- 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: March 31, 2009

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File No. 333-133649

STERLING BANKS, INC.

(Exact name of registrant as specified in its charter)

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

3100 Route 38, Mount Laurel, New Jersey 08054

(Address of principal executive offices) (Zip Code)

856-273-5900

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.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 8, 2009: 5,843,362

STERLING BANKS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2009

INDEX

Part I	FINANCIAL INFORMATION	Page

Item 1.	Consolidated Financial Statements
	Balance Sheets	4
	Statements of Operations	6
	Statements of Shareholders’ Equity	7
	Statements of Cash Flows	8
	Notes to Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4T.	Controls and Procedures	23

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24

SIGNATURES		25

EXHIBITS

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Sec.302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Sec.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. Sec.1350, as adopted pursuant to Sec.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, 2009 AND DECEMBER 31, 2008

	March 31, 2009 (unaudited)			December 31, 2008
ASSETS
Cash and cash due from banks	$	8,525,000		$	13,054,000
Federal funds sold		16,327,000			472,000
Cash and cash equivalents		24,852,000			13,526,000

Investment securities held-to-maturity, at cost (fair value of $18,088,000 at March 31, 2009 and $19,992,000 at December 31, 2008)		17,808,000			19,884,000
Investment securities available-for-sale, at fair value		31,875,000			24,097,000
Total investment securities		49,683,000			43,981,000

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

Loans held for sale		-			2,000

Loans		302,661,000			305,626,000
Less: allowance for loan losses		(8,380,000	)		(8,531,000	)
Total net loans		294,281,000			297,095,000

Core deposit intangible asset, net		2,275,000			2,374,000
Bank premises and equipment, net		8,987,000			9,122,000
Accrued interest receivable and other assets		10,966,000			10,557,000

Total assets	$	393,492,000		$	379,105,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2009 AND DECEMBER 31, 2008

	March 31, 2009 (unaudited)			December 31, 2008
LIABILITIES Deposits
Noninterest-bearing	$	34,020,000		$	35,873,000
Interest-bearing		308,886,000			292,721,000
Total deposits		342,906,000			328,594,000

Federal Home Loan Bank advances		16,000,000			16,000,000
Subordinated debentures		6,186,000			6,186,000
Accrued interest payable and other accrued liabilities		1,434,000			1,204,000

Total liabilities		366,526,000			351,984,000

COMMITMENTS AND CONTINGENCIES (Note 2)

SHAREHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000 shares authorized, none issued or outstanding		-			-
Common stock, $2 par value, 15,000,000 shares authorized; 5,843,362 issued and outstanding at March 31, 2009 and December 31, 2008		11,687,000			11,687,000
Additional paid-in capital		29,786,000			29,767,000
Accumulated deficit		(14,728,000	)		(14,279,000	)
Accumulated other comprehensive income (loss)		221,000			(54,000	)
Total shareholders' equity		26,966,000			27,121,000
Total liabilities and shareholders' equity	$	393,492,000		$	379,105,000

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Unaudited)

	2009			2008
INTEREST INCOME
Interest and fees on loans	$	4,211,000		$	5,510,000
Interest and dividends on securities		494,000			461,000
Interest on due from banks and federal funds sold		6,000			64,000
Total interest and dividend income		4,711,000			6,035,000

INTEREST EXPENSE
Interest on deposits		1,952,000			2,742,000
Interest on Federal Home Loan Bank advances and overnight borrowings		160,000			69,000
Interest on subordinated debentures		104,000			104,000
Total interest expense		2,216,000			2,915,000

Net interest income		2,495,000			3,120,000

PROVISION FOR LOAN LOSSES		-			-

Net interest income after provision for loan losses		2,495,000			3,120,000

NONINTEREST INCOME
Service charges		66,000			60,000
Gains on sales of available-for-sale securities		-			93,000
Miscellaneous fees and other		153,000			151,000
Total noninterest income		219,000			304,000

NONINTEREST EXPENSES
Compensation and benefits		1,646,000			1,891,000
Occupancy, equipment and data processing		946,000			923,000
Marketing and business development		130,000			147,000
Professional services		239,000			165,000
Amortization of core deposit intangible asset		99,000			87,000
Other operating expenses		367,000			337,000
Total noninterest expenses		3,427,000			3,550,000

LOSS BEFORE INCOME TAX BENEFIT		(713,000	)		(126,000	)

INCOME TAX BENEFIT		(264,000	)		(42,000	)

NET LOSS	$	(449,000	)	$	(84,000	)

NET LOSS PER COMMON SHARE
Basic and Diluted	$	(0.08	)	$	(0.01	)

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, 2009 AND 2008

(Unaudited)

							Retained			Accumulated
					Additional		Earnings			Other			Total
	Common Stock				Paid-In		(Accumulated			Comprehensive			Shareholders'
	Shares		Amount		Capital		Deficit)			Income (Loss)			Equity
December 31, 2007		5,843,362	$	11,687,000	$	29,708,000	$	1,949,000		$	(36,000	)	$	43,308,000

Comprehensive income:
Net loss – 2008		-		-		-		(84,000	)		-			(84,000	)
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment
and tax effects		-		-		-		-			138,000			138,000
Total comprehensive income														54,000
Stock compensation		-		-		11,000		-			-			11,000

March 31, 2008		5,843,362	$	11,687,000	$	29,719,000	$	1,865,000		$	102,000		$	43,373,000


December 31, 2008		5,843,362	$	11,687,000	$	29,767,000	$	(14,279,000	)	$	(54,000	)	$	27,121,000

Comprehensive income (loss):
Net loss – 2009		-		-		-		(449,000	)		-			(449,000	)
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment
and tax effects		-		-		-		-			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

See Notes to Consolidated Financial Statements

STERLING BANKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Unaudited)

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(449,000	)	$	(84,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		286,000			270,000
Net amortization of purchase premium on securities		70,000			11,000
Net amortization of core deposit intangible		99,000			87,000
Stock compensation		19,000			11,000
Realized loss on sales or retirement of equipment		-			1,000
Realized loss on sales of repossessed property		12,000			-
Realized gain on sales of securities available-for-sale		-			(93,000	)
Proceeds from sale of loans held for sale		2,000			89,000
Originations of loans held for sale		-			(58,000	)
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable and other assets		(856,000	)		488,000
Increase in accrued interest payable and other accrued liabilities		230,000			232,000
Net cash provided by (used in) operating activities		(587,000	)		954,000

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale		(9,665,000	)		-
Proceeds from sales of securities available-for- sale		-			5,470,000
Proceeds from maturities of securities available-for-sale		1,000,000			18,275,000
Proceeds from maturities of securities held-to-maturity		169,000			-
Proceeds from principal payments on mortgage-backed securities available-for-sale		1,320,000			838,000
Proceeds from principal payments on mortgage-backed securities held-to-maturity		1,861,000			474,000
Purchases of restricted stock		-			(1,131,000	)
Proceeds from sale of restricted stock		-			1,553,000
Net decrease in loans		2,814,000			269,000
Proceeds from sales of other real estate owned		253,000			-
Purchases of premises and equipment		(151,000	)		(163,000	)
Net cash provided by (used in) investing activities		(2,399,000	)		25,585,000

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits		(1,853,000	)		3,034,000
Net increase (decrease) in interest-bearing deposits		16,165,000			(10,142,000	)
Repayments of Federal Home Loan Advances		-			(9,500,000	)
Net cash provided by (used in) financing activities		14,312,000			(16,608,000	)

INCREASE IN CASH AND CASH EQUIVALENTS		11,326,000			9,931,000

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

CASH AND CASH EQUIVALENTS, MARCH 31,	$	24,852,000		$	21,719,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: Interest on deposits and borrowed funds	$	2,198,000		$	2,998,000
Income taxes	$	-		$	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 headquartered in Mount Laurel, NJ. Through its subsidiary, 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 Sterling Bank (the “Bank”).

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements and Basis of Presentation

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

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

Use of Estimates

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

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Commitments

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

Contingencies

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

Investments

The Company has identified investment securities that it has the intent and ability to hold to maturity considering all reasonably foreseeable events or conditions. The securities are classified as “held-to-maturity.” The Company has also identified investment securities that will be held for indefinite periods of time, including securities that will be used as part of the Company’s asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as “available-for-sale” and are carried at fair value, with any temporary unrealized gains or losses reported as a separate component of other comprehensive income, net of the related income tax effect. 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 March 31, 2009 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.

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.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

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

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment and definite lived intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. No impairments have occurred during the three months ended March 31, 2009 and 2008.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Core Deposit Intangible

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

Income Taxes

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

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

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

On January 1, 2009, FASB Staff Position (“FSP”) EITF 03-6-1 Share Based Payments and Earnings Per Share (“EPS”) became effective. According to the FSP EITF, unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities under Financial Accounting Standards ("FAS") No. 128. As such, they should be included in the computation of basic EPS using the two class method. At March 31, 2009 the Bank did not have any shares which were considered participating securities under FAS No. 128.

In April 2009, the Financial Accounting Standards Board (FASB) issued three amendments to the fair value measurement, disclosure and other-than-temporary impairment standards:

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

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

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

These amendments were in response to concerns raised by constituents, the mark-to-market study conducted for Congress by the Securities and Exchange Commission (SEC), and recent hearings held by the U.S. House of Representatives on mark-to-market accounting. Each of these accounting standards is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company has chosen not to adopt these FSPs as of March 31, 2009 and will adopt these effective June 30, 2009. The Company is currently evaluating the impact of adopting these FSP’s, however, they are not expected to materially impact the financial condition or results of operations.

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

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

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

FSP FAS 115-2 and 124-2 clarifies the interaction of factors that should be considered when determining whether a debt security is other-than-temporarily impaired (“OTTI”). For debt securities, management must assess whether (a) it has the intent to sell the security, or (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. If OTTI exists, but the entity does not intend to sell the security, then the OTTI adjustment is separated into the credit-related impairment portion which is charged to earnings and the other impairment portion which is recognized in other comprehensive income. This FSP also expands and increases the frequency of certain OTTI related disclosures.

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

FSP FAS 107-1 and APB 28-1 require disclosures about the fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements. Fair value information along with the significant assumptions used to estimate fair value must be disclosed.

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 March 31, 2009 and 2008 were 5,843,362, respectively. Diluted earnings per common share consider common share equivalents (when dilutive) outstanding during each year. Shares issuable upon the exercise of stock options were not considered in the calculation of net loss per share in 2009 or 2008, as their inclusion would be anti-dilutive.

NOTE 4. STOCK-BASED EMPLOYEE COMPENSATION

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

During the three months ended March 31, 2009 and 2008, the Company did not issue any options. Compensation cost charged to operations for the three months ended March 31, 2009 and 2008 was $19,000 and $11,000, respectively.

As of March 31, 2009, there was approximately $614,000 of total unrecognized compensation cost related to share-based payments which is expected to be recognized over a weighted average period of 8.8 years. Of the 296,984 unvested options at December 31, 2008, 3,654 options vested in 2009, 1,756 options expired and 291,574 options remain unvested at March 31, 2009.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. COMMON STOCK

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

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

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 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 March 31, 2009:

Total Capital (to Risk-Weighted Assets)	$31,315	10.44%	³ $24,151	³ 8.0%	³ $30,189		³ 10.0%
Tier I Capital (to Risk-Weighted Assets)	$27,483	9.17%	³ $12,075	³ 4.0%	³ $18,113		³ 6.0%
Tier I Capital (to Average Assets)	$27,483	7.19%	³ $15,599	³ 4.0%	³ $19,249		³ 5.0%

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

Total Capital (to Risk-Weighted Assets)	$32,134	10.52%	³ $24,428	³ 8.0%	³ $30,535			³ 10.0%
Tier I Capital (to Risk-Weighted Assets)	$28,258	9.25%	³ $12,214	³ 4.0%	³ $18,321			³ 6.0%
Tier I Capital (to Average Assets)	$28,258	7.21%	³ $15,675	³ 4.0%	³ $19,594			³ 5.0%

NOTE 7. FAIR VALUE MEASUREMENT

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

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. FAIR VALUE MEASUREMENT (continued)

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

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

Level 1 Inputs

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

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

Level 2 Inputs

Quoted prices for similar assets or liabilities in active markets.

Quoted prices for identical or similar assets or liabilities in markets that are not active.

Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

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

Level 3 Inputs

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

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

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. FAIR VALUE MEASUREMENT (continued)

Fair Value on a Recurring Basis

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

March 31, 2009	Level 1	Level 2	Level 3	Total
Financial Assets
Investment securities available-for-sale	$ -	$31,875,000	$ -	$31,875,000

December 31, 2008	Level 1	Level 2	Level 3	Total
Financial Assets
Investment securities available-for-sale	$ -	$24,097,000	$ -	$24,097,000

Securities Portfolio

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

Fair Value on a Nonrecurring Basis

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

March 31, 2009	Level 1	Level 2	Level 3	Total
Financial Assets
Impaired loans	$ -	$ -	$18,064,000	$18,064,000
Other real estate owned	$ -	$ -	$ 1,363,000	$ 1,363,000

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

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 loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

STERLING BANKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. FAIR VALUE MEASUREMENT (continued)

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 March 31, 2009 was $3,003,000. During the three months ended March 31, 2009, the valuation allowance for impaired loans increased $201,000 from $2,802,000 at December 31, 2008. During the three months ended March 31, 2008, the valuation allowance for impaired loans decreased $203,000.

Other Real Estate Owned

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

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

Forward-Looking Statements

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

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

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

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

General

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

Consolidated Results of Operations

Three Months Ended March 31, 2009 and 2008

(Unaudited)

The following discussion compares the results of operations for the three months ended March 31, 2009 (unaudited) to the results of operations for the three months ended March 31, 2008 (unaudited). This discussion should be read in conjunction with the accompanying financial statements (unaudited) and related notes, as well as statistical information included in this Form 10-Q.

Net Loss. For the three months ended March 31, 2009, the net loss totaled $449,000, compared to net loss of $84,000 for the three months ended March 31, 2008. Decreased earnings for the three months ended March 31, 2009 was attributable primarily to a decrease in net interest income of $625,000 and a decrease in gains on sales of available-for-sale securities of $93,000, partially offset by a decrease in noninterest expenses of $123,000. Basic and diluted loss per share for the three months ended March 31, 2009 and 2008 totaled $0.08 and $0.01, respectively.

Net Interest Income. Net interest income for the three months ended March 31, 2009 totaled $2,495,000, a decrease of 20.0% from $3,120,000 for the three months ended March 31, 2008. The net interest margin for the three months ended March 31, 2009 was 2.86%, compared to 3.50% for the comparable period of 2008. This decrease is primarily as a result of lost interest income on nonaccrual loans of approximately $558,000 in 2009.

Interest income decreased by $1,324,000 for the three months ended March 31, 2009 from the same period in 2008, attributable to a decrease in average interest earning assets of $4.9 million and a 137 basis point decrease in the yield on average earning assets from 6.77% in 2008 to 5.40% in 2009. Of the 137 basis point decrease, approximately 64 basis points is attributable to the loss of interest income due to the reversal in 2009 of previously recognized interest income on loans that became nonaccrual in 2009. Average loans outstanding decreased by $11.2 million while average investment securities increased $1.2 million and due from banks and federal funds sold increased $5.2 million. The decrease in average loans outstanding is attributable primarily to normal monthly payments and/or payoffs, while the increase in average investment securities and federal funds sold was attributable to management’s efforts to decrease the Bank’s general level of risk on the balance sheet. Interest expense decreased by $699,000 from the same time period in 2008. Average interest-bearing liabilities increased by $5.8 million, which was attributable an increase in borrowed funds in an effort to increase the Bank’s net interest income by borrowing at a lower cost and investing in higher yielding assets. The average rate paid on interest-bearing liabilities decreased to 2.74% for the three months ended March 31, 2009 from 3.65% for the same period of 2008.

Provision for Loan Losses. No provision for loan losses was made during the three months ended March 31, 2009 and 2008. As a result of FAS 5 and FAS 114 analysis of the loan portfolio, management concluded that no provision was necessary in either the first quarter of 2009 or 2008.

Noninterest Income . Noninterest income decreased $85,000, or 28.0%, for the three months ended March 31, 2009 to $219,000 compared to $304,000 for the same period of 2008, reflecting a decrease in gains on sales of available-for-sale securities of $93,000.

Noninterest Expenses . For the three months ended March 31, 2009, noninterest expenses decreased by $123,000, or 3.5%, to $3,427,000, compared to $3,550,000 for the same period of 2008. Decreases in personnel costs were $245,000, reflecting bonuses expensed in 2008 and the effect of staff reductions as a result of the closure of one our branch locations in November 2008. These decreases were partially offset by an increase in loan workout and repossessed property expenses of $85,000.

In response to the impact of the current economic environment on the banking industry, the FDIC has significantly increased their assessment rates to all banks. In addition, the FDIC has announced a special one-time assessment during the quarter which is needed to recapitalize the reserve fund. The assessment rate has not been finalized but may range anywhere from 6 to 20 basis points depending upon final legislation. The special assessment may have a material impact on the Company’s second or third quarter earnings.

Income Taxes . We recorded an income tax benefit of $264,000 on loss before taxes of $713,000 for the three months ended March 31, 2009, resulting in an effective tax rate of 37.0% for the 2009 period, compared to income tax benefit of $42,000 on loss before taxes of $126,000 for the same period of 2008, resulting in an effective tax rate of 33.3% for the 2008 period. The fluctuation in the effective tax rate is due to the amount and type of permanent tax difference between periods.

Consolidated Financial Condition

At March 31, 2009 and December 31, 2008

(Unaudited)

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

Total Assets. Total assets increased $14.4 million, or 3.8%, to $393.5 million at March 31, 2009, compared to $379.1 million at December 31, 2008. This was due to management’s efforts to increase the Bank’s net interest margin and liquidity.

Loans. Loans outstanding decreased $3.0 million, or 1.0%. The decrease in loans was due to normal contractual loan payments and/or payoffs in the loan portfolio.

Allowance for Loan Lo sses. The allowance for loan losses was $8.4 million at March 31, 2009 as compared to $8.5 million at December 31, 2008. The ratio of the allowance for loan losses to total loans was 2.77% and 2.79% at March 31, 2009 and December 31, 2008, respectively. The Company’s management has considered nonperforming assets and other assets of concern in establishing the allowance for loan losses. The Company continues to monitor its allowance for possible loan losses and will make future additions or reductions in light of the level of loans in its portfolio and as economic conditions dictate.

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

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

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

The Company had $14.2 million and $9.9 million, respectively, in loans on nonaccrual status at March 31, 2009 and December 31, 2008. This increase is the result of 15 loans that the Company placed on nonaccrual status during the first three months of 2009, less one that was transferred to other real estate owned. Of the 15 loans that were placed on nonaccrual status during the first three months of 2009, all were rated impaired as of December 31, 2008 and no additional valuation reserve was needed for these loans. Impaired loans increased by $4.0 million, or 24%, between December 31, 2008 and March 31, 2009; however, as a result of the collateral valuation, the FAS 114 valuation reserve only increased by $202,000, or 7%.

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

Commercial real estate loans analyzed under FAS 5 decreased $16.1 million, or 12%, between December 31, 2008 and March 31, 2009 due to payments and payoffs and loans being analyzed under FAS 114. Loans analyzed under FAS 5 under the spot lot construction portfolio had their qualitative adjustment factors increased an average of 22% due to the risk present in the performing portfolio. As a result of the above mentioned activity during the first quarter of 2009, management concluded that no provision for loan losses was needed during the first quarter of 2009.

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

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

Shareholders’ Equity. Shareholders’ equity decreased by $0.2 million, or 0.6%, mainly as a result of our net loss, partially offset by an increase in other comprehensive income.

Comparative Average Balances, Interest and Yields:

	Three Months Ended
	March 31, 2009								March 31, 2008
	Average Balance			Interest Income/Expense		Annual Yield			Average Balance			Interest Income/Expense		Annual Yield
Assets
Loans, net (1)	$	292,959,000		$	4,211,000		5.83	%	$	304,170,000		$	5,510,000		7.29	%
Investment securities (2)		46,291,000			494,000		4.33			45,138,000			461,000		4.10
Due from banks and Federal funds sold		14,574,000			6,000		0.15			9,385,000			64,000		2.74
Total interest-earning assets		353,824,000			4,711,000		5.40			358,693,000			6,035,000		6.77

Allowance for loan losses		(8,461,000	)							(2,889,000	)
Other assets		44,294,000								48,352,000
Total assets	$	389,657,000							$	404,156,000

Liabilities and shareholders’ equity
Time deposits	$	199,286,000		$	1,694,000		3.45	%	$	205,849,000		$	2,335,000		4.56	%
NOW/MMDA/savings accounts		105,763,000			258,000		0.99			103,089,000			407,000		1.59
Borrowed funds		22,342,000			264,000		4.80			12,639,000			173,000		5.51
Total interest-bearing liabilities		327,391,000			2,216,000		2.74			321,577,000			2,915,000		3.65

Noninterest-bearing demand deposits		33,886,000								38,582,000
Other liabilities		1,442,000								769,000
Shareholders’ equity		26,938,000								43,228,000
Total liabilities and shareholders’ equity	$	389,657,000							$	404,156,000

Net interest income				$	2,495,000							$	3,120,000

Interest rate spread (3)							2.66	%							3.12	%

Net interest margin (4)							2.86	%							3.50	%

________________________________

(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 88.3% and 93.0% at March 31, 2009 and December 31, 2008, respectively.

The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support growth. The Company also seeks to augment such deposits with longer term and higher yielding certificates of deposit. To the extent that retail deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds market. As of March 31, 2009, the Company maintained lines of credit with correspondent banks of $89.8 million. Longer term funding requirements can be satisfied through advances from the Federal Home Loan Bank.

As of March 31, 2009, the Company’s investment securities portfolio included $37.5 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, 2009, management believes that the Bank is “well capitalized,” as defined by regulatory banking agencies. The Company’s long term goal is to ensure that the Bank is “well capitalized” under the applicable regulatory standards. To this end, the Company issued $6.0 million of trust preferred securities (the “Securities”) on May 1, 2007. The Securities bear interest at 6.744% for the first five years. Subsequently, the interest rate will be adjusted quarterly based on a three month LIBOR rate plus 1.70%. The Securities are callable after five years with a final maturity of May 1, 2037. The Company contributed $4.5 million of the proceeds of the Securities to the capital of the Bank as Tier I capital. If the Company determines that there is a need to preserve capital or improve liquidity, the ability exists to defer interest payments for a maximum of five years.

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, 2009, commitments to extend credit and unused lines of credit amounted to approximately $42.6 million and standby letters of credit were approximately $4.9 million. See Note 8 to the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for additional information regarding the Bank’s long-term lease obligations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of March 31, 2009, management of the Company, under the supervision and with the participation the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as contemplated by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2009, in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods.

Changes in Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As disclosed in management’s annual report on internal control over financial reporting, filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 identified a material weakness related to the internal controls over the process supporting the determination of the adequacy of the allowance for loan losses.

In order to ensure that adequacy and accuracy in management’s determinations are consistently present, the Company has implemented a procedure of external review of the details of management’s assessments which review was completed for the period ended March 31, 2009 and will be completed on a timely basis each subsequent quarter in order to meet the deadlines for all future reporting.

Other than the change discussed above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, 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 § 3 02 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 14, 2009	By: /s/ Robert H. King
	Robert H. King
	President and Chief Executive Officer



Date: May 14, 2009	By: /s/ R. Scott Horner
	R. Scott Horner
	Executive Vice President and Chief
	Financial Officer