- Quarterly Report (10-Q)

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: September 30, 2008

[ ] 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 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 November 12, 2008: 5,843,362

STERLING BANKS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2008

INDEX

Part I	FINANCIAL INFORMATION	Page

Item 1.	Consolidated Financial Statements
	Balance Sheets	3
	Statements of Operations	5
	Statements of Shareholders’ Equity	6
	Statements of Cash Flows	7
	Notes to Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4T.	Controls and Procedures	22

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	22
Item 6.	Exhibits	22

SIGNATURES		23

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

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

	September 30, 2008 (unaudited)			December 31, 2007
ASSETS
Cash and cash due from banks	$	10,516,000		$	11,554,000
Federal funds sold		5,333,000			234,000
Cash and cash equivalents		15,849,000			11,788,000

Investment securities held-to-maturity, at cost (fair value of $20,451,000 at September 30, 2008 and $6,797,000 at December 31, 2007)		20,615,000			6,854,000
Investment securities available-for-sale, at fair value		18,574,000			48,095,000
Total investment securities		39,189,000			54,949,000

Restricted stock, at cost		2,448,000			2,229,000

Loans held for sale		12,000			38,000

Loans		301,996,000			312,210,000
Less: allowance for loan losses		(3,015,000	)		(2,891,000	)
Total net loans		298,981,000			309,319,000

Goodwill and core deposit intangible asset, net		14,688,000			14,924,000
Bank premises and equipment, net		9,293,000			9,751,000
Accrued interest receivable and other assets		7,407,000			7,487,000

Total assets	$	387,867,000		$	410,485,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

	September 30, 2008 (unaudited)			December 31, 2007
LIABILITIES Deposits
Noninterest-bearing	$	38,799,000		$	37,246,000
Interest-bearing		282,684,000			311,712,000
Total deposits		321,483,000			348,958,000

Federal Home Loan Bank advances		16,000,000			10,500,000
Subordinated debentures		6,186,000			6,186,000
Accrued interest payable and other accrued liabilities		1,335,000			1,533,000

Total liabilities		345,004,000			367,177,000

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 September 30, 2008 and December 31, 2007		11,687,000			11,687,000
Additional paid-in capital		29,748,000			29,708,000
Retained earnings		1,544,000			1,949,000
Accumulated other comprehensive loss		(116,000	)		(36,000	)
Total shareholders' equity		42,863,000			43,308,000
Total liabilities and shareholders' equity	$	387,867,000		$	410,485,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months ended September 30, 2008		For the three months ended September 30, 2007			For the nine months ended September 30, 2008			For the nine months ended September 30, 2007
INTEREST INCOME
Interest and fees on loans	$	5,125,000	$	6,032,000		$	15,839,000		$	16,984,000
Interest and dividends on securities		318,000		570,000			1,093,000			1,778,000
Interest on due from banks		-		28,000			2,000			168,000
Interest on federal funds sold		21,000		144,000			159,000			428,000
Total interest and dividend income		5,464,000		6,774,000			17,093,000			19,358,000

INTEREST EXPENSE
Interest on deposits		1,985,000		3,423,000			6,994,000			9,665,000
Interest on Federal Home Loan Bank advances and overnight borrowings		31,000		9,000			110,000			79,000
Interest on subordinated debentures		105,000		105,000			313,000			174,000
Total interest expense		2,121,000		3,537,000			7,417,000			9,918,000

Net interest income		3,343,000		3,237,000			9,676,000			9,440,000

PROVISION FOR LOAN LOSSES		105,000		-			505,000			101,000

Net interest income after provision for loan losses		3,238,000		3,237,000			9,171,000			9,339,000

NONINTEREST INCOME
Service charges		65,000		71,000			188,000			214,000
Gains on sales of available-for-sale securities		-		-			95,000			5,000
Miscellaneous fees and other		218,000		152,000			512,000			407,000
Total noninterest income		283,000		223,000			795,000			626,000

NONINTEREST EXPENSES
Compensation and benefits		1,719,000		1,876,000			5,516,000			5,345,000
Occupancy, equipment and data processing		923,000		924,000			2,751,000			2,555,000
Professional services		246,000		150,000			681,000			535,000
Marketing and business development		124,000		219,000			419,000			572,000
Amortization of core deposit intangible asset		86,000		87,000			261,000			188,000
Other operating expenses		284,000		346,000			960,000			965,000
Total noninterest expenses		3,382,000		3,602,000			10,588,000			10,160,000

INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)		139,000		(142,000	)		(622,000	)		(195,000	)

INCOME TAX EXPENSE (BENEFIT)		60,000		(48,000	)		(217,000	)		(54,000	)

NET INCOME (LOSS)	$	79,000	$	(94,000	)	$	(405,000	)	$	(141,000	)

NET INCOME (LOSS) PER COMMON SHARE
Basic and Diluted	$	0.01	$	(0.02	)	$	(0.07	)	$	(0.03	)

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		5,843,362		5,843,362			5,843,362			5,619,967
Diluted		5,849,335		5,843,362			5,843,362			5,619,967

CASH DIVIDENDS PER COMMON SHARE	$	0.00	$	0.03		$	0.00		$	0.09

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-In			Retained			Comprehensive			Shareholders'
	Shares		Amount		Capital			Earnings			Income (Loss)			Equity
December 31, 2006		4,783,568	$	9,567,000	$	22,930,000		$	2,931,000		$	(660,000	)	$	34,768,000

Comprehensive losses:
Net loss – 2007		-		-		-			(141,000	)		-			(141,000	)
Change in net unrealized loss on
securities available-for-sale, net
of reclassification adjustment
and tax effects		-		-		-			-			336,000			336,000
Total comprehensive income															195,000
Cash dividends paid ($0.09 per share)		-		-		-			(477,000	)		-			(477,000	)
Stock compensation		-		-		19,000			-			-			19,000
Acquisition of Farnsworth Bancorp, Inc.		768,438		1,537,000		7,246,000			-			-			8,783,000
Net proceeds from issuance of
common stock		13,493		27,000		64,000			-			-			91,000
Common stock split effected in the form of a 5% common stock dividend		277,863		556,000		(558,000	)		-			-			(2,000	)

September 30, 2007		5,843,362	$	11,687,000	$	29,701,000		$	2,313,000		$	(324,000	)	$	43,377,000


December 31, 2007		5,843,362	$	11,687,000	$	29,708,000		$	1,949,000		$	(36,000	)	$	43,308,000

Comprehensive losses:
Net loss – 2008		-		-		-			(405,000	)		-			(405,000	)
Change in net unrealized loss on
securities available-for-sale, net
of reclassification adjustment
and tax effects		-		-		-			-			(80,000	)		(80,000	)
Total comprehensive loss															(485,000	)
Stock compensation		-		-		40,000			-			-			40,000

September 30, 2008		5,843,362	$	11,687,000	$	29,748,000		$	1,544,000		$	(116,000	)	$	42,863,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(405,000	)	$	(141,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		809,000			755,000
Provision for loan losses		505,000			101,000
Net amortization of purchase premiums and discounts on securities		27,000			39,000
Amortization of core deposit intangible		261,000			188,000
Stock compensation		40,000			19,000
Realized gain on sales or retirement of equipment		(5,000	)		(9,000	)
Realized gain on sales of securities available-for-sale		(95,000	)		(5,000	)
Realized gain on sales of loans held for sale		(12,000	)		-
Proceeds from sale of loans held for sale		1,058,000			5,148,000
Originations of loans held for sale		(1,020,000	)		(3,761,000	)
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable and other assets		135,000			(622,000	)
Decrease in accrued interest payable and other accrued liabilities		(198,000	)		(2,186,000	)
Net cash provided by (used in) operating activities		1,100,000			(474,000	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(3,995,000	)		(4,883,000	)
Purchases of securities held-to-maturity		(15,322,000	)		(75,000	)
Proceeds from sales of securities available-for-sale		5,470,000			20,503,000
Proceeds from maturities of securities available-for-sale		25,900,000			3,000,000
Proceeds from maturities of securities held-to-maturity		-			875,000
Proceeds from principal payments on mortgage-backed securities available-for-sale		2,090,000			1,980,000
Proceeds from principal payments on mortgage-backed securities held-to-maturity		1,550,000			1,285,000
Purchases of restricted stock		(2,465,000	)		(400,000	)
Proceeds from sale of restricted stock		2,246,000			241,000
Net decrease in loans		9,833,000			6,360,000
Proceeds from sales of equipment		46,000			28,000
Purchases of premises and equipment		(392,000	)		(1,657,000	)
Cash acquired in (paid for) acquisition		(25,000	)		3,096,000
Net cash provided by investing activities		24,936,000			30,353,000
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock		-			91,000
Dividends paid		-			(477,000	)
Net increase in noninterest-bearing deposits		1,553,000			3,627,000
Net decrease in interest-bearing deposits		(29,028,000	)		(40,395,000	)
Proceeds from issuance of trust preferred securities		-			6,000,000
Proceeds from (repayments of) Federal Home Loan Advances		5,500,000			(5,243,000	)
Net cash used in financing activities		(21,975,000	)		(36,397,000	)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		4,061,000			(6,518,000	)

CASH AND CASH EQUIVALENTS, JANUARY 1,		11,788,000			22,942,000

CASH AND CASH EQUIVALENTS, SEPTEMBER 30,	$	15,849,000		$	16,424,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: Interest on deposits and borrowed funds	$	7,604,000		$	9,985,000
Income taxes	$	1,000		$	140,000

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 incorporated under the laws of the State of New Jersey on February 28, 2006 for the sole purpose of becoming the holding company of Sterling Bank (the “Bank”). At the 2006 Annual Meeting of Shareholders held on December 12, 2006, shareholders of the Bank approved a proposal to reorganize the Bank into the holding company form of organization in accordance with a Plan of Acquisition. The Company recognized the assets and liabilities transferred at the carrying amounts in the accounts of the Bank as of March 16, 2007, the effective date of the reorganization. All information for periods prior to March 16, 2007 relate to the Bank prior to the reorganization. Pursuant to the Plan of Acquisition, each outstanding share of Sterling Bank common stock was converted into one share of Sterling Banks, Inc. common stock. Sterling Banks, Inc. is authorized to issue 15,000,000 shares of common stock, par value $2.00 per share, and 10,000,000 shares of preferred stock, with no par value per share. Options outstanding under Sterling Bank’s various stock option plans were converted into options to purchase shares of Sterling Banks, Inc. on the same terms and conditions.

The Bank is a commercial bank, which 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 ten 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, 2007, 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, 2007. 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 nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

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. A material estimate that is particularly susceptible to significant change in the near term is the determination of the allowance for loan losses.

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. Declines in the fair value of individual securities below their cost that are other than temporary, result in write-downs of the individual securities to their fair value and are included in noninterest income in the statements of operations. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that the Company would not have the intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. The unrealized losses that existed as of September 30, 2008 are generally the result of market changes in interest rates since the purchase of the securities. This factor coupled with the fact the Company has both the intent and ability to hold securities to maturity or for a period of time sufficient to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the portfolio are temporary.

Goodwill and Other Intangibles Assets

Goodwill, the excess of cost over fair value of net assets acquired, amounted to approximately $11.8 million at September 30, 2008. Goodwill is not amortized into net income but rather is tested at least annually for impairment. Other intangible assets, which consist of core deposit intangibles, totaled approximately $2.9 million at September 30, 2008. This amount is amortized over its estimated useful life (ten years) and is also subject to impairment testing.

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. No impairments have occurred to date.

Income Taxes

When corporate income 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 accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are recognized in income tax expense in the statement of operations.

Recent Accounting Pronouncements

Statement No. 157 Fair Value Measurements (“SFAS No. 157”)

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measures. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with early adoption encouraged. On January 1, 2008, the Company adopted the provisions of SFAS No. 157 on a prospective basis, with application of certain non-financial assets and liabilities being delayed until January 1, 2009. See Note 7. The adoption of SFAS No. 157 did not materially affect the Company’s financial position or results of operations.

Statement No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”)

In February 2007, the FASB issued SFAS No. 159, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. On January 1, 2008, the Company adopted the provisions of SFAS No. 159 but has not elected to account for any financial instruments at fair value. The adoption of SFAS No. 159 did not materially affect the Company’s financial position or results of operations.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. 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 September 30, 2008 and 2007 were 5,843,362 and for the nine months ended September 30, 2008 and 2007 were 5,843,362 and 5,619,967, respectively. Diluted earnings per common share consider common share equivalents (when dilutive) outstanding during each period. Both basic and diluted earnings per share computations give retroactive effect to the stock split in 2007. Shares issuable upon the exercise of stock options were not considered in the calculation of net loss per share for the nine months ended September 30, 2008 and the three and nine months ended September 30, 2007, as their inclusion would be anti-dilutive. The effect for the three months ended September 30, 2008 was an additional 5,973 shares for dilution.

NOTE 4. STOCK-BASED EMPLOYEE COMPENSATION

During the nine months ended September 30, 2008 and 2007, the Company issued 175,200 and 7,875 options, respectively, with an exercise price range of $3.80 to $7.67, to employees and directors that vest in equal annual installments over ten years. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards. For options issued in 2008, the weighted average estimated value per option was $1.60. The fair value of options granted in 2008 was estimated at the date of the grant based on the following assumptions: risk free interest rate of 4.1%, volatility of 22-23%, expected life of 8-10 years and no expected dividend yield. Compensation cost charged to operations for the nine months ended September 30, 2008 and 2007 was $40,000 and $19,000, respectively.

As of September 30, 2008, there was approximately $652,000 of total unrecognized compensation cost related to share-based payments which is expected to be recognized over a weighted average period of 9.2 years. There were 145,230 unvested options at December 31, 2007. Of these, 4,442 options vested, 1,050 options expired and 175,200 new options were granted in 2008. 314,938 options remain unvested at September 30, 2008.

NOTE 5. COMMON STOCK

The Company paid a cash dividend of $0.03 per common share in February, May and August 2007.

The Company issued a 21 for 20 stock split in September 2007, effected in the form of a 5% common stock dividend.

During the first nine months of 2007, 13,493 stock options were exercised at a range of $6.66 to $8.04 per share. During the first nine months of 2008, no stock options were exercised.

In March 2007, the Company issued 768,438 shares of common stock (806,860 shares after giving effect to the stock split in 2007) in connection with the acquisition of Farnsworth Bancorp, Inc.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6. 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, under prompt correction action provisions, 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).

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 September 30, 2008:

Total Capital (to Risk-Weighted Assets)	$	36,185		11.76	%	$	≥ 24,610		≥ 8.0	%	$	≥ 30,762		≥ 10.0	%
Tier I Capital (to Risk-Weighted Assets)	$	33,102		10.76	%	$	≥ 12,305		≥ 4.0	%	$	≥ 18,457		≥ 6.0	%
Tier I Capital (to Average Assets)	$	33,102		9.11	%	$	≥ 14,527		≥ 4.0	%	$	≥ 18,159		≥ 5.0	%

						For Capital					To Be Well
	Actual					Adequacy Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2007:

Total Capital (to Risk-Weighted Assets)	$	35,923		11.13	%	$	≥25,824		≥8.0	%	$	≥32,280		≥10.0	%
Tier I Capital (to Risk-Weighted Assets)	$	32,957		10.21	%	$	≥12,912		≥4.0	%	$	≥19,368		≥ 6.0	%
Tier I Capital (to Average Assets)	$	32,957		8.28	%	$	≥15,926		≥4.0	%	$	≥19,907		≥ 5.0	%

NOTE 7. FAIR VALUE MEASUREMENT

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities. In accordance with FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” the Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities until January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The evaluation of goodwill and other intangibles falls under the deferral provisions of FSP 157-2.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. FAIR VALUE MEASUREMENT (continued)

SFAS 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

·	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.

Level 2

·	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 September 30, 2008.

	Level 1		Level 2		Level 3		Total
Financial Assets
Investment securities available-for-sale		-		18,574,000		-		18,574,000

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. FAIR VALUE MEASUREMENT (continued)

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 (level2) or significant management judgment or estimation based upon unobservable inputs due to limited or no market activity of the instrument (Level 3).

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 September 30, 2008.

	Level 1		Level 2		Level 3		Total
Financial Assets
Loans held for sale	$	-	$	12,000	$	-	$	12,000
Impaired loans	$	-	$	-	$	10,720,000	$	10,720,000

Loans Held-for-Sale

The fair value of loans held-for-sale was determined using a market approach that includes significant other observable inputs (Level 2 Inputs). The Level 2 fair values were estimated using quoted prices for similar assets in active markets.

Impaired Loans

The fair value of impaired loans is derived in accordance with SFAS NO. 114, Accounting by Creditors for Impairment of a Loan . Fair value is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

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 September 30, 2008 was $515,000. During the nine months ended September 30, 2008, the valuation allowance for impaired loans increased $177,000 from $338,000 at December 31, 2007.

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; the performance of newly established branches; 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); 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, including goodwill 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-KSB for the year ended December 31, 2007, 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 September 30, 2008 and 2007

(Unaudited)

The following discussion compares the results of operations for the three months ended September 30, 2008 (unaudited) to the results of operations for the three months ended September 30, 2007 (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 Income (Loss). For the three months ended September 30, 2008, the net income totaled $79,000, compared to net loss of $94,000 for the three months ended September 30, 2007. Increased earnings for the three months ended September 30, 2008 was attributable primarily to a decrease in noninterest expenses of $220,000, an increase in net interest income of $106,000, an increase in noninterest income of $60,000, partially offset by an increase in provision for loan losses of $105,000. Basic and diluted income per share for the three months ended September 30, 2008 was $0.01. Basic and diluted loss per share for the three months ended September 30, 2007 was $0.02.

Net Interest Income. Net interest income for the three months ended September 30, 2008 totaled $3,343,000, an increase of 3.3% from $3,237,000 for the three months ended September 30, 2007. The net interest margin for the three months ended September 30, 2008 was 4.00%, compared to 3.39% for the comparable period of 2007. This increase is due to the current interest rate environment for interest-bearing liabilities in our marketplace.

Interest income decreased by $1,310,000 for the three months ended September 30, 2008 over the same period in 2007, attributable to a decrease in average interest earning assets of $46.4 million and a 48 basis point decrease in the yield on average earning assets from 7.09% in 2007 to 6.61% in 2008. Average loans outstanding decreased by $11.7 million while average investment securities decreased $26.4 million. The decrease in average loans outstanding was attributable to paydowns in loan balances while the decrease in average investment securities was attributable to agency securities being called in the current rate environment and management’s efforts to decrease the Bank’s reliance on short term borrowings and time deposits. Interest expense decreased by $1,416,000 compared to the same time period in 2007. Average interest-bearing liabilities decreased by $44.3 million which is attributable to management’s efforts to decrease the Bank’s reliance on short term borrowings and time deposits. The average rate paid on interest-bearing liabilities decreased to 2.85% for the three months ended September 30, 2008 from 4.12% for the same period of 2007.

Provision for Loan Losses. Provision for loan losses for the three months ended September 30, 2008 was $105,000 compared to $0 for the same period in 2007. This increase is principally the result of recent deterioration in the residential real estate spot lot construction loan portfolio.

Noninterest Income . Noninterest income increased $60,000, or 26.9%, for the three months ended September 30, 2008 to $283,000, from $223,000 for the same period of 2007, primarily from an increase in prepayment penalties on loans.

Noninterest Expenses . For the three months ended September 30, 2008, noninterest expenses decreased by $220,000, or 6.1%, to $3,382,000, compared to $3,602,000 for the same period of 2007. This was primarily caused by a decrease in compensation and benefits of $157,000 due to synergies realized in 2008 as a result of the merger with Farnsworth in 2007 and a decrease in marketing and business development due to opening of our Delran branch in 2007, partially offset by an increase in professional services of $96,000 due to increases in strategic planning and SOX 404 costs.

Income Taxes . We recorded an income tax expense of $60,000 on income before taxes of $139,000 for the three months ended September 30, 2008, resulting in an effective tax rate of 43.2% for the 2008 period, compared to an income tax benefit of $48,000 on loss before taxes of $142,000 for the same period of 2007.

Consolidated Results of Operations

Nine Months Ended September 30, 2008 and 2007

(Unaudited)

The following discussion compares the results of operations for the nine months ended September 30, 2008 (unaudited) to the results of operations for the nine months ended September 30, 2007 (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 Income (Loss). For the nine months ended September 30, 2008, the net loss totaled $405,000, compared to a net loss of $141,000 for the nine months ended September 30, 2007. The increased net loss for the nine months ended September 30, 2008 was attributable primarily to an increase in noninterest expenses of $428,000 and an increase in provision for loan losses of $404,000, partially offset by an increase in net interest income of $236,000 and an increase in noninterest income of $169,000. Basic and diluted loss per share for the nine months ended September 30, 2008 and 2007 was $0.07 and $0.03, respectively.

Net Interest Income. Net interest income for the nine months ended September 30, 2008 totaled $9,676,000, an increase of 2.5% from $9,440,000 for the nine months ended September 30, 2007. The net interest margin for the nine months ended September 30, 2008 was 3.74%, compared to 3.43% for the comparable period of 2007. This increase is due mainly to the current interest rate environment for interest-bearing liabilities in our marketplace.

Interest income decreased by $2,265,000 for the nine months ended September 30, 2008 compared to the same period in 2007, attributable to a 41 basis point decrease in the yield on average earning assets from 7.03% in 2007 to 6.62% in 2008 and a decrease in average interest earning assets of $23.2 million. This decline primarily resulted from a decline in average investment securities of $23.0 million. Interest expense decreased by $2,501,000 compared to the same time period in 2007. Average interest-bearing liabilities decreased by $16.9 million primarily as a result of management’s efforts to decrease the Bank’s reliance on short term borrowings and time deposits which was partially offset by the issuance of $6.2 million in trust preferred securities in 2007. The average rate paid on interest-bearing liabilities decreased to 3.22% for the nine months ended September 30, 2008 from 4.09% for the same period of 2007 and is attributable to the Federal Reserve policy of lowering short term rates and local pricing for deposits.

Provision for Loan Losses. The provision for loan losses was $505,000 for the nine months ended September 30, 2008, compared to $101,000 for the same period in 2007. This increase was primarily attributable to the increased risk in the loan portfolio during 2008 compared to the same period in 2007 due primarily to a recent deterioration in the residential real estate spot lot construction loan portfolio.

Noninterest Income . Noninterest income increased $169,000, or 27.0%, for the nine months ended September 30, 2008 to $795,000, up from $626,000 for the same period of 2007, reflecting mainly an increase of $90,000 in gains on sales of available-for-sale securities, an increase in prepayment penalties on loans of $32,000 and an increase in miscellaneous fees attributable to the sale of branch rights of one of the former Farnsworth branch sites for $30,000.

Noninterest Expenses . For the nine months ended September 30, 2008, noninterest expenses increased by $428,000, or 4.2%, to $10,588,000, compared to $10,160,000 for the same period of 2007. Increases in compensation expenses of $171,000, in occupancy, equipment and data processing expenses of $196,000, and amortization of core deposit intangible asset of $72,000, are primarily a result of a full nine months of operations related to the Farnsworth Bancorp, Inc. acquisition in March 2007 and the opening of our Delran branch in June 2007.

Income Taxes . We recorded an income tax benefit of $217,000 on loss before taxes of $622,000 for the nine months ended September 30, 2008, resulting in an effective tax rate of 34.9%, compared to an income tax benefit of $54,000 on loss before taxes of $195,000 for the same period of 2007.

Consolidated Financial Condition

At September 30, 2008 and December 31, 2007

(Unaudited)

The following discussion compares the financial condition at September 30, 2008 (unaudited) to the financial condition at December 31, 2007. 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 $22.6 million, or 5.6%, to $387.9 million at September 30, 2008, compared to $410.5 million at December 31, 2007. This was due to management’s efforts to decrease the Bank’s reliance on time deposits and reductions in the investment and loan portfolios.

Loans. Loans outstanding decreased $10.2 million, or 3.3%, from $312.2 million at December 31, 2007. The decrease in loans was due to normal contractual loan payments/payoffs in the loan portfolio, an early loan payoff of $2.0 million and the sale of a $3.6 million nonperforming loan.

Allowance for Loan Lo sses. The allowance for loan losses was $3.0 million at September 30, 2008 as compared to $2.9 million at December 31, 2007. The ratio of the allowance for loan losses to total loans was 1.00% and 0.93% at September 30, 2008 and December 31, 2007, 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 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 results of operations could be significantly and adversely 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 Company had $8.1 million and $4.5 million, respectively, in loans on nonaccrual status at September 30, 2008 and December 31, 2007. This increase is the result of ten loans that the Company placed on nonaccrual status during the first nine months of 2008, less one which was sold.

Goodwill. The Company recorded $11.8 million of goodwill from its merger-related activities during 2007. In accordance with SFAS No. 142, goodwill is not amortized but rather tested for impairment annually during the fourth quarter. Impairment testing consists of comparing the fair value of the acquired reporting units with their carrying amounts, including goodwill. An impairment loss would be recorded to the extent the carrying value of the goodwill exceeds the fair value of the goodwill. At September 30, 2008, the Company’s market capitalization was less than the total shareholders’ equity, which is one factor that is considered when determining goodwill impairment. If current market conditions persist, it is possible that we will have a goodwill impairment charge against earnings in a future period.

Deposits. Deposits totaled $321.5 million at September 30, 2008, decreasing $27.5 million, or 7.9%, from the December 31, 2007 balance of $349.0 million. The decrease in deposits resulted primarily from management’s efforts to decrease the Bank’s reliance on time deposits.

Federal Home Loan Bank Advances and Other Borrowings. Federal Home Loan Bank advances and other borrowings totaled $16.0 million at September 30, 2008, increasing $5.5 million from December 31, 2007. The increase in borrowings resulted primarily from management’s efforts to increase the Bank’s net interest income through the purchase of investment securities.

Shareholders’ Equity. Shareholders’ equity decreased by $0.4 million, or 1.0%, mainly as a result of our net loss as of September 30, 2008.

Comparative Average Balances, Interest and Yields:

	Three Months Ended
	September 30, 2008								September 30, 2007
	Average Balance			Interest Income/Expense		Annual Yield			Average Balance			Interest Income/Expense		Annual Yield
Assets
Loans, net (1)	$	298,773,000		$	5,125,000		6.90	%	$	310,504,000		$	6,032,000		7.71	%
Investment securities (2)		28,955,000			318,000		4.41			55,320,000			570,000		4.09
Due from banks		144,000			-		1.48			2,047,000			28,000		5.49
Federal funds sold		4,708,000			21,000		1.81			11,124,000			144,000		5.15
Total interest-earning assets		332,580,000			5,464,000		6.61			378,995,000			6,774,000		7.09

Allowance for loan losses		(3,006,000	)							(2,854,000	)
Other assets		48,636,000								49,374,000
Total assets	$	378,210,000							$	425,515,000

Liabilities and shareholders’ equity
Time deposits	$	181,059,000			1,636,000		3.59	%	$	230,914,000			2,829,000		4.84	%
NOW/MMDA/savings accounts		105,213,000			349,000		1.32			102,402,000			595,000		2.36
Borrowed funds		9,821,000			136,000		5.48			7,236,000			113,000		6.20
Total interest-bearing liabilities		296,093,000			2,121,000		2.85			340,552,000			3,537,000		4.12

Noninterest-bearing demand deposits		37,971,000								41,778,000
Other liabilities		1,430,000								6,000
Shareholders’ equity		42,716,000								43,179,000
Total liabilities and shareholders’ equity	$	378,210,000							$	425,515,000

Net interest income				$	3,343,000							$	3,237,000

Interest rate spread (3)							3.76	%							2.97	%

Net interest margin (4)							4.00	%							3.39	%

________________________

(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.

	Nine Months Ended
	September 30, 2008								September 30, 2007
	Average Balance			Interest Income/Expense		Annual Yield			Average Balance			Interest Income/Expense		Annual Yield
Assets
Loans, net (1)	$	301,245,000		$	15,839,000		7.02	%	$	295,497,000		$	16,984,000		7.68	%
Investment securities (2)		34,412,000			1,093,000		4.24			57,390,000			1,778,000		4.14
Due from banks		113,000			2,000		2.38			4,444,000			168,000		5.07
Federal funds sold		9,366,000			159,000		2.27			10,974,000			428,000		5.22
Total interest-earning assets		345,136,000			17,093,000		6.62			368,305,000			19,358,000		7.03

Allowance for loan losses		(2,866,000	)							(2,567,000	)
Other assets		48,393,000								40,285,000
Total assets	$	390,663,000							$	406,023,000

Liabilities and shareholders’ equity
Time deposits	$	194,283,000			5,926,000		4.07	%	$	220,669,000			7,944,000		4.81	%
NOW/MMDA/savings accounts		103,211,000			1,068,000		1.38			97,798,000			1,721,000		2.35
Borrowed funds		9,882,000			423,000		5.72			5,851,000			253,000		5.78
Total interest-bearing liabilities		307,376,000			7,417,000		3.22			324,318,000			9,918,000		4.09

Noninterest-bearing demand deposits		38,422,000								40,554,000
Other liabilities		1,856,000								558,000
Shareholders’ equity		43,009,000								40,593,000
Total liabilities and shareholders’ equity	$	390,663,000							$	406,023,000

Net interest income				$	9,676,000							$	9,440,000

Interest rate spread (3)							3.40	%							2.94	%

Net interest margin (4)							3.74	%							3.43	%

________________________

(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 93.9% and 89.5% at September 30, 2008 and December 31, 2007, 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 September 30, 2008, the Company maintained lines of credit with correspondent banks of $89.7 million. Longer term funding requirements can be satisfied through advances from the Federal Home Loan Bank.

As of September 30, 2008, the Company’s investment securities portfolio included $30.0 million of mortgage-backed securities that provide significant cash flow each month. About half 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 consistent to secondary market criteria, and provide an additional source of liquidity.

Capital Resources

A strong capital position is fundamental to support the continued growth of the Company. 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 September 30, 2008, management believes that the Bank is “well capitalized,” as defined by regulatory banking agencies, and in compliance with all applicable regulatory capital requirements. 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.

On June 16, 2007, the Company opened a branch in Delran Township, Burlington County, New Jersey. The Company has incurred and will continue to incur significant expenses in connection with the new branch, including costs associated with branch construction, staffing and equipment needs sufficient to maintain the infrastructure necessary for branch operations. Unless and until the new branch generates sufficient income to offset these additional costs, the new branch will reduce the Company’s net earnings.

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 September 30, 2008, commitments to extend credit and unused lines of credit amounted to approximately $52.6 million and standby letters of credit were approximately $5.6 million. See Note 8 to the Notes to Financial Statements included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007 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

Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods.

Internal Control over Financial Reporting

During the quarter under 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.

None.

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: November 14, 2008	By: /s/ Robert H. King
	Robert H. King
	President and Chief Executive Officer

Date: November 14, 2008	By: /s/ R. Scott Horner
	R. Scott Horner
	Executive Vice President and Chief
	Financial Officer

Sterling Banks (MM) (NASDAQ:STBK)
Historical Stock Chart
From Jun 2024 to Jul 2024

Click Here for more Sterling Banks (MM) Charts.

Sterling Banks (MM) (NASDAQ:STBK)
Historical Stock Chart
From Jul 2023 to Jul 2024

Boards:

Quotes:

Boards

News

Market Data

Markets

Discover

STBK Sterling Banks (MM)

Latest STBK Messages

Loading Messages....

News

Loading Messages....

Your Recent History