities Equity and other securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 21,642 5,666 2,137 38 98 29,581 501 101 376 251 30,810 21,171 28,506 175,920 15,322 $ 103 12 74 — — 189 — 1 7 — 197 1,606 214 263 958 $ 6 11 — 1 — 18 — — — — 18 — 1,661 2,876 398 $ 21,739 5,667 2,211 37 98 29,752 501 102 383 251 30,989 22,777 27,059 173,307 15,882 $ 271,729 $ 3,238 $ 4,953 $ 270,014 $ 36,026 7,218 8,750 44 110 52,148 30,087 10,000 49,964 10,000 152,199 39,967 3,879 189,091 5,039 $ 64 72 84 2 — 222 77 — 132 31 462 780 79 278 1 $ 372 — 13 1 1 387 — 59 110 — 556 703 25 311 100 $ 35,718 7,290 8,821 45 109 51,983 30,164 9,941 49,986 10,031 152,105 40,044 3,933 189,058 4,940 Total $ 390,175 $ 1,600 $ 1,695 $ 390,080 p a g e 7 1 The carrying value and fair value of securities held to maturity are as follows: December 31, 2011 Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal National Mortgage Association) CMOs (Federal Home Loan Mortgage Corporation) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Federal Home Loan Bank Federal Home Loan Mortgage Corporation Total obligations of U.S. government corporations and government- sponsored enterprises Obligations of state and political institutions—New York bank qualified Total December 31, 2010 Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal National Mortgage Association) CMOs (Federal Home Loan Mortgage Corporation) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal Farm Credit Bank Carrying Value Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 3,942 6,474 46,937 23,682 4,132 85,167 104,981 44,992 34,991 270,131 137,726 $ 192 305 3,777 1,669 603 6,546 203 34 49 6,832 11,105 $ — — — — — — — — 9 9 10 $ 4,134 6,779 50,714 25,351 4,735 91,713 105,184 45,026 35,031 276,954 148,821 $ 407,857 $17,937 $ 19 $ 425,775 $ 7,504 11,704 70,001 40,583 4,943 134,735 84,969 14,991 42,493 5,078 $ 349 572 4,292 1,931 605 7,749 5 — 4 — $ — — — — — — 1,405 222 608 42 2,277 4,381 $ 7,853 12,276 74,293 42,514 5,548 142,484 83,569 14,769 41,889 5,036 287,747 112,706 Total obligations of U.S. government corporations and government- sponsored enterprises Obligations of state and political institutions—New York bank qualified 282,266 116,969 7,758 118 Total $ 399,235 $ 7,876 $6,658 $ 400,453 The Company invests principally in obligations of U.S. government corporations and government sponsored enterprises and other investment-grade securities. The fair value of these investments fluctuates based on several factors, including credit qual- ity and general interest rate changes. The Company determined that it is not more likely than not that the Company would be required to sell any investments before anticipated recovery. At December 31, 2011, approximately $95.8 million, representing approximately 14.13%, of the Company’s held to maturity and available for sale securities are comprised of securities issued by financial service companies/banks including single-issuer trust preferred securities (26 issuers), corporate debt (32 issuers) and equity securities (8 issuers). These investments may pose a higher risk of future impairment charges as a result of a lack of significant improvement of the U.S. economy and/or a further deterioration in stock prices of the companies in the financial services industry. The Company would be required to recognize impairment charges on these securities if they suffer a decline in value that is considered other than temporary. Numerous fac- tors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for p a g e 7 2 investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the com- petitive environment could have a negative effect on the Company’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. The following table presents information regarding securities available for sale with temporary unrealized losses for the periods indicated: December 31, 2011 Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal Home Loan Mortgage Corporation) CMOs (Government National Mortgage Association) Federal Home Loan Mortgage Corporation Total obligations of U.S. government corporations and government- sponsored enterprises Single-issuer trust preferred securities Corporate debt securities Equity and other securities Total December 31, 2010 Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal Home Loan Mortgage Corporation) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal Home Loan Bank Federal Home Loan Mortgage Corporation Total obligations of U.S. government corporations and government- sponsored enterprises Obligations of state and political institutions—New York bank qualified Single-issuer trust preferred securities Corporate debt securities Equity and other securities Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 4,276 3,448 — $ 6 11 — $ — — 22 $ — — 1 $ 4,276 3,448 22 $ 6 11 1 7,724 11,721 139,972 2,974 17 1,574 1,937 398 22 415 10,607 — 1 87 939 — 7,746 12,136 150,579 2,974 18 1,661 2,876 398 $ 162,391 $ 3,926 $ 11,044 $1,027 $ 173,435 $ 4,953 $ 30,494 7,269 28 110 37,901 9,941 9,875 57,717 18,716 — 92,392 4,900 $ 372 13 1 1 $ — — — — $ — — — — 387 59 110 556 703 — 311 100 — — — — — 2,111 — — — — — — — 25 — — $ 30,494 7,269 28 110 37,901 9,941 9,875 57,717 18,716 2,111 92,392 4,900 $ 372 13 1 1 387 59 110 556 703 25 311 100 Total $ 173,725 $1,670 $ 2,111 $ 25 $ 175,836 $1,695 At December 31, 2011, the Company held one position in residential mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation in the available for sale portfolio that was in an unrealized loss position for more than 12 months. The amount of the unrealized loss ($1 thousand) was insignificant to the Company’s results of operations for the year ended December 31, 2011. p a g e 7 3 The following table presents information regarding available for sale single-issuer, trust preferred securities at December 31, 2011: Issuer Sterling Bancorp Trust I, 8.375%, due 3/31/2032 NPB Capital Trust II, 7.85%, due 9/30/2032 BAC Capital Trust II, 7.00%, due 2/01/2032 BAC Capital Trust IV, 5.875%, due 5/03/2033 BNY Capital Trust V, 5.95%, due 5/01/2033 Citigroup Capital VII, 7.125%, due 7/31/2031 Citigroup Capital VIII, 6.95%, due 9/15/2031 Citigroup Capital IX, 6.00%, due 2/14/2033 Citigroup Capital X, 6.10%, due 9/30/2033 Citigroup Capital XVII, 6.35%, due 3/15/2067 First Tennessee Capital II, 6.30%, due 4/15/2034 Fleet Capital Trust VIII, 7.20%, due 3/15/2032, owned by Bank of America Corporation Goldman Sachs Capital I, 6.345%, due 2/15/2034 JP Morgan Chase Capital XI, 5.875%, due 6/15/2033 JP Morgan Chase Capital XV, 5.875%, due 3/15/2035 JP Morgan Chase Capital XVII, 5.85%, due 8/01/2035 Morgan Stanley Capital Trust III, 6.25%, due 3/01/2033 Keycorp Capital II, 6.875%, due 3/17/2029 Keycorp Capital VII, 5.70%, due 6/15/2035 PNC Capital Trust D, 6.125%, due 12/15/2033 USB Capital Trust XI, 6.60%, due 9/15/2066 VNB Capital Trust I, 7.75%, due 12/15/2031 Wachovia Capital Trust IV, 6.375%, due 3/01/2067 owned by Wells Fargo Wells Fargo Capital Trust VII, 5.85%, due 5/01/2033 Wells Fargo Capital Trust VIII, 5.625%, due 8/01/2033 Wells Fargo Capital IX, 5.625%, due 4/08/2034 *TARP obligation was repaid prior to december 31, 2011. Tarp Recipient Credit Rating Amortized Cost Fair Value Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * Yes * NA NA BB+ BB+ BBB BB BB BB BB BB BB+ BB+ BB+ BBB BBB BBB BB+ BBB- BBB- BBB BBB+ BBB- BBB+ BBB+ BBB+ BBB+ $ 989 126 300 50 50 1,507 246 2,881 293 46 988 502 5,937 1,623 2,195 2,245 1,043 93 955 1,390 100 22 50 424 367 4,084 $ 1,036 130 251 38 51 1,452 233 2,569 254 55 875 415 5,078 1,626 2,203 2,292 923 94 967 1,408 106 22 56 428 380 4,117 Unreal- ized Gains/ (Losses) $ 47 4 (49) (12) 1 (55) (13) (312) (39) 9 (113) (87) (859) 3 8 47 (120) 1 12 18 6 — 6 4 13 33 $ 28,506 $ 27,059 $ (1,447) p a g e 7 4 At December 31, 2011, the Company held 26 security positions of single-issuer bank trust preferred securities and 32 security positions of corporate debt securities issued by financial institutions all of which are paying in accordance with their terms and have no deferrals of interest or other deferrals. In addition, management analyzes the performance of the issuers on a quarterly basis, including a review of the issuer’s most recent bank regulatory report to assess credit risk and the probability of impair- ment of the contractual cash flows of the applicable securities. Based upon management’s fourth quarter review, all of the issuers have maintained performance levels adequate to support the contractual cash flows of the securities. As of December 31, 2011, management does not have the intent to sell any of the securities classified as available for sale in the tables above and believes that it is more likely than not that the Company will not have to sell any such securities before recovery of cost. The following table presents information regarding securities held to maturity with temporary unrealized losses for the periods indicated: December 31, 2011 Obligations of U.S. government corporations and government- sponsored enterprises Agency Notes Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Federal Home Loan Mortgage Corporation $ 14,991 $ 9 $ — $ — $ 14,991 $ 9 Total obligations of U.S. government corporations and government-sponsored enterprises Obligations of state and political institutions—New York bank qualified Total December 31, 2010 Obligations of U.S. government corporations and government- sponsored enterprises Agency Notes Federal National Mortgage Association Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal Farm Credit Bank Total obligations of U.S. government corporations and government-sponsored enterprises Obligations of state and political institutions—New York bank qualified 14,991 736 9 9 — 289 — 1 14,991 1,025 9 10 $ 15,727 $ 18 $ 289 $ 1 $ 16,016 $ 19 $ 78,564 $1,405 $ — $ — $ 78,564 $1,405 14,769 36,890 5,036 222 608 42 135,259 94,309 2,277 4,103 — — — — 2,277 — — — — 278 14,769 36,890 5,036 222 608 42 135,259 96,586 2,277 4,381 Total $ 229,568 $6,380 $2,277 $278 $ 231,845 $6,658 At December 31, 2011, the Company held no security position in obligations of U.S. government corporations and government- sponsored enterprises in the held to maturity portfolio that were in an unrealized loss position for more then 12 months. At December 31, 2011, the Company held one position in obligations of state and political institutions in the held to maturity portfolio that was in an unrealized loss position for more than 12 months. The amount of the unrealized loss ($1 thousand) was insignificant to the Company’s results of operations for the year ended December 31, 2011. p a g e 7 5 The following tables present information regarding securities available for sale and securities held to maturity at December 31, 2011, based on contractual maturity. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Obligations of U.S. government corporations and government- sponsored enterprises Residential mortgage-backed securities CMOs (Federal National Mortgage Association) CMOs (Federal Home Loan Mortgage Corporation) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Government National Mortgage Association Total residential mortgage-backed securities Agency notes Federal National Mortgage Association Due after 1 year but within 5 years Due after 5 years but within 10 years Due after 10 years Federal Home Loan Bank Due within 1 year Due after 1 year but within 5 years Due after 5 years but within 10 years Federal Home Loan Mortgage Corporation Due after 1 year but within 5 years Due after 5 years but within 10 years Federal Farm Credit Bank Due after 1 year but within 5 years Total obligations of U.S. government corporations and government- sponsored enterprises Obligations of state and political institutions Due within 1 year Due after 1 year but within 5 years Due after 5 years but within 10 years Due after 10 years Total obligations of state and political institutions Single-issuer trust preferred securities Due after 10 years Corporate debt securities Due within 6 months Due after 6 months but within 1 year Due after 1 year but within 2 years Due after 2 years but within 5 years Due after 5 years but within 10 years Due after 10 years Total corporate debt securities Equity and other securities Total p a g e 7 6 Available for sale Held to maturity Amortized Cost Fair Value Amortized Cost Fair Value $21,642 5,666 2,137 38 98 $ 21,739 5,667 2,211 37 98 $ 3,942 6,474 46,937 23,682 4,132 $ 4,134 6,779 50,714 25,351 4,735 29,581 29,752 85,167 91,713 501 — — 101 — — 376 — 251 501 — — 102 — — 383 — 251 15,000 19,995 69,986 — 5,000 39,992 10,000 24,991 15,077 20,024 70,083 — 5,003 40,023 10,006 25,025 — — 30,810 30,989 270,131 276,954 1,623 1,230 3,895 14,423 21,171 1,639 1,278 4,297 15,563 — — 2,203 135,523 — — 2,437 146,384 22,777 137,726 148,821 28,506 27,059 37,445 34,150 54,772 45,929 3,255 369 37,323 33,893 54,306 44,248 3,169 368 175,920 173,307 15,322 15,882 — — — — — — — — — — — — — — — — — — $ 271,729 $270,014 $407,857 $425,775 Information regarding sales and/or calls of held to maturity securities is as follows: Years Ended December 31, 2011 2010 2009 Sales: Proceeds Gross gains Gross losses Calls: Proceeds Gross gains Gross losses $ 2,141 $ 62 — — — — $ — — — 322,500 142,380 40,000 104 76 368 — — — During 2011, $2.1 million of mortgage-backed securities issued by the Federal National Mortgage Association were sold out of the held to maturity portfolio. Each of the securities sold had been paid down by more than 85% of its original cost. There were no sales of held to maturity securities in 2010 or 2009. Information regarding sales and/or calls of the available for sale securities is as follows: Years Ended December 31, 2011 2010 2009 Sales: Proceeds Gross gains Gross losses Calls: Proceeds Gross gains Gross losses $ 170,268 $ 169,517 $233,026 1,493 — 3,703 — 5,445 — 105,160 316,674 162,606 143 — 145 288 116 — Investment securities are pledged to secure trust and public deposits, securities sold under agreements to repurchase, borrow- ings from the Federal Home Loan Bank of New York and/or the Federal Reserve Bank of New York, and for other purposes required or permitted by law. note 5. loanS and allowance for loan lo SSeS The major components of domestic loans held for sale and loans held in portfolio are as follows: December 31, Loans held for sale, net of valuation reserve ($-0- at December 31, 2011 and $113 at December 31, 2010) Real estate—residential mortgage Loans held in portfolio, net of unearned discounts Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions Loans held in portfolio, gross Less unearned discounts Loans held in portfolio, net of unearned discounts p a g e 7 7 2011 2010 $ 43,372 $ 32,049 626,063 246,587 172,082 166,690 170,153 85,825 13,621 10,376 10 620,136 112,882 162,070 161,054 127,695 96,991 25,624 11,370 15,425 1,491,407 1,333,247 18,098 19,013 1,473,309 1,314,234 $ 1,516,681 $ 1,346,283 At December 31, 2011, the bank had qualified loans, with a carrying value of approximately $478.9 million, available to secure borrowings from the FHLB and the FRB; no loans were pledged at December 31, 2011. At December 31, 2010, $65.7 million of loans were pledged to secure FHLB borrowings. Loan Origination/Risk Management The Company has lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supple- ments the review process by providing management with fre- quent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-perform- ing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctua- tions in economic conditions. The Company maintains an independent loan review process that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identifi- cation and assessment decisions made by lenders. commercial and Loans to nondepository Institutions Sterling provides a full range of loans to small and medium- sized businesses with the objective of establishing longer-term relationships. Loans generally range in size up to $20 million, tailored to meet customers’ long- and short-term needs, and include secured and unsecured lines of credit and business installment loans. Loans generally are collateralized by accounts receivable, inventory, mortgages on residential real estate and other assets. Sterling also provides back-office services, i.e., pro- cessing payroll, generating customer invoices, credit collec- tion assistance and related payroll services. The repayment of commercial loans is generally dependent on the creditworthi- ness and cash flow of borrowers and guarantors, which may be negatively impacted by adverse economic conditions. While these loans are secured, collateral type, marketability, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability. Factoring Factoring provides a financing service that combines working capital financing, credit risk protection, and accounts receiv- able management for companies in a variety of industries. This business may be conducted on a recourse or non-recourse basis, depending upon the needs of the client. In general, Sterling records a receivable for the amount of accounts receivables due from customers of its clients and records a liability for the funds due to the client. Under advance factoring arrangements, clients can draw an advance as accounts receivables are sold/assigned to Sterling. With advance factoring, Sterling normally has recourse against the client if the customer fails to pay. Under collection factoring arrangements, clients sell Sterling their accounts receivables and Sterling provides credit protection to the client guaran- teeing the collection of the amount due and back office sup- port. Collection factoring is generally under a nonrecourse basis where the principal source of payment for Sterling is through the collection of the receivable from our client’s cus- tomer whose credit has been approved by Sterling following a rigorous review process. Also, with collection factoring, Sterling has credit default insurance with a nationally recog- nized insurance company to provide it with protection against customer default. commercial Real estate Sterling offers a range of commercial real estate lending including financing on commercial buildings, retail properties and mixed use properties. Loans are predicated on cash flow of the property, the value of the property determined by an independent appraisal and the strength of personal guaran- tees, if any. Loans are made at fixed or floating rates. Floating rate loans are based on the prime rate. Fixed rate loans are tied to Treasury or FHLB benchmarks and other indices. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the suc- cessful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diverse in terms of type and geographic loca- tion. This diversity helps reduce the Company’s exposure to adverse economic events that affect and single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geographic and risk grade criteria. With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a record of success. Construction p a g e 7 8 loans are underwritten utilizing feasibility studies, indepen- dent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and prop- erty owners. Construction loans are generally based upon estimates of costs and value associated with funds, with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financ- ing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensi- tive to timely completion of the project, interest rate changes, government regulation of real property, general conditions and the availability of long-term financing. Loans are made at fixed or floating rates. Fixed rate loans are tied to U.S. Treasury or FHLB benchmarks or other indices. Floating rate loans are based on the prime rate or other index. equipment Financing Sterling engages in direct lending and indirect lending. Direct lending is when requests for financing originate with an end user seeking to finance equipment up to 60 months. Indirect lending arises through relationships with equipment financing brokers. In both cases, credit approval is based upon a full underwriting process that involves the submission of financial and other information, including the applicant’s historical performance, cash flow projections and value of equipment, and for cus- tomers who are not public entities, Sterling generally obtains the personal guarantees of the principals of the entities. Residential mortgage Residential mortgage loans, principally on single-family resi- dences, are made primarily for re-sale into the secondary market. Offering both fixed and adjustable rate residential mortgage loan products, mortgages are focused on conform- ing credit, government insured FHA and other high quality loan products. Jumbo loans are also originated for sale into the secondary market, or brokered to third-party providers. The ability of borrowers to service debt in the residential mortgage loan portfolios is generally subject to personal income which may be impacted by general economic condi- tions, such as increased unemployment levels. These loans are predominantly collateralized by first and second liens on sin- gle family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in suf- ficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions. Concentrations of Credit There are no industry concentrations, other than loans to nondepository financial institutions (exceeding 10% of loans, gross) of loans held in portfolio. Loans to nondepository financial institutions, which includes the Company’s residen- tial mortgage warehouse funding product and loans to finance companies, represent approximately 16% of all loans. Approximately 68% of loans are to borrowers located in the New York metropolitan area. A further deterioration in eco- nomic conditions within the region, including a decline in real estate values, higher unemployment and other factors which could adversely impact small and mid-sized businesses, could have a significant adverse impact on the quality of the Company’s loan portfolio. In addition, a decline in real estate values and higher unemployment within the mid-Atlantic region and North Carolina could adversely impact the Company’s residential real estate loan portfolio. Approximately 21.0% or $26.9 million and 20.7% or $26.8 million of the Company’s net interest income and noninterest income are related to real estate lending in 2011 and 2010, respectively. Real estate prices in the U.S. market decreased significantly during 2009 and have continued to decrease in 2011. Continuing declines in real estate values could necessi- tate charge-offs in our mortgage loan portfolio that may impact our operating results. In addition, a sustained period of declining real estate values combined with the continued turbulence in the financial and credit markets would continue to limit our mortgage related revenues. As of December 31, 2011, approximately 59.0% of the Company’s loan portfolio consisted of commercial and indus- trial, factored receivables, construction and commercial real estate loans. Because the Company’s loan portfolio contains a number of commercial and industrial, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. Related Party Loans Loans are made to officers or directors (including their imme- diate families) of the Company or for the benefit of corpora- tions in which they have a beneficial interest subject to applicable regulations. There were no outstanding balances on such loans in excess of $60 thousand to any individual or entity at December 31, 2011 or 2010. p a g e 7 9 Nonperforming Loans Nonaccrual loans are those on which the accrual of interest has ceased. Loans, including loans that are individually identified as being impaired under FASB Codification Topic 310: Receivables, are generally placed on nonaccrual status immediately if, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days or more and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Interest income is recognized on nonaccrual loans only to the extent received in cash. Where there is doubt regarding the ultimate col- lectibility of the loan principal, cash receipts, whether designated as principal or interest, are thereafter applied to reduce the carrying value of the loan. Loans are restored to accrual status when interest and principal payments are brought current and future payments are reasonably assured. Nonaccrual loans at December 31, 2011 and 2010 totaled $6.4 million and $6.6 million, respectively. The interest income that would have been earned on nonaccrual loans outstanding at December 31, 2011, 2010 and 2009, in accordance with their original terms, is estimated to be $780 thousand, $902 thousand and $1.5 million, respectively, for the years then ended. Applicable interest income actually realized was $200 thousand, $204 thousand and $743 thousand, respectively, for the afore- mentioned years, and there were no commitments to lend additional funds on nonaccrual loans. The following table sets forth the amount of nonaccrual loans of the Company at the end of each of the two most recent fiscal years: December 31, Nonaccrual loans Commercial and industrial Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Total nonaccrual loans 2011 2010 $ 834 $ 1,014 — 370 1,991 3,124 — 39 — 892 1,614 3,124 — — $ 6,358 $6,644 The following tables provide information regarding the past due status of loans for the periods indicated: December 31, 2011 30–59 Days Past Due 60–89 Days Past Due 90 & Over Past Due Total Past Due Current Total Loans MEMO 90 & Over and Still Accruing Commercial and industrial $ 23,665 $ 5,344 $ 837 $ 29,846 $ 594,278 $ 624,124 $165 Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions — 3,266 546 1,570 — — 41 — — 665 386 633 — — 7 — — 162 370 1,991 3,124 — 39 — — 4,093 1,302 4,194 3,124 — 87 — 246,587 167,738 149,480 165,959 82,701 13,621 10,289 10 246,587 171,831 150,782 170,153 85,825 13,621 10,376 10 — — — — — — — — Total loans, net of unearned discount $ 29,088 $ 7,035 $ 6,523 $ 42,646 $ 1,430,663 $ 1,473,309 $165 p a g e 8 0 December 31, 2010 Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions 30–59 Days Past Due 60–89 Days Past Due 90 & Over Past Due Total Past Due Current Total Loans MEMO 90 & Over and Still Accruing $ 16,899 $ 4,693 $ 1,015 $ 22,607 $ 595,616 $ 618,223 — 3,321 1,399 3,297 9,626 — 52 — — 662 579 2,515 — — — — — 247 958 1,614 3,124 — — — — 4,230 2,936 7,426 12,750 — 52 — 112,882 157,559 141,299 120,269 84,241 25,624 11,318 15,425 112,882 161,789 144,235 127,695 96,991 25,624 11,370 15,425 $ 1 — 247 66 — — — — — Total loans, net of unearned discount $ 34,594 $ 8,449 $ 6,958 $ 50,001 $ 1,264,233 $ 1,314,234 $314 Impaired Loans 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. Determination of impairment is treated the same across all classes of loans on a loan-by-loan 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 effec- tive interest rate, except when the sole remaining source of repayment of the loan is the operation or liquidation of the collat- eral. In these cases management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded invest- ment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. When the ultimate collectibility of the total principal of an impaired loan is in doubt and the loan is on nonaccrual 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 not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The following tables include the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable. Management determined the specific allowance based on the present value of the expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded. December 31, 2011 Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions Total Recorded Investment in Impaired Loans Principal Balance With No Allowance Principal Balance With Allowance Related Allowance $2,954 — — 151 5,275 3,124 — — — $11,504 $1,395 — — — 825 — — — — $2,220 $ 2,159 — — 151 4,966 3,124 — — — $10,400 $ 287 — — 17 1,234 1,113 — — — $2,651 Average Recorded Investment in Impaired Loans $ 2,596 — — 230 4,886 3,124 — — — $10,836 p a g e 8 1 December 31, 2010 Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions Total Recorded Investment in Impaired Loans Principal Balance With No Allowance Principal Balance With Allowance Related Allowance $ 2,236 — — 414 4,904 3,124 — — — $10,678 $ 584 — — — — — — — — $ 584 $ 4,243 — — 414 4,990 3,124 — — — $12,771 $ 605 — — 33 1,104 1,100 — — — $2,842 Average Recorded Investment in Impaired Loans $1,598 — — 1,095 3,681 1,725 — — — $8,099 The average recorded investment in accruing impaired restructured loans was approximately $6.7 million (commercial and industrial $1.9 million, equipment financing receivables $0.2 million and real estate—residential mortgage $4.7 million), $4.5 million and $3.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. The recognition of interest income on these accruing impaired loans is based upon an individual assessment of each loan; however, interest income is not accrued on a loan that is more than 90 days past due. Interest income recognized on these loans during impairment was approx- imately $430 thousand (commercial and industrial $95 thousand, equipment financing receivables $8 thousand and real estate– residential mortgage $327 thousand), $60 thousand and $270 thousand for 2011, 2010 and 2009, respectively. The Company had troubled debt restructured loans (“TDRs”) totaling $6.4 million as of December 31, 2011 and $6.2 million as of December 31, 2010. The Company has allocated $1.3 million and $1.1 million of specific reserves to customers with equipment financing receivables and residential real estate loans whose loan terms have been modified in TDRs as of December 31, 2011 and December 31, 2010. The Company has no commitments to lend additional amounts to customers with outstand- ing loans that are classified as TDRs. During the year ended December 31, 2011, the terms of $1.7 million of residential real estate loans were modified as TDRs. The modification of terms of such loans included one or a combination of the following: a reduction of the stated interest rate; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. No lease financing receivables were modified during the twelve months ended December 31, 2011. Modifications of residential real estate loans involving a reduction of the stated interest rate or an extension of the maturity date were for periods ranging up to 40 years. The troubled debt restructurings described above increased the allowance for loan losses by $392 thousand for the twelve months ended December 31, 2011 and resulted in charge-offs of $82 thousand during the twelve months ended December 31, 2011. During the twelve months ended December 31, 2011, 12 residential real estate loans with a recorded investment of $1.7 million had a payment default, while two lease financing receivables with a recorded investment of $105.1 thousand had a payment default. A loan is considered to be in payment default once it is 60 days contractually past due under the modified terms. p a g e 8 2 Credit Quality Indicators As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of loans, (ii) the level of classified loans, (iii) charge-offs, (iv) nonperforming loans and (v) the general economic conditions in the New York metropolitan area. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company has a process for analyzing non-homogeneous loans, such as commercial and commercial real estate loans, individually by grading the loans based on credit risk. This analysis occurs at varying times based on the type of loan as well as the loan balance and occurs at least once every 18 months for those loans greater than $500,000. For homogeneous loan pools, such as residential mortgages, leases and consumer loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Company’s personnel and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools at December 31, 2011 is included in the aging of the recorded investment of past due loans table above. In addition, the total nonperforming portion of these homogeneous loan pools at December 31, 2011 is presented in the recorded investment in nonaccrual loans table above. The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans under $100,000 are not risk rated. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows: •  Risk Rating 1 & 2/high Quality/minimal Risk—These loans are well secured by liquid or high-quality, diversified, and readily marketable securities within the bank’s defined margin requirements including cash surrender value of life insurance, or loans to strong privately held obligors secured by real estate with satisfactory loan to value, and support guarantors. They could include loans to publicly traded entities with strong credit ratings (A-1 or better) by Moody’s or Standard & Poor’s. •  Risk Rating 3 & 4/Very good/good Quality—These loans can be either unsecured or secured (with monthly monitoring of Accounts Receivable and/or Inventory) to adequately or moderately capitalized privately held obligors with satisfactory sales, revenue, earnings trends, cash flow, and leverage. These secured loans may be monitored in the Asset Based Lending or the Factoring Department to include control of cash receipts and defined formula advances. These categories could include loans to publicly traded entities with credit ratings of A-3 or lower by Moody’s or Standard & Poor’s. •  Risk Rating 5/watch List—These loans are to companies with uneven financial performance containing exceptions to loan policy without mitigating factors. Loans may receive this rating when the obligors experience temporary credit and/or structural deficiencies. Such credits have not been criticized by Loan Review. Close supervision is warranted to avoid further deterioration. •  Risk Rating 6/special mention (occ definition)—Other Assets Especially Mentioned (OAEM) are loans that are currently protected but are potentially weak. Loans with special mention ratings have potential weaknesses which may, if not checked 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 rela- tively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific asset. •  Risk Rating 7/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 loss 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. •  Risk Rating 8/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 classifi- cation 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. p a g e 8 3 •  Risk Rating 9/Loss (occ definition)—These loans are classified as Loss and charged-off because they are determined to be uncollectible and unbankable assets. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. The bank should not be allowed to attempt long-term recoveries while the asset remains booked. Losses should be taken in the period in which they are determined to be uncollectible. The following table presents weighted average risk grades and classified loans by type of loans as of December 31, 2011 and 2010. Classified loans include loans in Risk Grades 6, 7 and 8. Commercial and industrial Risk grades 1–4 Risk grade 5 Risk grade 6 Risk grade 7 Risk grade 8 Risk grade 9 Total Loans to nondepository financial institutions Risk grades 1–4 Risk grade 5 Risk grade 6 Risk grade 7 Risk grade 8 Risk grade 9 Total Factored receivables Risk grades 1–4 Risk grade 5 Risk grade 6 Risk grade 7 Risk grade 8 Risk grade 9 Total Equipment financing receivables Risk grades 1–4 Risk grade 5 Risk grade 6 Risk grade 7 Risk grade 8 Risk grade 9 Total 2011 2010 Weighted Average Risk Weighted Average Risk Grade Loans Grade Loans 3.41 5.00 6.00 7.00 — — 3.50 3.14 — — 7.00 — — 3.24 2.84 5.00 — — — — $ 603,375 5,006 11,872 3,871 — — $624,124 3.29 5.00 — 7.00 — — 3.32 $ 609,991 4,782 — 3,450 — — $ 618,223 $ 240,154 3.06 $ 112,882 — — 6,433 — — — — — — — — — — — — $ 246,587 3.06 $ 112,882 $ 170,256 1,575 — — — — 2.76 $ 161,789 — — — — — — — — — — 2.86 $ 171,831 2.76 $ 161,789 3.89 — — 7.00 — — 3.90 $ 150,412 — — 370 — — $ 150,782 3.98 — — 7.00 — — 4.00 $ 143,335 — — 900 — — $ 144,235 p a g e 8 4 Allowance for Loan Losses The allowance reflects management’s best estimate of probable losses within the existing loan portfolio and of the risk inherent in various components of the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for esti- mated loan losses and risk inherent in the loan portfolio. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. The Company’s allowance for loan loss methodology is based on guidance provided by the “Interagency Policy Statement on the Allowance for Loan and Lease Losses” issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of Thrift Supervision in December 2006 and includes an allowance allocation calculated in accordance with U.S. GAAP guid- ance in FASB Codification Topic 310: Receivables and allowance allocations calculated in accordance with FASB Codification 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 level of the allowance for loan losses relies on a consistent process that requires multiple layers of management review and judgment and of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated to specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The Company’s allowance for loan losses includes (1) specific valuation allowances for impaired loans evaluated in accordance with FASB Codification Topic 310: Receivables; (2) formulaic allowances based on historical loss experience by loan category, adjusted, as necessary, to reflect the impact of current conditions; and (3) unallocated general valuation allowances determined in accordance with FASB Codification Topic 450: contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance established for losses on specific loans is based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all loans. When a loan has a calculated grade of 6 or higher, an analysis is performed to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. p a g e 8 5 Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the portion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. During 2010 the Company revised its historical loss ratio calculation to reflect a five year history from a ten year history to reflect the recent loss experience. The Company’s pool of similar loans includes similarly risk-graded groups of commercial and industrial loans, com mercial real estate loans, residential real estate loans and consumer and other loans. General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: •  Estimated losses in all significant loans •  Existence and effect of any concentrations of credit •  Existence and effect of any geographic concentration •   Other external factors such as competition, legal matters or regulation that may affect risk •  Effect of criticized and classified loans •  Effects from risk arising with international lending •   Effectiveness of internal problem loan identification and risk ratings •   Trends in portfolio volume, maturity and compositions of loans within segments •  Volumes and trends in delinquencies and nonaccrual loans •  Changes in the quality of lending policies and procedures •  Changes in local and national economic conditions •  Experience, ability and depth of lending staff •  Changes in value of underlying collateral Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined based on degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance. Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades. Loans are generally charged-off at the earlier of the date when it is determined that collection efforts are no longer productive or the date when they have been identified as losses by management, internal loan review and/or bank examiners. Furthermore, equipment financing receivables and revolving credit lines to small businesses are charged-off at the earlier of the date when payments are 120 days past due or when it is determined that collection efforts are no longer productive. Factors considered in determining whether collection efforts are no longer productive include any amounts currently being collected, the status of discussions or negotiations with the lessee/borrower, the principal and/or guarantors, the cost of continuing efforts to collect, the status of any foreclosure or other legal actions, the value of the collateral, and any other pertinent factors. p a g e 8 6 The following table presents the activity in the allowance for loan losses by portfolio segment: Year Ended December 31, 2011 Commercial and industrial Loans to nondepository financial institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions Unallocated Total [1] Includes losses on transfers to oReo Balance, Beginning of Period Charge- Offs[1] Recoveries Net Provision Balance, Charge- Offs[1] for Loan Losses End of Period $ 7,454 $ 2,909 $ 146 $ 2,763 $ 2,956 $ 7,647 564 1,424 3,423 2,497 2,275 310 119 46 126 — 358 8,266 1,291 — — 30 — — — 79 2,255 165 — — — — — — 279 6,011 1,126 — — 30 — — 805 305 6,103 2,119 (124) (145) 15 (46) 12 1,369 1,450 3,515 3,490 2,151 165 104 — 138 $18,238 $12,854 $2,645 $ 10,209 $12,000 $20,029 The following table presents the activity in the allowance for the periods shown: Years Ended December 31, Allowance for loan losses: Balance at beginning of year Charge-offs: Commercial and industrial Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Total charge-offs Recoveries: Commercial and industrial Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Total recoveries Subtract: Net charge-offs Provision for loan losses Less loss on transfers to other real estate owned Balance at end of year 2010 2009 $ 19,872 $ 16,010 7,212 665 22,509 351 129 — 231 4,945 514 19,115 312 — — — 31,097 24,886 312 239 902 — — — 48 1,501 29,596 28,500 538 1,042 63 345 102 — — — 1,552 23,334 27,900 704 $ 18,238 $ 19,872 p a g e 8 7 The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method for the periods indicated: Year Ended December 31, 2011 Individually Collectively Total Individually Collectively Total Ending Allowance Balance Loan Balances Attributable to Loans Evaluated for Impairment Evaluated for Impairment Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions Unallocated Total Year Ended December 31, 2010 Commercial and industrial Loans to nondepository institutions Factored receivables Equipment financing receivables Real estate—residential mortgage Real estate—commercial mortgage Real estate—construction and land development Loans to individuals Loans to depository institutions Unallocated Total note 6. $ 287 — — 17 1,234 1,113 — — — — $ 2,651 $ 605 — — 33 1,104 1,100 — — — — $ 2,842 $ 7,360 1,369 1,450 3,498 2,256 1,038 165 104 — — $ 7,647 1,369 1,450 3,515 3,490 2,151 165 104 — 138 $ 2,954 — — 151 5,275 3,124 — — — — $ 621,170 246,587 171,831 150,631 164,878 82,701 13,621 10,376 10 — $ 624,124 246,587 171,831 150,782 170,153 85,825 13,621 10,376 10 — $ 17,240 $ 20,029 $ 11,504 $ 1,461,805 $ 1,473,309 $ 6,849 564 1,424 3,390 1,393 1,175 310 119 46 — $ 7,454 564 1,424 3,423 2,497 2,275 310 119 46 126 $ 2,236 — — 414 4,904 3,124 — — — — $ 615,987 112,882 161,789 143,821 122,791 93,867 25,624 11,370 15,425 — $ 618,223 112,882 161,789 144,235 127,695 96,991 25,624 11,370 15,425 — $ 15,270 $ 18,238 $ 10,678 $ 1,303,556 $ 1,314,234 PremiSeS and eQui Pment The following table presents information on premises and equipment: December 31, Land and building Furniture and equipment Leasehold improvements Accumulated amortization and depreciation Premises and equipment, net 2011 2010 $ 344 15,221 24,139 39,704 16,079 $ 344 14,526 16,085 30,955 15,046 $ 23,625 $ 15,909 p a g e 8 8 note 7. intereSt-bearing d ePoS itS The following table presents certain information for interest expense on deposits: Years Ended December 31, Interest expense Interest-bearing deposits in domestic offices Savings NOW Money Market Time Three months or less More than three months through twelve months More than twelve months through twenty-four months More than twenty-four months through thirty-six months More than thirty-six months through forty-eight months More than forty-eight months through sixty months More than sixty months Interest-bearing deposits in foreign offices Time Three months or less More than three months through twelve months 2011 2010 2009 $ 8 372 2,475 $ 11 472 2,805 $ 18 620 3,252 2,185 1,776 1,215 235 142 29 1 8,438 — — 2,665 3,086 270 212 23 41 — 9,585 3 — 3,493 3,807 295 345 8 45 — 11,883 4 2 Total $ 8,438 $ 9,588 $ 11,889 The aggregate of time certificates of deposit and other time deposits in denominations of $100 thousand or more was $541.8 million and $488.4 million at December 31, 2011 and 2010, respectively. The following table provides certain information with respect to the Company’s deposits at the end of the two most recent fiscal years; there were no foreign deposits at either date: December 31, Domestic Demand NOW Savings Money Market Time deposits by remaining maturity: Three months or less More than three months through six months More than six months through twelve months More than twelve months through twenty-four months More than twenty-four months through thirty-six months More than thirty-six months through forty-eight months More than forty-eight months through sixty months More than sixty months 2011 2010 $ 765,800 177,495 18,566 369,362 $ 570,290 200,521 18,931 342,755 249,245 228,209 130,988 23,307 25,054 1,045 — — 176,070 228,635 158,559 32,645 13,624 5,177 466 91 Total $1,989,071 $ 1,747,764 The Company began participating in the Certificate of Deposit Account Registry Service (“CDARS”) on January 22, 2009. CDARS deposits totaled approximately $164.5 million and $180.7 million at December 31, 2011 and December 31, 2010, respectively. p a g e 8 9 note 8. Short-term b orrowingS The following table presents information regarding short-term borrowings: Years Ended December 31, Federal funds purchased At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate paid —Range of interest rates paid Commercial paper At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate paid —Range of interest rates paid Short-term borrowings—FHLB At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate paid —Range of interest rates paid Short-term borrowings—FRB At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate paid —Range of interest rates paid Short-term borrowings—treasury tax and loan and term Federal funds purchased At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate paid —Range of interest rates paid 2011 2010 2009 $ — — — 60,000 10,926 $ 15,000 0.15% 1 Day 105,000 33,192 $41,000 0.16% 1 Day 87,000 25,075 0.13% 0.07–0.25% 0.22% 0.10–0.35% 0.21% 0.06–0.50% $ 13,485 $ 14,388 $ 17,297 0.29% 0.29% 0.31% 44 Days 16,573 14,454 45 Days 16,927 14,718 34 Days 17,297 13,107 0.30% 0.20–0.60% 0.30% 0.20–0.65% 0.51% 0.15–2.25% $ $ — — — — — — — — — — — — — — $ — — — — — — — $ — — — 25,000 3,699 $ — — — — 3,411 0.31% 0.45–0.63% $ 50,000 0.25% 70 Days 235,000 154,726 0.25% 0.25% 0.26% 0.25–0.50% $ — — — 23,864 3,666 $ 3,490 — 1 Day 46,779 7,306 0.07% 0.00–0.31% 0.25% 0.00–0.40% $ 2,509 — 1 Day 4,262 1,864 — — Commercial paper is issued by the parent company and is not guaranteed by any subsidiary. The parent company has agree- ments with banks for back-up lines of credit for which it pays a fee at the annual rate of ¼ of 1% times the line of credit extended. At December 31, 2011, these back-up bank lines of credit totaled $19 million; no lines were used at any time during 2011, 2010 or 2009. p a g e 9 0 note 9. SecuritieS Sold under agreement S to re PurchaSe Securities sold under agreements to repurchase are secured by obligations of U.S. government corporations and government- sponsored enterprises and corporate debt obligations with a carrying amount of $68.3 million and $31.6 million at December 31, 2011 and 2010, respectively. Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase is summarized as follows: Years Ended December 31, 2011 2010 2009 Securities sold under agreements to repurchase—customers At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate paid —Range of interest rates paid Securities sold under agreements to repurchase—dealers At December 31 —Balance —Weighted average interest rate —Weighted average original maturity During the year —Maximum month-end balance —Daily average balance —Weighted average interest rate paid —Range of interest rates paid note 10. adVanceS — fhlb and l ong-term b orrowingS $ 47,313 $ 23,016 $ 21,048 0.34% 0.45% 0.46% 21 Days 51,991 42,911 35 Days 55,998 47,674 36 Days 80,960 72,892 0.43% 0.25–0.65% 0.48% 0.35–0.65% 0.48% 0.25–2.00% $ 5,000 $ 5,000 $ 1.30% 1.30% 731 Days 5,000 5,186 1.27% 0.13–1.30% 731 Days 39,893 5,618 0.79% 0.25–1.30% — — — — — — — These borrowings represent advances from the FHLB and junior subordinated debt securities issued by the parent company. The following table presents information regarding fixed and floating rate FHLB advances: Advance Type Fixed Rate Callable Callable Callable Callable Callable Callable Callable Callable Callable Callable Term Term Term Term Term Term Term Floating Rate Term Term Total Weighted-average interest rate Maturity Date Initial Call Date December 31, 2011 2010 2/22/11 1/16/13 2/28/13 3/19/13 3/19/13 5/6/13 7/2/18 8/8/18 9/5/13 9/12/13 8/6/12 7/16/12 4/12/13 4/14/14 8/4/11 3/23/11 9/23/11 2/10/16 2/10/16 2/20/03 1/16/09 3/2/09 3/19/09 3/19/09 2/6/09 1/2/09 2/9/09 3/5/09 3/12/09 — — — — — — — — — $ — — — — — — — — — — 10,000 10,000 1,197 1,536 — — — 50,000 50,000 $ 10,000 20,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 — 10,000 2,024 2,149 10,000 5,000 5,000 — — $ 122,733 $ 144,173 0.97% 2.42% Interest Rate 4.70 % 3.19 1.96 1.834 2.318 2.53 2.57 2.505 2.94 2.783 0.53 2.26 1.73 2.13 0.70 0.55 0.61 0.864 0.864 p a g e 9 1 During the 2011 first quarter, the bank restructured a portion of its FHLB fixed rate callable and term advances by repaying $100 million of existing borrowings and replacing them with $100 million of lower cost, floating rate advances. This transac- tion resulted in $4.2 million in prepayment penalties that were deferred and will be recognized in interest expense as an adjust- ment to the cost of these borrowings in future periods. The existing borrowings had an average cost of 2.58% and an average duration of 3.2 years. The new borrowings had an initial average cost of 1.58%, including the deferred adjustment, with an average duration of three months. The relevant accounting treatment for this transaction was provided in ASC 470-50. This transaction was executed as an earnings and interest rate risk strategy, resulting in lower FHLB advance costs and a reduction of average duration. Under the terms of a collateral agreement with the FHLB, advances are secured by stock in the FHLB and by certain qualifying assets (primarily mortgage-backed securities) having market values at least equal to 110% of the advances outstanding. After the initial call date, each callable advance is callable by the FHLB quarterly from the initial call date, at par. In February 2002, the Company completed its issuance of trust capital securities (“capital securities”) that raised $25 million ($24.1 million net proceeds after issuance costs). The 8.375% capital securities, due March 31, 2032, were issued by Sterling Bancorp Trust I (the “trust”), a wholly-owned non-consolidated statutory business trust. The trust was formed with initial capitalization of common stock and for the exclusive purpose of issuing the capital securities. The trust used the proceeds from the issuance of the capital securities to acquire $25.8 million junior subordinated debt securities that pay interest at 8.375% (“debt securities”) issued by the parent company. The Company is not considered the primary beneficiary of the trust (which is a VIE); therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The debt securities are due concurrently with the capital securities which may not be redeemed, except under limited circumstances, until March 31, 2007, and thereafter at a price equal to their principal amount plus interest accrued to the date of redemption. The Company may also reduce outstanding capital securities through open market purchases. During 2011, 2010 and 2009, the parent company did not purchase any capital securities. Securities purchased are included in the Company’s securities available for sale and are considered to be outstanding for the payment of dividends but are considered to be redeemed for the calculation of the regulatory capital ratios. During 2011 and 2010, the Company’s tax-qualified defined benefit pension plan (the “Plan”) did not purchase any capital securities. During 2009, the Plan purchased in the open market $652 thousand par amount of the capital securities at an aggregate cost of $495 thousand. As a result of these repurchases, the amounts of capital securities held by third parties at December 31, 2011, 2010 and 2009 were $22.8 million, $22.8 million and $22.8 million, respectively. Dividends and interest are paid quarterly. The parent company has the right to defer payments of interest on the debt securities at any time or from time to time for a period of up to 20 consecutive quarterly periods with respect to each deferral period. Under the terms of the debt securities, in the event that under certain circumstances there is an event of default under the debt securities or the parent company has elected to defer interest on the debt securities, the parent company may not, with certain exceptions, declare or pay any divi- dends or distributions on its capital stock or purchase or acquire any of its capital stock. Payments of distributions on the capital securities and payments on redemption of the capital securities are guaranteed by the parent company on a limited basis. The parent company also entered into an agreement as to expenses and liabilities pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the trust other than those arising under the capital securities. The obligations of the parent company under the debt securities, the related indenture, the trust agree ment establishing the trust, the guarantee and the agreement as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by the parent company of the trust’s obligations under the capital securities. The ability of the parent company to obtain funds from its subsidiaries is limited (see Note 16). Notwithstanding that the accounts of the trust are not included in the Company’s consolidated financial statements, the amount of capital securities issued by the trust and held by third parties is included in the Tier 1 capital of the parent company for regulatory capital purposes as allowed by the Federal Reserve Board. In March 2005, the Federal Reserve Board adopted a rule that would continue to allow the inclusion of capital securities issued by unconsolidated subsidiary trusts in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after March 31, 2011, the aggregate amount of capital securities and certain other capital elements is limited to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Based on the final rule, the parent company continues to include the amount of capital securities held by third parties in Tier 1 capital. p a g e 9 2 note 11. due to factored client S Due to factored clients represents amounts due on accounts receivable purchased in excess of the amounts advanced. Beginning October 1, 2011 the assets and liabilities of Sterling Factors Corporation were transferred to Sterling National Bank which then continued to offer all factoring services. As a result, these amounts are now included in “Noninterest- bearing demand deposits.” note 12. Preferred ShareS The parent company is authorized to issue up to 644,389 preferred shares, $5 par value per share, in one or more series. The following table presents information regarding the parent company’s preferred shares issued and outstanding: December 31, 2011 2010 Series A preferred shares. Issued and outstanding— -0- and 42,000 shares, at liquidation value $-0- $ 42,000 Under the provisions of the TARP Capital Purchase Program enacted under EESA, on December 23, 2008, the parent com- pany sold to the U.S. Treasury 42,000 shares of the parent company’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, par value $5.00 per share, having a liquidation pref- erence of $1 thousand per share (the “Series A Preferred Shares”), together with a warrant to purchase 516,817 shares of its common shares, for an aggregate price of $42 million. Under the standardized terms of the TARP Capital Purchase Program, cumulative dividends on the Series A Preferred Shares accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter, but are required to be paid only if, as and when declared by the parent company’s Board of Directors. The Series A Preferred Shares have no maturity date and rank senior to the parent company’s common shares with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the parent company. The Series A Preferred Shares qualify as Tier 1 capital for regulatory capital purposes. The warrant has a 10-year term with 50% vesting immedi- ately upon issuance and the remaining 50% vesting on January 1, 2010 if certain qualified equity offerings have not been conducted. As the Company did not conduct any quali- fied equity offering after the issuance of the Series A Preferred Shares, 100% of the warrant has been vested. The warrant has an exercise price, subject to anti-dilution adjustments, equal to $12.19 per common share. The parent company may redeem the Series A Preferred Shares three years after the date of the U.S. Treasury’s invest- ment, or earlier if it raises in an equity offering net proceeds equal to the amount of the Series A Preferred Shares to be redeemed. It must raise proceeds equal to at least 25% of the issue price of the Series A Preferred Shares to redeem any Series A Preferred Shares prior to the end of the third year. The redemption price is equal to the sum of the liquidation amount per share and any unpaid dividends on the Series A Preferred Shares up to, but excluding, the date fixed for redemption. Notwithstanding the foregoing limitations, under the American Recovery and Reinvestment Act of 2009 the U.S. Treasury may, after consultation with the parent company’s federal regulator, permit the parent company at any time to redeem the Series A Preferred Shares at liquida- tion value. Upon such redemption, the common share pur- chase warrant may also be repurchased at its then current fair value. The Series A Preferred Shares and the warrant issued under the TARP program qualify and are accounted for as permanent equity on the Company’s Consolidated Balance Sheet. Of the $42 million in total issuance proceeds, $39.4 million and $2.6 million were allocated to the Series A Preferred Shares and the warrant, respectively, based upon their estimated fair values as of December 23, 2008. The resulting discount of $2.6 million recorded for the Series A Preferred Shares was being accreted by a charge to retained earnings over a five- year estimated life of the preferred shares based on the likeli- hood of their redemption by the parent company within that timeframe. Accretion of discount amounted to $1.4 million in 2011, $489 thousand in 2010 and $673 thousand in 2009. The proceeds from the issuance to the U.S. Treasury were allocated based on the relative fair value of the warrants as compared with the fair value of the preferred shares. The fair value of the warrants was determined using a valuation model which incorporates assumptions regarding our common share price, dividend yield, expected life of the warrants, share price volatility and the risk-free interest rate. The fair value of the preferred shares was determined based on assumptions regarding the discount rate (market rate) on the preferred shares, which was estimated to be approximately 13% at the date of issuance. The discount on the preferred shares was accreted to liquidation value using a constant effective yield of 6.431% over a five-year term, which is the expected life of the preferred shares. On April 27, 2011, the parent company paid $42.4 million to the U.S. Treasury for the repurchase in full of the Series A Preferred Shares. As a result of this action, the Series A Preferred Shares were redeemed in full, eliminating an annual p a g e 9 3 dividend of $2.1 million. In this connection, in determining net income available to common shareholders, the Company recog- nized in the second quarter a $1.2 million charge for accelerated accretion which represents the difference between the carrying value and the liquidation value for the repurchased Series A Preferred Shares. On May 18, 2011, the parent company paid approximately $0.95 million to the U.S. Treasury to repurchase the warrant. The parent company’s repurchase of the warrant concluded its participation in the TARP Capital Purchase Program. note 13. common S hareS On March 9, 2011, the Company completed an underwritten public offering of 4.025 million common shares at an offering price of $9.60 per share, which resulted in net proceeds of $36.5 million after underwriting discounts and expenses. On March 19, 2010, the Company completed an underwritten public offering of 8.625 million common shares at an offering price of $8.00 per share, which resulted in net proceeds of $64.9 million after underwriting discounts and expenses. The following table provides information regarding the number of common shares issued: Years Ended December 31, Issued at beginning of year Shares issued—public offering Shares issued under stock incentive plan Issued at end of year note 14. treaSurY ShareS Number of Shares Issued 2011 2010 31,138,545 4,025,000 61,565 22,226,425 8,625,000 287,120 35,225,110 31,138,545 The following table provides information regarding the number of common shares held by the Company: Years Ended December 31, Held at beginning of year Surrender of shares issued under incentive compensation plan Held at end of year Number of Shares Held 2011 2010 4,297,782 2,496 4,119,934 177,848 4,300,278 4,297,782 p a g e 9 4 note 15. accumulated other comPrehenSiVe lo SS Information related to the components of accumulated other comprehensive (loss) income is as follows with related tax effect: Other Comprehensive (Loss) Income Unrealized holding (losses) gains on available for sale securities and other investments, arising during the period: Before tax Tax effect Net of tax Reclassification adjustment for securities gains included in net income: Before tax Tax effect Net of tax Pension liability adjustment—net actuarial (losses) gains: Before tax Tax effect Net of tax Reclassification adjustment for amortization of prior service cost: Before tax Tax effect Net of tax Reclassification adjustment for amortization of net actuarial losses: Before tax Tax effect Net of tax 2011 2010 2009 $ (337) 157 (180) $ 3,846 (1,745) $ 5,564 (2,525) 2,101 3,039 (1,726) 768 (958) (3,315) 1,309 (2,006) 63 (28) 35 3,208 (1,428) 1,780 (3,928) 1,783 (2,145) (3,551) 1,611 (1,940) 67 (31) 36 2,673 (1,213) 1,460 (5,561) 2,524 (3,037) 3,544 (1,609) 1,935 67 (31) 36 3,454 (1,567) 1,887 Other comprehensive (loss) income $ (1,329) $ (488) $ 3,860 The following table presents the components of accumulated other comprehensive loss as of December 31, 2011 and 2010 included in shareholders’ equity: December 31, 2011 Net unrealized loss on securities Adjustment for underfunded pension and postretirement life insurance obligations Total December 31, 2010 Pre-tax Amount Tax Effect After-tax Amount $ (1,720) (23,925) $ 763 10,666 $ (957) (13,259) $ (25,645) $ 11,429 $ (14,216) Net unrealized gain on securities Adjustment for underfunded pension and postretirement life insurance obligations $ 343 (23,881) $ (161) 10,812 $ 182 (13,069) Total $ (23,538) $ 10,651 $ (12,887) p a g e 9 5 note 16. note 17. reStrictionS on the b ank Stock i ncentiVe Plan The parent company depends for its cash requirements on funds maintained or generated by its subsidiaries, principally the bank. Approval by the Comptroller of the Currency is required if the effect of dividends declared would cause the regulatory capital of the bank to fall below specified mini- mum levels. Additionally, all national banks are limited in the payment of dividends in any year without the approval of the Comptroller of the Currency to an amount not to exceed the net profits (as defined) for that year to date combined with its retained net profits for the preceding two calendar years. Under the foregoing restrictions, as of December 31, 2011 the bank could pay dividends of approximately $47.1 million to the parent company, without regulatory approval. Federal law also prohibits national banks from paying divi- dends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution, such as the bank, may not pay divi- dends if payment would cause it to become undercapitalized or it is already undercapitalized. The payment of dividends by the parent company and the bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital. In April 1992, shareholders approved a Stock Incentive Plan (the “SIP”) covering up to 100,000 common shares of the parent company. Under the SIP, key employees of the parent company and its subsidiaries could be granted awards in the form of incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock or a combination of these. The SIP is admin- istered by a committee of the Board of Directors. Since the inception of the SIP, shareholders have approved amend- ments increasing the number of shares covered under the SIP; the total number of shares authorized by shareholders through December 31, 2011 was 2,650,000. The SIP pro- vides for proportional adjustment to the number of shares covered by the SIP and by outstanding awards, and in the exercise price of outstanding stock options, to reflect, among other things, stock splits and stock dividends. After giving effect to stock option and restricted stock awards granted and the effect of the 5% stock dividend effected December 12, 2005, the six-for-five stock split in the form of a stock dividend effected in December 2004, the five-for-four stock split in the form of a stock dividend effected September 10, 2003, the 20% stock dividend paid in December 2002, the 10% stock dividends paid in December 2001 and December 2000, and the 5% stock dividend paid in December 1999, shares available for grant were 616,184 at December 31, 2011. The Company issues new shares to satisfy stock option exercises. The total intrinsic value of stock options exercised for the years ended December 31, 2011, 2010 and 2009 was $-0- thousand, $171 thousand and $61 thousand, respectively. p a g e 9 6 Stock Options The following tables present information on the qualified and non-qualified stock options outstanding (after the effect of the stock dividends/splits discussed above) as of December 31, 2011, 2010 and 2009 and changes during the years then ended: Qualified Stock Options Outstanding at beginning of year Exercised Forfeited/Lapsed Outstanding at end of year Options exercisable at end of year 2011 2010 2009 Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price 150,358 — (6,237) 144,121 144,121 $14.43 — 10.61 14.60 204,112 (53,754) — 150,358 143,502 $12.46 6.94 — 14.43 231,898 (24,006) (3,780) 204,112 190,401 $12.11 8.69 14.60 12.46 Non-Qualified Stock Options Outstanding at beginning of year Exercised Forfeited/Lapsed Outstanding at end of year Options exercisable at end of year 2011 2010 2009 Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price 272,389 — (106,050) 166,339 71,339 $19.55 — 24.29 16.54 460,102 (149,638) (38,075) 272,389 177,389 $15.49 6.94 20.03 19.55 533,338 — (73,236) 460,102 350,646 $16.34 — 21.65 15.49 At December 31, 2011, no qualified or NQSO stock options were outstanding, exercisable and in-the-money. The Company believes that all unvested stock options will ultimately vest. The following table presents information regarding qualified and non-qualified stock options outstanding at December 31, 2011: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding at 12/31/11 Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price Number Exercisable at 12/31/11 Weighted-Average Exercise Price Qualified Non-Qualified $14.60 144,121 14.60–17.99 166,339 0.10 years 3.02 years $14.60 16.54 144,121 71,339 $14.60 14.60 Director NQSOs expire five years from the date of the grant and become exercisable in four annual installments, starting one year from the date of the grant, or upon the earlier of death or disability of the grantee. Employee stock options generally expire ten years from the date of the grant and vest one year from the date of grant, although, if necessary to qualify to the maximum extent possible as ISOs, these options become exercisable in annual installments. Employee stock options which become exercis- able over a period of more than one year are generally subject to earlier exercisability upon the termination of the grantee’s employment for any reason from the first anniversary of the grant date. Amounts received upon exercise of options are recorded as common shares and capital surplus. The additional tax benefit received by the Company upon exercise of a NQSO is credited to capital surplus. p a g e 9 7 There were no options granted during 2011, 2010 or 2009. Under the provisions of FASB Codification Topic 718: compensation—stock compensation, the Company recorded compensation expense of $85 thousand, $109 thousand and $132 thousand during the years ended December 31, 2011, 2010 and 2009, respectively, for option awards in 2006 and 2007. As of December 31, 2011, the total remaining unrecog- nized compensation cost related to option awards was $18 thousand, which is expected to be recognized over a weighted- average vesting period of 0.2 years. The tax benefit recognized as a credit to capital surplus upon the exercise of NQSOs amounted to approximately $-0- thousand at December 31, 2011, $66 thousand at December 31, 2010 and $-0- at December 31, 2009. Restricted Stock On March 25, 2010, the Board of Directors, upon recom- mendation by the Compensation and Corporate Governance Committees, granted a total of 40,000 shares of restricted stock to the eight non-management directors (“2010 director restricted shares”) and 43,728 restricted shares to the Chairman, President, and five Executive Vice Presidents (“2010 officer restricted shares”). The 2010 director restricted shares will vest 25% annually over four years beginning on the first anniversary of the grant date. The 2010 officer restricted shares vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date and are also limited by the 2008 agreement between the Company and the U.S. Treasury. The 2010 direc- tor restricted shares and the 2010 officer restricted shares were issued at $9.23 per share, the closing price on the date of the grant. The agreements for both the 2010 director restricted shares and the 2010 officer restricted shares have additional provisions regarding transferability and acceler- ated vesting of the shares and the continuation of performing substantial services for the Company. As of December 31, 2011, all 83,728 shares were still issued and 10,000 of the 2010 director restricted shares were vested. On March 24, 2011, the Board of Directors, upon recom- mendation by the Compensation and Corporate Governance Committees, granted a total of 20,000 shares of restricted stock to the eight non-management directors (“2011 director restricted shares”) and 41,565 restricted shares to the Chairman, President and five Executive Vice Presidents (“2011 officer restricted shares”). The 2011 director restricted shares will vest 25% annually over four years beginning on the first anniversary of the grant date. The 2011 officer restricted shares vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniver- saries of the grant date and had been limited by the 2008 agreement between the Company and the U.S. Treasury until the Preferred Shares were redeemed on April 27, 2011. The 2011 director restricted shares and the 2011 officer restricted shares were issued at $9.71 per share, the closing price on the date of the grant. The agreements for both the 2011 director restricted shares and the 2011 officer restricted shares have additional provisions regarding transferability and acceler- ated vesting of the shares and the continuation of performing substantial services for the Company. As of December 31, 2011, all 61,565 shares were still issued and none were vested. Under the provisions of FASB Codification Topic 718: compensation—stock compensation, the Company recorded compensation expense of $309 thousand during the year ended December 31, 2011 and a related tax benefit of $138 thousand. As of December 31, 2011, the total remaining unrecognized compensation cost related to restricted stock awards was $913 thousand, which is expected to be recognized over a weighted- average vesting period of 2.8 years. note 18. emPloYee b enefit PlanS Retirement Plans The Company has a noncontributory, tax-qualified defined benefit pension plan that covers the majority of employees with one or more years of service of at least 1,000 hours, who are at least 21 years of age. The benefits are based upon years of credited service, primary social security benefits and a par- ticipant’s highest average compensation as defined. The fund- ing requirements for the plan are determined annually based upon the amount needed to satisfy the Employee Retirement Income Security Act of 1974 funding standards. No employ- ees initially hired after January 2, 2006 were eligible to enter the plan. The Company also has a noncontributory, supplemental non- qualified, non-funded retirement plan which is designed to supplement the pension plan for key officers. p a g e 9 8 The following tables, using a December 31 measurement date for each period presented, set forth the disclosures required for pension benefits: At or for the Years Ended December 31, change in benefit obligation Benefit obligation at beginning of year (Projected Benefit Obligation) Service cost Interest cost Actuarial loss Benefits paid Benefit obligation at end of year change in Plan aSSetS Fair value of assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of assets at end of year Funded status amountS recogniZed in the conSolidated balance SheetS conSiSt of: Pension liability Accumulated other comprehensive loss (pre-tax) 2011 2010 $ 70,970 $ 63,054 2,147 3,933 1,890 2,050 3,766 4,607 (1,929) (2,507) $ 77,011 $ 70,970 $ 41,521 $ 38,010 1,672 2,035 (1,929) 4,284 1,735 (2,507) $ 43,299 $ 41,522 $ (33,712) $ (29,448) $ (33,712) $ (29,448) 23,889 23,588 Rate of Compen sation weighted-aVerage aSSumPtionS uSed to determine the benefit obligation: Defined benefit pension plan Supplemental retirement plan Discount Rate Increase 2011 2010 2011 2010 5.10% 5.50% 3.00% 3.00% 5.10 5.50 3.00 3.00 Components of the net periodic benefit expense and other amounts recognized in other comprehensive loss (income) are as follows: Years Ended December 31, comPonentS of net Periodic coSt Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized actuarial loss Net periodic benefit expense Other changes in plan assets and benefit obligations recognized in other comprehensive loss (income): Net actuarial loss (income), after tax Prior service credit, after tax Total recognized in other comprehensive loss (income) 2011 2010 2009 $ 2,147 $ 2,050 $ 2,160 3,933 (3,305) 63 3,159 5,997 226 (35) 191 3,766 (3,020) 67 2,672 5,535 480 (36) 444 3,355 (2,618) 67 3,454 6,418 (3,822) (36) (3,858) Total recognized in net periodic benefit expense and other comprehensive income or loss $ 6,188 $ 5,979 $ 2,560 p a g e 9 9 Discount Rate on Plan Assets Increase Expected Return Rate of Compensation 2011 2010 2009 2011 2010 2009 2011 2010 2009 weighted-aVerage aSSumPtionS uSed to determine net Periodic coSt: Defined benefit pension plan Supplemental retirement plan 5.50% 6.00% 5.75% 8.00% 8.00% 8.50% 3.00% 3.00% 3.00% 5.50 6.00 5.75 N/A N/A N/A 3.00 3.00 3.00 To determine the expected return on plan assets, we consider historical return information on plan assets, the mix of investments that comprise plan assets and the actual income derived from plan assets. The accumulated benefit obligation for the defined benefit pension plan at December 31, 2011 and 2010 was $45.5 million and $42.9 million, respectively. The tables presented on the previous page and above include the supplemental retirement plan, which is an unfunded plan. The following information is presented regarding the supplemental retirement plan: December 31, Projected benefit obligation Accumulated benefit obligation The following table sets forth information regarding the assets of the defined benefit pension plan: December 31, U.S. government corporation and agency debt obligations Corporate debt obligation Common equity securities Other Total 2011 2010 $ 28,581 28,521 $ 25,165 25,165 2011 2010 3% 4% 32 59 6 28 61 7 100% 100% The overall investment strategy of the Plan is to have a diversified portfolio of investments that balance risk and return with the goal of meeting or exceeding the plan’s actuarial return assumptions and shorter term liquidity needs. The asset mix can vary but, to achieve these objectives, it is targeted at 60% equity securities, including up to 10% in the parent company common shares, 25% in corporate obligations and 10% in federal and agency obligations with the balance in other investments including trust preferred securities. The allocation of Plan assets as of December 31, 2011 is shown in the table above. The money market investment positions will vary but, will generally be under 5%. The Plan’s asset allocation and investments are recommended and managed by an independent advisor. The weighted average expected long-term rate of return is estimated based on current trends in the plan assets as well as pro- jected future rates of returns on those assets. The long-term rate of return considers historical returns, with adjustments to reflect expectations of future returns as determined by the trustee’s investment advisor after consultation with the trustee. These adjustments include consideration of projected future economic conditions, interest rates, industry trends and other factors. The defined benefit pension plan owns common shares of the parent company which is included in common equity securities above. At December 31, 2011, the fair value of the parent company common shares was $597 thousand and represented approx- imately 1% of plan assets. At December 31, 2010, the fair value of the parent company common shares was $723 thousand and represented approximately 2% of plan assets. p a g e 1 0 0 The defined benefit pension plan also owns capital securities (see Note 12 for definition) issued by Sterling Bancorp Trust I, a wholly-owned non-consolidated statutory business trust (which is a VIE). At December 31, 2011 and December 31, 2010, the fair value of the capital securities was $1.2 million and represented approximately 3% of plan assets. The Company expects to contribute approximately $2.0 million to the defined benefit pension plan in 2012. The following table presents benefit payments expected to be paid, based on the assumption described below, including the effect of expected future service for the years indicated. Year(s) 2012 2013 2014 2015 2016 Years 2017–2021 Defined Supplemental Total Benefit Plan Retirement Plan Benefit Payments $ 2,128 2,336 2,494 2,644 2,800 17,146 $27,462 36 37 563 37 196 $29,590 2,372 2,531 3,207 2,837 17,342 The cash flows shown above are based on the assumptions used in the annual actuarial valuations of the defined benefit plan. The supplemental retirement plan column is computed assuming that any executive who has reached the age upon which full retirement is assumed for actuarial purposes actually retires in the current year. However, if such an executive does not actually retire in the current year, the obligation will be deferred until a later year. We are not aware of any senior executives who have near-term plans to retire. Amounts recognized in accumulated other comprehensive loss, pre-tax, as of December 31, 2011 and 2010 follow: Net actuarial loss Prior service cost Total Qualified Pension Plan 2011 $ 17,517 38 $ 17,555 2010 $ 17,131 85 $ 17,216 Supplemental Retirement Plan 2011 $ 6,330 4 $ 6,334 2010 $ 6,352 20 $ 6,372 Total 2011 $ 23,847 42 $ 23,889 2010 $ 23,483 105 $ 23,588 The estimated costs that will be amortized from accumulated other comprehensive loss into net periodic cost in 2012 are as follows: Net actuarial loss Prior service cost Total Qualified Pension Plan Supplemental Retirement Plan $1,892 23 $1,915 $734 4 $738 Total $2,626 27 $2,653 Fair Value of Plan Assets: Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. p a g e 1 0 1 The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: equity, debt, Investment Funds and other securities. The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair val- ues are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. The fair value of the plan assets at December 31, 2011, by asset category, is as follows: Plan Assets Equity securities U.S. government agency obligations Corporate debt securities Money market funds and other Total Plan Assets Fair Value Measurements at December 31, 2011 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $28,306 1,273 13,493 — $43,072 $ — — — 227 $227 $— — — — $— Carrying Value $28,306 1,273 13,493 227 $43,299 Savings Plans As of January 1, 2008, the Company merged its two 401(k) plans into one plan (“new plan”). Eligible employees must complete 1,000 hours of service in order to be eligible for the Company matching contributions. Participants in the new plan eligible for Company matching contributions include any employee hired after January 1, 2006 and employees of two subsidiaries of the bank. Eligible employees may enroll in the new plan on the first day of the month after hire. The Company matches 25% of the eligible employee’s contribution to the plan based on the amount of each participant’s contributions, up to the Internal Revenue Service maximum contribution limit. All participants may immediately invest their individual contributions, as well as any Company matching contribution, in any of a variety of investment alternatives offered under the new plan. Expense for employer match related to the new plan totaled $480 thousand in 2011, $323 thousand in 2010 and $289 thousand in 2009. Postretirement Life Insurance Benefits The Company currently provides life insurance benefits to certain officers. The coverage provided depends upon years of service with the Company and the employee’s date of retirement. The Company’s plan for its postretirement benefit obligation is unfunded with a liability of $1.2 million at December 31, 2011 and $1.4 million at December 31, 2010. Net postretirement benefit cost was $125 thousand, $65 thousand and $65 thousand for 2011, 2010 and 2009, respectively. Amounts related to the postretirement life insurance plan included in other comprehensive income were $143 thousand at December 31, 2011 and $-0- thousand at December 31, 2010. p a g e 1 0 2 note 19. income taxeS The current and deferred tax provisions (benefits) applicable to income before taxes for each of the last three fiscal years are as follows: Years Ended December 31, federal Current Deferred Total State and local Current Deferred Total total Current Deferred Total 2011 2010 2009 $ (71) $ 3,615 $ 9,187 2,046 (1,734) (5,226) $ 1,975 $ 1,881 $ 3,961 $ 2,188 $ 973 $ 2,065 33 (696) (1,118) $ 2,221 $ 277 $ 947 $ 2,117 2,079 $ 4,588 $ 11,252 (2,430) (6,344) $ 4,196 $ 2,158 $ 4,908 Reconciliations of income tax provisions with taxes computed at Federal statutory rates are as follows: Years Ended December 31, Federal statutory rate 2011 2010 2009 35% 34% 35% Computed tax based on income from continuing operations $ 7,627 $ 3,123 $ 5,015 Increase (Decrease) in tax resulting from: State and local taxes, net of Federal income tax benefit Tax-exempt income Tax benefit related to closed Federal tax audits Other permanent items Total 1,500 (2,578) (2,523) 170 218 (1,640) — 457 673 (648) — (132) $ 4,196 $ 2,158 $ 4,908 p a g e 1 0 3 The components of the net deferred tax asset, included in other assets, are as follows: December 31, Deferred tax assets Difference between financial statement provision for loan losses and tax bad debt deduction Pension and benefit plans Available for sale securities Compensation and other benefits Deferred rent Other Total deferred tax assets Deferred tax liabilities Difference between tax and net book values of fixed assets Available for sale securities and other investments deferred tax liability Other Total deferred tax liabilities Net deferred tax asset Based on management’s consideration of historical and antic- ipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabili- ties, a valuation allowance for deferred assets was not consid- ered necessary at December 31, 2011 and 2010 since it is more likely than not that these assets will be realized. The current tax net receivable as of December 31, 2011 was approximately $1.7 million. The current tax net payable at December 31, 2010 was approximately $1.6 million. The Company has accrued $750 thousand in 2011 for state income taxes due to changes in the economic nexus rules gov- erning taxation of business conducted within that state. The Company anticipates filing tax returns under the voluntary disclosure regulations of that state which will limit the Company’s tax exposure to business conducted within that state during the past three years. The Company recognizes interest accrued related to unrecognized tax expense and penalties as income tax expense. At December 31, 2011 and 2010, the Consolidated Balance Sheet included accrued inter- est related to unrecognized tax expense of $313 thousand and $297 thousand, respectively. The Consolidated Statement of Income included interest expense for 2011, 2010 and 2009 of $16 thousand, $47 thousand and $250 thousand, respectively. 2011 2010 $ 7,909 10,649 763 1,934 1,324 1,127 $ 8,275 10,796 — 2,853 1,182 1,227 23,706 24,333 2,029 — 79 2,108 738 156 534 1,428 $ 21,598 $ 22,905 The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdic- tions. The Company’s federal income tax returns have been examined through 2009, with 2010 subject to examination. The Company’s New York State tax returns for years 2005 through 2007 are currently under examination and 2008 through 2010 are subject to examination. The Company’s New York City tax returns for 2006 through 2010 are sub- ject to examination. note 20. earningS Per common Share Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding during the applicable period, excluding participating secu- rities. Participating securities include non-vested share awards such as awards of restricted common shares. Non-vested share awards are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as holders of the Company’s common shares. Diluted earnings per common share is computed using the weighted- average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock option compensation using the treasury stock method. p a g e 1 0 4 The following table presents the calculation of net earnings allocated to common shares and a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share: Distributed earnings allocated to common shares Undistributed earnings allocated to common shares Net earnings allocated to common shares Weighted average common shares outstanding Add dilutive effect of: Stock options Adjusted for assumed diluted computation 2011 $11,080 4,374 $15,454 2010 $ 8,851 (4,429) $ 4,422 2009 $10,131 (3,482) $ 6,649 30,038,047 24,492,279 18,104,619 — 2,765 21,714 30,038,047 24,495,044 18,126,333 Options issued with exercise prices greater than the average market price of the common shares for each of the years ended December 31, 2011, 2010 and 2009 have not been included in computation of diluted earnings per share for those respective years. As of December 31, 2011, 310,460 options to purchase shares between $14.60 and $17.99 were not included; as of December 31, 2010, 422,747 options to purchase shares between $10.61 and $26.94 were not included; as of December 31, 2009, 460,822 options to purchase shares between $10.61 and $26.94 were not included. note 21. fair Value m eaSurementS The fair value of an asset or liability is the price that would be receivable from selling that asset or payable to transfer that liabil- ity in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact and willing to transact. FASB Codification Topic 820: Fair Value measurements and disclosures establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows: •   Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Examples of financial instruments generally included in this level are U.S. Treasury securities, equity and trust preferred securities that trade in active markets and listed derivative instruments. •   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 risks, etc.) or inputs that are derived princi- pally from or corroborated by market data by correlation or other means. Examples of financial instruments generally included in this level are corporate debt, mortgage-backed certificates issued by U.S. government corporations and government- sponsored enterprises, equity securities that trade in less active markets and certain derivative instruments. •   Level 3 Inputs—Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own judg- ments about the assumptions that market participants would use in pricing the assets or liabilities. Examples of financial instruments generally included in this level are private equities, certain loans held for sale and other alternative investments. In general, fair value of securities is based upon quoted market prices, where available (Level 1 inputs). If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs observable market-based parameters (Level 2 inputs). Fair value of loans held for sale is based upon internally developed models that primarily use as inputs observable market-based parameters. Valuation adjustments may be made to ensure that financial instru- ments 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 (Level 3 inputs). Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be p a g e 1 0 5 indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodolo- gies are appropriate and consistent with those of other mar ket 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. securities available for sale and other investments. Securities classified as available for sale and other investments (included in “Other assets” on the Consolidated Balance Sheet) are generally reported at fair value utilizing Level 1 and Level 2 inputs. Investments in fixed income securities, exclusive of preferred stock and mortgage-backed securities, are valued based on evalu- ations provided by Interactive Data Corporation (“IDC”), a leading global provider of market data information. IDC evalua- tions represent an exit price or their opinion as to what a buyer would pay for a security, typically in an institutional round lot position in a current sale. IDC seeks to utilize market data and observations in its evaluation service, and gives priority to observable benchmark yields and reported trades. IDC utilizes evaluated pricing techniques that vary by asset class and incor- porate available market information; because many fixed income securities do not trade on a daily basis, IDC applies available information through processes such as benchmark curves, benchmarking of similar securities, sector groupings and matrix pricing. Model processes such as option-adjusted spread models are used to value securities that have prepayment features. Substantially all securities available for sale evaluated in this manner are deemed to be Level 2 valuations. For mortgage-backed securities issued by U.S. government corporations and government-sponsored enterprises, management considers dealer indicative bids in the valuation process. Indicative bids are estimates of value and do not necessarily represent the price at which the dealer would be willing to transact. Such bids are compared to IDC-evaluated prices for reason- ableness as well as consistency with observable market conditions. All mortgage-backed securities are deemed to be valued based on Level 2 inputs. Publicly traded common and preferred stocks are valued by reference to the market closing price (last trade) on the measurement date (Level 1 inputs). In the unlikely event that no trade occurred on the measurement date, reference would be made to an indicative bid or the last trade most proximate to the measurement date (Level 2 inputs). The following table summarizes financial assets measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no financial liabilities measured at fair value. Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value December 31, 2011 Securities available for sale: Obligations of U.S. government corporations and government-sponsored enterprises Mortgage-backed securities Agency notes Total obligations of U.S. government corporations and government-sponsored enterprises Obligations of state and political institutions—New York bank qualified Single-issuer, trust preferred securities Corporate debt securities Equity and other securities Total marketable securities $ — $ 29,752 1,237 — $ — — $ 29,752 1,237 — — 27,059 — 15,882 30,989 22,777 — 173,307 — — — — — — 30,989 22,777 27,059 173,307 15,882 $ 42,941 $ 227,073 $ — $270,014 December 31, 2010 Securities available for sale: Obligations of U.S. government corporations and government-sponsored enterprises Mortgage-backed securities Agency notes Total obligations of U.S. government corporations and government-sponsored enterprises Obligations of state and political institutions—New York bank qualified Single-issuer, trust preferred securities Corporate debt securities Equity and other securities Total marketable securities Other investments $ — $ 51,983 100,122 — — — 3,933 — 4,940 152,105 40,044 — 189,058 — $ 8,873 $ 381,207 $ 11,838 $ 6,760 $ — — — — — — — $ — $ — $ 51,983 100,122 152,105 40,044 3,933 189,058 4,940 $390,080 $ 18,598 p a g e 1 0 6 Certain financial assets, such as loans held for sale and collateral-dependent impaired loans are measured at fair value on a non-recurring basis; that is, the instruments are not mea- sured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table summarizes the period end fair value of financial assets, based on significant unobservable (Level 3) inputs, measured on a non-recurring basis: December 31, December 31, 2011 2010 Impaired loans Commercial and industrial $ 1,298 Commercial real estate Other real estate owned, net 2,011 1,929 $ 1,344 2,024 182 Impaired loans. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on either recent real estate appraisals or, for loans with modification agreements in place, discounted cash flow anal- yses. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differ- ences between the comparable sales and income data avail- able. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. other real estate owned. The fair value of real estate owned (“OREO”) is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $4.5 million, with a valuation allow- ance of $1.2 million at December 31, 2011, resulting in an additional provision for loan losses of $31 thousand for the year ended December 31, 2011. At December 31, 2010, impaired loans had a principal balance of $4.5 million, with a valuation allowance of $1.1 million, resulting in an addi- tional provision for loan losses of $1.1 million for the year ended December 31, 2010. Other real estate owned measured at fair value less costs to sell had a net carrying amount of $1.9 million, which is made up of the outstanding balance of $1.9 million, net of a valua- tion allowance of $-0- million. For the year ended December 31, 2011, $-0- million of other real estate owned was written down through a charge to noninterest expense. At December 31, 2010, other real estate owned had a net carrying amount of $182 thousand, made up of the outstanding balance of $182 thousand, net of a valuation allowance of $-0- thou- sand. For the year ended December 31, 2010, $233 thousand of other real estate owned was written down through a charge to noninterest expense. For those financial instruments that are not recorded at fair value in the Consolidated Balance Sheets, but are measured at fair value for disclosure purposes, management follows the same fair value measurement principles and guidance as for instruments recorded at fair value. Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. The subjective factors include, among other things, estimated cash flows, risk characteris- tics, credit quality and interest rates, all of which are subject to change. With the exception of investment securities and certain long-term debt, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments that are not read- ily marketable depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be sig- nificantly different. p a g e 1 0 7 In particular, fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the financial instrument. Illiquid credit mar- kets have resulted in inactive markets for certain of the Company’s financial instruments. As a result, there is no or limited observable market data for these assets and liabilities. Fair value estimates for financial instruments for which no or limited observable market data is available are based on our judgments regarding current economic conditions, liquidity discounts, currency, credit, and interest rate risks, loss expe- rience and other factors, all of which are Level 3 inputs as discussed above. These estimates involve significant judg- ments and uncertainties and cannot be substantiated by com- parison to quoted prices in active markets and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, there are inherent uncertainties in any fair value measurement tech- nique, and changes in the underlying assumptions used in the fair value measurement technique, including discount rates, liquidity risks, and estimates of future cash flows, could significantly affect these fair value estimates. A description of the methods, factors and significant assump- tions utilized in estimating the fair values for significant cat- egories of financial instruments follows: Financial Instruments with Carrying Amounts Equal to Fair Value The carrying amounts for cash and due from banks, interest- bearing deposits with other banks, customers’ liabilities under acceptances, accrued interest receivable, Federal funds pur- chased, securities sold under agreements to repurchase, com- mercial paper, other short-term borrowings, acceptances outstanding, and accrued interest payable, as a result of their short-term nature, are considered to approximate fair value. Investment Securities The methods, factors and significant assumptions used to estimate fair values of all securities are described more fully beginning on page 105. Loans, Net The fair value of loans held in portfolio which reprice within 90 days reflecting changes in the base rate approximate their carrying amount. For other loans held in portfolio, the fair value is calculated based on discounted cash flow analyses, using interest rates currently being offered for loans with sim- ilar terms to borrowers of similar credit quality and for similar maturities. These calculations have been adjusted for credit risk based on the Company’s historical credit loss experience. The fair value for secured nonaccrual loans is the value of the underlying collateral which is sufficient to repay each loan. For other nonaccrual loans, the fair value represents book value less a credit risk adjustment based on the Company’s historical credit loss experience. Deposits FASB Codification Topic 825: Financial Instruments requires that the fair value of demand, savings, NOW (Negotiable Order of Withdrawal) and certain money market deposits be equal to their carrying amount. The Company believes that the fair value of these deposits, including the value of deposit relationships, is greater than that prescribed by FASB Codification Topic 825. For other types of deposits with fixed maturities, fair value has been estimated based upon interest rates currently being offered on deposits with similar characteristics and maturities. Advances—FHLB and Long-Term Borrowings For advances—FHLB and long-term borrowings, the fair value is calculated based on discounted cash flow analyses, using interest rates currently being quoted for debt with similar char- acteristics and maturities. Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees The fees received for the issuance of commitments to extend credit, standby letters of credit, and financial guarantees, are considered to approximate fair value. Due to the uncertainty involved in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the amount of consid- eration received. p a g e 1 0 8 The following is a summary of the carrying amounts and fair values of the Company’s financial assets and liabilities: December 31, financial aSSetS Cash and due from banks Interest-bearing deposits with other banks Investment securities Loans, net Customers’ liability under acceptances Accrued interest receivable financial liabilitieS Demand, NOW, savings and money market deposits Time deposits Securities sold under agreements to repurchase Federal funds purchased Commercial paper Other short-term borrowings Acceptances outstanding Accrued interest payable Advances—FHLB and long-term borrowings 2011 2010 Carrying Amount Fair Value Carrying Amount Fair Value $ 31,046 126,448 677,871 1,496,652 4 6,838 $ 31,046 126,448 695,789 1,505,005 4 6,838 $ 26,824 40,503 789,315 1,328,045 — 8,280 $ 26,824 40,503 790,533 1,332,673 — 8,280 1,331,223 657,848 52,313 — 13,485 — 4 1,064 148,507 1,331,223 659,439 52,313 — 13,485 — 4 1,064 149,056 1,132,497 615,267 28,016 15,000 14,388 3,490 — 1,314 169,947 1,132,497 617,096 28,016 15,000 14,388 3,490 — 1,314 173,110 p a g e 1 0 9 note 22. caPital matterS The Company and the bank are subject to risk-based capital regulations which quantitatively measure capital against risk-weighted assets, including certain off-balance sheet items. These regulations define the elements of the Tier 1 and Tier 2 components of Total Capital and establish minimum ratios of 4% for Tier 1 capital and 8% for Total Capital for capital adequacy purposes. Sup ple- menting these regulations is a leverage requirement. This requirement establishes a minimum leverage ratio (at least 3% or 4%, depending upon an institution’s regulatory status), which is calculated by dividing Tier 1 capital by adjusted quarterly average assets (after deducting goodwill). In addition, the bank is subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) which imposes a number of mandatory supervisory measures. Among other matters, FDICIA established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Such classifications are used by regulatory agencies to determine a bank’s deposit insurance premium, approval of applications authorizing institu- tions to increase their asset size or otherwise expand business activities or acquire other institutions. Under FDICIA a “well capitalized” bank must maintain minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and 10%, respectively. The Federal Reserve Board applies comparable tests for holding companies such as the Company. At December 31, 2011, manage- ment believes that the Company and the bank exceeded the requirements for “well capitalized” institutions under the tests pursuant to FDICIA and of the Federal Reserve Board. The following tables present information regarding the Company’s and the bank’s regulatory capital ratios: Actual Minimum For Capital Adequacy To Be Well Capitalized As of December 31, 2011 Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk-Weighted Assets): The Company The bank $ 256,526 13.71% 234,737 12.63 $ 149,738 148,732 8.00% 8.00 $ 187,173 185,915 10.00% 10.00 Tier 1 Capital (to Risk-Weighted Assets): The Company The bank Tier 1 Leverage Capital (to Average Assets): The Company The bank As of December 31, 2010 Total Capital (to Risk-Weighted Assets): 235,947 214,159 12.61 11.52 235,947 214,159 9.02 8.30 74,869 77,366 104,593 103,148 4.00 4.00 4.00 4.00 112,304 111,549 130,741 128,935 6.00 6.00 5.00 5.00 The Company The bank $255,022 14.68% 211,737 12.32 $ 138,982 137,516 8.00% 8.00 $ 173,728 171,895 10.00% 10.00 Tier 1 Capital (to Risk-Weighted Assets): The Company The bank Tier 1 Leverage Capital (to Average Assets): The Company The bank 236,477 193,192 236,477 193,192 13.61 11.24 10.15 8.39 69,491 68,758 93,152 92,070 4.00 4.00 4.00 4.00 104,237 103,137 116,440 115,087 6.00 6.00 5.00 5.00 p a g e 1 1 0 note 23. Parent comPanY condenSed b alance SheetS December 31, aSSetS Cash and due from banks— Banking subsidiary Other banks Interest-bearing deposits—banking subsidiary Securities available for sale (at fair value) Loans, net of unearned discount Investment in subsidiaries— Banking subsidiary (including goodwill of $22,901 in 2011 and 2010) Other subsidiaries Cash surrender value of life insurance policies Other assets liabilitieS and ShareholderS’ eQuitY Commercial paper (see Note 10) Due to subsidiaries— Other subsidiaries Accrued expenses and other liabilities Junior subordinated debt (see Note 12) Shareholders’ equity condenSed StatementS of i ncome Years Ended December 31, income Dividends and interest from— Banking subsidiary Loans Securities available for sale Other income Total income exPenSe Interest expense Other expenses Total expense Loss before income taxes and equity in undistributed net income of subsidiaries Benefit for income taxes Loss before equity in undistributed net income of subsidiaries Equity in undistributed net income of— Banking subsidiary Other subsidiaries Net income p a g e 1 1 1 2011 2010 $ 20,870 $ 37,285 13 1,244 8,571 10,127 32 3,443 6,086 15,370 226,403 206,818 2,179 4,609 16,728 2,160 4,104 15,856 $ 290,744 $ 291,154 $ 13,485 $ 14,388 992 29,672 25,774 992 27,258 25,774 220,821 222,742 $ 290,744 $ 291,154 2011 2010 2009 $ 1 92 249 140 482 2,186 2,937 5,123 (4,641) (1,313) (3,328) 20,905 19 $ 2 208 342 155 707 2,189 3,373 5,562 (4,855) (1,147) (3,708) 10,713 21 $ 39 95 88 172 394 2,211 3,301 5,512 (5,118) (1,755) (3,363) 12,764 21 $ 17,596 $ 7,026 $ 9,422 condenSed StatementS of c aSh f lowS Years Ended December 31, oPerating actiVitieS Net income Adjustments to reconcile net income to net cash used in operating activities: Increase (Decrease) in accrued expenses and other liabilities Equity in undistributed net income of subsidiaries Security gains Increase in other assets Other, net Net cash used in operating activities inVeSting actiVitieS Net decrease (increase) in interest-bearing deposits—banking subsidiary Purchase of securities available for sale Decrease (Increase) in loans Proceeds from sales of securities available for sale Proceeds from maturities and redemptions of securities available for sale Investment in subsidiaries—banking subsidiary 2011 2010 2009 $ 17,596 $ 7,026 $ 9,422 2,414 (20,924) — (1,377) (1,383) (3,674) 2,199 (109,991) 5,243 — 109,250 — 3,246 (10,734) (15) (4,415) 1,028 (3,864) 24,498 (62,495) (209) 2,054 54,318 (31,500) (512) (12,785) — (2,028) (97) (6,000) (17,039) — (15,111) — — — Net cash provided by (used in) investing activities 6,701 (13,334) (32,150) financing actiVitieS Net (decrease) increase in commercial paper Cash dividends paid on common shares Cash dividends paid on preferred shares Proceeds from exercise of stock options Net proceeds from issuance of common shares Net redemption of preferred stock and common stock warrants Net cash (used in) provided by financing activities Net (decrease) increase in cash and due from banks Cash and due from banks—beginning of year (903) (11,122) (945) — 36,454 (42,945) (19,461) (16,434) 37,317 (2,909) (8,873) (2,100) 403 64,881 — 51,402 34,204 3,113 5,565 (10,131) (1,878) 197 — — (6,247) (44,397) 47,510 Cash and due from banks—end of year $ 20,883 $ 37,317 $ 3,113 Supplemental disclosure of cash flow information: Interest paid Income taxes paid $ 2,187 $ 2,174 $ 2,214 5,744 3,994 5,757 p a g e 1 1 2 note 24. commitmentS and c ontingent l iabilitieS Total rental expenses under cancelable and noncancelable leases for premises and equipment were $6.2 million, $5.8 million and $5.2 million for the years ended December 31, 2011, 2010 and 2009, respectively, which are net of rental income for a sub- lease of $213 thousand, $218 thousand and $194 thousand for the years ended December 31, 2011, 2010 and 2009, respectively. The future minimum rental commitments as of December 31, 2011 under noncancelable leases follow: Year(s) 2012 2013 2014 2015 2016 2017 and thereafter Total Rental Commitments $ 3,833 4,324 4,747 4,518 3,789 22,837 $44,048 Certain leases included above have escalation clauses and/or provide that the Company pay maintenance, electric, taxes and other operating expenses applicable to the leased property. In the normal course of business, there are various commitments and contingent liabilities outstanding which are properly not recorded on the balance sheet. Management does not anticipate that losses, if any, as a result of these transactions would materially affect the financial position of the Company. Loan commitments, approximately 89% of which have an original maturity of one year or less, were approximately $75.5 mil- lion as of December 31, 2011. These commitments are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The total commitment amounts do not necessarily represent future cash requirements because some of the commit- ments are expected to expire without being drawn upon. The bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the bank upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include cash, U.S. Treasury and other marketable securities, accounts receivable, inventory and property, plant and equipment. Standby letters of credit and financial guarantees, substantially all of which are within the scope of FASB Codification Topic 460: guarantees, are written conditional commitments issued by the bank to guarantee the performance of a customer to a third party. At December 31, 2011, these commitments totaled $27.8 million of which $21.7 million expire within one year and $6.1 million within two years. Approximately 78% of the commitments are automatically renewable for a period of one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to custom- ers. The bank holds cash or cash equivalents and marketable securities as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 2011 ranged from 0% to 100%; the average amount collateralized was approximately 94%. Other commercial commitments principally consist of commercial letters of credit issued to our trade finance customers to finance the import of various merchandise. At December 31, 2011, these commitments totaled $61.8 million, of which $61.6 million expire within one year. The commercial documents are secured by the underlying merchandise. The majority of these letters of credit require cash payment before the release of documents. In the normal course of business there are various legal proceedings pending against the Company. Management, after consult- ing with counsel, is of the opinion that there should be no material liability with respect to such proceedings, and accordingly no provision has been made in the accompanying consolidated financial statements. p a g e 1 1 3 note 25. QuarterlY d ata (unaudited) 2011 Quarter Total interest income Total interest expense Net interest income Provision for loan losses Net securities gains Noninterest income, excluding securities gains Noninterest expenses Income before income taxes Provision (Benefit) for income taxes Net income Dividends on preferred shares and accretion Net income available to common shareholders Net income available to common shareholders, per average common share: Basic Diluted Common share closing price: High Low Quarter-end 2010 Quarter Total interest income Total interest expense Net interest income Provision for loan losses Net securities gains Noninterest income, excluding securities gains Noninterest expenses Income (Loss) before income taxes Provision (Benefit) for income taxes Net income (loss) Dividends on preferred shares and accretion Net income (loss) available to common shareholders Net income (loss) available to common shareholders, per average common share: Basic Diluted Common share closing price: High Low Quarter-end Mar 31 Jun 30 Sept 30 Dec 31 $ 22,754 $ 24,110 $ 25,179 $ 25,021 3,325 19,429 3,000 729 10,713 22,453 5,418 1,475 3,943 644 3,299 0.12 0.12 10.73 9.48 10.01 3,193 20,917 3,000 380 10,488 23,446 5,339 1,394 3,945 1,430 2,515 0.08 0.08 10.55 8.78 9.49 3,307 21,872 3,000 420 11,039 23,770 6,561 2,191 4,370 — 4,370 0.14 0.14 9.92 7.05 7.26 3,162 21,859 3,000 197 10,094 24,676 4,474 (864) 5,338 — 5,338 0.17 0.17 8.92 6.67 8.64 Mar 31 Jun 30 Sept 30 Dec 31 $ 24,016 $ 24,475 $ 24,702 $ 23,997 4,121 19,895 6,000 1,502 9,600 21,336 3,661 1,098 2,563 636 1,927 0.10 0.10 10.05 7.27 10.05 3,937 20,538 5,500 746 10,615 22,139 4,260 1,278 2,982 644 2,338 0.09 0.09 10.93 8.99 9.00 3,827 20,875 14,000 1,171 11,887 23,753 (3,820) (1,146) (2,674) 654 (3,328) (0.12) (0.12) 10.28 8.39 8.69 3,698 20,299 3,000 509 11,603 24,328 5,083 928 4,155 655 3,500 0.13 0.13 10.59 8.71 10.47 p a g e 1 1 4 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M We have audited the accompanying consolidated balance sheet of Sterling Bancorp (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011 and the consolidated statement of condition of Sterling National Bank as of December 31, 2011 and 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state- ments are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America and the financial position of Sterling National Bank as of December 31, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sterling Bancorp’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2012 expressed an unqualified opinion thereon. /s/ Crowe Horwath LLP Livingston, New Jersey March 9, 2012 p a g e 1 1 5 item 9. change S in and di SagreementS with accountantS on accounting and financial diScloSure None. item 9a. control S and ProcedureS (a) Evaluation of Disclosure Controls and Procedures As required under the Exchange Act, the Company’s manage- ment, with the participation of the Com pany’s principal exec- utive and principal financial officers, evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation the Company’s management, includ- ing the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2011, the Company’s dis- closure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. (b) Management’s Annual Report on Internal Control over Financial Reporting The management of the Company is responsible for establish- ing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance to the Company’s manage- ment and Board of Directors regarding the preparation and fair presentation of published financial statements. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a con- trol can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effective- ness may vary over time. Accordingly, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changed conditions, or that the degree of compliance with the policies or procedures may deteriorate. The management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making its assessment of internal control over financial reporting, management used the crite- ria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal control— Integrated Framework. Based on this assessment, the Company’s management concluded that, as of December 31, 2011, the Company’s internal control over financial reporting is effective. Crowe Horwath LLP, the independent registered public accounting firm that audited the consolidated financial state- ments of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2011. The report, which expresses an unquali- fied opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm” below. p a g e 1 1 6 (c) Report of Independent Registered Public Accounting Firm We have audited Sterling Bancorp’s (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sterling Bancorp’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reli- ability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispo- sitions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendi- tures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, pro- jections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Sterling Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2011 and 2010 and the related consolidated statements of income, comprehen- sive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended of Sterling Bancorp and the consolidated statement of condition of Sterling National Bank as of December 31, 2011 and 2010 and our report dated March 9, 2012 expressed an unqualified opinion on those consolidated financial statements. /s/ Crowe Horwath LLP Livingston, New Jersey Match 9, 2012 p a g e 1 1 7 (e) Changes in Internal Control over Financial Reporting No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. item 9b. other information None. p a g e 1 1 8 P A R T I I I item 10. director S, executi Ve officer S and corPorate goVernance Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure beginning on page 27 at the end of Part I of this report. The other information required by Item 10 will be in the parent company’s defini- tive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act within 120 days after December 31, 2011 and is incorporated herein by reference. item 11. executiV e com PenSation The information required by Item 11 will be in the parent company’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act within 120 days after December 31, 2011 and is incorporated herein by reference. item 12. S ecuritY owner ShiP of certain beneficial owner S and management and related Stock holder matterS See the information appearing in Note 17 of the Company’s consolidated financial statements beginning on page 96. The following table provides information as of December 31, 2011, regarding securities issued to all of the Company’s employees under equity compensation plans that were in effect during the fiscal year ended December 31, 2011, and other equity compensation plan information. eQuitY c omP enSation Plan i nformation Plan Category Equity Compensation Plans approved by security holders Equity Compensation Plans not approved by security holders Total Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) (c) 310,460 — 310,460 $15.64 — $15.64 616,184 — 616,184 The other information required by Item 12 will be in the parent company’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act within 120 days after December 31, 2011 and is incorporated herein by reference. item 13. certain relationS hiPS and related tranS actionS, and director inde Pendence The information required by Item 13 will be in the parent company’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act within 120 days after December 31, 2011 and is incorporated herein by reference. item 14. P rinciPal accountant fee S and S erViceS The information required by Item 14 will be in the parent company’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act within 120 days after December 31, 2011 and is incorporated herein by reference. p a g e 1 1 9  Pursuant to Regulation S-K, Item 601(b)(4) (iii)(A), no instrument which defines the rights of holders of long-term debt of the Registrant or any of its consolidated sub- sidiaries is filed herewith. Pursuant to this regulation, the Registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10. (i)(A)* Sterling Bancorp Stock Incentive Plan (Amended and Restated as of May 20, 2004) (Filed as Exhibit 10 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference). (i)(B)* Form of Award Letter for Non-Employee Directors (Filed as Exhibit 10 to the Reg- istrant’s Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference). (i)(C)* Form of Award Letter for Officers (Filed as Exhibit 10 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference). (i)(D)* Form of Nonqualified Stock Option Award (Filed as Exhibit 10(A) to the Registrant’s Form 8-K dated March 18, 2005 and filed on March 24, 2005 and incorporated herein by reference). (i)(E)* Form of Award Letter for Officers (Filed as Exhibit 10(i)(E) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006 and incorporated herein by reference). (i)(F)* Amendment to Sterling Bancorp Stock Incentive Plan (Filed as Exhibit 10(i)(F) to the Registrant’s Form 8-K dated December 29, 2008 and filed on January 5, 2009 and incorporated herein by reference). (ii)(A)* Sterling Bancorp Key Executive Incentive Bonus Plan (Filed as Exhibit C to the Reg- is trant’s definitive Proxy Statement, dated March 13, 2001, filed on March 16, 2001 and incorporated herein by reference). P A R T I V item 15. exhibit S and financial Statement 4. ScheduleS (a) The documents filed as a part of this report are listed below: 1. Financial Statements Sterling Bancorp Consolidated Balance Sheets as of December 31, 2011 and 2010 Consolidated Statements of Income for the Years Ended December 31, 2011, 2010 and 2009 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009 Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009 Sterling National Bank Consolidated Statements of Condition as of December 31, 2011 and 2010 2. Financial Statement Schedules None 3. Exhibits 3. (i) Restated Certificate of Incorporation filed with the State of New York Department of State on October 28, 2004 (Filed as Exhibit 3(i) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference). (ii) Certificate of Amendment of Certificate of Incorporation filed with the New York Department of State on December 18, 2008. (Filed as Exhibit 3(ii) to the Registrant’s Form 10 -K for the fiscal year ended December 31, 2008 and incorporated herein by reference). (iii) By-Laws as amended through November 15, 2007 (Filed as Exhibit 3(ii) to the Registrant’s Form 8-K dated November 15, 2007 and filed on November 19, 2007 and incorpo- rated herein by reference). * constitutes a management contract or compensatory Plan or Arrangement p a g e 1 2 0  (ii)(B)* Amendment to Sterling Bancorp Key Executive Incentive Bonus Plan (Filed as Exhibit 10(ii) (B) to the Registrant’s Form 8-K dated December 29, 2008 and filed on January 5, 2009 and incorporated herein by reference). (iii)(A)* A mended and Restated Employment Agreements dated March 22, 2002 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(i)(a) and 10(i)(b), respectively, to the Reg istrant’s Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference). (iii)(B)* Amendments to Employment Agreements dated February 26, 2003 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 3.10(xiv)(a) and 3.10(xiv)(b), respectively, to the Registrant’s Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference). (iii)(C)* Amendments to Employment Agreements dated February 24, 2004 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(xv)(a) and 10(xv)(b), respectively, to the Registrant’s Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference). (iii)(D)* Amendments to Employment Agreements dated March 18, 2005 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(B) and 10(C), respectively, to the Registrant’s Form 8-K dated March 18, 2005 and filed on March 24, 2005 and incorporated herein by reference). (iii)(E)* Amendments to Employment Agreements dated March 15, 2006 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(iii)(E)(a) and 10(iii)(E)(b), respectively, to the Registrant’s Form 10-K for the fiscal year ended December 31, 2005 and incorporated herein by reference). (iii)(F)* Amendments to Employment Agreements dated March 15, 2007 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(iii)(F)(a) and 10(iii)(F)(b), respectively, to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006 and incorpo- rated herein by reference). (iii)(G)* Amendments to Employment Agreements dated March 13, 2008 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(iii)(G)(a) and 10(iii)(G)(b), respectively, to the Registrant’s Form 10-K for the fiscal year ended December 31, 2007 and incorpo- rated herein by reference). (iii)(H)* Amendments dated December 29, 2008 to Employment Agreements (a) For Louis J. Cappelli and (b) For John C. Millman (Filed as Exhibit 10(iii)(H) to the Registrant’s Form 8-K dated December 29, 2008 and filed on January 5, 2009 and incorporated herein by reference). (iii)(I)* Amendments to Employment Agreements dated March 12, 2009 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(iii)(I)(a) and 10(iii)(I)(b), respectively, to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and incorpo- rated herein by reference). (iii)(J)* Amendments to Employment Agreements dated March 25, 2010 for Louis J. Cappelli and John C. Millman (Filed as Exhibits 10(ii)(J)(a) and 10(iii)(J)(b), respectively, to the Registrant’s Form 10-K for the fiscal year ended December 31, 2010 and incorpo- rated herein by reference). (iii)(K)* Amendments to Employment Agreements dated March 8, 2011 (a) For Louis J. Cappelli (b) For John C. Millman (iii)(L)* Amendments to Employment Agreements dated March 2, 2012 (a) For Louis J. Cappelli (b) For John C. Millman (iv)(A)* Form of Change of Control Severance Agree- ment entered into May 21, 1999 between the Registrant and each of six executives (Filed as Exhibit 10(ii) to the Registrant’s Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference). (iv)(B)* Amendment to Form of Change of Control Severance Agreement dated February 6, 2002 entered into between the Registrant and each of four executives (Filed as Exhibit 10(ii) to the Registrant’s Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference). *constitutes a management contract or compensatory Plan or Arrangement p a g e 1 2 1  (v)(B)* Form of Letter Agreement, executed by each of Louis J. Cappelli, John C. Millman, John W. Tietjen, Howard M. Applebaum and Eliot Robinson (Filed as Exhibit 10.3 to the Registrant’s Form 8-K dated December 23, 2008 and filed on December 30, 2008 and incorporated herein by reference). 11. 12. 21. 23. Statement re: Computation of Per Share Earnings. Statement re: Computation of Ratios. Subsidiaries of the Registrant. Consent of Crowe Horwath LLP Independent Regis tered Public Accounting Firm. 31.1 Certification of the CEO pursuant to Exchange Act Rule 13a-14(a). 31.2 Certification of the CFO pursuant to 32.1 32.2 Exchange Act Rule 13a-14(a). Certification of the CEO required by Section 1350 of Chapter 63 of Title 18 of the U.S. Code. (Pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act, the certification filed under this Exhibit shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Exchange Act and shall not be otherwise subject to the liability of that section). Certification of the CFO required by Section 1350 of Chapter 63 of Title 18 of the U.S. Code. (Pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act, the certification filed under this Exhibit shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Exchange Act and shall not be otherwise subject to the liability of that section). 101.INS** XBRL Instance Document 101.SCH** XBRL Taxonomy Extension Schema 101.CAL** XBRL Taxonomy Extension Calculation Label Linkbase 101.LAB** XBRL Taxonomy Extension Label Linkbase 101.PRE** XBRL Taxonomy Presentation Linkbase 101DEF** XBRL Taxonomy Definition Linkbase (iv)(C)* Form of Change of Control Severance Agree- ment dated April 3, 2002 entered into between the Registrant and one executive (Filed as Exhibit 10(i) to the Registrant’s Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference). (iv)(D)* Form of Change of Control Severance Agree- ment dated June 8, 2004 entered into between the Registrant and one executive (Filed as Exhibit 10(i) to the Registrant’s Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference). (iv)(E)* Form of Change of Control Severance and Retention Agreement, dated as of November 7, 2006, entered into between the Registrant and one officer (Filed as Exhibit 10 to the Registrant’s Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference). (iv)(F)* Form of Change of Control Severance and Retention Agreement, dated as of September 7, 2006, entered into between the Registrant and one officer (Filed as Exhibit 10(iv)(F) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006 and incorpo- rated herein by reference). (iv)(G)* Form of Amendment dated December 29, 2008 to Form of Change in Control Severance Agreement between the Registrant and each of three executives (Filed as Exhibit 10(iv)(G) to the Registrant’s Form 8-K dated December 29, 2008 and filed on January 5, 2009 and incorporated herein by reference). (iv)(H)* Form of Amendment dated December 29, 2008 to Form of Change in Control Severance and Retention Agreement between the Registrant and each of six executives (Filed as Exhibit 10(iv)(H) to the Registrant’s Form 8-K dated December 29, 2008 and filed on January 5, 2009 and incorporated herein by reference). (v)(A)* Form of Waiver, executed by each of Louis J. Cappelli, John C. Millman, John W. Tietjen, Howard M. Applebaum and Eliot Robinson (Filed as Exhibit 10.2 to the Registrant’s Form 8-K dated December 23, 2008 and filed on December 30, 2008 and incorpo- rated herein by reference). *constitutes a management contract or compensatory Plan or Arrangement ** As provided in Rule 406T of Regulation s-T, this information is furnished and not filed for purposes of sections 11 and 12 of the securities Act of 1993 and section 18 of the securities exchange Act of 1934. p a g e 1 2 2 S I G N A T U R E S Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STERLING BANCORP /s/ Louis J. Cappelli Louis J. Cappelli, Chairman and Chief Executive Officer (Principal Executive Officer) March 9, 2012 Date /s/ John W. Tietjen John W. Tietjen, Executive Vice President (Principal Financial and Accounting Officer) March 9, 2012 Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: March 9, 2012 (Date) March 9, 2012 (Date) March 9, 2012 (Date) March 9, 2012 (Date) March 9, 2012 (Date) March 9, 2012 (Date) March 9, 2012 (Date) /s/ Louis J. Cappelli Louis J. Cappelli Director, Chairman and Chief Executive Officer (Principal Executive Officer) /s/ John W. Tietjen John W. Tietjen Executive Vice President (Principal Financial and Accounting Officer) /s/ John C. Millman John C. Millman Director /s/ Henry J. Humphreys Henry J. Humphreys Director /s/ Joseph M. Adamko Joseph M. Adamko Director /s/ Robert W. Lazar Robert W. Lazar Director /s/ Eugene T. Rossides Eugene T. Rossides Director p a g e 1 2 3 Sterling N ati o nal B ank Busin e s s Ad v is o r y B o ard Andrew W. Albstein, esq. Managing partner Goldberg Weprin Finkel Goldstein llp ellen H. Aschendorf president egg electric, Inc. Neil J. Bressler, CpA Managing partner Skwiersky, Alpert & Bressler llp timothy M. Bryan Chairman and Ceo Galaxy Systems, Inc. Andrew Buchbinder president Bill levkoff, Inc. Daniel A. Castellano, CpA Castellano, Korenberg & Co., CpA’s, p.C. Howard Hoff, CpA partner Marks paneth & Shron llp David B. Schwartz, CpA partner WeiserMazars llp louis C. Ciliberti president louis C. Ciliberti & Associates, ltd. Bernard Friedman president penmark Realty Corp. Neil B. Garfinkel, esq. partner Abrams Garfinkel Margolis Bergson, llp Jeffrey A. Getzel, CpA Managing partner Getzel Schiff Ross & pesce, llp John H. Jankoff, esq. Managing partner Jankoff & Gabe, p.C. Brian Shatz Managing principal Madison Realty Capital Dennis R. Klein, CpA Senior Assurance partner Nussbaum Yates Berg Klein & Wolpow, llp lyle C. Mahler, esq. partner Farrell Fritz, p.C. Mark l. Meinberg, CpA Managing partner MayerMeinberg llp Steven Weinstein president Access Staffing, llC Bruce Weksler president Bruce Supply Corp. Michael G. Zapson, esq. Managing Attorney Davidoff Malito & Hutcher llp Shareho ld er I nfo r mati o n Annual Meeting transfer Agent/Registrar the Annual Meeting of Shareholders of Sterling Bancorp will be held at 10:00 a.m., thursday, May 3, 2012 at the university Club, one West 54th Street, New York, NY 10019. Independent Registered public Accounting Firm Crowe Horwath llp Counsel Sullivan & Cromwell llp Common Share listing New York Stock exchange Symbol: Stl Computershare Shareowner Services llC p.o. Box 358015, pittsburgh, pA 15252-8015 or 480 Washington Boulevard, Jersey City, NJ 07310-1900 (800) 359-8248 tDD for Hearing Impaired: (800) 231-5469 Foreign Shareholders: (201) 680-6578 tDD Foreign Shareholders: (201) 680-6610 Web Site Address: www.computershare.com Form 10-K and other Shareholder Information Sterling Bancorp’s Annual Report to the Securities and exchange Commission, Form 10-K, and other shareholder information can be viewed at the company’s Investor Relations website, www.sterlingbancorp.com; shareholders may also elect email notification of press releases, document filings and other related information. printed materials may be obtained by contacting John W. tietjen or Debra A. Ashton at 650 Fifth Avenue, New York, NY 10019-6108, or by calling (212) 757-3300. . m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b n g i s e D t r o p e R l a u n n A m o c . y h p a r g o t o h p n o s u g r e f y r r e j y b e g a m i r e v o C Sterling Bancorp Sterling national Bank 650 Fifth Avenue, New York, NY 10019-6108 212-757-3300 sterlingbancorp.com 

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