- Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Sterling Banks (MM)	NASDAQ:STBK	NASDAQ	Common Stock

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2009

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File No. 333-133649

STERLING BANKS, INC.

(Exact name of registrant as specified in its charter)

New Jersey	20-4647587
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

3100 Route 38, Mount Laurel, New Jersey 08054

(Address of principal executive offices) (Zip Code)

856-273-5900

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 X 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 (§232.405 of this chapter) during the 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES NO X

Number of shares outstanding of the registrant’s common stock, par value $2.00 per share, outstanding as of August 14, 2009: 5,843,362

STERLING BANKS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2009

INDEX

Part I	FINANCIAL INFORMATION	Page

Item 1.	Consolidated Financial Statements
	Balance Sheets	4
	Statements of Operations	6
	Statements of Shareholders’ Equity	7
	Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4T.	Controls and Procedures	37

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 5.	Other Information	38
Item 6.	Exhibits	38

SIGNATURES		39

EXHIBITS

Exhibit 31.1	Certification of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

Part I. Financial Information

Item 1. Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2009 AND DECEMBER 31, 2008

	June 30, 2009 (unaudited)			December 31, 2008
ASSETS
Cash and cash due from banks	$	9,372,000		$	13,054,000
Federal funds sold		15,629,000			472,000
Cash and cash equivalents		25,001,000			13,526,000

Investment securities held-to-maturity, at cost (fair value of $14,478,000 at June 30, 2009 and $19,992,000 at December 31, 2008)		14,224,000			19,884,000
Investment securities available-for-sale, at fair value		34,466,000			24,097,000
Total investment securities		48,690,000			43,981,000

Restricted stock, at cost		2,087,000			2,448,000

Loans held for sale		-			2,000

Loans		301,029,000			305,626,000
Less: Allowance for loan losses		(7,041,000	)		(8,531,000	)
Total net loans		293,988,000			297,095,000

Core deposit intangible asset, net		2,176,000			2,374,000
Bank premises and equipment, net		8,357,000			8,526,000
Branch Property Held for Sale		505,000			596,000
Accrued interest receivable and other assets		11,794,000			10,557,000

Total assets	$	392,598,000		$	379,105,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2009 AND DECEMBER 31, 2008

	June 30, 2009 (unaudited)			December 31, 2008
LIABILITIES Deposits
Noninterest-bearing	$	33,604,000		$	35,873,000
Interest-bearing		309,345,000			292,721,000
Total deposits		342,949,000			328,594,000

Federal Home Loan Bank advances		16,000,000			16,000,000
Subordinated debentures		6,186,000			6,186,000
Accrued interest payable and other accrued liabilities		1,647,000			1,204,000

Total liabilities		366,782,000			351,984,000

COMMITMENTS AND CONTINGENCIES (Note 2)

SHAREHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000 shares authorized, none issued or outstanding		-			-
Common stock, $2 par value, 15,000,000 shares authorized; 5,843,362 issued and outstanding at June 30, 2009 and December 31, 2008		11,687,000			11,687,000
Additional paid-in capital		29,804,000			29,767,000
Accumulated deficit		(15,674,000	)		(14,279,000	)
Accumulated other comprehensive loss		(1,000	)		(54,000	)
Total shareholders' equity		25,816,000			27,121,000
Total liabilities and shareholders' equity	$	392,598,000		$	379,105,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(Unaudited)

	For the three months ended June 30, 2009			For the three months ended June 30, 2008			For the six months ended June 30, 2009			For the six months ended June 30, 2008
INTEREST INCOME
Interest and fees on loans	$	4,294,000		$	5,204,000		$	8,505,000		$	10,714,000
Interest and dividends on securities		491,000			314,000			985,000			775,000
Interest on due from banks and federal funds sold		6,000			76,000			12,000			140,000
Total interest and dividend income		4,791,000			5,594,000			9,502,000			11,629,000

INTEREST EXPENSE
Interest on deposits		1,858,000			2,267,000			3,810,000			5,009,000
Interest on Federal Home Loan Bank advances and overnight borrowings		161,000			10,000			321,000			79,000
Interest on subordinated debentures		105,000			104,000			209,000			208,000
Total interest expense		2,124,000			2,381,000			4,340,000			5,296,000

Net interest income		2,667,000			3,213,000			5,162,000			6,333,000

PROVISION FOR LOAN LOSSES		390,000			400,000			390,000			400,000

Net interest income after provision for loan losses		2,277,000			2,813,000			4,772,000			5,933,000

NONINTEREST INCOME
Service charges		64,000			63,000			130,000			123,000
Gains on sales of available-for-sale securities		5,000			2,000			5,000			95,000
Gains on sales of fixed assets		-			6,000			-			4,000
Miscellaneous fees and other		105,000			137,000			270,000			290,000
Total noninterest income		174,000			208,000			405,000			512,000

NONINTEREST EXPENSES
Compensation and benefits		1,554,000			1,906,000			3,200,000			3,797,000
Occupancy, equipment and data processing		881,000			905,000			1,827,000			1,828,000
Marketing and business development		138,000			148,000			268,000			295,000
Professional services		385,000			270,000			624,000			435,000
FDIC Insurance		403,000			123,000			499,000			213,000
Amortization of core deposit intangible asset		99,000			87,000			198,000			174,000
Impairment or disposal of fixed assets		84,000			-			84,000			-
Losses on sales and impairment of repossessed property		65,000			-			77,000			-
Other operating expenses		357,000			340,000			628,000			464,000
Total noninterest expenses		3,966,000			3,656,000			7,405,000			7,206,000

LOSS BEFORE INCOME TAX BENEFIT		(1,515,000	)		(635,000	)		(2,228,000	)		(761,000	)

INCOME TAX BENEFIT		(569,000	)		(235,000	)		(833,000	)		(277,000	)

NET LOSS	$	(946,000	)	$	(400,000	)	$	(1,395,000	)	$	(484,000	)

NET LOSS PER COMMON SHARE
Basic and Diluted	$	(0.16	)	$	(0.07	)	$	(0.24	)	$	(0.08	)

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and Diluted		5,843,362			5,843,362			5,843,362			5,843,362

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(Unaudited)

							Retained			Accumulated
					Additional		Earnings			Other			Total
	Common Stock				Paid-In		(Accumulated			Comprehensive			Shareholders'
	Shares		Amount		Capital		Deficit)			Loss			Equity
December 31, 2007		5,843,362	$	11,687,000	$	29,708,000	$	1,949,000		$	(36,000	)	$	43,308,000
Comprehensive loss:
Net loss – 2008		-		-		-		(484,000	)		-			(484,000	)
Change in net unrealized loss on
securities available-for-sale, net
of reclassification adjustment
and tax effects		-		-		-		-			(29,000	)		(29,000	)
Total comprehensive loss														(513,000	)
Stock compensation		-		-		23,000		-			-			23,000

June 30, 2008		5,843,362	$	11,687,000	$	29,731,000	$	1,465,000		$	(65,000	)	$	42,818,000


December 31, 2008		5,843,362	$	11,687,000	$	29,767,000	$	(14,279,000	)	$	(54,000	)	$	27,121,000
Comprehensive loss:
Net loss – 2009		-		-		-		(1,395,000	)		-			(1,395,000	)
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment
and tax effects		-		-		-		-			53,000			53,000
Total comprehensive loss														(1,342,000	)
Stock compensation		-		-		37,000		-			-			37,000

June 30, 2009		5,843,362	$	11,687,000	$	29,804,000	$	(15,674,000	)	$	(1,000	)	$	25,816,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(Unaudited)

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,395,000	)	$	(484,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		536,000			535,000
Provision for loan losses		390,000			400,000
Net amortization of purchase premium on securities		189,000			19,000
Net amortization of core deposit intangible		198,000			174,000
Stock compensation		37,000			23,000
Realized loss (gain) on sales, write down or retirement of buildings and equipment		84,000			(4,000	)
Realized loss on sales or write down of repossessed property		77,000			-
Realized gain on sales of securities available-for-sale		(5,000	)		(95,000	)
Realized gain on sales of loans held for sale		-			(8,000	)
Proceeds from sale of loans held for sale		2,000			1,009,000
Originations of loans held for sale		-			(983,000	)
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable and other assets		(1,784,000	)		154,000
Increase (Decrease) in accrued interest payable and other accrued liabilities		443,000			(56,000	)
Net cash (used in) provided by operating activities		(1,228,000	)		684,000

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale		(17,779,000	)		(3,995,000	)
Proceeds from sales of securities available-for- sale		-			5,470,000
Proceeds from maturities of securities available-for-sale		4,005,000			22,900,000
Proceeds from maturities of securities held-to-maturity		169,000			-
Proceeds from principal payments on mortgage-backed securities available-for-sale		3,431,000			1,535,000
Proceeds from principal payments on mortgage-backed securities held-to-maturity		5,369,000			990,000
Purchases of restricted stock		(219,000	)		(1,131,000	)
Proceeds from sale of restricted stock		580,000			1,586,000
Net decrease in loans		2,717,000			2,591,000
Proceeds from sales of other real estate owned		435,000			-
Proceeds from sales of equipment		-			41,000
Purchases of premises and equipment		(360,000	)		(312,000	)
Cash paid for acquisition		-			(25,000	)
Net cash (used in) provided by investing activities		(1,652,000	)		29,650,000

CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in noninterest-bearing deposits		(2,269,000	)		1,059,000
Net increase (decrease) in interest-bearing deposits		16,624,000			(18,032,000	)
Repayments of Federal Home Loan Advances		-			(9,500,000	)
Net cash provided by (used in) financing activities		14,355,000			(26,473,000	)

INCREASE IN CASH AND CASH EQUIVALENTS		11,475,000			3,861,000

CASH AND CASH EQUIVALENTS, JANUARY 1,		13,526,000			11,788,000

CASH AND CASH EQUIVALENTS, JUNE 30,	$	25,001,000		$	15,649,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash:
Interest on deposits and borrowed funds	$	4,257,000		$	5,471,000
Income taxes	$	-		$	-
Noncash investing activities:
Transfer of loans to other real estate owned	$	646,000		$	-

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

Sterling Banks, Inc. (the “Company”) is a bank holding company headquartered in Mount Laurel, NJ. Through its subsidiary, Sterling Bank (the “Bank”), the Company provides individuals, businesses and institutions with commercial and retail banking services, principally in loans and deposits. Sterling Banks, Inc. was incorporated under the laws of the State of New Jersey on February 28, 2006 for the sole purpose of becoming the holding company of the Bank.

The Bank is a commercial bank, which was incorporated on September 1, 1989, and commenced operations on December 7, 1990. The Bank is chartered by the New Jersey Department of Banking and Insurance and is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 3100 Route 38 in Mount Laurel, New Jersey and has nine other full service branches. The Bank’s primary deposit products are checking, savings and term certificate accounts, and its primary loan products are consumer, residential mortgage and commercial loans.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements and Basis of Presentation

The financial statements included herein have not been audited, except for the balance sheet at December 31, 2008, which was derived from the audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted; therefore, these financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2008. The accompanying financial statements reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature. The results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The financial statements include the accounts of Sterling Banks, Inc. and its wholly-owned subsidiary, Sterling Bank. Sterling Banks Capital Trust I is a wholly-owned subsidiary but is not consolidated because it does not meet the requirements. All significant inter-company balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from such estimates. M aterial estimates that are particularly susceptible to significant change in the near term are the determination of the allowance for loan losses and the fair value of financial instruments.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Commitments

In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and unadvanced loan commitments, which are not reflected in the accompanying financial statements. Management does not anticipate any material losses as a result of these commitments.

Contingencies

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. Management does not believe the resolution of this litigation, if any, would have a material adverse effect on the Company’s financial condition or results of operations. However, the ultimate outcome of any such matter, as with litigation generally, is inherently uncertain and it is possible that some of these matters may be resolved adversely to the Company.

Investments

The Company has identified investment securities that it has the intent and ability to hold to maturity considering all reasonably foreseeable events or conditions. The securities are classified as “held-to-maturity.” The Company has also identified investment securities that will be held for indefinite periods of time, including securities that will be used as part of the Company’s asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as “available-for-sale” and are carried at fair value, with any temporary unrealized gains or losses reported as a separate component of other comprehensive income, net of the related income tax effect.

Allowance for Losses on Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of loans in light of changes in the nature and volume of the loan portfolio, overall portfolio quality and historical experience, review of specific problem loans, adverse situations which may affect borrowers’ ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and other factors which may warrant current recognition. Such periodic assessments may, in management’s judgment, require the Bank to recognize additions or reductions to the allowance.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to recognize additions or reductions to the allowance based on their judgments of information available to them at the time of their examination. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage and consumer loans for impairment disclosures.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment and definite lived intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. During the six months ended June 30, 2009, impairment was identified on our former Gaither Road location that is held for sale and a write down of $82,000 was recorded. No impairments occurred during the six months ended June 30, 2008.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Core Deposit Intangible

Core deposit intangibles arise from purchase business combinations. On March 16, 2007, we completed our merger with the former Farnsworth Bancorp, Inc. We were deemed to be the purchaser for accounting purposes and thus recognized a core deposit intangible asset in connection with the merger. The establishment and subsequent amortization of this intangible asset requires several assumptions including, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives. If the value of the core deposit intangible or the customer relationship intangible is determined to be less than the carrying value in future periods, a write down would be taken through a charge to our earnings. The most significant element in evaluation of these intangibles is the attrition rate of the acquired deposits. If such attrition rate accelerates from that which we expected, the intangible is reduced by a charge to earnings. The attrition rate related to deposit flows is influenced by many factors, the most significant of which are alternative yields for deposits available to customers and the level of competition from other financial institutions and financial services companies. In connection with our annual impairment testing in the fourth quarter of 2008, we reassessed the carrying value of the core deposit intangible, determined that the value of the core deposit relationship had declined below its carrying value, and charged earnings for $475,000 in the fourth quarter of 2008. We further reassessed the estimated useful life and determined that with changes in the marketplace, a remaining useful life of six years would be more appropriate.

Income Taxes

Deferred income taxes arise principally from the difference between the income tax basis of an asset or liability and its reported amount in the financial statements, at the statutory income tax rates expected to be in effect when the taxes are actually paid or recovered. Deferred income tax assets are reduced by a valuation allowance when, based on the weight of evidence available, it is more likely than not that some portion of the net deferred tax assets may not be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. It is the Company’s policy to recognize interest and penalties related to the unrecognized tax liabilities within income tax expense in the statements of operations.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

On January 1, 2009, Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) EITF 03-6-1 Share Based Payments and Earnings Per Share (“EPS”) became effective. According to the FSP EITF, unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities under Financial Accounting Standards ("FAS") No. 128. As such, they should be included in the computation of basic EPS using the two class method. At June 30, 2009 the Company did not have any shares which were considered participating securities under FAS No. 128.

In April 2009, the FASB issued three amendments to the fair value measurement, disclosure and other-than-temporary impairment standards:

·	FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

·	FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments

·	FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

These amendments were in response to concerns raised by constituents, the mark-to-market study conducted for Congress by the Securities and Exchange Commission (SEC), and recent hearings held by the U.S. House of Representatives on mark-to-market accounting. Each of these accounting standards is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted these FSPs as of April 1, 2009.

FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

FSP FAS 157-4 provides additional guidance on: a) determining when the volume and level of activity for the asset or liability has significantly decreased; b) identifying circumstances in which a transaction is not orderly; and c) understanding the fair value measurement implications of both (a) and (b). This FSP requires several new disclosures, including the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, in both interim and annual periods. Adoption of this FSP did not have a significant impact on the Company’s financial position or results of operations.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

FSP FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments

FSP FAS 115-2 provides new guidance on the recognition and presentation of an other-than-temporary impairment (“OTTI”) and requires additional disclosures. The recognition provisions within FSP FAS 115-2 apply only to our debt securities classified as available-for-sale and held-to-maturity, while the presentation and disclosure requirements of FSP FAS 115-2 apply to both our debt and equity securities. An impaired debt security will be considered other-than-temporarily impaired if we have the intent to sell or it more likely than not we will be required to sell prior to recovery of the amortized cost. In these situations the OTTI recognized in net income (loss) is equal to difference between amortized cost and fair value. If we do not expect recovery of the entire cost basis, even if we have no intention to sell the security, it will be considered an OTTI as well. In this situation FSP FAS 115-2 requires we recognize OTTI by separating the loss between the amount representing the credit loss and the amount relating to other factors. Credit losses will be recognized in net income and losses relating to other factors will be recognized in other comprehensive income (“OCI”). FSP FAS 115-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 115-2 requires a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption with a corresponding adjustment to accumulated OCI for that portion representing losses related to factors other than credit quality. We adopted FSP FAS 115-2 effective April 1, 2009. The change in accounting principle had no impact on the consolidated financial statements. The adoption effects of this new FSP are depicted in Note 3 – Investment Securities .

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

FSP FAS 107-1 and APB 28-1 require disclosures about the fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements. Fair value information along with the significant assumptions used to estimate fair value must be disclosed. The adoption effects of this new FSP are depicted in Note 8 – Fair Value.

FASB Statement No. 165, Subsequent Events

In May 2009, the FASB issued Statement No. 165, Subsequent Events, which the Company adopted as of June 30, 2009. This Statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued (i.e., complete in a form and format that complies with generally accepted accounting principles (GAAP) and approved for issuance). However, Statement No. 165 does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. There are two types of subsequent events to be evaluated under this Statement:

Recognized subsequent events - An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.

Non-recognized subsequent events - An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but that arose after the balance sheet date but before financial statements are issued or are available to be issued. Some non-recognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity must disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Statement No. 165 also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date - that is, whether that date represents the date the financial statements were issued or were available to be issued.

This Statement applies to both interim financial statements and annual financial statements. Statement No. 165 is effective for interim and annual periods ending after June 15, 2009, and should be applied prospectively. Management believes that Statement No. 165 will not result in significant changes in the subsequent events that the Company reports - either through recognition or disclosure - in its financial statements.

Accordingly, management has evaluated subsequent events through August 19, 2009, the date the financial statements were issued and has determined that, other than that which has been reported in Note 10 to the consolidated financial statements, no other recognized or non-recognized subsequent events warranted inclusion or disclosure in the interim financial statements as of June 30, 2009.

NOTE 3. INVESTMENT SECURITIES

The following is a summary of the Company's investment in available-for-sale and held-to-maturity securities as of June 30, 2009:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale
U.S. Government agencies and corporations	$	8,096,000	$	48,000	$	(53,000	)	$	8,091,000
Residential mortgage-backed securities		21,430,000		282,000		(163,000	)		21,549,000
Municipal securities		4,941,000		3,000		(118,000	)		4,826,000
Total securities available-for-sale	$	34,467,000	$	333,000	$	(334,000	)	$	34,466,000
Held-to-maturity
U.S. Government agencies and corporations	$	100,000	$	-	$	-		$	100,000
Residential mortgage-backed securities		14,124,000		254,000		-			14,378,000
Total securities held-to-maturity	$	14,224,000	$	254,000	$	-		$	14,478,000

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. INVESTMENT SECURITIES (continued)

The Company’s investment securities as of December 31, 2008 were as follows:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale
U.S. Government agencies and corporations	$	3,995,000	$	33,000	$	-		$	4,028,000
Residential mortgage-backed securities		15,250,000		76,000		(29,000	)		15,297,000
Municipal securities		4,941,000		-		(169,000	)		4,772,000
Total securities available-for-sale	$	24,186,000	$	109,000	$	(198,000	)	$	24,097,000
Held-to-maturity
U.S. Government agencies and corporations	$	100,000	$	-	$	-		$	100,000
Residential mortgage-backed securities		19,784,000		129,000		(21,000	)		19,892,000
Total securities held-to-maturity	$	19,884,000	$	129,000	$	(21,000	)	$	19,992,000

The amortized cost and estimated market value of debt securities classified as available-for-sale and held-to-maturity at June 30, 2009 by contractual maturities are shown below. Expected maturities may differ from contractual maturities for mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties; therefore, these securities are not included in the maturity categories in the following maturity schedule.

	June 30, 2008
	Available-for-sale				Held-to-maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Maturing within one year	$	-	$	-	$	100,000	$	100,000
Maturing after one year, but within five years		-		-		-		-
Maturing after five years, but within ten years		10,128,000		10,103,000		-		-
Maturing after ten years		2,909,000		2,814,000		-		-
Residential mortgage-backed securities		21,430,000		21,549,000		14,124,000		14,378,000
Total securities	$	34,467,000	$	34,466,000	$	14,224,000	$	14,478,000

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. INVESTMENT SECURITIES (continued)

The following table shows the gross unrealized losses and fair value of Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009:

	Continuous Unrealized Losses					Continuous Unrealized Losses
	Existing for Less Than 12 Months					Existing for 12 Months or More
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
Available-for-sale:
U.S. Government agencies and corporations	$	4,043,000	$	(53,000	)	$	-	$	-
Residential mortgage-backed securities		5,538,000		(163,000	)		-		-
Municipal securities		3,482,000		(77,000	)		704,000		(41,000	)
		13,063,000		(293,000	)		-		(41,000	)
Held-to-maturity:
Residential mortgage-backed securities		-		-			-		-
Total temporarily impaired securities	$	13,063,000	$	(293,000	)	$	704,000	$	(41,000	)

U.S. Government and Agency Obligations. The unrealized losses on the Company’s investments in U.S. Treasury obligations and direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2009.

Residential Federal Agency Mortgage-Backed Securities. The unrealized losses on the Company’s investment in federal agency mortgage-backed securities were caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2009.

Municipal Securities. The unrealized losses on the Company’s investments in municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2009.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. EARNINGS PER SHARE

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding. Shares issued during the period are weighted for the portion of the period that they were outstanding during the year. The weighted average number of common shares outstanding for the six months ended June 30, 2009 and 2008 were 5,843,362, respectively. Diluted earnings per common share consider common share equivalents (when dilutive) outstanding during each year. Shares issuable upon the exercise of stock options were not considered in the calculation of net loss per share in 2009 or 2008, as their inclusion would be anti-dilutive.

NOTE 5. STOCK-BASED EMPLOYEE COMPENSATION

The Company has a stock-based employee compensation plan and follows FASB Statement No. 123 Share-Based Payment (Revised 2004) ("FAS 123R") to account for stock options. FAS 123R requires that the Company record compensation expense equal to the fair value of all equity-based compensation over the vesting period of each award. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards.

During the six months ended June 30, 2009 and 2008, the Company did not issue any options. Compensation cost charged to operations for the six months ended June 30, 2009 and 2008 was $37,000 and $23,000, respectively.

As of June 30, 2009, there was approximately $596,000 of total unrecognized compensation cost related to share-based payments which is expected to be recognized over a weighted average period of 8.4 years. Of the 296,984 unvested options at December 31, 2008, 13,027 options vested in 2009, 1,960 options expired and 281,997 options remain unvested at June 30, 2009.

NOTE 6. COMMON STOCK

During the six months of 2009 and 2008, no stock options were exercised.

During the six months of 2009 and 2008, no cash dividends were declared or paid.

NOTE 7. CAPITAL RATIOS

The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Bank’s actual capital amounts and ratios are presented in the following tables (amounts in thousands, except percentages):

						For Capital					To Be Well
	Actual					Adequacy Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2009:

Total Capital (to Risk-Weighted Assets)	$	30,240		10.15	%	$	> 23,826		> 8.0	%	$	> 29,782		> 10.0	%
Tier I Capital (to Risk-Weighted Assets)	$	26,476		8.89	%	$	> 11,913		> 4.0	%	$	> 17,869		> 6.0	%
Tier I Capital (to Average Assets)	$	26,476		6.79	%	$	> 15,603		> 4.0	%	$	> 19,504		> 5.0	%

						For Capital					To Be Well
	Actual					Adequacy Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2008:

Total Capital (to Risk-Weighted Assets)	$	32,134		10.52	%	$	> 24,428		> 8.0	%	$	> 30,535		> 10.0	%
Tier I Capital (to Risk-Weighted Assets)	$	28,258		9.25	%	$	> 12,214		> 4.0	%	$	> 18,321		> 6.0	%
Tier I Capital (to Average Assets)	$	28,258		7.21	%	$	> 15,675		> 4.0	%	$	> 19,594		> 5.0	%

NOTE 8. FAIR VALUE

Effective January 1, 2008, the Company adopted FAS 157, Fair Value Measurement , which provides a framework for measuring fair value under generally accepted accounting principles. FAS 157 applies to all financial instruments that are being measured and reported on a fair value basis. Nonfinancial assets and nonfinancial liabilities that are recognized and disclosed at fair value on a nonrecurring basis under FAS 157 were delayed under FSP No. 157-2 “Effective date of FASB Statement No. 157” to fiscal years beginning after November 15, 2008. Accordingly, effective January 1, 2009, the Company began disclosing the fair value of Other Real Estate Owned (OREO) previously deferred under the provisions of this FSP.

FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.

Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs

·	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Generally, this includes debt and equity securities and derivative contracts that are traded in an active exchange market (i.e. New York Stock Exchange), as well as certain US Treasury and US Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

Level 2 Inputs

·	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, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

·	Generally, this includes US Government and agency mortgage-backed securities, corporate debt securities, derivative contracts and loans held for sale.

Level 3 Inputs

·	Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

·	These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis

Certain assets and liabilities are measured at fair value on a recurring basis. The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the SFAS 157 hierarchy (as described above) as of the dates listed.

June 30, 2009	Level 1		Level 2		Level 3		Total
Financial Assets
Investment securities available-for-sale
U.S. Government agencies and corporations	$	-	$	8,091,000	$	-	$	8,091,000
Mortgage-backed securities	$	-	$	21,549,000	$	-	$	21,549,000
Municipal securities	$	-	$	4,826,000	$	-	$	4,826,000

December 31, 2008	Level 1		Level 2		Level 3		Total
Financial Assets
Investment securities available-for-sale
U.S. Government agencies and Corporations	$	-	$	4,028,000	$	-	$	4,028,000
Mortgage-backed securities	$	-	$	15,297,000	$	-	$	15,297,000
Municipal securities	$	-	$	4,772,000	$	-	$	4,772,000

Securities Portfolio

The fair value of securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers. The fair value of securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). When listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or significant management judgment or estimation based upon unobservable inputs due to limited or no market activity of the instrument (Level 3).

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is impairment). The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the SFAS 157 hierarchy (as described above) as of the dates listed.

June 30, 2009	Level 1		Level 2		Level 3		Total
Financial Assets
Impaired loans	$	-	$	-	$	23,504,000	$	23,504,000

December 31, 2008	Level 1		Level 2		Level 3		Total
Financial Assets
Impaired loans	$	-	$	-	$	14,892,000	$	14,892,000

June 30, 2009	Level 1		Level 2		Level 3		Total
Non-Financial Assets
Other real estate owned	$	-	$	-	$	1,633,000	$	1,633,000

Impaired Loans

The fair value of impaired loans is based on the loan’s fair value of the collateral for collateral dependent loans. The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets. The valuation allowance for impaired loans at June 30, 2009 was $1,639,000. During the six months ended June 30, 2009, the valuation allowance for impaired loans decreased $1,163,000 from $2,802,000 at December 31, 2008 as a result of loans being collected or charged off in full or in part.

Other Real Estate Owned

Other real estate owned (OREO) fair value was determined using appraisals which may be discounted based on management’s review and changes in market conditions (Level 3).

Fair Value of Financial Instruments (SFAS 107 Disclosure)

SFAS 107, Disclosures About Fair Value of Financial Instruments , requires the disclosure of the estimated fair value of financial instruments, including those financial instruments for which the Company did not elect the fair value option. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.

The following methods and assumptions were used to estimate the fair value under FAS No. 107 of each class of financial instruments not previously discussed.

Cash and Cash Equivalents : The carrying amounts of cash and due from banks and federal funds sold approximate fair value.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

Investment Securities Held-to-Maturity : The fair value of securities held-to-maturity is based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. These financial instruments are not carried at fair value.

Restricted Stock: The carrying value of restricted stock approximates fair value based on redemption provisions.

Loans (except collateral dependent impaired loans) : Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage and other consumer. Each loan category is further segmented into groups by fixed and adjustable rate interest terms and by performing and non-performing categories.

The fair value of performing loans is typically calculated by discounting scheduled cash flows through their estimated maturity, using estimated market discount rates that reflect the credit and interest rate risk inherent in each group of loans. The estimate of maturity is based on contractual maturities for loans within each group, or on the Company’s historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic conditions.

Fair value for nonperforming loans that are not collateral dependent is based on the discounted value of expected future cash flows, discounted using a rate commensurate with the risk associated with the likelihood of repayment.

For all loans, assumptions regarding the characteristics and segregation of loans, maturities, credit risk, cash flows, and discount rates are judgmentally determined using specific borrower and other available information.

The carrying amounts reported for loans held for sale approximates fair value.

Accrued Interest Receivable and Payable : The fair value of interest receivable and payable is estimated to approximate the carrying amounts.

Deposits : The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.

Borrowed Funds : The fair value of borrowings is calculated by discounting scheduled cash flows through the estimated maturity date using current market rates.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

Estimated Fair Values: The estimated fair values of the Company’s material financial instruments as of June 30, 2009 are as follows:

	Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	9,372,000	$	9,372,000
Federal funds sold	$	15,629,000	$	15,629,000
Investment securities, held-to-maturity	$	14,224,000	$	14,478,000
Investment securities, available-for-sale	$	34,466,000	$	34,466,000
Restricted stock	$	2,087,000	$	2,087,000
Loans, net of allowance for loan losses	$	293,988,000	$	295,232,000
Accrued interest receivable	$	1,328,000	$	1,328,000
Financial Liabilities:
Noninterest-bearing demand deposits	$	33,604,000	$	33,604,000
Interest-bearing deposits	$	309,345,000	$	302,438,000
Borrowed funds	$	22,186,000	$	19,277,000
Accrued interest payable	$	509,000	$	509,000

The estimated fair values of the Company’s material financial instruments as of December 31, 2008 are as follows:

	Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	13,054,000	$	13,054,000
Federal funds sold	$	472,000	$	472,000
Investment securities, held-to-maturity	$	19,884,000	$	19,992,000
Investment securities, available-for-sale	$	24,097,000	$	24,097,000
Restricted stock	$	2,448,000	$	2,448,000
Loans held for sale	$	2,000	$	2,000
Loans, net of allowance for loan losses	$	297,095,000	$	299,648,000
Accrued interest receivable	$	1,740,000	$	1,740,000
Financial Liabilities:
Noninterest-bearing demand deposits	$	35,873,000	$	35,873,000
Interest-bearing deposits	$	292,721,000	$	288,303,000
Borrowed funds	$	22,186,000	$	19,340,000
Accrued interest payable	$	427,000	$	427,000

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, and, as the fair value for these financial instruments is not material, these disclosures are not included above.

Limitations : Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount which could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are provided for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates, and have generally not been considered in the Company’s estimates.

NOTE 9. LOANS

The composition of net loans as of June 30, 2009 and December 31, 2008 are as follows:

	June 30, 2009			December 31, 2008
Commercial, Financial and Agricultural	$	30,897,000		$	32,115,000
Real Estate - Construction		56,805,000			68,278,000
Real Estate – Mortgage		158,171,000			147,435,000
Installment loans to individuals		50,473,000			53,827,000
Lease Financing		5,320,000			4,636,000
Unrealized Loan Fees		(637,000	)		(665,000	)
Total loans		301,029,000			305,626,000
Less: Allowance for loan losses		(7,041,000	)		(8,531,000	)
Net loans	$	293,988,000		$	297,095,000

Summaries of information pertaining to impaired and nonaccrual loans are as follows:

	June 30, 2009		December 31, 2008
Impaired loans without a valuation allowance	$	15,286,000	$	5,813,000
Impaired loans with a valuation allowance		8,217,000		11,881,000
Total impaired loans including troubled debt restructurings		23,503,000		17,694,000
Valuation allowance related to impaired loans		1,639,000		2,802,000
Average investment in impaired loans		20,540,000		10,348,000
Total non-accrual loans (included in impaired loans)		15,703,000		9,898,000

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is calculated under FAS No. 5, Accounting for Contingencies and FAS No. 114, Accounting by Creditors for Impairment of a Loan . Nonperforming and impaired loans are evaluated under FAS No. 114 using either the fair value of collateral or present value of future cash flow methods. The Company evaluates all nonperforming and impaired loans using the fair value of collateral method since all non-performing and impaired loans are collateralized by real estate. When a loan is evaluated using this method, a new appraisal of the primary and or secondary collateral is obtained and compared to the outstanding balance of the loans. A specific reserve is added to the allowance for loan losses if a collateral shortfall exists. On December 31, 2008, the amount of the specific reserve was $2,802,000 which was included in the total allowance for loan losses of $8,531,000. On June 30, 2009, the Company charged off loans or portions of loans totaling $1,671,000 from this specific reserve, made a provision of $390,000 and made other minor adjustments of $146,000, including changes in qualitative factors, resulting in an allowance for loan losses balance of $7,041,000.

The following table shows changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category and additions to the allowance that have been charged to expenses for the periods presented.

	For the three months ended June 30,
	2009			2008
Balance at beginning of period	$	8,380,000		$	2,671,000
Charge-offs:
Commercial, Financial, Agricultural		(170,000	)		(32,000	)
Real Estate – Construction		(1,351,000	)		-
Real Estate – Mortgage		(150,000	)		(1,000	)
Consumer Installment loans		(59,000	)		(76,000	)
Lease Financing		-			-
		(1,730,000	)		(109,000	)
Recoveries:
Commercial, Financial, Agricultural		1,000			1,000
Real Estate – Construction		-			-
Real Estate – Mortgage		-			3,000
Consumer Installment loans		-			8,000
Lease Financing		-			-
		1,000			12,000
Net recoveries (charge-offs)		(1,729,000	)		(97,000	)
Provision for loan loss		390,000			400,000
Balance at end of period	$	7,041,000		$	2,974,000

Average loans outstanding (1)	$	302,381,000		$	307,829,000

Net charge-offs as a percentage of average loans		0.57	%		0.03	%

(1) Includes loans held for sale and non-accruing loans

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. ALLOWANCE FOR LOAN LOSSES (continued)

	For the six months ended June 30,
	2009			2008
Balance at beginning of period	$	8,531,000		$	2,891,000
Charge-offs:
Commercial, Financial, Agricultural		(238,000	)		(32,000	)
Real Estate – Construction		(1,434,000	)		-
Real Estate – Mortgage		(150,000	)		(221,000	)
Consumer Installment loans		(62,000	)		(76,000	)
Lease Financing		-			-
		(1,884,000	)		(329,000	)
Recoveries:
Commercial, Financial, Agricultural		1,000			1,000
Real Estate – Construction		-			-
Real Estate – Mortgage		1,000			3,000
Consumer Installment loans		2,000			8,000
Lease Financing		-			-
		4,000			12,000
Net charge-offs		(1,880,000	)		(317,000	)
Provision for loan loss		390,000			400,000
Balance at end of period	$	7,041,000		$	2,974,000

Average loans outstanding (1)	$	303,378,000		$	309,503,000

Net charge-offs as a percentage of average loans		0.62	%		0.10	%

(1) Includes loans held for sale and non-accruing loans

The charge offs on June 30, 2009, were a result of the Company analyzing its impaired loans with collateral deficiencies and charging off portions of loans not covered by the Company’s collateral as a result of new real estate appraisals obtained. Even though a portion of individual loans were charged off, management will continue to obtain and convert the collateral and pursue the borrower(s) for full collection of the entire loan, including the partial charge off amount.

NOTE 11. OTHER COMPREHENSIVE INCOME (LOSS)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. OTHER COMPREHENSIVE INCOME (LOSS) (continued)

The components of other comprehensive income (loss) and related tax effects for the six months ended June 30, 2009 and 2008 are as follows:

	For the three months ended June 30, 2009			For the three months ended June 30, 2008			For the six months ended June 30, 2009			For the six months ended June 30, 2008
Unrealized holding gains (losses) on available-for-sale securities		$(365,000	)		$(276,000	)		$93,000			$47,000
Reclassification adjustment for gains realized in income		(5,000	)		(2,000	)		(5,000	)		(95,000	)
Net unrealized gains (losses)		(370,000	)		(278,000	)		88,000			(48,000	)
Tax effect		148,000			111,000			(35,000	)		19,000
Net-of-tax amount		$(222,000	)		$(167,000	)		$53,000			$(29,000	)

NOTE 12. SUBSEQUENT EVENT

On July 28, 2009, the Company and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia and the New Jersey Department of Banking and Insurance (collectively, the “Regulators”). The Agreement is based on findings of the Regulators identified in an examination of the Bank that commenced on January 5, 2009.

Under the terms of the Agreement, the Bank agreed, among other things, to engage, within 30 days of the Agreement, an independent consultant acceptable to the Regulators to assess the Bank’s staffing needs and the qualifications and performance of all senior executive officers of the Bank and to prepare a written report. Within 45 days of receipt of such report, the Bank agreed to submit to the Regulators a written management plan addressing the findings of the report. In addition, within 60 days of the Agreement, the Bank will submit to the Regulators written plans to: strengthen board oversight of the management and operation of the Bank; strengthen the Bank’s management of commercial real estate; strengthen lending and credit administration, which includes a prohibition on the capitalization of interest; improve the periodic review and grading of the Bank’s loan portfolio; improve the Bank’s position regarding past due loans, problem loans, adversely classified loans; improve the Bank’s internal audit program; maintain sufficient capital at the Bank; improve the Bank’s earnings; improve management of the Bank’s liquidity position; and correct criticisms detailed in the Regulators’ examination report of the Bank’s compliance with all federal laws relating to anti-money laundering. The Bank has also agreed to maintain an adequate allowance for loan and lease losses; charge-off or collect assets classified as “loss” in the Regulators’ examination report that have not been previously collected or charged off, and not to extend or renew any credit to or for the benefit of any borrower who is obligated to the Bank on an extension of credit that has been charged off or classified as “loss” in the Regulators’ examination report. Under the Agreement, neither the Company nor Bank is permitted to declare or pay any dividends. The Company has also agreed not to distribute any interest, principal or other sums on trust preferred securities; issue, increase or guarantee any debt; nor purchase or redeem any shares of the Company’s stock.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12. SUBSEQUENT EVENT (continued)

The Board of Directors of the Company and the Bank are also required to appoint a joint Compliance Committee to monitor and coordinate the Company’s and the Bank’s compliance with the provisions of the Agreement, obtain prior approval for the appointment of new directors, the hiring or change in responsibilities of senior executive officers, and to comply with restrictions on severance payments and indemnification payments to institution affiliated parties. Failure to comply with the provisions of the Agreement could subject the Company and/or the Bank to additional enforcement actions. We believe that the Company and or the Bank have already implemented or are acting in accordance with most of the requirements of the Agreement, and we intend to take such actions as may be necessary to enable the Company and or the Bank to comply with the remaining requirements of the Agreement. However, there can be no assurance that the Company and or the Bank will be able to comply fully with the provisions of the Agreement, or that efforts to comply with the Agreement will not have adverse effects on the operations and financial condition of the Company or the Bank.

The Agreement does not affect the Bank’s ability to continue to conduct its banking business with customers in a normal fashion. The Bank’s deposits will remain insured by the FDIC to the maximum limits allowed by law. The Agreement will remain effective and enforceable until stayed, modified, terminated or suspended in writing by the Regulators.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The Company may from time to time make written or oral “forward-looking statements”, including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the effect that maintaining regulatory capital requirements could have on the growth of the Company; inflation; changes in prevailing short term and long term interest rates; national and global liquidity of the banking system; changes in loan portfolio quality; adequacy of loan loss reserves; changes in the rate of deposit withdrawals; changes in the volume of loan refinancings; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance), including the increase in the cost of FDIC insurance; technological changes; changes in consumer spending and saving habits; changes in the local competitive landscape, including the acquisition of local and regional banks in the Company’s geographic marketplace; possible impairment of intangible assets, specifically core deposit premium from the Company’s acquisition of Farnsworth; the ability of our borrowers to repay their loans; the uncertain credit environment in which the Company operates; the ability of the Company to manage the risk in its loan and investment portfolios; the ability of the Company to reduce noninterest expenses and increase net interest income, its growth, results of possible collateral collections and subsequent sales; and the success of the Company at managing the risks resulting from these factors.

The Company cautions that the above-listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Bank.

Readers should carefully review the risk factors described in other reports the Company files from time to time with the Securities and Exchange Commission, including the Company’s Form 10-K for the year ended December 31, 2008, and its subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.

General

Our principal source of revenue is net interest income, which is the difference between the interest income from our earning assets and the interest expense of our deposits and borrowings. Interest-earning assets consist principally of loans, investment securities and federal funds sold, while our interest-bearing liabilities consist primarily of deposits and borrowings. Our net income is also affected by our provision for loan losses, noninterest income and noninterest expenses, which include salaries, benefits, occupancy costs and charges relating to non-performing and other classified assets.

Consolidated Results of Operations

Three Months Ended June 30, 2009 and 2008

(Unaudited)

The following discussion compares the results of operations for the three months ended June 30, 2009 (unaudited) to the results of operations for the three months ended June 30, 2008 (unaudited). This discussion should be read in conjunction with the accompanying financial statements (unaudited) and related notes, as well as statistical information included in this Form 10-Q.

Net Loss. For the three months ended June 30, 2009, the net loss totaled $946,000, compared to net loss of $400,000 for the three months ended June 30, 2008. Decreased earnings for the three months ended June 30, 2009 were attributable primarily to a decrease in net interest income after provision for loan losses of $536,000, a decrease in noninterest income of $34,000 and an increase in noninterest expenses of $310,000. Basic and diluted loss per share for the three months ended June 30, 2009 and 2008 totaled $0.16 and $0.07, respectively.

Net Interest Income. Net interest income for the three months ended June 30, 2009 totaled $2,667,000, a decrease of 17.0% from $3,213,000 for the three months ended June 30, 2008. The net interest margin for the three months ended June 30, 2009 was 3.01%, compared to 3.75% for the comparable period of 2008. This decrease is primarily as a result of lost interest income on nonaccrual loans of approximately $328,000 and a decrease in the net interest margin of $307,000 in 2009.

Interest income decreased by $803,000 for the three months ended June 30, 2009 from the same period in 2008, attributable to a 113 basis point decrease in the yield on average earning assets from 6.53% in 2008 to 5.40% in 2009, partially offset by an increase in average interest earning assets of $11.2 million. Average interest earning loans outstanding decreased by $15.0 million while average investment securities increased $22.1 million and due from banks and federal funds sold increased $4.1 million. The decrease in average interest earning loans outstanding is attributable primarily to an increase in average nonaccrual loans of $9.5 million, an increase in repossessed property of $1.5 million and normal monthly payments and/or payoffs, while the increase in average investment securities and federal funds sold was attributable to management’s efforts to decrease the Bank’s general level of risk on the balance sheet. Interest expense decreased by $257,000 from the same time period in 2008. Average interest-bearing liabilities increased by $27.2 million, which was attributable an increase in borrowed funds of $15.0 million in an effort to increase the Bank’s net interest income by borrowing at a lower cost and investing in higher yielding assets and an increase in interest bearing deposits. The average rate paid on interest-bearing liabilities decreased to 2.55% for the three months ended June 30, 2009 from 3.12% for the same period of 2008.

Provision for Loan Losses. Provision for loan losses was $390,000 and $400,000 for the three months ended June 30, 2009 and 2008.

Noninterest Income . Noninterest income decreased $34,000, or 16.3%, for the three months ended June 30, 2009 to $174,000 compared to $208,000 for the same period of 2008, primarily in fee income on mortgage originations as compared to the same period in 2008.

Noninterest Expenses . For the three months ended June 30, 2009, noninterest expenses increased by $310,000, or 8.5%, to $3,966,000, compared to $3,656,000 for the same period of 2008. Increases in FDIC insurance of $280,000, including a one time special assessment of $183,000, in loan workout and repossessed property expenses of $219,000, a partial write down on the Company’s former Gaither Road office of $82,000 and losses on sales of or partial write downs on repossessed property of $65,000, were partially offset by decreases in personnel costs of $352,000, reflecting bonuses expensed in 2008 and the effect of staff reductions as a result of the closure of one our branch locations in November 2008.

Income Taxes . We recorded an income tax benefit of $569,000 on loss before taxes of $1,515,000 for the three months ended June 30, 2009, resulting in an effective tax rate of 37.6% for the 2009 period, compared to income tax benefit of $235,000 on loss before taxes of $635,000 for the same period of 2008, resulting in an effective tax rate of 37.0% for the 2008 period. The fluctuation in the effective tax rate is due to the amount and type of permanent tax difference between periods.

Consolidated Results of Operations

Six Months Ended June 30, 2009 and 2008

(Unaudited)

The following discussion compares the results of operations for the six months ended June 30, 2009 (unaudited) to the results of operations for the six months ended June 30, 2008 (unaudited). This discussion should be read in conjunction with the accompanying financial statements (unaudited) and related notes, as well as statistical information included in this Form 10-Q.

Net Loss. For the six months ended June 30, 2009, the net loss totaled $1,395,000, compared to net loss of $484,000 for the six months ended June 30, 2008. Decreased earnings for the six months ended June 30, 2009 were attributable primarily to a decrease in net interest income after provision for loan losses of $1,161,000, a decrease in noninterest income of $107,000 and an increase in noninterest expenses of $199,000. Basic and diluted loss per share for the six months ended June 30, 2009 and 2008 totaled $0.24 and $0.08, respectively.

Net Interest Income. Net interest income for the six months ended June 30, 2009 totaled $5,162,000, a decrease of 18.5% from $6,333,000 for the six months ended June 30, 2008. The net interest margin for the six months ended June 30, 2009 was 2.94%, compared to 3.62% for the comparable period of 2008. This decrease is primarily as a result of lost interest income on nonaccrual loans of approximately $886,000 in 2009.

Interest income decreased by $2,127,000 for the six months ended June 30, 2009 from the same period in 2008, attributable to a 125 basis point decrease in the yield on average earning assets from 6.65% in 2008 to 5.40% in 2009, partially offset by an increase in average interest earning assets of $3.1 million. Average interest earning loans outstanding decreased by $13.1 million while average investment securities increased $11.5 million and due from banks and federal funds sold increased $4.7 million. The decrease in average interest earning loans outstanding is attributable primarily to an increase in average nonaccrual loans of $7.0 million, an increase in repossessed property of $1.4 million and normal monthly payments and/or payoffs, while the increase in average investment securities and federal funds sold was attributable to management’s efforts to decrease the Bank’s general level of risk on the balance sheet. Interest expense decreased by $956,000 from the same time period in 2008. Average interest-bearing liabilities increased by $9.3 million, which was attributable an increase in borrowed funds in an effort to increase the Bank’s net interest income by borrowing at a lower cost and investing in higher yielding assets and an increase in interest bearing deposits. The average rate paid on interest-bearing liabilities decreased to 2.64% for the six months ended June 30, 2009 from 3.39% for the same period of 2008.

Provision for Loan Losses. Provision for loan losses was $390,000 and $400,000 for the six months ended June 30, 2009 and 2008.

Noninterest Income . Noninterest income decreased $107,000, or 20.9%, for the six months ended June 30, 2009 to $405,000 compared to $512,000 for the same period of 2008, primarily as a result of a and a decrease in gains on sales of available-for-sale securities of $90,000 in 2009, compared to the same period in 2008.

Noninterest Expenses . For the six months ended June 30, 2009, noninterest expenses increased by $199,000, or 2.8%, to $7,405,000, compared to $7,206,000 for the same period of 2008. Increases in FDIC insurance of $286,000, including a one time special assessment of $183,000, in loan workout and repossessed property expenses of $304,000, a partial write down on the Company’s former Gaither Road office of $82,000 and losses on sales of or partial write downs on repossessed property of $77,000, were partially offset by decreases in personnel costs of $597,000, reflecting bonuses expensed in 2008 and the effect of staff reductions as a result of the closure of one our branch locations in November 2008.

Income Taxes . We recorded an income tax benefit of $833,000 on loss before taxes of $2,228,000 for the six months ended June 30, 2009, resulting in an effective tax rate of 37.4% for the 2009 period, compared to income tax benefit of $277,000 on loss before taxes of $761,000 for the same period of 2008, resulting in an effective tax rate of 36.4% for the 2008 period. The fluctuation in the effective tax rate is due to the amount and type of permanent tax difference between periods.

Consolidated Financial Condition

At June 30, 2009 and December 31, 2008

(Unaudited)

The following discussion compares the financial condition at June 30, 2009 (unaudited) to the financial condition at December 31, 2008. This discussion should be read in conjunction with the accompanying financial statements (unaudited) and related notes as well as statistical information included in this Form 10-Q.

Total Assets. Total assets increased $13.5 million, or 3.6%, to $392.6 million at June 30, 2009, compared to $379.1 million at December 31, 2008. This was due to management’s efforts to increase the Bank’s net interest margin and liquidity.

Loans. Loans outstanding decreased $4.6 million, or 1.5%. The decrease in loans was due primarily to normal contractual loan payments and/or payoffs in the loan portfolio and a decrease in originations of residential mortgage construction loans.

Allowance for Loan Lo sses. The allowance for loan losses was $7.0 million at June 30, 2009 as compared to $8.5 million at December 31, 2008. This decline was due primarily to the charging off of certain loans that were impaired. The ratio of the allowance for loan losses to total loans was 2.3% and 2.8% at June 30, 2009 and December 31, 2008, respectively. The Company’s management has considered nonperforming assets and other assets of concern in establishing the allowance for loan losses. The Company continues to monitor its allowance for possible loan losses and will make future additions or reductions in light of the level of loans in its portfolio and as economic conditions dictate.

The table below recaps loans accruing but past due 90 days or more, non-accrual loans, OREO (Other Real Estate Owned), and troubled debt restructurings as of the dates listed.

	June 30, 2009			December 31, 2008
Restructured loans:
Real Estate – Construction	$	3,409,000		$	642,000
Real Estate – Mortgage		915,000			-
Total restructured loans		4,324,000			642,000
Loans accruing, but past due 90 days or more:
Commercial, Financial and Agricultural		75,000			92,000
Real Estate – Construction		1,003,000			2,360,000
Real Estate – Mortgage		634,000			178,000
Consumer Installment loans		56,000			77,000
Total loans accruing, but past due 90 days or more		1,768,000			2,707,000
Nonaccrual Loans:
Commercial, Financial and Agricultural		3,000			-
Real Estate – Construction		14,425,000			9,840,000
Real Estate – Mortgage		1,275,000			55,000
Total nonaccrual loans		15,703,000			9,895,000
Total nonperforming loans		21,795,000			13,244,000
Other Real Estate Owned		1,569,000			923,000
Total nonperforming assets	$	23,364,000		$	14,167,000
Non-performing loans/Total loans (1)		7.24	%		4.33	%
Non-performing assets/Total assets		5.95	%		3.74	%
Allowance for loan losses/Total non-performing loans		32.31	%		64.41	%

(1) Includes loans held for sale.

During 2009, to conform to bank regulatory reporting requirements and general practices within the banking industry for impaired collateral dependent loans where repayment is expected solely from the underlying collateral, we reduced the carrying value through a partial charge-off of certain loans as shown in the table below:

Real Estate:	Loan Balance		Direct charge-off		Adjusted Loan Balance		% Charged-off
Construction	$	9,242,000	$	1,434,000	$	7,808,000		15.52	%
Mortgage		150,000		150,000		-		100.00
	$	9,392,000	$	1,584,000	$	7,810,000		16.87	%

The current level of the allowance for loan losses is the result of management’s assessment of the risks within the portfolio based on the information revealed in credit monitoring processes. The Company utilizes a risk-rating system on all commercial, business, agricultural, construction and multi-family and commercial real estate loans, including purchased loans. A quarterly risk analysis is performed on all types of loans to establish the necessary reserve based on the estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan portfolio, historical loss experience for each loan category, previous loan experience, concentrations of credit, current economic conditions and other factors that in management’s judgment deserve consideration.

Although management believes that it uses the best information available to determine the allowance, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determinations. Future additions to the Company’s allowance may result from periodic loan, property and collateral reviews and thus cannot be predicted in advance.

The allowance for loan losses is calculated under Statement of Financial Accounting Standards (“FAS”) No. 5 and FAS No. 114. Non-performing and impaired loans are evaluated under FAS No. 114, using either the fair value of collateral or present value of future cash flows method. In our case, all non-performing and impaired loans are evaluated using the fair value of collateral method since all the non-performing and impaired loans are collateralized by real estate. When a loan is evaluated using this method, a new appraisal(s) of the primary and secondary collateral is obtained and compared to the outstanding balance of the loan. A specific reserve is added to the allowance for loan losses, if a collateral shortfall exists.

The Company had $15.7 million and $9.9 million, respectively, in loans on nonaccrual status at June 30, 2009 and December 31, 2008. This increase is the result of 25 loans that the Company placed on nonaccrual status during the first six months of 2009, less 3 that were transferred to other real estate owned. Of the 25 loans that were placed on nonaccrual status during the first six months of 2009, 15 were deemed impaired as of December 31, 2008 and no additional valuation reserve was needed for these loans during the first six months of 2009. The remaining 10 were classified impaired and put on nonaccrual status during the first six months of 2009, and required $194,000 in valuation reserves. Impaired loans increased by $5.8 million, or 33%, between December 31, 2008 and June 30, 2009; however, as a result of the collateral valuation, the FAS 114 valuation reserve decreased by $1,163,000, or 42%.

The Company utilizes a risk rating system on all loans under FAS No. 5, which takes into account loans with similar characteristics and historical loss experience related to each group. In addition, qualitative adjustments are made for levels and trends in delinquencies and nonaccruals, downturns in specific industries, changes in credit policy, experience and ability of staff, national and local economic conditions, and concentrations of credit within the portfolio. The total loans outstanding in each group of loans with similar characteristics is multiplied by the sum of the historical loss factors and the qualitative factors (for that group), to produce the allowance for loan loss balance required for all loans analyzed under FAS No. 5.

Commercial real estate loans analyzed under FAS 5 decreased $23.1 million, or 17%, between December 31, 2008 and June 30, 2009 due to payments and payoffs and loans being analyzed under FAS 114. Loans analyzed under FAS 5 under the spot lot construction portfolio had their qualitative adjustment factors increased an average of 62% due to the risk present in the performing portfolio and the historical charge off qualitative factor. As a result of the above mentioned activity during the first six months of 2009, management concluded that a provision for loan losses of $390,000 was needed during the first six months of 2009.

Deposits. Deposits totaled $342.9 million at June 30, 2009, increasing $14.3 million, or 4.4%, from the December 31, 2008 balance of $328.6 million. The increase in deposits resulted primarily from management’s efforts to increase the bank’s net interest income and liquidity.

Federal Home Loan Bank Advances and Other Borrowings. Federal Home Loan Bank advances and other borrowings totaled $22.2 million at June 30, 2009 and December 31, 2008.

Shareholders’ Equity. Shareholders’ equity decreased by $1.3 million, or 4.8%, mainly as a result of our net loss, partially offset by a decrease in other comprehensive loss.

Comparative Average Balances, Interest and Yields:

	Three Months Ended
	June 30, 2009								June 30, 2008
	Average Balance			Interest Income/Expense		Annual Yield			Average Balance			Interest Income/Expense		Annual Yield
Assets
Loans, net (1)	$	285,857,000		$	4,294,000		6.02	%	$	300,820,000		$	5,204,000		6.96	%
Investment securities (2)		51,465,000			491,000		3.83			29,384,000			314,000		4.31
Due from banks and Federal funds sold		18,348,000			6,000		0.14			14,252,000			76,000		2.14
Total interest-earning assets		355,670,000			4,791,000		5.40			344,456,000			5,594,000		6.53

Allowance for loan losses		(8,370,000	)							(2,702,000	)
Other assets		47,870,000								48,226,000
Total assets	$	395,170,000							$	389,980,000

Liabilities and shareholders’ equity
Time deposits	$	204,176,000		$	1,641,000		3.22	%	$	195,922,000		$	1,955,000		4.01	%
NOW/MMDA/savings accounts		108,018,000			217,000		0.80			104,046,000			312,000		1.20
Borrowed funds		22,186,000			266,000		4.81			7,186,000			114,000		6.40
Total interest-bearing liabilities		334,380,000			2,124,000		2.55			307,154,000			2,381,000		3.12

Noninterest-bearing demand deposits		33,175,000								38,718,000
Other liabilities		1,127,000								1,020,000
Shareholders’ equity		26,488,000								43,088,000
Total liabilities and shareholders’ equity	$	395,170,000							$	389,980,000

Net interest income				$	2,667,000							$	3,213,000

Interest rate spread (3)							2.85	%							3.41	%

Net interest margin (4)							3.01	%							3.75	%

	Six Months Ended
	June 30, 2009								June 30, 2008
	Average Balance			Interest Income/Expense		Annual Yield			Average Balance			Interest Income/Expense		Annual Yield
Assets
Loans, net (1)	$	289,389,000		$	8,505,000		5.93	%	$	302,495,000		$	10,714,000		7.12	%
Investment securities (2)		48,692,000			985,000		4.08			37,168,000			775,000		4.19
Due from banks and Federal funds sold		16,471,000			12,000		0.14			11,819,000			140,000		2.38
Total interest-earning assets		354,552,000			9,502,000		5.40			351,482,000			11,629,000		6.65

Allowance for loan losses		(8,416,000	)							(2,889,000	)
Other assets		46,293,000								55,563,000
Total assets	$	392,429,000							$	404,156,000

Liabilities and shareholders’ equity
Time deposits	$	201,745,000		$	3,336,000		3.33	%	$	205,849,000		$	4,290,000		4.29	%
NOW/MMDA/savings accounts		106,896,000			474,000		0.89			103,089,000			719,000		1.40
Borrowed funds		22,264,000			530,000		4.80			12,639,000			287,000		5.83
Total interest-bearing liabilities		330,905,000			4,340,000		2.64			321,577,000			5,296,000		3.39

Noninterest-bearing demand deposits		33,529,000								38,582,000
Other liabilities		1,284,000								769,000
Shareholders’ equity		26,711,000								43,228,000
Total liabilities and shareholders’ equity	$	392,429,000							$	404,156,000

Net interest income				$	5,162,000							$	6,333,000

Interest rate spread (3)							2.76	%							3.26	%

Net interest margin (4)							2.94	%							3.62	%

________________________________

(1) Includes loans held for sale. Also includes loan fees, which are not material. Does not include loans on nonaccrual.

(2) Yields are not on a tax-equivalent basis.

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

(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.

Liquidity

Liquidity describes our ability to meet the financial obligations that arise out of the ordinary course of business. Liquidity addresses the Company’s ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund current and planned expenditures. Liquidity is derived from loan and investment securities repayments and income from interest-earning assets. Our loan to deposit ratio was 87.8% and 93.0% at June 30, 2009 and December 31, 2008, respectively.

The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support growth. The Company also seeks to augment such deposits with longer term and higher yielding certificates of deposit. To the extent that retail deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds market. As of June 30, 2009, the Company maintained lines of credit with correspondent banks of $82.7 million. Longer term funding requirements can be satisfied through advances from the Federal Home Loan Bank.

As of June 30, 2009, the Company’s investment securities portfolio included $35.6 million of mortgage-backed securities that provide significant cash flow each month. The majority of the investment portfolio is classified as available-for-sale, is readily marketable, and is available to meet liquidity needs. The Company’s residential real estate portfolio includes loans, which are underwritten to secondary market criteria, and provide an additional source of liquidity.

Capital Resources

The Company is subject to various regulatory capital requirements. Regulatory capital is defined in terms of Tier I capital (shareholders’ equity adjusted for unrealized gains or losses on available-for-sale securities), Tier II capital (which includes a portion of the allowance for loan losses) and Total capital (Tier I plus Tier II). Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet associated risk. Regulators have also adopted minimum Tier I leverage ratio standards, which measure the ratio of Tier I capital to average assets.

At June 30, 2009, management believes that the Bank is “well capitalized,” as defined by regulatory banking agencies. The Company’s long term goal is to ensure that the Bank is “well capitalized” under the applicable regulatory standards. To this end, the Company issued $6.0 million of trust preferred securities (the “Securities”) on May 1, 2007. The Securities bear interest at 6.744% for the first five years. Subsequently, the interest rate will be adjusted quarterly based on a three month LIBOR rate plus 1.70%. The Securities are callable after five years with a final maturity of May 1, 2037. The Company contributed $4.5 million of the proceeds of the Securities to the capital of the Bank as Tier I capital. If the Company determines that there is a need to preserve capital or improve liquidity, the ability exists to defer interest payments for a maximum of five years. During the second quarter of 2009, the Company elected to defer the interest payment due. Further, pursuant to the terms of the Agreement with the Regulators, the Company will not make any interest payments in the future without prior approval from the Regulators.

Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit and standby letters of credit. The Company has also entered into long-term lease obligations for some of its premises and equipment, the terms of which generally include options to renew. The above instruments and obligations involve, to varying degrees, elements of off-balance sheet risk in excess of the amount recognized in the balance sheets. None of these instruments or obligations have or are reasonably likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

As of June 30, 2009, commitments to extend credit and unused lines of credit amounted to approximately $37.7 million and standby letters of credit were approximately $4.2 million. See Note 8 to the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for additional information regarding the Bank’s long-term lease obligations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of June 30, 2009, management of the Company, under the supervision and with the participation the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as contemplated by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009, in ensuring 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 required time periods.

Changes in Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. During the period covered by this Quarterly Report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

Not Applicable.

ITEM 1A. Risk Factors.

Not Applicable.

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

Not Applicable.

ITEM 3. Defaults Upon Senior Securities.

None.

ITEM 4. Submission of Matters to a Vote of Security Holders.

On May 12, 2008, the Bank held its annual shareholders meeting. The following matter was voted upon at the meeting and the final votes on the proposal were recorded as follows:

·	To elect twelve (12) persons to the Board of Directors of the Company to hold office for a one-year term and until their successors are duly elected and qualified;

	For	Against	Abstentions
S. David Brandt, Esq.	3,839,080	0	173,399
Jeffrey Dubrow	3,852,566	0	159,913
A. Theodore Eckenhoff	3,707,637	0	304,842
R. Scott Horner	3,712,918	0	299,561
James L. Kaltenbach, M.D.	3,834,758	0	177,721
Robert H. King	3,710,939	0	301,540
G. Edward Koenig, Jr.	3,709,126	0	303,353
John J. Maley, Jr.	3,704,442	0	308,037
Luis G. Rogers	3,855,132	0	157,347
Ronald P. Sandmeyer	3,840,573	0	171,906
Jeffrey P. Taylor	3,854,534	0	157,945
James W. Yoh, Ph.D.	3,620,529	0	391,950

All twelve members of the Board of Directors were re-elected. Subsequently, Mr. Rogers retired from the Board on July 27, 2009.

ITEM 5. Other Information.

None.

ITEM 6. Exhibits.

The following are filed as exhibits to this report:

31.1 Certification of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STERLING BANKS, INC.



Date: August 19, 2009	By:	/s/ Robert H. King
		Robert H. King
		President and Chief Executive Officer


Date: August 19, 2009	By:	/s/ R. Scott Horner
		R. Scott Horner
		Executive Vice President and Chief Financial Officer

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STBK Sterling Banks (MM)