- 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: March 31, 2010

[ ] 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 May 13, 2010: 5,843,362

STERLING BANKS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2010

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	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4T.	Controls and Procedures	34

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Reserved	34
Item 5.	Other Information	34
Item 6.	Exhibits	34

SIGNATURES		35

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	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

MARCH 31, 2010 AND DECEMBER 31, 2009

	March 31, 2010 (unaudited)			December 31, 2009
ASSETS
Cash and cash due from banks	$	10,347,000		$	10,765,000
Federal funds sold		16,101,000			4,545,000
Cash and cash equivalents		26,448,000			15,310,000

Investment securities held-to-maturity, at cost (fair value of $7,681,000 at March 31, 2010 and $9,462,000 at December 31, 2009)		7,401,000			9,198,000
Investment securities available-for-sale, at fair value		28,651,000			34,098,000
Total investment securities		36,052,000			43,296,000

Restricted stock, at cost		1,730,000			1,866,000

Loans		296,086,000			300,499,000
Less: allowance for loan losses		(9,235,000	)		(9,915,000	)
Total net loans		286,851,000			290,584,000

Core deposit intangible asset, net		1,879,000			1,978,000
Bank premises and equipment, net		7,986,000			8,164,000
Branch Property Held for Sale		505,000			505,000
Accrued interest receivable and other assets		7,707,000			8,098,000

Total assets	$	369,158,000		$	369,801,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2010 AND DECEMBER 31, 2009

	March 31, 2010 (unaudited)			December 31, 2009
LIABILITIES Deposits
Noninterest-bearing	$	34,251,000		$	30,864,000
Interest-bearing		296,598,000			299,862,000
Total deposits		330,849,000			330,726,000

Federal Home Loan Bank advances		14,250,000			14,250,000
Subordinated debentures		6,186,000			6,186,000
Accrued interest payable and other accrued liabilities		1,794,000			1,653,000

Total liabilities		353,079,000			352,815,000

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 March 31, 2010 and December 31, 2009		11,687,000			11,687,000
Additional paid-in capital		29,860,000			29,841,000
Accumulated deficit		(25,679,000	)		(24,633,000	)
Accumulated other comprehensive income		211,000			91,000
Total shareholders' equity		16,079,000			16,986,000
Total liabilities and shareholders' equity	$	369,158,000		$	369,801,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited)

	2010			2009
INTEREST INCOME
Interest and fees on loans	$	4,087,000		$	4,211,000
Interest and dividends on securities		382,000			494,000
Interest on due from banks and federal funds sold		3,000			6,000
Total interest and dividend income		4,472,000			4,711,000

INTEREST EXPENSE
Interest on deposits		1,210,000			1,952,000
Interest on Federal Home Loan Bank advances and overnight borrowings		144,000			160,000
Interest on subordinated debentures		110,000			104,000
Total interest expense		1,464,000			2,216,000

Net interest income		3,008,000			2,495,000

PROVISION FOR LOAN LOSSES		550,000			-

Net interest income after provision for loan losses		2,458,000			2,495,000

NONINTEREST INCOME
Service charges		59,000			66,000
Gains on sales of available-for-sale securities		10,000			-
Miscellaneous fees and other		103,000			153,000
Total noninterest income		172,000			219,000

NONINTEREST EXPENSES
Compensation and benefits		1,596,000			1,646,000
Occupancy, equipment and data processing		862,000			946,000
Professional services		366,000			239,000
FDIC insurance		266,000			96,000
Losses on sales and impairment of repossessed property		131,000			12,000
Marketing and business development		109,000			130,000
Amortization of core deposit intangible asset		99,000			99,000
Other operating expenses		247,000			259,000
Total noninterest expenses		3,676,000			3,427,000

LOSS BEFORE INCOME TAX BENEFIT		(1,046,000	)		(713,000	)

INCOME TAX BENEFIT		-			(264,000	)

NET LOSS	$	(1,046,000	)	$	(449,000	)

NET LOSS PER COMMON SHARE
Basic and Diluted	$	(0.18	)	$	(0.08	)

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

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited)

										Accumulated
					Additional					Other			Total
	Common Stock				Paid-In		Accumulated			Comprehensive			Shareholders'
	Shares		Amount		Capital		Deficit			Income (Loss)			Equity
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		-		-		-		(449,000	)		-			(449,000	)
Change in net unrealized gain (loss) on
securities available-for-sale, net
of reclassification adjustment
and tax effects, if any		-		-		-		-			275,000			(275,000	)
Total comprehensive loss														(174,000	)
Stock compensation		-		-		19,000		-			-			19,000

March 31, 2009		5,843,362	$	11,687,000	$	29,786,000	$	(14,728,000	)	$	221,000		$	26,966,000


December 31, 2009		5,843,362	$	11,687,000	$	29,841,000	$	(24,633,000	)	$	91,000		$	16,986,000
Comprehensive loss:
Net loss – 2010		-		-		-		(1,046,000	)		-			(1,046,000	)
Change in net unrealized gain
on securities available-for-sale,
net of reclassification adjustment
and tax effects, if any		-		-		-		-			120,000			120,000
Total comprehensive loss														(926,000	)
Stock compensation		-		-		19,000		-			-			19,000

March 31, 2010		5,843,362	$	11,687,000	$	29,860,000	$	(25,679,000	)	$	211,000		$	16,079,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited)

	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,046,000	)	$	(449,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		221,000			286,000
Provision for loan losses		550,000			-
Net amortization of purchase premium on securities		64,000			70,000
Net amortization of core deposit intangible		99,000			99,000
Stock compensation		19,000			19,000
Realized loss on sales or write down of repossessed property		131,000			12,000
Realized gain on sales of securities available-for-sale		(10,000	)		-
Proceeds from sale of loans held for sale		-			2,000
Changes in operating assets and liabilities:
Decrease (Increase) in accrued interest receivable and other assets		115,000			(856,000	)
Increase in accrued interest payable and other accrued liabilities		141,000			230,000
Net cash provided by (used in) operating activities		284,000			(587,000	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale		-			(9,665,000	)
Proceeds from sales of securities available-for- sale		4,316,000			-
Proceeds from maturities of securities available-for-sale		-			1,000,000
Proceeds from maturities of securities held-to-maturity		-			169,000
Proceeds from principal payments on mortgage-backed securities available-for-sale		1,310,000			1,320,000
Proceeds from principal payments on mortgage-backed securities held-to-maturity		1,764,000			1,861,000
Proceeds from sale of restricted stock		136,000			-
Net decrease in loans		2,813,000			2,814,000
Proceeds from sales of other real estate owned		435,000			253,000
Purchases of premises and equipment		(43,000	)		(151,000	)
Net cash provided by investing activities		10,731,000			(2,399,000	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits		3,387,000			(1,853,000	)
Net (decrease) increase in interest-bearing deposits		(3,264,000	)		16,165,000
Net cash provided by financing activities		123,000			14,312,000

INCREASE IN CASH AND CASH EQUIVALENTS		11,138,000			11,326,000

CASH AND CASH EQUIVALENTS, JANUARY 1,		15,310,000			13,526,000

CASH AND CASH EQUIVALENTS, MARCH 31,	$	26,448,000		$	24,852,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash:
Interest on deposits and borrowed funds	$	1,361,000		$	2,198,000
Noncash investing activities:
Transfer of loans to other real estate owned	$	370,000		$	705,000

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.

On March 18, 2010, the Company announced that the Board of Directors approved an Agreement and Plan of Merger providing for the Company to merge with and into a subsidiary of Roma Financial (“Roma”) in exchange for a cash payment. Under the terms of the merger agreement, which has been approved by the boards of directors of both companies, Roma will acquire all of the outstanding shares of the Company for a total purchase price of approximately $14.7 million in cash, or $2.52 per share (subject to adjustment) for each share of common stock outstanding. It is expected that the merger will be consummated in the third quarter of 2010.

The transaction is subject to certain conditions, including requisite regulatory approval, the approval of the Company’s stockholders, and the Company maintaining its financial condition through the closing such that the Company’s nonperforming assets, inclusive of troubled debt restructurings, do not exceed $30.0 million for the period from January 1, 2010 through the closing date of the merger, and the Company’s tangible common equity capital being not less than $9.9 million on the closing date of the merger. At March 31, 2010, the Company’s tangible common equity capital was $14.2 million, and its non-performing assets, inclusive of troubled debt restructurings, were $25.1 million.

In the event that the Company is unsuccessful in completing the merger with Roma, the Company may pursue other opportunities including seeking a new acquirer, raising capital externally, such as through a public offering or private placement, and/or raising capital internally, such as the selling of assets and/or cutting costs in an effort to increase earnings.

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, 2009, 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, 2009. 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 months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued and has determined that, other than that which has been reported in Note 13 to the consolidated financial statements, no other events warranted inclusion or disclosure.

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, the valuation of deferred tax assets, the valuation of intangible assets and the fair value of financial instruments.

Accounting Standards Codification

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

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.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 other comprehensive income, net of the related income tax effect, a separate component of shareholders’ equity.

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 collectability 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 Company to recognize additions or reductions to the allowance.

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.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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. No impairments occurred during the three months ended March 31, 2010 and 2009.

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.

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 all or 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

FASB ASC Topic 820, Fair Value Measurements and Disclosures (Accounting Standards Update No. 2010-6)

New authoritative accounting guidance (Accounting Standards Update No. 2010-6) provides amendments to ASC Topic 820 that require new disclosures as follows:

1) A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.

2) In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

The new authoritative guidance also clarifies existing disclosures as follows:

1) A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.

2) A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3.

These new disclosures and clarifications of existing disclosures were effective for the Company’s financial statements for fiscal years beginning after December 15, 2009, and did not have a significant impact on the Company’s financial statements (except for the disclosures about the purchases, sales, issuances, and settlements in the roll forward activity of Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010).

FASB ASC Topic 860, Transfers and Servicing

This authoritative accounting guidance under amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This new authoritative accounting guidance was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 March 31, 2010:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale
U.S. Government agencies and corporations	$	8,089,000	$	124,000	$	-		$	8,213,000
Residential mortgage-backed securities		20,210,000		353,000		(125,000	)		20,438,000
Total securities available-for-sale	$	28,299,000	$	477,000	$	(125,000	)	$	28,651,000
Held-to-maturity
U.S. Government agencies and corporations	$	100,000	$	-	$	-		$	100,000
Residential mortgage-backed securities		7,301,000		280,000		-			7,581,000
Total securities held-to-maturity	$	7,401,000	$	280,000	$	-		$	7,681,000

The Company’s investment securities as of December 31, 2009 were as follows:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale
U.S. Government agencies and corporations	$	8,092,000	$	61,000	$	(46,000	)	$	8,107,000
Residential mortgage-backed securities		21,549,000		286,000		(222,000	)		21,613,000
Municipal securities		4,305,000		73,000		-			4,378,000
Total securities available-for-sale	$	33,946,000	$	420,000	$	(268,000	)	$	34,098,000
Held-to-maturity
U.S. Government agencies and corporations	$	100,000	$	-	$	-		$	100,000
Residential mortgage-backed securities		9,098,000		264,000		-			9,362,000
Total securities held-to-maturity	$	9,198,000	$	264,000	$	-		$	9,462,000

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. INVESTMENT SECURITIES (continued)

The amortized cost and estimated fair value of debt securities classified as available-for-sale and held-to-maturity at March 31, 2010 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.

	March 31, 2010
	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		8,089,000		8,213,000		-		-
Maturing after ten years		-		-		-		-
Residential mortgage-backed securities		20,210,000		20,438,000		7,301,000		7,581,000
Total securities	$	28,299,000	$	28,651,000	$	7,401,000	$	7,681,000

The following tables show 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 March 31, 2010 and December 31, 2009:

	Continuous Unrealized Losses					Continuous Unrealized Losses
	Existing for Less Than 12 Months					Existing for 12 Months or More
			Unrealized					Unrealized
At March 31, 2010	Fair Value		Losses			Fair Value		Losses
Available-for-sale:
U.S. Government agencies and corporations	$	-	$	-		$	-	$	-
Residential mortgage-backed securities		7,725,000		(125,000	)		-		-
		7,725,000		(125,000	)		-		-
Held-to-maturity:
Residential mortgage-backed securities		-		-			-		-
Total temporarily impaired securities	$	7,725,000	$	(125,000	)	$	-	$	-

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. INVESTMENT SECURITIES (continued)

	Continuous Unrealized Losses					Continuous Unrealized Losses
	Existing for Less Than 12 Months					Existing for More Than 12 Months
			Unrealized					Unrealized
At December 31, 2009	Fair Value		Losses			Fair Value		Losses
Available-for-sale:
U.S. Government agencies and corporations	$	3,954,000	$	(46,000	)	$	-	$	-
Mortgage-backed securities		10,360,000		(222,000	)		-		-
		14,314,000		(268,000	)		-		-
Held-to-maturity:
Mortgage-backed securities		-		-			-		-
Total temporarily impaired securities	$	14,314,000	$	(268,000	)	$	-	$	-

U.S. Government and Agency Obligations. At December 31, 2009, 2 U.S. Government agencies and corporations were in an unrealized loss position. 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 December 31, 2009.

Residential Federal Agency Mortgage-Backed Securities. There were 4 and 6 mortgage-backed securities were in an unrealized loss position at March 31, 2010 and December 31, 2009, respectively. 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 March 31, 2010 or December 31, 2009.

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 three months ended March 31, 2010 and 2009 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 for the three months ended March 31, 2010 and 2009, as their inclusion would be anti-dilutive.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. STOCK-BASED EMPLOYEE COMPENSATION

The Company has a stock-based employee compensation plan. The Company records 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 three months ended March 31, 2010 and 2009, the Company did not issue any options. Compensation cost charged to operations for the three months ended March 31, 2010 and 2009 was $19,000, respectively.

As of March 31, 2010, there was approximately $539,000 of total unrecognized compensation cost related to share-based payments which is expected to be recognized over a weighted average period of 7.8 years. Of the 255,390 unvested options at December 31, 2009, 3,655 options vested in 2010, 7,100 options expired and 244,635 options remain unvested at March 31, 2010.

NOTE 6. COMMON STOCK

During the three months of 2010 and 2009, no stock options were exercised.

During the three months of 2010 and 2009, 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).

At March 31, 2010, management believes that the Bank is “adequately capitalized,” as defined by regulatory banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank’s capital levels do not allow the Bank to accept brokered deposits without prior approval from regulators. As of March 31, 2010, the Bank did not have any brokered deposits. Further, the Bank is subject to certain interest rate restrictions that can be paid for its deposits without prior approval from regulators.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. CAPITAL RATIOS (continued)

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 March 31, 2010:

Total Capital (to Risk-Weighted Assets)	$23,739	8.44%	≥ $22,492	≥8.0%	≥$28,114	≥10.0%
Tier I Capital (to Risk-Weighted Assets)	$20,153	7.17%	≥$11,246	≥4.0%	≥$16,869	≥ 6.0%
Tier I Capital (to Average Assets)	$20,153	5.47%	≥$14,740	≥4.0%	≥$18,425	≥ 5.0%

			For Capital		To Be Well
	Actual		Adequacy Purposes		Capitalized
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2009:

Total Capital (to Risk-Weighted Assets)	$24,553	8.64%	≥$22,733	≥8.0%	≥$28,416	≥10.0%
Tier I Capital (to Risk-Weighted Assets)	$20,922	7.36%	≥$11,367	≥4.0%	≥$17,050	≥ 6.0%
Tier I Capital (to Average Assets)	$20,922	5.52%	≥$15,149	≥4.0%	≥$18,937	≥ 5.0%

NOTE 8. FAIR VALUE

FASB ASC Topic 820 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 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, 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 FASB ASC Topic 820 hierarchy (as described above) as of the dates listed.

March 31, 2010	Level 1		Level 2		Level 3		Total
Financial Assets
Investment securities available-for-sale
U.S. Government agencies and corporations	$	-	$	8,213,000	$	-	$	8,213,000
Mortgage-backed securities	$	-	$	20,438,000	$	-	$	20,438,000

December 31, 2009	Level 1		Level 2		Level 3		Total
Financial Assets
Investment securities available-for-sale
U.S. Government agencies and Corporations	$	-	$	8,107,000	$	-	$	8,107,000
Mortgage-backed securities	$	-	$	21,613,000	$	-	$	21,613,000
Municipal securities	$	-	$	4,378,000	$	-	$	4,378,000

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 (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)

As of March 31, 2010, the fair value of the Bank's available-for-sale securities portfolio was $28,651,000. Over 71 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $20,438,000 at March 31, 2010. All the residential mortgage-backed securities were issued or are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States. All available-for-sale securities were classified as Level 2 assets at March 31, 2010. The valuation of available-for-sale securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and all relevant information.

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 FASB ASC Topic 820 hierarchy (as described above) as of the dates listed.

March 31, 2010	Level 1		Level 2		Level 3		Total
Financial Assets
Impaired loans	$	-	$	-	$	30,948,000	$	30,948,000

December 31, 2009	Level 1		Level 2		Level 3		Total
Financial Assets
Impaired loans	$	-	$	-	$	26,725,000	$	26,725,000

March 31, 2010	Level 1		Level 2		Level 3		Total
Non-Financial Assets
Other real estate owned	$	-	$	-	$	796,000	$	796,000
Branch held for sale	$	-	$	-	$	505,000	$	505,000

December 31, 2009	Level 1		Level 2		Level 3		Total
Non-Financial Assets
Other real estate owned	$	-	$	-	$	1,100,000	$	1,100,000
Branch held for sale	$	-	$	-	$	505,000	$	505,000

Impaired Loans

The carrying value of impaired loans is derived in accordance with FASB ASC Topic 310, “Receivables” . Fair value is determined based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Appraised and reported values may be discounted based on management’s historical knowledge and changes in market conditions from the time of valuation. The valuation allowance for impaired loans is included in the allowance for loan losses in the balance sheets. The valuation allowance for impaired loans at March 31, 2010 was $580,000. During the three months ended March 31, 2010, the valuation allowance for impaired loans decreased $104,000 from $684,000 at December 31, 2009 as a result of loans being collected or charged off in full or in part.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

Other Real Estate Owned and Branch Held for Sale

Other real estate owned and branch held for sale are carried at fair value, less estimated costs to sell. The fair value was determined using appraisals or other sources of market value. Discounts are based on management’s review and changes in market conditions (Level 3 inputs).

Fair Value of Financial Instruments (FASB ASC Topic 825 Disclosure)

FASB ASC Topic 825, 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 FASB ASC Topic 825 of each class of financial instruments.

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

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 on a recurring basis.

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 and/or the fair value of collateral (if repayment of the loan is collateral dependent).

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, if any, approximates fair value.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

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

Deposits : In accordance with the FASB ASC Topic 825, 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.

Estimated Fair Values: The estimated fair values of the Company’s material financial instruments as of March 31, 2010 are as follows:

	Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	10,347,000	$	10,347,000
Federal funds sold	$	16,101,000	$	16,101,000
Investment securities, held-to-maturity	$	7,401,000	$	7,681,000
Investment securities, available-for-sale	$	28,651,000	$	28,651,000
Restricted stock	$	1,730,000	$	1,730,000
Loans, net of allowance for loan losses	$	286,851,000	$	284,546,000
Accrued interest receivable	$	1,368,000	$	1,368,000
Financial Liabilities:
Noninterest-bearing demand deposits	$	34,251,000	$	34,251,000
Interest-bearing deposits	$	296,598,000	$	290,365,000
Borrowed funds	$	20,436,000	$	18,537,000
Accrued interest payable	$	715,000	$	715,000

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. FAIR VALUE (continued)

The estimated fair values of the Company’s material financial instruments as of December 31, 2009 are as follows:

	Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	10,765,000	$	10,765,000
Federal funds sold	$	4,545,000	$	4,545,000
Investment securities, held-to-maturity	$	9,198,000	$	9,462,000
Investment securities, available-for-sale	$	34,098,000	$	34,098,000
Restricted stock	$	1,886,000	$	1,886,000
Loans, net of allowance for loan losses	$	290,584,000	$	288,668,000
Accrued interest receivable	$	1,290,000	$	1,290,000
Financial Liabilities:
Noninterest-bearing demand deposits	$	30,864,000	$	30,864,000
Interest-bearing deposits	$	299,862,000	$	293,361,000
Borrowed funds	$	20,436,000	$	17,988,000
Accrued interest payable	$	612,000	$	612,000

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.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9. LOANS

The composition of net loans as of March 31, 2010 and December 31, 2009 are as follows:

	March 31, 2010			December 31, 2009
Commercial, Financial and Agricultural	$	31,082,000		$	30,371,000
Real Estate - Construction		38,278,000			41,558,000
Real Estate – Mortgage		171,945,000			171,465,000
Installment loans to individuals		48,883,000			50,453,000
Lease Financing		6,531,000			7,291,000
Unrealized Loan Fees		(633,000	)		(639,000	)
Total loans		296,086,000			300,499,000
Less: allowance for loan losses		(9,235,000	)		(9,915,000	)
Net loans	$	286,851,000		$	290,584,000

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

	March 31, 2010		December 31, 2009
Impaired loans without a valuation allowance	$	26,864,000	$	24,091,000
Impaired loans with a valuation allowance		4,084,000		2,634,000
Total impaired loans including troubled debt restructurings		30,948,000		26,725,000
Valuation allowance related to impaired loans		580,000		684,000
Average investment in impaired loans		28,148,000		23,215,000
Total non-accrual loans (included in impaired loans)		16,508,000		16,437,000

Impaired loans without a valuation allowance increased $2.8 million since December 31, 2009 as a result of the Company designating new loans as impaired where the current appraisal supports the full amount of the loan and existing impaired loans, where the Company charged off or partially charged off $1.2 million during the three months ended March 31, 2010, based upon current appraisals obtained by the Company or, serving as a proxy, a 40% reduction in appraised value on older appraisals.

NOTE 10. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is calculated under FASB ASC Topic 310, Receivables and FASB ASC Topic 450, Contingencies . Nonperforming and impaired loans are evaluated under FASB ASC Topic 310 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, 2009, the amount of the specific reserve was $684,000 which was included in the total allowance for loan losses of $9,915,000. During the three months ended March 31, 2010, the Company charged off loans or portions of loans totaling $1,230,000 from the allowance for loan losses and made a provision of $550,000, including changes in qualitative factors, resulting in an allowance for loan losses balance of $9,235,000.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. ALLOWANCE FOR LOAN LOSSES (continued)

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 March 31,
	2010			2009
Balance at beginning of period	$	9,915,000		$	8,531,000
Charge-offs:
Commercial, Financial, Agricultural		-			(68,000	)
Real Estate – Construction		(452,000	)		(84,000	)
Real Estate – Mortgage		(771,000	)		-
Consumer Installment loans		(7,000	)		(2,000	)
Lease Financing		-			-
		(1,230,000	)		(154,000	)
Recoveries:
Commercial, Financial, Agricultural		-			-
Real Estate – Construction		-			-
Real Estate – Mortgage		-			-
Consumer Installment loans		-			3,000
Lease Financing		-			-
		-			3,000
Net charge-offs		(1,230,000	)		(151,000	)
Provision for loan loss		550,000			-
Balance at end of period	$	9,235,000		$	8,380,000

Average loans outstanding (1)	$	298,278,000		$	303,699,000

Net charge-offs as a percentage of average loans (2)		1.67	%		0.20	%

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

The charge offs as of March 31, 2010, 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 and related tax effects for the three months ended March 31, 2010 and 2009 are as follows:

	March 31, 2010			March 31, 2009
Unrealized holding gains on available-for-sale securities	$	210,000		$	458,000
Reclassification adjustment for gains realized in income		(10,000	)		-
Net unrealized gains		200,000			458,000
Tax effect		80,000			183,000
Net-of-tax amount	$	120,000		$	275,000

NOTE 12. WRITTEN AGREEMENT

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.

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.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13. SUBSEQUENT EVENT

As previously reported, as a result of the Federal Reserve Bank of Philadelphia (the “FRB”) examination report dated November 30, 2009, the Company was required to increase its allowance for loan losses by $5 million as of June 30, 2009. As a result, the Company amended its Quarterly Reports on Form 10-Q for the periods ended June 30 and September 30, 2009, and restated its consolidated financial statements for such periods. Recently, the staff of the SEC advised the Company that it had initiated an informal inquiry and asked the Company to preserve documents related to the Company provisions and allowances for reserves for the fiscal years 2007 through 2009. The Company has not received any requests for documentation at this time and cannot predict what actions, if any, the SEC will take in connection with its informal inquiry or whether it will ultimately lead to a formal investigation or action.

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 likelihood of the Company consummating the merger with Roma and the Company’s ability to pursue alternative strategies if it does not; 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; findings of the Bank’s examination by the FRB; any effects from an inquiry or possible investigation from the SEC; 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, 2009, 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 March 31, 2010 and 2009

(Unaudited)

The following discussion compares the results of operations for the three months ended March 31, 2010 (unaudited) to the results of operations for the three months ended March 31, 2009 (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 March 31, 2010, the net loss totaled $1,046,000, compared to net loss of $449,000 for the three months ended March 31, 2009. Decreased earnings for the three months ended March 31, 2010 were attributable primarily to a recording of a tax benefit of $264,000 in 2009 and none in 2010 and an increase in noninterest expenses of $249,000. Basic and diluted loss per share for the three months ended March 31, 2010 and 2009 totaled $0.18 and $0.08, respectively.

Net Interest Income. Net interest income for the three months ended March 31, 2010 totaled $3,008,000, an increase of $513,000, or 20.6%, from $2,495,000 for the three months ended March 31, 2009. This increase is primarily as a result of an increase in the net interest margin, from 2.86% for the three months ended March 31, 2009 to 3.63% for the three months ended March 31, 2010.

Interest income decreased by $239,000 for the three months ended March 31, 2010 from the same period in 2009, attributable to a decrease in average interest earning assets of $18.2 million. Average interest earning loans outstanding decreased by $11.3 million and average investment securities decreased $6.5 million. The decrease in average interest earning loans outstanding is attributable primarily to an increase in average nonaccrual loans of $6.0 million and normal monthly payments and/or payoffs, while the decrease in average investment securities was attributable to management’s efforts to decrease the Bank’s general level of risk on the balance sheet. Interest expense decreased $752,000 from the same time period in 2009, primarily as a result of an 88 basis point decline in the rate on average interest-bearing liabilities from 2.74% in 2009 to 1.86% in 2010.

Provision for Loan Losses. Provision for loan losses was $550,000 and $0 for the three months ended March 31, 2010 and 2009.

Noninterest Income . Noninterest income decreased $47,000, or 21.5%, for the three months ended March 31, 2010 to $172,000 compared to $219,000 for the same period of 2009, primarily as a result of decreased prepayment penalties for early loan payoffs of $35,000 and a decrease in late charges of $17,000, partially offset by a $10,000 gain in sales of securities available-for-sale.

Noninterest Expenses . For the three months ended March 31, 2010, noninterest expenses increased by $249,000, or 7.3%, to $3,676,000, compared to $3,427,000 for the same period of 2009, primarily as a result of an increase in FDIC insurance of $170,000, an increase in losses on repossessed property of $119,000, an increase in legal expense for loan workouts of $114,000, partially offset by a decrease in occupancy, equipment and data processing expense of $84,000 and a decrease in personnel cost of $50,000. The decrease in occupancy, equipment and data processing expense was primarily attributable to a decrease in amortization on our core processing system as it is fully depreciated and the decline in personnel expense was primarily attributable to a decline in general staffing and the discontinuance of our 401k match.

Income Taxes . No tax expense or benefit was recorded during the three months ended March 31, 2010 as a result of management’s determination that there was a need for a valuation allowance on the Company’s deferred tax assets generated from the benefit. During the three months ended March 31, 2009, we recorded an income tax benefit of $264,000 on loss before taxes of $713,000, resulting in an effective tax rate of 37.0% for the 2009 period.

Consolidated Financial Condition

At March 31, 2010 and December 31, 2009

(Unaudited)

The following discussion compares the financial condition at March 31, 2010 (unaudited) to the financial condition at December 31, 2009. 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 decreased $0.6 million, or 0.2%, to $369.2 million at March 31, 2010, compared to $369.8 million at December 31, 2009.

Loans. Loans outstanding decreased $4.4 million, or 1.5%. The decrease in loans was due primarily to $1.2 million in loan charge offs and normal contractual loan payments and/or payoffs in the loan portfolio.

Allowance for Loan Lo sses. The allowance for loan losses was $9.2 million at March 31, 2010 as compared to $9.9 million at December 31, 2009. This decline was due primarily to the charging off of $1.2 million in loans that were impaired, partially offset by a $0.5 million provision for loan losses. The ratio of the allowance for loan losses to total loans was 3.1% and 3.3% at March 31, 2010 and December 31, 2009, 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 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.

	March 31, 2010			December 31, 2009
Restructured loans:
Commercial, Financial and Agricultural	$	39,000		$	39,000
Real Estate – Construction		750,000			1,189,000
Real Estate – Mortgage		4,641,000			4,907,000
Installment loans to individuals		101,000			101,000
Total restructured loans		5,531,000			6,236,000
Loans accruing, but past due 90 days or more:
Commercial, Financial and Agricultural		-			85,000
Real Estate – Construction		823,000			-
Real Estate – Mortgage		1,419,000			523,000
Installment loans to individuals		28,000			26,000
Total loans accruing, but past due 90 days or more		2,270,000			634,000
Nonaccrual Loans:
Commercial, Financial and Agricultural		3,000			3,000
Real Estate – Construction		13,493,000			14,274,000
Real Estate – Mortgage		3,012,000			2,160,000
Total nonaccrual loans		16,508,000			16,437,000
Total nonperforming loans		24,309,000			23,307,000
Other Real Estate Owned		796,000			1,100,000
Total nonperforming assets	$	25,105,000		$	24,407,000
Non-performing loans/Total loans		8.21	%		7.76	%
Non-performing assets/Total assets		6.80	%		6.60	%
Allowance for loan losses/Total non-performing loans		37.99	%		42.54	%

During 2010, 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	$	2,642,000	$	452,000	$	2,190,000		17.11	%
Mortgage		1,659,000		771,000		888,000		46.47
	$	4,301,000	$	1,223,000	$	3,078,000		28.44	%

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 FASB ASC Topic 310 and FASB ASC Topic 450. Non-performing and impaired loans are evaluated under FASB ASC Topic 310, 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 $16.5 million and $16.4 million, respectively, in loans on nonaccrual status at March 31, 2010 and December 31, 2009. This increase is the result of three loans that the Company placed on nonaccrual status during the first three months of 2010, less one that was transferred to other real estate owned, less one that was paid in full. The three loans that were placed on nonaccrual status during the first three months of 2010 were deemed impaired as of March 31, 2010, and no additional valuation reserve was needed for these loans during the first three months of 2010. Impaired loans increased by $4.2 million, or 16%, between December 31, 2009 and March 31, 2010; however, as a result of the charge offs or partial charge offs, the valuation reserve decreased by $104,000, or 15%.

The Company utilizes a risk rating system on all unimpaired loans 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 the unimpaired loan loss balance required.

Unimpaired commercial real estate loans analyzed decreased $6.3 million, or 6%, between December 31, 2009 and March 31, 2010 due to payments and payoffs and loans characterized as impaired. Unimpaired spot lot construction loans, a component type within the real estate - construction portfolio, had their qualitative adjustment factors increased an average of 7% due to the risk present in this portfolio segment and the increasing historical charge off qualitative factor. As a result of the above mentioned activity during the first three months of 2010, management concluded that a provision for loan losses of $550,000 was needed.

Deposits. Deposits totaled $330.8 million at March 31, 2010, increasing $0.1 million, or 0.4%, from the December 31, 2009 balance of $330.7 million.

Federal Home Loan Bank Advances and Other Borrowings. Federal Home Loan Bank advances and other borrowings totaled $20.4 million at March 31, 2010 and December 31, 2009, respectively.

Shareholders’ Equity. Shareholders’ equity decreased by $0.9 million, or 5.3%, mainly as a result of our net loss, partially offset by an increase in other comprehensive loss.

Comparative Average Balances, Interest and Yields:

	Three Months Ended
	March 30, 2010								March 31, 2009
	Average Balance			Interest Income/Expense		Annual Yield/Cost			Average Balance			Interest Income/Expense		Annual Yield/Cost
Assets
Loans, net (1)	$	281,637,000		$	4,087,000		5.89	%	$	292,959,000		$	4,211,000		5.83	%
Investment securities (2)		39,758,000			382,000		3.89			46,291,000			494,000		4.33
Due from banks and Federal funds sold		14,270,000			3,000		0.09			14,574,000			6,000		0.15
Total interest-earning assets		335,665,000			4,472,000		5.40			353,824,000			4,711,000		5.40

Allowance for loan losses		(9,914,000	)							(8,461,000	)
Other assets		45,044,000								44,294,000
Total assets	$	370,795,000							$	389,657,000

Liabilities and shareholders’ equity
Time deposits	$	195,682,000		$	1,054,000		2.18	%	$	199,286,000		$	1,694,000		3.45	%
NOW/MMDA/savings accounts		102,229,000			156,000		0.62			105,763,000			258,000		0.99
Borrowed funds		20,436,000			254,000		5.04			22,342,000			264,000		4.80
Total interest-bearing liabilities		318,347,000			1,464,000		1.86			327,391,000			2,216,000		2.74

Noninterest-bearing demand deposits		33,823,000								33,886,000
Other liabilities		1,834,000								1,442,000
Shareholders’ equity		16,791,000								26,938,000
Total liabilities and shareholders’ equity	$	370,795,000							$	389,657,000

Net interest income				$	3,008,000							$	3,343,000

Interest rate spread (3)							3.54	%							2.66	%

Net interest margin (4)							3.63	%							2.86	%

________________________________

(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 89.5% and 90.9% at March 31, 2010 and December 31, 2009, 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 March 31, 2010, the Company maintained lines of credit with correspondent banks of $38.1 million. Longer term funding requirements can be satisfied through advances from the Federal Home Loan Bank.

As of March 31, 2010, the Company’s investment securities portfolio included $27.5 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 March 31, 2010, management believes that the Bank is “adequately 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 assist in this goal, 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 by the Company 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, third and fourth quarters of 2009 and the first quarter of 2010, the Company elected to defer the interest payments 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 March 31, 2010, commitments to extend credit and unused lines of credit amounted to approximately $32.8 million and standby letters of credit were approximately $4.1 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, 2009 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 March 31, 2010, 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 March 31, 2010, 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. Reserved.

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: May 17, 2010	By: /s/ Robert H. King
	Robert H. King
	President and Chief Executive Officer



Date: May 17, 2010	By: /s/ R. Scott Horner
	R. Scott Horner
	Executive Vice President and Chief
	Financial Officer

Market Data

News

Trading Tools

Markets

Discover

Hot Features

Follow Feed

Options Flow

Monitor

STBK Sterling Banks (MM)