UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


____________





FORM
10-K





(Mark
One)




[X] 
Annual report pursuant to section 13 or 15 (d) of the Securities Exchange Act of
1934


For the
fiscal year ended  December 31,
2008





-OR-


[ 
]Transition report pursuant to 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)
              (I.R.S.
      E.I.N.)





3100 Route 38, Mount Laurel, New
      Jersey
              08054(Address
      of principal executive offices)
              Zip
      Code





Registrant's
telephone number, including area code:  (856)
273-5900





Securities
registered pursuant to Section 12(b) of the Act:





Title of Each Class
              Name of Each Exchange on Which
      RegisteredCommon
      Stock, par value $2.00 per share
              NASDAQ
      Capital Market





Securities
registered pursuant to Section 12(g) of the Act:





None


(Title of
Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  YES __  NO _X_





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.  YES __  NO _X_





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.  YESX  NO
__





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]








Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. 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
            oNon-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





The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the sale price of the registrant's Common Stock as of June
30,2008,was $21,789,880 ($4.30 per
share times 5,067,414 shares of Common Stock held by
non-affiliates).





As of
March 13, 2009, there were 5,843,362 outstanding shares of the registrant's
Common Stock.





DOCUMENTS
INCORPORATED BY REFERENCE





1.
            Portions
      of the registrant’s Definitive Proxy Statement to Shareholders for the
      2009 Annual Meeting of Shareholders are incorporated by reference to Part
      III of this Annual Report.











PART
I





Forward-Looking
Statements





Sterling
Banks, Inc. (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 Annual
Report on Form 10-K and the exhibits hereto), 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
Company.




3


Item
1.  Description of Business.





General





The
Company is a bank holding company headquartered in Burlington County, New
Jersey, with assets of $379.1 million as of December 31, 2008.  Our
main office is located in Mount Laurel, New Jersey with nine other Community
Banking Centers located in Burlington and Camden Counties, New
Jersey.  We believe that this geographic area represents an attractive
banking market with a diversified economy.  We began operations in
December 1990 with the purpose of serving consumers and small to medium-sized
businesses in our market area.  We have chosen to focus on the higher
growth areas of western Burlington County and eastern Camden
County.  We believe that understanding the character and nature of the
local communities that we serve, and having first-hand knowledge of customers
and their needs for financial services enable us to compete effectively and
efficiently.  All references to “we,” “us,” “our,” and “ours” and
similar terms in this report refers to the Company and its subsidiaries,
collectively, except where the context otherwise requires.





Our
growth and the strength of our asset quality result from our implementation of a
carefully developed strategic planning process that provides the basis for our
activities and direction.  We are guided by a series of important
principles that provides the focus from which we continue to effectively and
systematically manage our operations.  These principles include:
attracting core deposits; developing a cohesive branch network; maintaining a
community focus; emphasizing local loan generation; providing attentive and
highly-personalized service; vigorously controlling and monitoring asset
quality; and attracting and empowering highly-experienced
personnel.





The
Company is the successor registrant to Sterling Bank (the “Bank”) pursuant to
the Plan of Reorganization by and between the Company and the Bank that was
completed on March 16, 2007, whereby the Bank became a wholly-owned subsidiary
of the Company.  Additionally, on March 16, 2007, the Bank, the
Company and Farnsworth Bancorp, Inc. (“Farnsworth”) completed the merger (the
“Merger”) in which Farnsworth merged with and into the Company, with the Company
as the surviving corporation.  Subsequent to the Merger, Peoples
Savings Bank, a wholly-owned subsidiary of Farnsworth, was merged with and into
the Bank, with the Bank as the surviving Bank.  As a result of the
merger of Peoples Savings Bank, the Bank acquired four new branches, one of
which was subsequently closed.





Development of the Branch
Network.  We have achieved our growth by expanding our branch
presence into markets we have identified as growth opportunities.  We
began a period of facility expansion in September 1996 with the opening of our
second branch in Cherry Hill, New Jersey.  This was followed by the
opening of new branches in Southampton Township-Vincentown (December 1998),
Maple Shade (May 1999), Medford (May 2000), Voorhees (November 2005), and Delran
(June 2007).  In addition, as a result of the Merger, we have acquired
three branches in Bordentown, Florence and Evesham Township-Marlton (March
2007).  Each of these full-service Community Banking Centers is
carefully positioned to deliver competitively priced and personalized products
and services with customer convenient banking hours during both traditional and
non-traditional hours of availability.  We continue to evaluate
possible sites for the establishment of new branches, but we have no definitive
plans to open any branches in the near future.





Maintaining a Community
Focus.We offer a wide array of banking products and services
specifically designed for the consumer and the small to medium-sized business,
informed and friendly professional staff, customer convenient operating hours,
consistently-applied credit policies, and local and timely decision
making.




4


Our
market area has a concentration of national and regional financial institutions
that have increasingly focused on large corporate customers and standardized
loan and deposit products.  We believe that many customers of these
financial institutions are dissatisfied.  As a result, we believe that
there exists a significant opportunity to attract and retain those customers
dissatisfied with their current banking relationship.





Emphasizing Core Deposit
Generation.  We seek to attract core deposits as the starting
point of a relationship development process.  We generally do not pay
above-market rates on deposits.  We endeavor to attract loyal
depositors by offering fairly priced financial services, convenient banking
hours and a relationship-focused approach.  We believe that our growth
is driven by our ability to generate stable core deposits that in turn are used
to fund local, quality loans.  Our approach contrasts with that of
some banks, where a priority on loan generation drives a need to obtain sources
of funds.  Our approach and philosophy allows management to have more
control in managing both our net interest margin and the quality of our loan
portfolio.





Emphasizing Local Loan
Generation.  Our management team’s depth of experience in
commercial lending has been an important factor in our efforts to increase our
lending to consumers and small to medium-sized businesses in the southern New
Jersey region.  The Company generates substantially all of its loans
in its immediate market area.  Our knowledge of our market has enabled
us to identify niche markets that are similar to those in which we currently
operate.  For example, we have formed two specific groups: the
Specialized Lending and the Private Banking Group.  The Specialized
Lending Group focuses on construction loans.  Our Private Banking
Group targets wealthy individuals and families in our markets and offers
flexible, responsive service.





Providing Attentive and Personalized
Service.  We believe that a very attractive niche exists
serving consumers and small to medium-sized businesses that, in our management’s
view, are not adequately served by larger competitors.  We believe
that this segment of the market responds very positively to the attentive and
highly personalized service that we provide.





Vigorous Control of Asset
Quality.  Historically, we have maintained high overall credit
quality through the establishment and observance of prudent lending policies and
practices.  The current economic environment, particularly the
significant softening in the real estate market and associated declines in real
estate values, has resulted in a deterioration of asset quality in some of our
real estate backed loans.  As a result, the Company has developed and
implemented an enhanced process to identify deteriorating credit
situations.  The Board of Directors and management continue to be
actively involved in maintaining efforts to work with borrowers whenever
possible to remediate troubled loans.





Experienced
Personnel.  The members of our executive management have an
average of 33 years of banking experience in providing quality service to
consumers and businesses in the southern New Jersey region.





In addition, all of our executive
officers have experience with larger institutions and have chosen to affiliate
with a community-oriented organization serving consumers and small to
medium-sized businesses.  Our ability to meet market service
expectations with skilled locally based and experienced staff has significantly
enhanced the market acceptance of our service-centered approach.








5







Lending
Activities





Loan
Portfolio





General.We engage in a
variety of lending activities, which are primarily categorized as commercial and
consumer lending.  Commercial lending (consisting of commercial real
estate, commercial business, construction and other commercial lending) is
currently our main lending focus.  Sources to fund loans are derived
primarily from deposits.





We
generate substantially all of our loans in the State of New Jersey, with a
significant portion in Burlington and Camden Counties.  At December
31, 2008, our loan portfolio totaled approximately $305.6 million.





At
December 31, 2008, our lending limit to one borrower under applicable
regulations was approximately $6.1 million, or approximately 15% of capital
funds.





Loans are
generated through marketing efforts, our present customers, walk-in customers
and referrals.  We have established and observed prudent lending
policies and practices in an effort to achieve sound credit
quality.  We have established a written loan policy for each category
of loans.  These loan policies have been adopted by the Board of
Directors and are reviewed annually.  All loans to directors (and
their affiliates) must be approved by the Board of Directors in accordance with
federal law.





In
managing the growth of our loan portfolio, we have focused on: (i) the
application of prudent underwriting criteria; (ii) active involvement by senior
management and the Board of Directors in the loan approval process; (iii)
monitoring of loans to ensure that repayments are made in a timely manner and to
identify potential problem loans; and (iv) the review of selected aspects of our
loan portfolio by independent consultants.





Analysis of Loan
Portfolio.  Set forth below is selected data relating to the
composition of the Company's loan portfolio by type of loan at the dates
indicated.  The table does not include loan fees.





December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Commercial,
      Financial and Agricultural
                
                $
                32,115,000
                
                
                $
                30,209,000
                
                
                $
                29,097,000
                
                
                $
                30,443,000
                
                
                $
                30,721,000Real
      Estate – Construction
                
                
                68,278,000
                
                
                
                80,486,000
                
                
                
                85,902,000
                
                
                
                77,499,000
                
                
                
                51,086,000Real
      Estate – Mortgage
                
                
                147,435,000
                
                
                
                141,237,000
                
                
                
                73,666,000
                
                
                
                72,020,000
                
                
                
                64,032,000Consumer
      Installment loans
                
                
                53,827,000
                
                
                
                52,291,000
                
                
                
                45,179,000
                
                
                
                38,714,000
                
                
                
                29,781,000Lease
      Financing
                
                
                4,636,000
                
                
                
                8,345,000
                
                
                
                9,439,000
                
                
                
                6,662,000
                
                
                
                4,145,000Total
      loans
                
                $
                306,291,000
                
                
                $
                312,568,000
                
                
                $
                243,283,000
                
                
                $
                225,338,000
                
                
                $
                179,765,000





6


Loan Maturity.The following
table sets forth the contractual maturity of the Company's loan portfolio at
December 31, 2008.





Due
      within
                1 year
              
              
              Due
      after 1
                through 5 years
              
              
              Due
      after
                5 years
              
              
              TotalCommercial,
      Financial and Agricultural
              
              $
              18,508,000
              
              
              $
              11,620,000
              
              
              $
              1,987,000
              
              
              $
              32,115,000Real
      Estate - Construction
              
              
              66,908,000
              
              
              
              323,000
              
              
              
              1,047,000
              
              
              
              68,278,000Real
      Estate – Mortgage
              
              
              12,007,000
              
              
              
              18,708,000
              
              
              
              116,720,000
              
              
              
              147,435,000Consumer
      Installment loans
              
              
              336,000
              
              
              
              2,130,000
              
              
              
              51,361,000
              
              
              
              53,827,000Lease
      Financing
              
              
              611,000
              
              
              
              4,025,000
              
              
              
              -
              
              
              
              4,636,000Total
      amount due
              
              $
              98,370,000
              
              
              $
              36,806,000
              
              
              $
              171,115,000
              
              
              $
              306,291,000





The
following table sets forth the dollar amount of all loans due after December 31,
2009, which have predetermined interest rates and which have floating or
adjustable interest rates.





Fixed Rates
              
              
              Floating
      or
                Adjustable Rates
              
              
              TotalCommercial,
      Financial and Agricultural
              
              $
              10,490,000
              
              
              $
              3,117,000
              
              
              $
              13,607,000Real
      Estate - Construction
              
              
              163,000
              
              
              
              1,207,000
              
              
              
              1,370,000Real
      Estate – Mortgage
              
              
              106,656,000
              
              
              
              28,772,000
              
              
              
              135,428,000Consumer
      Installment loans
              
              
              53,491,000
              
              
              
              -
              
              
              
              53,491,000Lease
      Financing
              
              
              4,025,000
              
              
              
              -
              
              
              
              4,025,000Total
              
              $
              174,825,000
              
              
              $
              33,096,000
              
              
              $
              207,921,000





Commercial
Loans





Our
commercial loan portfolio consists primarily of commercial business loans and
leases to small and medium-sized businesses and individuals for business
purposes and commercial real estate and construction
loans.  Commercial loans and leases that exceed established lending
limits are accomplished through participations with other local commercial
banks.





We have
established written underwriting guidelines for commercial loans and
leases.  In granting commercial loans and leases, we look primarily to
the borrowers’ cash flow as the principal source of loan
repayment.  Collateral and personal guarantees may be secondary
sources of repayment.  A credit report and/or Dun & Bradstreet
report is typically obtained on all prospective borrowers, and a real estate
appraisal is required on all commercial real estate loans.  Generally,
the maximum loan-to-value ratio on commercial real estate loans at origination
is 75%.  All appraisals are performed by a state licensed or
certified, independent appraiser.  We typically require the personal
guarantees of the principals of the entities to whom we lend.





Commercial
loans are often larger and may involve greater risks than other types of
lending.  Because payments onsuch loans are often
dependent on the successful operation of the property or business involved,
repayment of such loans may be more sensitive than other types of loans to
adverse conditions in the real estate market or the economy.  Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment and other income
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans typically are made on the basis of the
borrower’s ability to make repayment from the cash flow of the borrower’s
business.  As a result, the availability of funds for the repayment of
commercial loans may be substantially dependent on the success of the business
itself and the general economic environment.  If the cash flow from
business operations is reduced, the borrower’s ability to repay the loan may be
impaired.





Constructionloans involve
additional risks because loan funds are advanced based onthe security of the
project under construction.  The majority of these loans are to fund
single family residential construction projects which have permanent financing
provided by other financial institutions.  We seek to minimize these
risks through underwriting guidelines.  There can be no assurances,
however, that we will be successful in our efforts to minimize these
risks.




7


Commercial Business Loans and
Leases.Commercial business loans and leases are usually made
to finance the purchase of inventory, new or used equipment, or to provide
short-term working capital.  Generally, these loans and leases are
secured, but some loans are sometimes granted on an unsecured
basis.  To further enhance our security position, we generally require
personal guarantees of principal owners.  These loans and leases are
made either on a line of credit basis or on a fixed-term basis ranging from one
to five years in duration.





Construction
Loans.Construction loans are made on a short-term basis for
both residential and non-residential properties and are secured by land and
improvements.  Construction loans are usually for a term of 9 to 21
months.  The Company has a general policy of not providing interest
reserves for construction loans advanced.  However, each loan
structure includes a 5% contingency/holdback reserve created to provide for
successful project completion, and/or unanticipated project
developments.  Interest reserves are a means through which a lender
builds in, as a part of the loan approval, the amount of the monthly interest
for a specified period of time.  While the capitalization of interest
on loans is not part of the Company’s standard underwriting practice, we have,
on some occasions, allowed interest to be capitalized as a part of the
contingency/holdback reserve allocation associated with the
project.  As of December 31, 2008, the Company had no loans
outstanding for which the 5% contingency/holdback reserve has been drawn
upon.  This portfolio includes what we commonly refer to as “spot lot”
construction loans.  These loans represent approximately 79% of the
real estate – construction loan portfolio as of December 31, 2008.





Commercial Real Estate
Loans.Commercial real estate loans are made for the
acquisition of new property or the refinancing of existing
property.  These loans are typically related to commercial business
loans and secured by the underlying real estate used in these businesses or real
property of the principal.  These loans are offered on a fixed or
variable rate basis with 3 to 5 year maturity and a 15 to 20 year amortization
schedule.





Residential
Mortgage Loans





Our
residential mortgage loan portfolio consists of home equity lines of credit and
loans, and primary and first lien residential mortgages.  We generate
substantially all of our residential mortgage loans in our market area and
maintain strict underwriting guidelines throughout the residential mortgage
portfolio.





Consumer
Installment Loans





We offer
a full range of consumer installment loans.  Consumer installment
loans consist of automobile loans, boat loans, mobile home loans, personal
loans, and overdraft protection.





Investment
Portfolio





Our
investment portfolio consists primarily of U.S. Government securities,
mortgage-backed securities, and municipal securities.  Government
regulations limit the type and quality of instruments in which we may invest our
funds.





We have
established a written investment policy, which is reviewed
annually.  The investment policy identifies investment criteria and
states specific objectives in terms of risk, interest rate sensitivity and
liquidity.  We emphasize the quality, term and marketability of the
securities acquired for our investment portfolio.





8


We
conduct our asset liability management through consultation with members of the
Board of Directors, senior management and outside financial
advisors.  We have an Investment Committee, which is composed of
certain members of the Board of Directors.  The Investment Committee
can propose changes to the investment policy to be approved by the Board of
Directors, which changes may be adopted without a vote of shareholders. This
Investment Committee, in consultation with the Asset/Liability Management
Committee, is responsible for the review of interest rate risk and evaluates
future liquidity needs over various time periods.  In this capacity,
the Investment Committee is responsible for monitoring our investment portfolio
and ensuring that investments comply with our investment policy.





The
Investment Committee may from time to time consult with investment
advisors.  Our President and another senior executive officer may
purchase or sell securities for the Company’s portfolio in accordance with the
guidelines of the Investment Committee.  The Board of Directors
reviews our investment portfolio on a quarterly basis.





Sources
of Funds





Deposits and Other Sources of
Funds.Deposits are the primary source of funds used by us in
lending and other general business purposes.  In addition to deposits,
we can derive additional funds from principal repayments on loans, the sale of
loans and investment securities, and borrowings from other financial
institutions or the Federal Home Loan Bank of New York (“FHLB”), which functions
as a credit facility for member institutions within its assigned
region.  Loan amortization payments have historically been a
relatively predictable source of funds.  The level of deposit
liabilities can vary significantly and is influenced by prevailing interest
rates, money market conditions, general economic conditions and
competition.





Our
deposits consist of checking accounts, regular savings accounts, money market
accounts and certificates of deposit.  We also offer Individual
Retirement Accounts (“IRAs”).  Deposits are obtained from individuals,
partnerships, corporations and unincorporated businesses in our market
area.  We attempt to control the flow of deposits primarily by pricing
our accounts to remain generally competitive with other financial institutions
in our market area, although we do not necessarily seek to match the highest
rates paid by competing institutions.





Borrowings.  Deposits
are the primary source of funds for the Company's lending and investment
activities as well as for general business purposes; however, should the need
arise, the Company may access the Federal Reserve Bank discount window to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  The Company maintains the ability to borrow funds on an
overnight basis under secured and unsecured lines of credit with correspondent
banks.  In addition, the Company had advances totaling $16.0 million
from the FHLB as of December 31, 2008, with $1.7 million maturing within 1 year,
with a fixed rate range of 3.16% to 4.05%, $2.3 million maturing within two
years, with a fixed rate of 3.43%, $2.3 million maturing within three years,
with a fixed rate of 3.85%, $2.2 million maturing within four years, with a
fixed rate of 4.11%, and $7.5 million maturing within five years, with a fixed
rate of 4.25%, none of which can be prepaid without penalty.




9


On May 1,
2007, Sterling Banks Capital Trust I, a Delaware statutory business trust and a
wholly-owned subsidiary of the Company (the “Trust”), issued $6.2 million of
variable rate capital trust pass-through securities (“capital securities”) to
investors.  The variable interest rate re-prices quarterly after five
years at the three month LIBOR plus 1.70% and was 6.744% as of December 31,
2008.  The Trust purchased $6.2 million of variable rate junior
subordinated deferrable interest debentures from the Company.  The
debentures are the sole asset of the Trust.  The terms of the junior
subordinated debentures are the same as the terms of the capital
securities.  The Company has also fully and unconditionally guaranteed
the obligations of the Trust under the capital securities.  The
capital securities are redeemable by the Company on or after May 1, 2012 at par,
or earlier if the deduction of related interest for federal income taxes is
prohibited, classification as Tier I Capital is no longer allowed, or certain
other contingencies arise.  The capital securities must be redeemed
upon final maturity of the subordinated debentures on May 1,
2037.  Proceeds of approximately $4.5 million were contributed in 2007
to paid-in capital of the Bank.  The remaining $1.5 million was
retained at the Company for future use.  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.





The
following table sets forth information regarding the Company’s borrowed
funds:





At
      December 31,2008
              
              
              2007
              
              
              2006Amount
      outstanding at year end
              
              $
              22,200,000
              
              
              $
              16,700,000
              
              
              $
              5,885,000Weighted
      average interest rate at year end
              
              
              4.8
              %
              
              
              5.0
              %
              
              
              3.5
              %Maximum
      outstanding at any month end
              
              $
              22,200,000
              
              
              $
              16,700,000
              
              
              $
              14,835,000Average
      outstanding
              
              $
              12,975,000
              
              
              $
              6,327,000
              
              
              $
              12,247,000Weighted
      average interest rate during the year
              
              
              5.3
              %
              
              
              5.9
              %
              
              
              3.4
              %





Competition





We
experience substantial competition in attracting and retaining deposits and in
making loans.  In attracting depositors and borrowers, we compete with
commercial banks, savings banks, and savings and loan associations, as well as
regional and national insurance companies, regulated small loan companies, local
credit unions, regional and national issuers of money market funds and corporate
and government borrowers.  The principal market presently served by us
has approximately 80 offices of other financial institutions.  In New
Jersey generally, and in our Burlington and Camden County market specifically,
large commercial banks, as well as savings banks and savings and loan
associations, hold a dominant market share.  By virtue of their larger
capital and asset size, many such institutions have substantially greater
lending limits and other resources than we have and, in certain cases, lower
funding costs (the price a bank must pay for deposits and other borrowed monies
used to make loans to customers).  In addition, many such institutions
are empowered to offer a wider range of services, including international
banking and trust services.





In
addition to having established deposit bases and loan portfolios, these
institutions, particularly the large regional commercial and savings banks, have
the ability to finance extensive advertising campaigns and to allocate
considerable resources to locations and products perceived as
profitable.





Although
we face competition for deposits from other financial institutions, management
believes that we have been able to compete effectively for deposits because of
our image as a community-oriented bank, providing a high level of personal
service as well as an attractive array of deposit programs.  We have
emphasized personalized banking services and the advantage of local
decision-making in our banking business, and management believes that this
emphasis has been well received by consumers and businesses in our market
area.




10


Although
we face competition for loans from mortgage banking companies, savings banks,
savings and loan associations, other commercial banks, insurance companies,
consumer loan companies, credit unions, and other institutional and private
lenders, management believes that our image in the community as a local bank
that provides a high level of personal service and direct access to senior
management gives us a competitive advantage.  Factors that affect
competition include the general availability of lendable funds and credit,
general and local economic conditions, current interest rate levels and the
quality of service.





Regulation





General.Sterling Banks, Inc. 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.  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.





Sterling
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.





Insurance of
Deposits.  Our deposits are normally insured up to a maximum of
$100,000 per depositor under the Bank Insurance Fund of the
FDIC.  Pursuant to the Emergency Economic Stabilization Act of 2008,
the maximum deposit insurance amount per depositor has been increased from
$100,000 to $250,000 until December 31, 2009.  The FDIC has
established a risk-based assessment system for all insured depository
institutions.  Under the risk-based assessment system in 2008, deposit
insurance premium rates range from zero to 27 basis points, with our deposit
insurance premium having been assessed at ten basis points of
deposits.  On February 27, 2009, the FDIC adopted a final rule with
respect to the risk-based assessment system, which will take effect on April 1,
2009.  Under the final rule, deposit insurance premium rates will
range from seven to 77.5 basis points of deposits. Additionally, the FDIC
recently adopted an interim rule that imposes a 20 basis point emergency special
assessment on all insured depository institutions on June 30,
2009.  The special assessment will be collected September 30, 2009, at
the same time that the risk-based assessments for the second quarter of 2009 are
collected. The interim rule also permits the FDIC to impose an emergency special
assessment of up to 10 basis points on all insured depository institutions
whenever, after June 30, 2009, the FDIC estimates that the fund reserve ratio
will fall to a level that the FDIC believes would adversely affect public
confidence or to a level close to zero or negative at the end of a calendar
quarter.





Community Investment and Consumer
Protection Laws.In connection with our lending activities, we
are subject to a variety of federal laws designed to protect borrowers and
promote lending to various sectors of the economy and
population.  Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and Community
Reinvestment Act (“CRA”).







11




The CRA
requires insured institutions to define the communities that they serve,
identify the credit needs of those communities and adopt and implement a “CRA
Statement” pursuant to which they offer credit products and take other actions
that respond to the credit needs of the community.  The responsible
federal banking regulator must conduct regular CRA examinations.  We
are in compliance with applicable CRA requirements.




Capital Adequacy
Guidelines.  The Federal Reserve Board has adopted risk based
capital guidelines for member banks such as us.  To be considered
“adequately capitalized,” the required minimum ratio of total capital to total
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) is 8.0%.  At least half of the total risk based
capital is required to be “Tier I capital,” consisting principally of common
shareholders’ equity, non-cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less
goodwill.  The remainder (“Tier II capital”) may consist of a limited
amount of subordinated debt and intermediate-term preferred stock, certain
hybrid capital instruments and other debt securities, perpetual preferred stock,
and a limited amount of the allowance for loan losses.





In
addition to the risk-based capital guidelines, the Federal Reserve Board has
established minimum leverage ratio (Tier I capital to average total assets)
guidelines for member banks.  These guidelines provide for a minimum
leverage ratio of 3% for those member banks, which have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other member banks are required to maintain a leverage ratio
of at least 1 to 2% above the 3% stated minimum.  We are in compliance
with these guidelines.





Prompt Corrective
Action.Under the Federal Deposit Insurance Act, the federal
banking agencies possess broad powers to take “prompt corrective action” as
deemed appropriate for an insured depository institution and its holding
company.  The extent of these powers depends upon whether the
institution in question is considered “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” or
“critically undercapitalized.”  Generally, the smaller an
institution’s capital base in relation to its total assets, the greater the
scope and severity of the agencies’ powers.  Business activities may
also be influenced by an institution’s capital classification.  At
December 31, 2008, we exceeded the required ratios for classification as “well
capitalized.”  For additional discussion of capital requirements, we
refer you to Note 14, Regulatory Matters of the Notes to our Consolidated
Financial Statements.





Restrictions on
Dividends.Because the Company has substantially no assets
other than the stock of the Bank, cash dividend payments to our shareholders are
primarily limited to the Bank’s ability to pay dividends to the
Company.  Dividends by the Bank are subject to the New Jersey Banking
Act of 1948 (the “Banking Act”), the Federal Reserve Act, and the Federal
Deposit Insurance Act (the “FDIA”).  Under the Banking Act, no
dividends may be paid if after such payment the Bank’s surplus (generally,
additional paid-in capital plus retained earnings) would be less than 50% of the
Bank’s capital stock. Under Federal Reserve Board regulations, without prior
approval of the Federal Reserve Board, we cannot pay dividends that exceed our
net income from the current year and the preceding two years and, in any event,
cannot pay any dividends if we have an accumulated deficit.  Under the
FDIA, no dividends may be paid by an insured bank if the bank is in arrears in
the payment of any insurance assessment due to the FDIC.





12


As
discussed below, state and federal regulatory authorities have adopted standards
for the maintenance of adequate levels of capital by banks.  Adherence
to such standards further limits our ability to pay dividends to our
shareholders.





In 2008,
we did not pay a cash dividend, and we have no plans to do so in
2009.  In 2007, we paid three cash dividends of $0.03 per
share.  Our future dividend policy is subject to the discretion of our
Board of Directors and will depend upon a number of factors, including future
earnings, financial conditions, cash needs, general business conditions and
applicable dividend limitations.  Further, the Company's ability to
pay cash dividends to shareholders will depend largely on the Bank’s ability to
pay dividends to the Company. We have distributed a 5% stock dividend, accounted
for as a stock split, each year during the period from 1997 through 2002 and
from 2004 through 2006.  In 2007, we distributed a 21 for 20 stock
split, effected in the form of a 5% common stock dividend.  Currently,
we have no plans to declare additional stock dividends or splits.





Holding Company
Regulation.  The Company is subject to the provisions of the
Bank Holding Company Act and to supervision by the FRB and by the New Jersey
Department of Banking.  The Bank Holding Company Act requires the
Company to secure the prior approval of the FRB before it owns or controls,
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any institution, including another bank.





A bank
holding company is also prohibited from engaging in, or acquiring direct or
indirect control of more than 5% of the voting shares of any company engaged in,
non-banking activities unless the FRB, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.  In making this determination, the
FRB considers whether the performance of these activities by a bank holding
company would offer benefits to the public that outweigh possible adverse
effects.





As a bank
holding company, the Company is required to register as such with the FRB, and
is required to file with the FRB an annual report and any additional information
as the FRB may require pursuant to the Bank Holding Company Act.  The
FRB may also conduct examinations of the Company and any or all of its
subsidiaries.  Further, under the Bank Holding Company Act and the
FRB’s Regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit or provision of credit or provision of any property or
services.  The so-called anti-tie-in provisions state generally that a
bank may not extend credit, lease, sell property or furnish any service to a
customer on the condition that the customer provide additional credit or service
to the Bank, to the Company or to any other subsidiary of the Company or on the
condition that the customer not obtain other credit or service from a competitor
of the Bank, to the Company or to any other subsidiary of the
Company.





In 1999,
legislation was enacted that allows bank holding companies to engage in a wider
range of non-banking activities, including greater authority to engage in
securities and insurance activities.  Under the Gramm-Leach-Bliley Act
(“GLB Act”), a bank holding company that elects to become a financial holding
company may engage in any activity that the FRB, in consultation with the
Secretary of the Treasury, determines by regulation or order is (1) financial in
nature, (2) incidental to any such financial activity, or (3) complementary to
any such financial activity and does not pose a substantial risk to the safety
or soundness of depository institutions or the financial system
generally.  The GLB Act makes significant changes in the U.S. banking
law, principally by repealing the restrictive provisions of the 1933
Glass-Steagall Act.  The GLB Act specifies certain activities that are
deemed to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the FRB under section
4(c)(8) of the Bank Holding Company Act.  The GLB Act does not
authorize banks or their affiliates to engage in commercial activities that are
not financial in nature.




13


A bank
holding company may elect to be treated as a financial holding company only if
all depository institution subsidiaries of the holding company are well
capitalized, well managed and have at least a satisfactory rating under the
Community Reinvestment Act.  The Company may elect to become a
financial holding company but has not done so as of December 31,
2008.





USA PATRIOT
Act.The USA
PATRIOT Act of 2001, which was renewed in 2006, establishes a wide variety of
new and enhanced ways of combating terrorism, including amending the Bank
Secrecy Act to provide the federal government with enhanced authority to
identify, deter, and punish international money laundering and other
crimes.  Among other things, the USA PATRIOT Act prohibits financial
institutions from doing business with foreign “shell” banks and requires
increased due diligence for private banking transactions and correspondent
accounts for foreign banks.  In addition, financial institutions must
follow new minimum verification of identity standards for all new accounts and
will be permitted to share information with law enforcement authorities under
circumstances that were not previously permitted.





Sarbanes-Oxley
Act.  The Sarbanes-Oxley Act of 2002 required changes in some
of our corporate governance, securities disclosure and compliance
practices.  In particular, Section 404 of the Sarbanes-Oxley Act
requires public companies to include a report of management on the company’s
internal control over financial reporting in their annual reports on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal control over financial reporting.  Beginning with the Annual
Report on Form 10-K for our 2009 fiscal year, the independent registered public
accounting firm auditing the Company’s financial statements must attest to and
report on the effectiveness of the Company’s internal control over financial
reporting.  The costs associated with the implementation of this
requirement, including documentation and testing, have not been estimated by
us.  Moreover, if we are ever unable to conclude that we have
effective internal control over financial reporting, or if our independent
auditors are unable to provide us with an unqualified report as to the
effectiveness of our internal control over financial reporting for any future
year-ends as required by Section 404, investors could lose confidence in the
reliability of our financial statements, which could result in a decrease in the
value of our securities.




Emergency Economic Stabilization Act
of 2008.  The Emergency Economic Stabilization Act of 2008 (the
“EESA”), which established the U.S. Treasury Department’s Troubled Asset Relief
Program (“TARP”), was enacted on October 3, 2008.  As part of TARP,
the Treasury Department created the Capital Purchase Program (“CPP”), under
which the Treasury Department will invest up to $250 billion in senior preferred
stock of U.S. banks and savings associations or their holding companies for the
purpose of stabilizing and providing liquidity to the U.S. financial
markets.  The Company did not choose to participate in the
CPP.  On February 17, 2009, the American Recovery and Reinvestment Act
of 2009 (the “ARRA”) was enacted as a sweeping economic recovery package
intended to stimulate the economy and provide for extensive infrastructure,
energy, health, and education needs.





Temporary Liquidity Guarantee
Program.  Pursuant to the EESA, the maximum deposit insurance
amount per depositor has been increased from $100,000 to $250,000 until December
31, 2009.  Additionally, on October 14, 2008, after receiving a
recommendation from the boards of the FDIC and the Federal Reserve, and
consulting with the President of the United States, the Secretary of the
Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC
to establish its Temporary Liquidity Guarantee Program (“TLGP”). Under the
transaction account guarantee program of the TLGP, the FDIC will fully
guarantee, until the end of 2009, all non-interest-bearing transaction accounts,
including NOW accounts with interest rates of 0.5 percent or less and IOLTAs
(lawyer trust accounts).




14


The TLGP
also guarantees all senior unsecured debt of insured depository institutions or
their qualified holding companies issued between October 14, 2008 and June 30,
2009 with a stated maturity greater than 30 days. All eligible institutions were
permitted to participate in both of the components of the TLGP without cost for
the first 30 days of the program. Following the initial 30 day grace period,
institutions were assessed at the rate of ten basis points for transaction
account balances in excess of $250,000 for the transaction account guarantee
program and at the rate of either 50, 75, or 100 basis points of the amount of
debt issued, depending on the maturity date of the guaranteed debt, for the debt
guarantee program. Institutions were required to opt-out of the TLGP if they did
not wish to participate.  The Company did not choose to opt out of
either the transaction account guarantee program or debt guarantee program
components of the TGLP.





Future
Regulation.  Various laws, regulations and governmental
programs affecting financial institutions and the financial industry are from
time to time introduced in Congress or otherwise promulgated by regulatory
agencies.  Such measures may change the operating environment of the
Company in substantial and unpredictable ways. With the recent enactments of the
EESA and the ARRA, the nature and extent of future legislative, regulatory or
other changes affecting financial institutions is very unpredictable at this
time.





Employees.  As of
December 31, 2008, we had 99 full-time and 27 part-time
employees.  Our employees are not represented by a collective
bargaining agent.  We believe the relationship with our employees to
be good.




Item
1A.  Risk Factors.





Our
business, operations and financial condition are subject to various
risks.  In addition to the other information contained in this Form
10-K, you should carefully consider the risks, uncertainties and other factors
described below because they could materially and adversely affect our business,
financial condition, operating results, cash flow and prospects, and/or the
market price of our common stock.  This section does not describe all
risks that may be applicable to us, our business or our industry, and is
included solely as a summary of certain material risk factors.





Risks
Related to Our Business





If
we experience excessive loan losses relative to our allowance, our earnings will
be adversely affected.





The risk
of credit losses on loans varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
and marketability of the collateral for the loan.  Given the current
economic situation and particularly the adverse impact on the market for real
estate, which constitutes nearly all the collateral for approximately 70% of our
loans, we cannot be sure we are adequately secured. Management maintains an
allowance for loan losses based upon, among other things, historical experience,
an evaluation of economic conditions and regular reviews of delinquencies and
loan portfolio quality.  Based upon such factors, management makes
various assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides an allowance for loan losses based upon a percentage of
the outstanding balances and for specific loans when their ultimate
collectibility is considered questionable.





15





If
management’s assumptions and judgments prove to be incorrect and the allowance
for loan losses is inadequate to absorb future losses, or if the bank regulatory
authorities require us to increase the allowance for loan losses as a part of
their examination process, our earnings and capital could be significantly and
adversely affected.





As of
December 31, 2008, our allowance for loan losses was approximately $8.5 million,
which represented 2.78% of outstanding loans.  At such date, we had 22
loans on nonaccrual status.  Although management believes that our
allowance for loan losses is adequate, there can be no assurance that the
allowance will prove sufficient to cover future loan losses.  Further,
although management uses the best information available to make determinations
with respect to the allowance for loan losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
or adverse developments arise with respect to our non-performing or performing
loans.  Additions to our allowance for loan losses would result in a
decrease in our net income and capital, and could have a material adverse effect
on our financial condition and results of operations.





We
realize income primarily from the difference between interest earned on loans
and investments and interest paid on deposits and borrowings, and changes in
interest rates may adversely affect our profitability and assets.





Changes
in prevailing interest rates may hurt our business.  We derive our
income mainly from the difference or “spread” between the interest earned on
loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities.  In
general, the larger the spread, the more we earn.  When market rates
of interest change, the interest we receive on our assets and the interest we
pay on our liabilities will fluctuate.  This can cause decreases in
our spread and can adversely affect our income.





Interest
rates affect how much money we can lend.  For example, when interest
rates rise, the cost of borrowing increases and loan originations tend to
decrease.  In addition, changes in interest rates can affect the
average life of loans and investment securities.  A reduction in
interest rates generally results in increased prepayments of loans and
mortgage-backed securities, as borrowers refinance their debt in order to reduce
their borrowing cost.  This causes reinvestment risk, because we
generally are not able to reinvest prepayments at rates that are comparable to
the rates we earned on the prepaid loans or securities.





Changes
in market interest rates could also reduce the value of our financial
assets.  If we are unsuccessful in managing the effects of changes in
interest rates, our financial condition and results of operations could
suffer.





We
may be required to pay significantly higher Federal Deposit Insurance
Corporation (FDIC) premiums in the future.





Recent
insured institution failures, as well as deterioration in banking and economic
conditions, have significantly increased FDIC loss provisions, resulting in a
decline in the designated reserve ratio to historical lows. The FDIC expects a
higher rate of insured institution failures in the next few years compared to
recent years; thus, the reserve ratio may continue to decline.  In
addition, EESA temporarily increased the limit on FDIC coverage to $250,000
through December 31, 2009.  These developments will cause the premiums
assessed to us by the FDIC to increase.





16





On
December 16, 2008, the FDIC Board of Directors determined deposit insurance
assessment rates for the first quarter of 2009 at 12 to 14 basis points per $100
of deposits.  Beginning April 1, 2009, the rates will increase to 12
to 16 basis points per $100 of deposits.  Additionally, on February
27, 2009, the FDIC announced an interim rule imposing a 20 basis point special
emergency assessment on June 30, 2009, payable September 30, 2009. The interim
rule also allows the FDIC to impose a special emergency assessment after June
30, 2009, of up to 10 basis points if necessary to maintain public confidence in
FDIC insurance. These higher FDIC assessment rates and special assessments could
have an adverse impact on our results of operations.




Our
ability to be profitable will depend upon our ability to grow, which will be
limited by our need to maintain required capital levels.





We
believe that we have in place the management and systems, including data
processing systems, internal controls and a strong credit culture, to support
continued growth.  However, our continued growth and profitability
depend on the ability of our officers and key employees to manage such growth
effectively, to attract and retain skilled employees and to maintain adequate
internal controls and a strong credit culture.  Accordingly, there can
be no assurance that we will be successful in managing our expansion, and the
failure to do so would adversely affect our financial condition and results of
operations.





Our
business is geographically concentrated and is subject to regional economic
factors that could have an adverse impact on our business.





Substantially
all of our business is with customers in our market area of southern New
Jersey.  Most of our customers are consumers and small and
medium-sized businesses which are dependent upon the regional
economy.  Adverse changes in economic and business conditions in our
markets have adversely affected some of our borrowers, their ability to repay
their loans and to borrow additional funds, and consequently our financial
condition and performance.





Additionally,
we often secure our loans with real estate collateral, most of which is located
in southern New Jersey.  A decline in local economic conditions could
adversely affect the values of such real estate.  Consequently, a
decline in local economic conditions may have a greater effect on our earnings
and capital than on the earnings and capital of larger financial institutions
whose real estate loan portfolios are geographically diverse.





Most
of our loans are commercial loans, which have a higher degree of risk than other
types of loans.





Commercial
loans are often larger and may involve greater risks than other types of
lending.  Because payments onsuch loans are often
dependent on the successful operation of the property or business involved,
repayment of such loans may be more sensitive than other types of loans to
adverse conditions in the real estate market or the economy.  Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment and other income
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans typically are made on the basis of the
borrower’s ability to make repayment from the cash flow of the borrower’s
business.  As a result, the availability of funds for the repayment of
commercial loans may be substantially dependent on the success of the business
itself and the general economic environment.  If the cash flow from
business operations is reduced, the borrower’s ability to repay the loan may be
impaired.





17


We
have incurred and expect to continue to incur significant expenses in connection
with our branch expansion.





We have historically experienced growth
through expansion of our existing branches as well as through the establishment
of new branches.  A natural consequence of our growth during the
branch expansion program has been a significant increase in noninterest
expenses.  These costs are associated with marketing, increased
staffing, branch construction and equipment needs sufficient to create the
infrastructure necessary for branch operations.  Unless and until a
new branch generates sufficient income to offset these additional costs, a new
branch will reduce our earnings.





Most
of our loans are secured, in whole or in part, with real estate collateral which
may be subject to declines in value.





In
addition to the financial strength and cash flow characteristics of the borrower
in each case, we often secure our loans with real estate
collateral.  As of December 31, 2008, approximately 70% of our loans
had real estate as a primary, secondary or tertiary component of
collateral.  Real estate values and real estate markets are generally
affected by, among other things, changes in national, regional or local economic
conditions, fluctuations in interest rates and the availability of loans to
potential purchasers, changes in tax laws and other governmental statutes,
regulations and policies, and acts of nature.  The real estate
collateral in each case provides an alternate source of repayment in the event
of default by the borrower.  As real estate prices in our markets
decline, the value of the real estate collateral securing our loans will be
further reduced.  If we are required to liquidate the collateral
securing a loan during a period of reduced real estate values to satisfy the
debt, our earnings and capital could be adversely affected.





Our
legal lending limits are relatively low and restrict our ability to compete for
larger customers.





At
December 31, 2008, our lending limit per borrower was approximately $6.1
million, or approximately 15% of our capital.  Accordingly, the size
of loans that we can offer to potential borrowers is less than the size of loans
that many of our competitors with larger capitalization are able to
offer.  We may engage in loan participations with other banks for
loans in excess of our legal lending limits.  However, there can be no
assurance that such participations will be available at all or on terms which
are favorable to us and our customers.





The
loss of our executive officers and certain other key personnel could hurt our
business.





Our
success depends, to a great extent, upon the services of Robert H. King, our
President and Chief Executive Officer; John Herninko, our Executive Vice
President and Senior Loan Officer; R. Scott Horner, our Executive Vice President
and Chief Financial Officer; Dale F. Braun, Jr., our Senior Vice President and
Controller; Kimberly A. Johnson, Senior Vice President and Senior Administrative
Officer; and Theresa S. Valentino Congdon, our Senior Vice President and Senior
Retail Officer.  From time to time, we also need to recruit personnel
to fill vacant positions for experienced lending and credit administration
officers.  Competition for qualified personnel in the banking industry
is intense, and there can be no assurance that we will continue to be successful
in attracting, recruiting and retaining the necessary skilled managerial,
marketing and technical personnel for the successful operation of our existing
lending, operations, accounting and administrative functions or to support the
expansion of the functions necessary for our future growth.  Our
inability to hire or retain key personnel could have a material adverse effect
on our results of operations.





18


Risks
Related to Our Common Stock





There
is a limited trading market for our common stock, which may adversely impact the
ability to sell shares and the price received for shares.





Our
common stock has limited trading activity, and although our common stock is
listed on the Nasdaq Capital Market, there can be no assurance that trading in
our common stock will develop at any time in the foreseeable
future.  This means that there may be limited liquidity for our common
stock, which may make it difficult to buy or sell our common stock, may
negatively affect the price of our common stock and may cause volatility in the
price of our common stock.  See Item 5, “Market for Common Equity and
Related Stockholder Matters,” below.




There
is a possibility that our common stock may be delisted and as a result, become
more volatile and less liquid.





Due to
the recent trading price range of our common stock, it is possible that without
a sustained increase in the trading price range of our common stock, the shares
will be delisted by NASDAQ.  If that were to occur, our common shares
might continue to trade on the “over-the-counter” (OTC) market although there
can be no assurances that will occur.  OTC transactions involve risks
in addition to those associated with transactions on a stock
exchange.  Many OTC stocks trade less frequently and in smaller
volumes than stocks listed on an exchange.  Accordingly, OTC-traded
shares are less liquid and are likely to be more volatile than exchange-traded
stocks.





We
have ceased paying cash dividends on a quarterly basis on our common stock and
there is no assurance that we will resume doing so.





We have a
limited history of paying cash dividends on our common stock.  We paid
our first cash dividend to our shareholders in February
2004.  Although we subsequently paid cash dividends on a quarterly
basis, the Company has not paid a cash dividend since the third quarter of 2007
and there is no assurance that the Company will resume paying cash dividends in
the future.  Future payment of cash dividends, if any, will be at the
discretion of the Board of Directors and will be dependent upon a number of
factors including financial condition, cash needs, general business conditions
and applicable legal limitations, including meeting regulatory capital
requirements.  See Item 5, “Market for Common Equity and Related
Stockholder Matters,” below.




Our
management and significant shareholders control a substantial percentage of our
stock and therefore have the ability to exercise substantial influence over our
affairs.





As of
March 13, 2009, our directors and executive officers beneficially owned
approximately 913,000 shares, or approximately 15%, of our common stock,
including options with the vested right to purchase approximately 241,000
shares, in the aggregate, of our common stock at exercise prices ranging from
$6.27 to $10.90 per share.  In addition, approximately 7% of our
common stock is controlled by a non-management shareholder.  Also,
approximately 5% of our common stock is control by an institutional
investor.  Because of the large percentage of stock held by our
directors and executive officers and other significant shareholders, these
persons could influence the outcome of any matter submitted to a vote of our
shareholders.





19


We
may issue additional shares of common stock, which may dilute the ownership and
voting power of our shareholders and the book value of our common
stock.





We are
currently authorized to issue up to 15,000,000 shares of common
stock.  Of that amount, approximately 5,843,362 shares were issued and
outstanding as of March 13, 2009.  On March 16, 2007, we completed the
Plan of Merger with Farnsworth Bancorp, Inc., for which the Holding Company
issued approximately 768,438 shares of common stock.  Our Board of
Directors has authority, without action or vote of the shareholders (except to
the extent required under applicable rules of the Nasdaq Capital Market), to
issue all or part of the authorized but unissued shares.  A total of
602,586 shares of common stock have been reserved for issuance under options
outstanding on March 13, 2009.  As of March 13, 2009, options to
purchase a total of 309,481 shares were exercisable and had exercise prices
ranging from $6.27 to $10.90.  Any such issuance will dilute the
percentage ownership interest of shareholders and may further dilute the book
value of our common stock.





Our
common stock is not insured and you could lose the value of your entire
investment.





An
investment in shares of our common stock is not a deposit and is not insured
against loss by the government.





Risks
Related to Our Industry





The
capital and credit markets have experienced unprecedented levels of
volatility.





During
2008, the capital and credit markets experienced extended volatility and
disruption.  In the third and fourth quarters of 2008, the volatility
and disruption reached unprecedented levels.  In response to the
financial conditions affecting the banking system and financial markets and the
potential threats to the solvency of investment banks and other financial
institutions, the U.S. government has taken unprecedented
actions.  These actions include the government assisted acquisition of
Bear Stearns by JPMorgan Chase, the federal conservatorship of Fannie Mae and
Freddie Mac, and the plan of the Treasury Department to inject capital and to
purchase mortgage loans and mortgage-backed and other securities from financial
institutions for the purpose of stabilizing the financial markets or particular
financial institutions. Investors should not assume that these governmental
actions will necessarily benefit the financial markets in general, or the
Company in particular.  Investors should not assume that the
government will continue to intervene in the financial markets at
all.  Investors should be aware that governmental intervention (or the
lack thereof) could materially and adversely affect the Company’s business,
financial condition and results of operations.





We
operate in a competitive market which could constrain our future growth and
profitability.





We
operate in a competitive environment, competing for deposits and loans with
commercial banks, savings associations and other financial
entities.  Competition for deposits comes primarily from other
commercial banks, savings associations, credit unions, money market and mutual
funds and other investment alternatives.  Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries.  Many of the
financial intermediaries operating in our market area offer certain services,
such as trust investment and international banking services, which we do not
offer.  Moreover, banks with a larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have larger lending
limits and are thereby able to serve the needs of larger
customers.  See Item 1, “Description of Business – Competition,”
above.




20


Legislative
and regulatory actions taken now or in the future to address the current
liquidity and credit crisis in the financial industry may significantly affect
our financial condition, results of operation, liquidity or stock
price





The
Emergency Economic Stabilization Act of 2008 (the “EESA”), which established the
U.S. Treasury Department’s Troubled Asset Relief Program (“TARP”), was enacted
on October 3, 2008.  As part of TARP, the Treasury Department created
the Capital Purchase Program (“CPP”), under which the Treasury Department will
invest up to $250 billion in senior preferred stock of U.S. banks and savings
associations or their holding companies for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.  On February 17,
2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was
enacted as a sweeping economic recovery package intended to stimulate the
economy and provide for extensive infrastructure, energy, health, and education
needs.  There can be no assurance as to the actual impact that EESA or
its programs, including the CPP, and ARRA or its programs, will have on the
national economy or financial markets.  The failure of these
significant legislative measures to help stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect the Company’s financial condition, results of
operation, liquidity or stock price.





In
addition, there have been numerous actions undertaken in connection with or
following EESA and ARRA by the Federal Reserve Board, Congress, the Treasury
Department, the FDIC, the SEC and others in efforts to address the current
liquidity and credit crisis in the financial industry that followed the
sub-prime mortgage market meltdown which began in late 2007. These measures
include homeowner relief that encourages loan restructuring and modification;
the establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; a mandatory “stress
test” requirement for banking institutions with assets in excess of $100 billion
to analyze capital sufficiency and risk exposure; and coordinated international
efforts to address illiquidity and other weaknesses in the banking
sector.  The purpose of these legislative and regulatory actions is to
help stabilize the U.S. banking system.  However, the EESA, the ARRA
and any current or future legislative or regulatory initiatives may not have
their desired effect, or may have an adverse effect when applied to the
Company.





We
are required to comply with extensive and complex governmental regulation which
can adversely affect our business.





Our
operations are and will be affected by current and future legislation and by the
policies established from time to time by various federal and state regulatory
authorities.  We are subject to supervision and periodic examination
by the Federal Reserve Board, or FRB, the Federal Deposit Insurance Corporation,
or FDIC, and the New Jersey Department of Banking and
Insurance.  Banking regulations, designed primarily for the safety of
depositors, may limit a financial institution’s growth and the return to its
investors by restricting such activities as the payment of dividends, mergers
with or acquisitions by other institutions, investments, loans and interest
rates, interest rates paid on deposits, expansion of branch offices, and the
offering of securities or trust services.  We are also subject to
capitalization guidelines established by federal law and could be subject to
enforcement actions to the extent that we are found by regulatory examiners to
be undercapitalized.  It is not possible to predict what changes, if
any, will be made to existing federal and state legislation and regulations or
the effect that any such changes may have on our future business and earnings
prospects.  Further, the cost of compliance with regulatory
requirements may adversely affect our ability to operate
profitability.




21


In
addition, the monetary policies of the FRB have had a significant effect on the
operating results of banks in the past and are expected to continue to do so in
the future.  Among the instruments of monetary policy used by the FRB
to implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank
deposits.  It is not possible to predict what changes, if any, will be
made to the monetary policies of the FRB or to existing federal and state
legislation or the effect that such changes may have on our future business and
earnings prospects.




During
the past several years, significant legislative attention has been focused on
the regulation and deregulation of the financial services
industry.  Non-bank financial institutions, such as securities
brokerage firms, insurance companies and money market funds, have been permitted
to engage in activities which compete directly with traditional bank
business.




As
a public company, our business is subject to numerous reporting requirements
that are currently evolving and could substantially increase our operating
expenses and divert management’s attention from the operation of our
business.




Compliance with the requirements of the Sarbanes-Oxley
Act of 2002 and the rules and listing standards promulgated by the SEC and Nasdaq may
significantly increase our legal and financial and accounting costs in the
future, once full compliance is required.  In addition, full
compliance with the requirements may take a significant amount of management’s
and the Board of Directors’ time and resources.  Likewise, these
developments may make it more difficult for us to attract and retain qualified
members of our board of directors, particularly independent directors, or
qualified executive officers.





As
directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules
requiring public companies to include a report of management on the company’s
internal control over financial reporting in their annual reports on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal control over financial reporting.  Under the SEC’s current
rules, we began to comply with this requirement with our 2007 annual
report.  Beginning with our 2009 fiscal year, the independent
registered public accounting firm auditing the Company’s financial statements
must attest to and report on the effectiveness of the Company’s internal control
over financial reporting.  The costs associated with the
implementation of this requirement, including documentation and testing, have
not been estimated by us.  If we are ever unable to conclude that we
have effective internal control over financial reporting or, if our independent
auditors are unable to provide us with an unqualified report as to the
effectiveness of our internal control over financial reporting for any future
year-ends as required by Section 404, we may incur
additional costs to rectify the deficiency and investors could lose
confidence in the reliability of our financial statements, either of which could
result in a decrease in the value of our securities.





Item
1B.  Unresolved Staff Comments.





Not
Applicable.





Item
2.  Properties.





The
Company currently operates 10 bank branches, including the main branch; 5 are
owned and 5 are leased.  Our principal office in Mount Laurel, New
Jersey, consisting of 10,500 square feet, is leased.  The lease
expires on December 31, 2015 with renewal options available through December 31,
2035.   A second branch office is leased in Medford, New Jersey
consisting of 3,000 square feet.  The Medford lease expires on May 31,
2025 with renewal options available through May 31, 2035.  A third
branch office is leased in Voorhees, New Jersey consisting of 3,000 square
feet.  The Voorhees lease expires on November 30, 2020 with renewal
options available through November 30, 2045.  A fourth branch office
is leased in Marlton, New Jersey consisting of 2,200 square feet.  The
Marlton lease expires on November 30, 2012 with renewal options available
through November 30, 2022.  A fifth branch office is leased in Delran,
New Jersey consisting of 3,000 square feet.  The Delran lease expires
on June 30, 2027 with renewal options available through June 30,
2047.  In addition, we own branch offices located in Cherry Hill,
Vincentown, Maple Shade, Bordentown and Florence, New Jersey containing 3,000,
6,400, 3,300, 7,900 and 1,000 square feet, respectively.





22


We also
lease an administrative office in Mount Laurel, New Jersey consisting of 8,100
square feet.  This lease will expire on July 31, 2011.





Management
considers the physical condition of all offices and branches to be good and
adequate for the conduct of the Company’s business.





Item
3. Legal Proceedings.





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.





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





No matters were submitted to a vote of the shareholders
of the Company during the fourth quarter of the fiscal year ended December 31,
2008.





PART
II




Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.





Our
common stock is listed on the Nasdaq Capital Market.  The number of
shareholders of record of our common stock, as of December 31, 2008, was
522.





For
information with respect to Equity Compensation Plans see Item 12 (“Securities
Authorized for Issuance under Equity Compensation Plans”).





The table
below presents the high and low sales prices reported for our common stock as
reported by the NASDAQ Capital Market for the periods indicated.  Sale
prices have been adjusted for stock splits and dividends.





NASDAQ Capital MarketYear
                    Quarter
                    
                    High price
                    
                    
                    Low price2008
                    4th
                    
                    $
                    3.50
                    
                    
                    $
                    0.883rd
                    
                    
                    5.50
                    
                    
                    
                    2.492nd
                    
                    
                    5.54
                    
                    
                    
                    2.901st
                    
                    
                    7.25
                    
                    
                    
                    4.752007
                    4th
                    
                    $
                    8.22
                    
                    
                    $
                    6.233rd
                    
                    
                    9.99
                    
                    
                    
                    7.502nd
                    
                    
                    10.19
                    
                    
                    
                    7.801st
                    
                    
                    11.12
                    
                    
                    
                    9.00





23


Dividends





The
holders of our common stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available
therefor.  Our ability to pay cash dividends is limited by applicable
state and federal law.  See "Item 1. Description of Business –
Regulation – Restriction on Dividends".




In 2008, we did not pay a cash
dividend, and we have no plans to do so in 2009.  In 2007, we paid
three cash dividends of $0.03 per share.  The Company has not paid a
cash dividend since the third quarter of 2007 and there is no assurance that the
Company will resume paying cash dividends in the future.





Future payments of dividends, if any,
is subject to the discretion of our Board of Directors and will depend upon a
number of factors, including future earnings, financial conditions, cash needs,
general business conditions and applicable legal limitations, including meeting
regulatory capital requirements.  Further, the Company's ability to
pay cash dividends to shareholders will depend largely on the Bank’s ability to
pay dividends to the Company.





We have distributed a 5% stock
dividend, accounted for as a stock split, each year during the period from 1997
through 2002 and from 2004 through 2006.  In 2007, we distributed a 21
for 20 stock split, effected in the form of a 5% common stock
dividend.





Item
6.  Selected Financial Data.





Not Applicable for Smaller Reporting
Companies.





Item
7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations.





The
information contained in the section captioned “Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations” is
included as an exhibit to this Annual Report.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk.





Not Applicable for Smaller Reporting
Companies.




Item
8.  Financial Statements and Supplementary Data.





The
Company's financial statements listed under Item 15 are included as an exhibit
to this Annual Report.





Item
9.  Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.





Not applicable.








24











Item
9A(T).  Controls and Procedures.





Disclosure
Controls and Procedures





The
Company, under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company’s disclosure controls
and procedures as of the end of the period covered by this
report.  Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were not effective, because of the material weakness described
below, to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and that such
information is accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.  Because of the inherent limitations in all control
systems, any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.  Furthermore, our controls and procedures can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the control, and misstatements due to error
or fraud may occur and not be detected on a timely basis.





Management’s Annual Report on
Internal Control over Financial Reporting.





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934.  The Company’s internal
control over financial reporting is designed to provide reasonable assurance to
the Company’s management and board of directors regarding the preparation and
fair presentation of published financial statements and the reliability of
financial reporting.  Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.  Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2008.  In
making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated
Framework.  Based on our assessment, we believe that, as of
December 31, 2008, the Company’s internal control over financial reporting is
not effective based on those criteria because management identified a material
weakness related to the internal controls over the process supporting the
determination of the adequacy of the allowance for loan losses. Specifically,
the Company did not initially provide sufficient general reserves under SFAS No.
5 in reaction to the rapidly deteriorating economic conditions affecting the
credit quality of segments of the loan portfolio and did not timely identify
loans that had become impaired under SFAS No.114.  This resulted in
material adjustments to the allowance for loan losses within the 2008 annual
consolidated financial statements, following the Company’s fourth quarter and
year-end earnings release, which necessitated a delay in filing of the Company’s
Form 10-K.  Management determined that these control deficiencies
constitute a material weakness in the Company’s internal control over financial
reporting.  In order to ensure that adequacy and accuracy in these
determinations are consistently present, a procedure of external review of the
details of management’s assessments will be completed on a timely basis each
quarter in order to meet the deadlines for all future reporting.  This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report.





25


Changes
in Internal Control over Financial Reporting





There
were no changes in the Company’s internal control over financial reporting in
the quarter ended December 31, 2008 that materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





Item
9B. Other Information.





Not applicable.





PART
III





The
Company will file a definitive proxy statement for its 2009 Annual Meeting of
Shareholders pursuant to Regulation 14A (the “Proxy Statement”) within 120 days
after the end of the fiscal year covered by this annual report on Form 10-K
(i.e., by April 30, 2009); accordingly, certain information that is required
under Part III of this Annual Report on Form 10-K is omitted from this report
and will be included in the Proxy Statement, and is incorporated herein by
reference to the Proxy Statement.





Item
10.  Directors, Executive Officers and Corporate
Governance.





The
information contained under the sections captioned “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Election of Directors” in the Company’s
Proxy Statement is incorporated herein by reference.





Code of Ethics.The
Company has adopted a Code of Ethics for the Company’s chief executive officer
and principal financial and accounting officers.  Printed copies of
the Code of Ethics are available without charge to any shareholder upon written
request addressed to R. Scott Horner, Secretary, Sterling Banks, Inc., 3100
Route 38, Mount Laurel, New Jersey 08054.  Any amendments to the Code
of Ethics, or any waivers of the Code of Ethics, will be disclosed promptly on a
Current Report on Form 8-K filed with the Securities and Exchange
Commission.





Item
11.  Executive Compensation.





The information contained in the
section captioned “Director and Executive Officer Compensation” in the Proxy
Statement is incorporated herein by reference.




Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.





Information required by this item is
incorporated herein by reference to the first chart in the section captioned
“Security Ownership of Directors and Executive Officers and Certain Beneficial
Owners” in the Proxy Statement.





Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





The
information is incorporated herein by reference to the sections captioned
“Certain Transactions” and “Election of Directors” in the Proxy
Statement.





26





Item
14.  Principal Accountant Fees and Services.





The
information is incorporated herein by reference to the section captioned
“Independent Auditors” in the Proxy Statement.





PART
IV





Item
15.  Exhibits and Financial Statement Schedules.





(a)(1)  
 Financial
Statements.  The consolidated statements of financial condition
of Sterling Banks, Inc. as of December 31, 2008 and 2007 and the related
consolidated statements of operations, shareholders’ equity and cash flows for
the years ended December 31, 2008 and 2007 together with the related notes, are
filed as a part of this Annual Report.





(a)(2)   
Financial Statement
Schedules.  Schedules have been omitted as they are not
applicable.





(a)(3)    Exhibits.  The
exhibits required by Item 601 of Regulation S-K are listed below:





2.1
            Plan
      of Acquisition, dated April 26, 2006 by and between Sterling Bank and
      Sterling Banks, Inc. (a)2.2
            Agreement
      and Plan of Merger, dated June 23, 2006, by and among Sterling Banks,
      Inc., Sterling Bank, and Farnsworth Bancorp, Inc. (b)3.1
            Certificate
      of Incorporation of Sterling Banks, Inc. (c)3.2
            Amended
      and Restated Bylaws of Sterling Banks, Inc. (d)10.1
            1994
      Employee Stock Option Plan (e), (g)10.2
            1998
      Employee Stock Option Plan (e), (g)10.3
            2003
      Employee Stock Option Plan (e), (g)10.4
            Sterling
      Banks, Inc. 2008 Employee Stock Option Plan (i)10.5
            Sterling
      Banks, Inc. 2008 Director Stock Option Plan (j)10.6
            Change
      in Control Severance Agreement dated December 26, 2007 between the
      Company, the Bank and R. Scott Horner (g), (h)10.7
            Change
      in Control Severance Agreement dated December 26, 2007 between the
      Company, the Bank and John Herninko (g), (h)10.8
            Employment
      agreement dated January 26, 2006 between the Bank and Robert H. King (f),
      (g)10.9
            Amendment
      to Employment Agreement dated December 26, 2007 between the Bank and
      Robert H. King (g)10.10
            Lease
      dated as of April 3, 1990, as amended, for headquarters facility in Mount
      Laurel, New Jersey (e)23.1
            Consent of McGladrey & Pullen, LLP, Independent
      Registered Public Accounting Firm31.1
            CEO Certification required under Section 302 of Sarbanes
      – Oxley Act of 200231.2
            CFO Certification required under Section 302 of Sarbanes
      – Oxley Act of 200232.1
            CEO Certification required under Section 906 of Sarbanes
      – Oxley Act of 200232.2
            CFO Certification required under Section 906 of Sarbanes
      – Oxley Act of 2002





27





(a)
              Incorporated
      by reference to Exhibit 2.1 of Sterling Banks, Inc.; Registration
      Statement on Form S-4 (File no. 333-133649).(b)
              Incorporated
      by reference to Exhibit 2.2 of Sterling Banks, Inc.; Registration
      Statement on Form S-4 (File no. 333-133649).(c)
              Incorporated
      by reference to Exhibit 3.1 of Sterling Banks, Inc.; Registration
      Statement on Form S-4 (File no. 333-133649).(d)
              Incorporated
      by reference to Exhibit 3.4 of Sterling Banks, Inc.; Registration
      Statement on Form S-4 (File no. 333-133649).(e)
              Incorporated
      by reference to the Bank’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003.(f)
              Incorporated
      by reference to the Bank’s Current Report on Form 8-K dated January 25,
      2006.(g)
              Management
      contract or compensatory plan or arrangement.(h)
              Incorporated
      by reference to the Company’s Current Report on Form 8-K dated January 4,
      2008.(i)
              Incorporated
      by reference to the Company’s Definitive Proxy Statement on Schedule 14A
      filed March 14, 2008.(j)
              Incorporated
      by reference to Exhibit 10.2 of Sterling Banks, Inc. Registration
      Statement on Form S-8 filed November 12,
2008.





28


SIGNATURES







In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





STERLING
      BANKS, INC.By:
            /s/ Robert H. KingRobert
      H. KingPresident
      and Chief Executive Officer


Date:
April 15, 2009





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
April 15, 2009.





/s/  Robert H.
    King
                            
                            /s/ James L. KaltenbachRobert
      H. King
                            
                            James
      L. Kaltenbach, M.D.President,
      Chief Executive Officer
                            
                            Directorand
      Director(Principal
      Executive Officer)
                            
                            /s/ G. Edward Koenig,
Jr.G.
      Edward Koenig, Jr./s/ R. Scott Horner
                            
                            DirectorR.
      Scott HornerExecutive
      Vice President, Chief
                            
                            /s/ John J. Maley, Jr.Financial
      Officer and Director
                            
                            John
      J. Maley, Jr., CPA(Principal
      Financial Officer)
                            
                            Director/s/ Dale F. Braun, Jr.
                            
                            /s/ Luis G. RogersDale
      F. Braun, Jr.
                            
                            Luis
      G. RogersSenior
      Vice President and Controller
                            
                            Director(Principal
      Accounting Officer)/s/ Ronald P. Sandmeyer/s/ A. Theodore Eckenhoff
                            
                            Ronald
      P. SandmeyerA.
      Theodore Eckenhoff
                            
                            DirectorChairman/s/ S. David Brandt
                            
                            Jeffrey
      P. Taylor, P.E.S.
      David Brandt, Esq
                            
                            DirectorDirector/s/ James Yoh
                            
                            /s/ Jeffrey DubrowJames
      Yoh, PhD.
                            
                            Jeffrey
      DubrowDirector
                            
                            Director




29




Sterling
Banks, Inc.
 
 
 
 Financial
Report
 December
31, 2008
  F-1
 Contents
 
 
 Management’s
      Discussion and Analysis
                    F-3Report
      of Independent Registered Public Accounting Firm
                    F-18Financial
      StatementsConsolidated
      Balance Sheets
                    F-19Consolidated
      Statements of Operations
                    F-21Consolidated
      Statements of Shareholders’ Equity
                    F-22Consolidated
      Statements of Cash Flows
                    F-23Notes
      to Consolidated Financial Statements
                    F-24
 
 F-2
 MANAGEMENT’SDISCUSSION AND ANALYSIS
  OF
 FINANCIAL
      CONDITION AND RESULTS OF
OPERATIONS
 
 The
following discussion focuses on the major components of the Company’s
operations.  This discussion should be read in conjunction with the
financial statements and accompanying notes included in this Annual
Report.
 
 Sterling
Banks, Inc. (the “Holding Company”) is the successor to Sterling Bank (the
“Bank” and together with the Holding Company, the “Company”) pursuant to the
Plan of Reorganization by and between the Holding Company and the Bank that was
completed on March 16, 2007, whereby the Bank became a wholly-owned subsidiary
of the Holding Company.  Additionally, on March 16, 2007, the Bank,
the Holding Company and Farnsworth Bancorp, Inc. (“Farnsworth”) completed the
merger (the “Merger”) in which Farnsworth merged with and into the Holding
Company, with the Holding Company as the surviving
corporation.  Subsequent to the Merger, Peoples Savings Bank, a
wholly-owned subsidiary of Farnsworth, was merged with and into the Bank, with
the Bank as the surviving Bank.  All information contained herein
represents solely the financial information of the Company.  All
references to “we,” “us,” “our,” and “ours” and similar terms in this report
refers to the Company and its subsidiaries, collectively.
 
 We are a
bank holding company headquartered in Burlington County, New Jersey, with assets
of $379.1 million as of December 31, 2008.  Our main office is located
in Mount Laurel, New Jersey with nine other Community Banking Centers located in
Burlington and Camden Counties, New Jersey.  We believe that this
geographic area represents an attractive banking market with a diversified
economy.  We began operations in December 1990 with the purpose of
serving consumers and small to medium-sized businesses in our market
area.  We have chosen to focus on the higher growth areas of western
Burlington County and eastern Camden County.  We believe that
understanding the character and nature of the local communities that we serve,
and having first-hand knowledge of customers and their needs for financial
services enable us to compete effectively and efficiently.
 
 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 on
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.  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, impaired and other classified
assets.
 
 Critical
Accounting Policies
 
 Allowance
for Losses on Loans
 
 The
allowance for losses on loans is based on management’s ongoing evaluation of the
loan portfolio and reflects an amount considered by management to be its best
estimate of probable losses inherent in the portfolio.  Management
considers a variety of factors when establishing the allowance, such as the
impact of current market conditions, diversification of the loan portfolio,
delinquency statistics, results of loan review and related classifications, and
historic loss rates.  In addition, certain individual loans that
management has identified as problematic are specifically provided for in the
allowance, based upon an evaluation of the borrower’s perceived ability to pay,
the estimated adequacy of the underlying collateral and other relevant
factors.  Consideration is also given to examinations performed by
regulatory agencies.  Although provisions have been established and
segmented by type of loan based upon management’s assessment of the loss
characteristics inherent in each type, the entire allowance for losses on loans
is available to absorb loan losses in any category.
 
 F-3
 Management
performs a detailed analysis to determine the allowance for loan
losses.  Since the allowance for loan losses is dependent, to a great
extent, on conditions that may be beyond our control, it is possible that
management’s estimate of the allowance for loan losses and actual results could
differ materially in the near future.
 
 In
addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for loan losses.  They may require
additions to the allowance based upon their judgments about information
available to them at the time of the examination.
 
 Goodwill
and Intangible Assets
 
 Goodwill
and intangible assets 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 goodwill and other intangible assets in connection with the
merger.  The goodwill was assigned to our one reporting unit,
banking.  As a general matter, goodwill generated from purchase
business combinations is deemed to have an indefinite life and is not subject to
amortization and is instead tested for impairment at least
annually.  Core deposit intangibles arising from acquisitions are
being amortized over their estimated useful lives, originally estimated to be 10
years.
 
 In 2008,
the extreme volatility in the banking industry that first started to surface in
the latter part of 2007 had a significant impact on banking companies and the
price of banking stocks, including our common stock.  During the
fourth quarter of 2008, the Company performed its annual impairment analysis and
determined that the Company’s enterprise value and the value of the Company’s
assets and liabilities did not support any level of goodwill.  Based
on this analysis, we wrote off $11.8 million of goodwill in the fourth quarter
of 2008, which represented all of the goodwill that resulted from the
Merger.  For purposes of the 2008 goodwill impairment testing, the
Company’s enterprise value was derived from a combination of trading price
information for its common stock and market data regarding comparable public
financial institutions.  The goodwill impairment charge had no effect
on the Holding HCompany's or the Bank's cash balances or
liquidity.  In addition, because goodwill and other intangible assets
are not included in the calculation of regulatory capital, the Bank's December
31, 2008 regulatory ratios were not adversely affected by this non-cash expense,
and they exceeded the minimum amounts required to be considered
"well-capitalized."
 
 Our other
intangible assets are core deposit intangibles.  The establishment and
subsequent amortization of these intangible assets 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 or loans.  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 or loan flows is influenced by many
factors, the most significant of which are alternative yields for loans and
deposits available to customers and the level of competition from other
financial institutions and financial services companies.  In
connection with the goodwill impairment testing discussed previously, we also
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.  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.
 
 F-4
 Income
Taxes
 
 The
Company accounts for income taxes according to the asset and liability
method.  Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis.  Deferred tax assets and liabilities are
measured using the enacted tax rates applicable to taxable income for the years
in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.  Valuation reserves are established against certain
deferred tax assets when it is more likely than not that the deferred tax assets
will not be realized.  Increases or decreases in the valuation reserve
are charged or credited to the income tax provision.
 
 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.
 
 Results
of Operations for the Years Ended December 31, 2008 and 2007
 
 Net
Loss
 
 Net loss
increased $15.7 million, or 3,113.5%, to a net loss of $16.2 million for the
year ended December 31, 2008 compared to net loss of $0.5 million for the year
ended December 31, 2007.  The decrease in earnings was mainly the
result of impairment charges of $11.8 million in goodwill and $475,000 in core
deposit intangibles associated with the Merger and an increase in the provision
for loan losses of $5.7 million.  Loss per share (basic and diluted)
increased $2.69 per share, or 2,988.9%, to a net loss of $2.78 per share for the
year ended December 31, 2008 compared to a net loss of $0.09 per share for the
year ended December 31, 2007.
 
 Net
Interest Income and Average Balances
 
 Net
interest income after the provision for loan losses decreased $5.6 million, or
45.9%, to $6.6 million for the year ended December 31, 2008 from $12.2 million
for the year ended December 31, 2007.  The provision for loan losses
increased $5.7 million to $6.1 million for the year ended December 31, 2008 from
$0.4 million for the year ended December 31, 2007.  The net interest
margin increased to 3.67% for the year ended December 31, 2008 from 3.43% for
the year ended December 31, 2007.  The increase in the net interest
margin is primarily a result of a decrease in cost of funds in our
marketplace.  Yield on interest-earning assets decreased to 6.46% for
the year ended December 31, 2008 from 7.01% for the year ended December 31,
2007.  The average cost of interest-bearing liabilities decreased to
3.10% for the year ended December 31, 2008 compared to 4.06% for the year ended
December 31, 2007.
 
 F-5
 The
following table presents a summary of the principal components of average
balances, yields and rates for the periods indicated:
  Year
      Ended December 31,(Dollars
      in thousands)2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Average
                                    Balance
                                  
                                  
                                  Interest
                                  
                                  
                                  Average
                                    Rate
                                  
                                  
                                  Average
                                    Balance
                                  
                                  
                                  Interest
                                  
                                  
                                  Average
                                    Rate
                                  
                                  
                                  Average
                                    Balance
                                  
                                  
                                  Interest
                                  
                                  
                                  Average
                                    RateAssetsLoans,
      net (1)
                                  
                                  $
                                  299,544
                                  
                                  
                                  $
                                  20,580
                                  
                                  
                                  
                                  6.87
                                  %
                                  
                                  $
                                  298,195
                                  
                                  
                                  $
                                  22,802
                                  
                                  
                                  
                                  7.65
                                  %
                                  
                                  $
                                  254,008
                                  
                                  
                                  $
                                  19,430
                                  
                                  
                                  
                                  7.65
                                  %Investment
      securities (2)
                                  
                                  
                                  36,239
                                  
                                  
                                  
                                  1,542
                                  
                                  
                                  
                                  4.26
                                  
                                  
                                  
                                  57,350
                                  
                                  
                                  
                                  2,374
                                  
                                  
                                  
                                  4.14
                                  
                                  
                                  
                                  60,436
                                  
                                  
                                  
                                  2,410
                                  
                                  
                                  
                                  3.99Federal
      funds sold
                                  
                                  
                                  9,321
                                  
                                  
                                  
                                  176
                                  
                                  
                                  
                                  1.89
                                  
                                  
                                  
                                  9,452
                                  
                                  
                                  
                                  485
                                  
                                  
                                  
                                  5.13
                                  
                                  
                                  
                                  8,222
                                  
                                  
                                  
                                  417
                                  
                                  
                                  
                                  5.07Due
      from banks
                                  
                                  
                                  210
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  1.00
                                  
                                  
                                  
                                  3,420
                                  
                                  
                                  
                                  173
                                  
                                  
                                  
                                  5.04
                                  
                                  
                                  
                                  5,633
                                  
                                  
                                  
                                  289
                                  
                                  
                                  
                                  5.13Total
      interest-earningassets
                                  
                                  
                                  345,314
                                  
                                  
                                  
                                  22,300
                                  
                                  
                                  
                                  6.46
                                  
                                  
                                  
                                  368,417
                                  
                                  
                                  
                                  25,834
                                  
                                  
                                  
                                  7.01
                                  
                                  
                                  
                                  328,299
                                  
                                  
                                  
                                  22,546
                                  
                                  
                                  
                                  6.87Allowance
      for loanlosses
                                  
                                  
                                  (2,938
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (2,610
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1,265
                                  )Other
      assets
                                  
                                  
                                  49,573
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  42,278
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  20,072Total
      Assets
                                  
                                  $
                                  391,949
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  408,085
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  347,106Liabilities
      and shareholders’ equityTime
      deposits
                                  
                                  $
                                  192,268
                                  
                                  
                                  
                                  7,570
                                  
                                  
                                  
                                  3.94
                                  
                                  
                                  $
                                  219,735
                                  
                                  
                                  
                                  10,569
                                  
                                  
                                  
                                  4.81
                                  
                                  
                                  $
                                  185,903
                                  
                                  
                                  
                                  8,012
                                  
                                  
                                  
                                  4.31NOW/MMDA/savingsaccounts
                                  
                                  
                                  105,077
                                  
                                  
                                  
                                  1,374
                                  
                                  
                                  
                                  1.31
                                  
                                  
                                  
                                  99,205
                                  
                                  
                                  
                                  2,263
                                  
                                  
                                  
                                  2.28
                                  
                                  
                                  
                                  79,511
                                  
                                  
                                  
                                  1,923
                                  
                                  
                                  
                                  2.42Borrowings
                                  
                                  
                                  12,975
                                  
                                  
                                  
                                  690
                                  
                                  
                                  
                                  5.32
                                  
                                  
                                  
                                  6,327
                                  
                                  
                                  
                                  371
                                  
                                  
                                  
                                  5.86
                                  
                                  
                                  
                                  12,247
                                  
                                  
                                  
                                  417
                                  
                                  
                                  
                                  3.41Total
      interest-bearingliabilities
                                  
                                  
                                  310,320
                                  
                                  
                                  
                                  9,634
                                  
                                  
                                  
                                  3.10
                                  
                                  
                                  
                                  325,267
                                  
                                  
                                  
                                  13,203
                                  
                                  
                                  
                                  4.06
                                  
                                  
                                  
                                  277,661
                                  
                                  
                                  
                                  10,352
                                  
                                  
                                  
                                  3.73Noninterest-bearingdemand  deposits
                                  
                                  
                                  37,901
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  41,166
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  33,928Other
      liabilities
                                  
                                  
                                  836
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  368
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,034Shareholders’
      equity
                                  
                                  
                                  42,892
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  41,284
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  34,483Total
      liabilities andshareholders’
      equity
                                  
                                  $
                                  391,949
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  408,085
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  347,106Net
      interest income
                                  
                                  
                                  
                                  
                                  
                                  $
                                  12,666
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  12,631
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  12,194Interest
      rate spread (3)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.36
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2.95
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.14Net
      interest margin (4)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.67
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.43
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.71
  (1)
Includes loans held for sale.  Also includes loan fees, which are
not material, but excludes overdrafts and nonaccrual loans of $7,789 in
2008, $4,639 in
2007 and $685 in 2006.
 (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.
 
 
 F-6
  The
following table presents a summary of the changes in interest income and expense
by both rate and volume for the periods indicated and including interest income
from loans held for sale:
 
 Year
      Ended December 31, 2008
                  Compared
      to Year Ended
                  December
      31, 2007
                
                
                Year
      Ended December 31, 2007
                  Compared
      to Year Ended
                  December
      31, 2006Variance
      Due to
                  Changes
      In
                
                
                
                
                
                Variance
      Due to
                  Changes
      InAverage
                  Volume
                
                
                Average
                  Rate
                
                
                Net
                  Increase/
                  (Decrease)
                
                
                Average
                  Volume
                
                
                Average
                  Rate
                
                
                Net
                  Increase/
                  (Decrease)Interest
      Income:Loans,
      net
                
                $
                104,000
                
                
                $
                (2,326,000
                )
                
                $
                (2,222,000
                )
                
                $
                3,372,000
                
                
                $
                -
                
                
                $
                3,372,000Investment
      securities
                
                
                (875,000
                )
                
                
                43,000
                
                
                
                (832,000
                )
                
                
                (122,000
                )
                
                
                86,000
                
                
                
                (36,000
                )Federal
      funds sold and
                  due
      from banks
                
                
                (171,000
                )
                
                
                (309,000
                )
                
                
                (480,000
                )
                
                
                (51,000
                )
                
                
                3,000
                
                
                
                (48,000
                )Total
      interest income
                
                
                (942,000
                )
                
                
                (2,592,000
                )
                
                
                (3,534,000
                )
                
                
                3,199,000
                
                
                
                89,000
                
                
                
                3,288,000Interest
      Expense:Deposits
                
                
                (869,000
                )
                
                
                (3,019,000
                )
                
                
                (3,888,000
                )
                
                
                1,937,000
                
                
                
                960,000
                
                
                
                2,897,000Borrowings
                
                
                389,000
                
                
                
                (70,000
                )
                
                
                319,000
                
                
                
                (197,000
                )
                
                
                151,000
                
                
                
                (46,000
                )Total
      interest expense
                
                
                (480,000
                )
                
                
                (3,089,000
                )
                
                
                (3,569,000
                )
                
                
                1,740,000
                
                
                
                1,111,000
                
                
                
                2,851,000Net
      interest income
                
                $
                (462,000
                )
                
                $
                497,000
                
                
                $
                35,000
                
                
                $
                1,459,000
                
                
                $
                (1,022,000
                )
                
                $
                437,000
 
 The
increase or decrease due to a change in average volume has been determined by
multiplying the change in average balances by the average rate during the
preceding period, and the increase or decrease due to a change in average rate
has been determined by multiplying the preceding period average balances by the
change in average rate.  For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated to volume.
 
 Noninterest
Income
 
 Total
noninterest income increased $37,000, or 4.0%, to $955,000 for the year ended
December 31, 2008 from $918,000 for the year ended December 31, 2007, primarily
from an increase in gains on sales of investment securities.  Service
charges on deposit accounts decreased $28,000, or 10.0%, to $252,000 for the
year ended December 31, 2008 from $280,000 for the year ended December 31,
2007.  Miscellaneous fees, including gains on sales of investment
securities of $95,000, increased $65,000, or 10.2%, to $703,000 for the year
ended December 31, 2008 from $638,000 for the year ended December 31,
2007.
 
 Noninterest
Expenses
 
 Total
noninterest expenses increased $12.6 million, or 90.0%, to $26.5 million for the
year ended December 31, 2008 from $13.9 million for the year ended December 31,
2007.  The increase was primarily as a result of an impairment charge
of $11.8 million in goodwill and an impairment charge of $0.5 million in the
core deposit intangible, associated with the Merger.
 
 Compensation
and benefits decreased $52,000, or 0.7%, to $7,183,000 for the year ended
December 31, 2008 from $7,235,000 for the year ended December 31,
2007.  This decrease was primarily from decreased staffing cost as a
result of the consolidation of one of our Mount Laurel branches with our Marlton
branch in September 2007, and to a lesser degree, as a result of the
consolidation of one of our Mount Laurel branches with our Maple Shade branch in
November 2008.
 
 Occupancy,
equipment and data processing expense increased $200,000, or 5.8%, to $3.7
million for the year ended December 31, 2008 from $3.5 million for the year
ended December 31, 2007.  This increase resulted primarily from a full
year of operations of three branches acquired in the Merger and our Delran
branch which opened in June 2007.
 
 F-7
 Marketing
and business development expense decreased $23,000, or 3.1%, to $718,000 for the
year ended December 31, 2008 from $741,000 for the year ended December 31,
2007.  The higher expense level in 2007 was primarily due to marketing
expenses incurred in the opening of our Delran branch in June 2007.
 
 Professional
services increased $188,000, or 22.1%, to $1,038,000 for the year ended December
31, 2008 from $850,000 for the year ended December 31, 2007.  This
increase was primarily due to increased strategic planning, loan workout and
Sarbanes-Oxley audit costs.
 
 During
2008, the Company recorded a goodwill impairment charge of $11,752,000
associated with the Merger.  Also during 2008, the Company recorded a
core deposit intangible impairment charge of $475,000, also associated with the
Merger.
 
 Other
operating expenses decreased $76,000, or 5.6%, to $1,275,000 for the year ended
December 31, 2008 from $1,351,000 for the year ended December 31,
2007.  The higher expense level in 2007 was primarily as a result of
costs associated with the formation of the Holding Company in March
2007.
 
 Income
Taxes
 
 Income
tax benefit, as a percentage of pre-tax loss, was 14.3% in
2008.  Income tax benefit, as a percentage of pre-tax loss, was 34.8%
in 2007.  The decrease is substantially attributable to the goodwill
charge, which is not tax deductible.
 
 Financial
Condition
 
 General
 
 Our total
assets decreased $31.4 million, or 7.6%, to $379.1 million at December 31, 2008
from $410.5 million at December 31, 2007.  This decrease was mainly
due to management’s efforts to decrease the Bank’s reliance on time deposits,
with corresponding reductions in the investment and loan portfolios and the
reductions in goodwill and core deposit intangible as a result of recording
impairment charges.
 
 Loan
Portfolio
 
 Total
loans, excluding loans held for sale, decreased $6.6 million, or 2.1%, to $305.6
million at December 31, 2008 from $312.2 million at December 31,
2007.  The decrease in loans was due to normal contractual loan
payments/payoffs in the loan portfolio, including an early loan payoff of $2.0
million.
 
 The
following table summarizes our loan portfolio by category and amount at the
dates listed.  The table does not include loans held for sale or
unrealized loan fees.
 
 December
      31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006
                                    
                                    
                                    2005
                                    
                                    
                                    2004Commercial,
      Financial and Agricultural
                                    
                                    $
                                    32,115,000
                                    
                                    
                                    $
                                    30,209,000
                                    
                                    
                                    $
                                    29,097,000
                                    
                                    
                                    $
                                    30,443,000
                                    
                                    
                                    $
                                    30,721,000Real
      Estate – Construction
                                    
                                    
                                    68,278,000
                                    
                                    
                                    
                                    80,486,000
                                    
                                    
                                    
                                    85,902,000
                                    
                                    
                                    
                                    77,499,000
                                    
                                    
                                    
                                    51,086,000Real
      Estate – Mortgage
                                    
                                    
                                    147,435,000
                                    
                                    
                                    
                                    141,237,000
                                    
                                    
                                    
                                    73,666,000
                                    
                                    
                                    
                                    72,020,000
                                    
                                    
                                    
                                    64,032,000Consumer
      Installment loans
                                    
                                    
                                    53,827,000
                                    
                                    
                                    
                                    52,291,000
                                    
                                    
                                    
                                    45,179,000
                                    
                                    
                                    
                                    38,714,000
                                    
                                    
                                    
                                    29,781,000Lease
      Financing
                                    
                                    
                                    4,636,000
                                    
                                    
                                    
                                    8,345,000
                                    
                                    
                                    
                                    9,439,000
                                    
                                    
                                    
                                    6,662,000
                                    
                                    
                                    
                                    4,145,000Total
      loans
                                    
                                    $
                                    306,291,000
                                    
                                    
                                    $
                                    312,568,000
                                    
                                    
                                    $
                                    243,283,000
                                    
                                    
                                    $
                                    225,338,000
                                    
                                    
                                    $
                                    179,765,000
 
  F-8
  Loans
Held for Sale
 
 Loans
held for sale decreased $36,000, or 94.7%, to $2,000 as of December 31, 2008
compared to $38,000 as of December 31, 2007.  This decrease was the
result of the SLM Corporation’s (formerly known as Sallie Mae) plan to self fund
these student loans.  We expect to discontinue funding these loans
during 2009.
 
 Non-Performing
Loans
 
 Loans,
including loans past due 90 days or more and still accruing interest, are
considered to be non-performing if they are on a non-accrual basis or terms have
been renegotiated to provide a reduction or deferral of interest or principal
because of a weakening in the financial condition of the borrowers.  A
loan that is past due 90 days or more and still accruing interest remains on
accrual status only if it is both adequately secured as to principal and
interest and is in the process of collection.
 
 At
December 31, 2008 and 2007, loans past due 90 days or more and still accruing
interest were $2,707,000 and $2,644,000, respectively.  Total
non-accruing loans were $9,895,000 and $4,538,000 at December 31, 2008 and 2007,
respectively.  Gross interest income of approximately $586,000 and
$268,000 would have been recorded under the original terms of these loans in
2008 and 2007, respectively.
 
 The table
below recaps loans accruing but past due 90 days or more, non-accrual loans,
OREO (Other Real Estate Owned), and troubled debt restructurings as of the dates
listed.
 
 December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Restructured
      loans:Real
      Estate – Construction
                
                $
                642,000
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Loans
      accruing, but past due 90 days or more:Commercial,
      Financial and Agricultural
                
                
                92,000
                
                
                
                27,000
                
                
                
                75,000
                
                
                
                -
                
                
                
                -Real
      Estate - Construction
                
                
                2,360,000
                
                
                
                2,349,000
                
                
                
                -
                
                
                
                329,000
                
                
                
                296,000Real
      Estate - Mortgage
                
                
                178,000
                
                
                
                180,000
                
                
                
                -
                
                
                
                -
                
                
                
                5,000Consumer
      Installment loans
                
                
                77,000
                
                
                
                88,000
                
                
                
                103,000
                
                
                
                118,000
                
                
                
                136,000Total
      loans accruing, but past due 90 days or more
                
                
                2,707,000
                
                
                
                2,644,000
                
                
                
                178,000
                
                
                
                447,000
                
                
                
                437,000Nonaccrual
      Loans:Commercial,
      Financial and Agricultural
                
                
                -
                
                
                
                -
                
                
                
                268,000
                
                
                
                -
                
                
                
                -Real
      Estate - Construction
                
                
                9,840,000
                
                
                
                3,656,000
                
                
                
                -
                
                
                
                -
                
                
                
                284,000Real
      Estate - Mortgage
                
                
                55,000
                
                
                
                882,000
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      nonaccrual loans
                
                
                9,895,000
                
                
                
                4,538,000
                
                
                
                268,000
                
                
                
                -
                
                
                
                284,000Total
      nonperforming loans
                
                
                13,244,000
                
                
                
                7,182,000
                
                
                
                446,000
                
                
                
                447,000
                
                
                
                721,000Other
      Real Estate Owned
                
                
                923,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      nonperforming assets
                
                $
                14,167,000
                
                
                $
                7,182,000
                
                
                $
                446,000
                
                
                $
                447,000
                
                
                $
                721,000Non-performing
      loans/Total loans (1)
                
                
                4.33
                %
                
                
                2.30
                %
                
                
                0.18
                %
                
                
                0.17
                %
                
                
                0.35
                %Non-performing
      assets/Total assets
                
                
                3.74
                %
                
                
                1.75
                %
                
                
                0.13
                %
                
                
                0.13
                %
                
                
                0.25
                %Allowance
      for loan losses/Total non-performing loans
                
                
                64.41
                %
                
                
                40.25
                %
                
                
                394.62
                %
                
                
                258.82
                %
                
                
                126.63
                %
 
 (1)
Includes loans held for sale.
 
 F-9
 Potential
Problem Loans
 
 In
addition to non-accrual loans and loans past due 90 days or more and still
accruing interest, we maintain a “watch list” of loans where management has
identified problems which potentially could cause such loans to be placed on
non-accrual status in future periods.  Loans on the watch list are
subject to heightened scrutiny and more frequent review by
management.  At December 31, 2008, there were 37 such loans totaling
$13,891,000.  Management believes that they have provided an adequate
allowance for such loans and are aggressively pursuing collection from the
borrowers.
 
 Allowance
for Loan Losses
 
 We
determine the level of allowance for loan losses based on a number of
factors.In order
to determine the amount of the provision for loan losses, we conduct a quarterly
review of the loan portfolio to evaluate overall credit quality.  This
evaluation consists of an analysis of individual loans and overall risk
characteristics and size of the different loan portfolios, and takes into
consideration current economic and market conditions, changes in non-performing
loans, the capability of specific borrowers to repay specific loan obligations
and current loan collateral values.  We also consider past estimates
of possible loan losses and actual losses incurred.  As adjustments
become identified, they are reported in earnings for the period in which they
become known.  During the fourth quarter of 2008, the Company
increased the allowance for loan losses due mainly to management’s determination
that 23 of its loan customers had deteriorated in financial condition and
warranted an increase in risk to the Company.
 
 The
allowance for loan losses is calculated under Statement of Financial Accounting
Standards (“SFAS”) No. 5 and SFAS No. 114.  Non-performing and
impaired loans are evaluated under SFAS 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 $17.7 million of impaired loans as of December 31, 2008 and may be
segmented as follows:
  Real
      Estate – Construction
                      =
                      98
                      %Real
      Estate – Mortgage
                      =
                      1
                      %Consumer
      Installment loans
                      =
                      1
                      %100
                      %
  Of
the impaired loans, $9.9 million were on nonaccrual status as of December 31,
2008.  Using the methods described above, $2.8 million was deemed the
collateral shortfall associated with these loans using the SFAS No. 114
method.  This is an increase of $2.5 million in specific valuation
reserves from December 31, 2007.
 
 The
Company utilizes a risk rating system on all loans under SFAS 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 non accruals, 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 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 SFAS No. 5.
 
 F-10
  Total
loans analyzed under SFAS No. 5 decreased by $16.2 million from December 31,
2007 to December 31, 2008 due to portfolio run off and loans being classified as
impaired.  During the same period the qualitative factors for
commercial real estate and consumer loans increased due to credit risks impacted
by the severe economic downturn in late 2008.  As a result, the
reserve under SFAS No. 5 increased by $3.1 million during this
period.
 
 Factors
that influenced management’s judgment on determining the amount of additions to
the allowance charged to operating expense were: an increase in nonaccruals, an
increase in loans classified as impaired, declining real estate values, a rising
national and local unemployment rate and further deterioration in the national
and local economic forecasts.
 
 The
following schedule sets forth the allocation of the allowance for loan losses
among various categories.  The allocation is based upon historical
experience.  The entire allowance for loan losses is available to
absorb future loan losses in any loan category.  This schedule
includes any provision for loan losses associated with loans held for
sale.
 
 December
      31,2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005
                          
                          
                          2004Allocation
      of allowance
                            for
      loan losses:
                          
                          Amount
                          
                          
                          %
      Gross Loans
                          
                          
                          Amount
                          
                          
                          %
      Gross Loans
                          
                          
                          Amount
                          
                          
                          %
      Gross Loans
                          
                          
                          Amount
                          
                          
                          %
      Gross Loans
                          
                          
                          Amount
                          
                          
                          %
      Gross LoansCommercial,
      Financial and
                            Agricultural
                          
                          $
                          353,000
                          
                          
                          
                          10
                          %
                          
                          $
                          124,000
                          
                          
                          
                          10
                          %
                          
                          $
                          78,000
                          
                          
                          
                          12
                          %
                          
                          $
                          47,000
                          
                          
                          
                          11
                          %
                          
                          $
                          37,000
                          
                          
                          
                          15
                          %Real
      Estate – Construction
                          
                          
                          5,481,000
                          
                          
                          
                          22
                          
                          
                          
                          1,846,000
                          
                          
                          
                          26
                          
                          
                          
                          1,052000
                          
                          
                          
                          35
                          
                          
                          
                          626,000
                          
                          
                          
                          29
                          
                          
                          
                          494,000
                          
                          
                          
                          25Real
      Estate – Mortgage
                          
                          
                          2,029,000
                          
                          
                          
                          48
                          
                          
                          
                          788,000
                          
                          
                          
                          45
                          
                          
                          
                          441,000
                          
                          
                          
                          30
                          
                          
                          
                          262,000
                          
                          
                          
                          27
                          
                          
                          
                          207,000
                          
                          
                          
                          31Consumer
      Installment loans
                          
                          
                          668,000
                          
                          
                          
                          18
                          
                          
                          
                          133,000
                          
                          
                          
                          17
                          
                          
                          
                          189,000
                          
                          
                          
                          19
                          
                          
                          
                          219,000
                          
                          
                          
                          30
                          
                          
                          
                          175,000
                          
                          
                          
                          27Lease
      Financing
                          
                          
                          -
                          
                          
                          
                          2
                          
                          
                          
                          -
                          
                          
                          
                          2
                          
                          
                          
                          
                          
                          
                          
                          4
                          
                          
                          
                          
                          
                          
                          
                          3
                          
                          
                          
                          
                          
                          
                          
                          2Total
      loans
                          
                          $
                          8,531,000
                          
                          
                          
                          100
                          %
                          
                          $
                          2,891,000
                          
                          
                          
                          100
                          %
                          
                          $
                          1,760,000
                          
                          
                          
                          100
                          %
                          
                          $
                          1,154,000
                          
                          
                          
                          100
                          %
                          
                          $
                          913,000
                          
                          
                          
                          100
                          %
 
 
 F-11
  Summary
of Charge-Off Experience
 
 The
following table summarizes the activity in our allowance for loan losses and our
charge-off experience for the periods listed:
 
 Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Balance
      at beginning of period
                  
                  $
                  2,891,000
                  
                  
                  $
                  1,760,000
                  
                  
                  $
                  1,154,000
                  
                  
                  $
                  913,000
                  
                  
                  $
                  760,000Charge-offs:Commercial,
      Financial, Agricultural
                  
                  
                  (32,000
                  )
                  
                  
                  (242,000
                  )
                  
                  
                  -
                  
                  
                  
                  (18,000
                  )
                  
                  
                  -Real
      Estate – Construction
                  
                  
                  (70,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      Estate – Mortgage
                  
                  
                  (237,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Consumer
      Installment loans
                  
                  
                  (124,000
                  )
                  
                  
                  (58,000
                  )
                  
                  
                  (1,000
                  )
                  
                  
                  (27,000
                  )
                  
                  
                  (9,000
                  )Lease
      Financing
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -(463,000
                  )
                  
                  
                  (300,000
                  )
                  
                  
                  (1,000
                  )
                  
                  
                  (45,000
                  )
                  
                  
                  (9,000
                  )Recoveries:Commercial,
      Financial, Agricultural
                  
                  
                  2,000
                  
                  
                  
                  1,000
                  
                  
                  
                  -
                  
                  
                  
                  1,000
                  
                  
                  
                  -Real
      Estate – Construction
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      Estate – Mortgage
                  
                  
                  3,000
                  
                  
                  
                  8,000
                  
                  
                  
                  1,000
                  
                  
                  
                  1,000
                  
                  
                  
                  1,000Consumer
      Installment loans
                  
                  
                  8,000
                  
                  
                  
                  3,000
                  
                  
                  
                  1,000
                  
                  
                  
                  -
                  
                  
                  
                  6,000Lease
      Financing
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -13,000
                  
                  
                  
                  12,000
                  
                  
                  
                  2,000
                  
                  
                  
                  2,000
                  
                  
                  
                  7,000Net
      recoveries (charge-offs)
                  
                  
                  (450,000
                  )
                  
                  
                  (288,000
                  )
                  
                  
                  1,000
                  
                  
                  
                  (43,000
                  )
                  
                  
                  (2,000
                  )Provision
      for loan loss
                  
                  
                  6,090,000
                  
                  
                  
                  401,000
                  
                  
                  
                  605,000
                  
                  
                  
                  284,000
                  
                  
                  
                  155,000Allowance
      for credit losses in acquired bank
                  
                  
                  -
                  
                  
                  
                  1,018,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance
      at end of period
                  
                  $
                  8,531,000
                  
                  
                  $
                  2,891,000
                  
                  
                  $
                  1,760,000
                  
                  
                  $
                  1,154,000
                  
                  
                  $
                  913,000Average
      loans outstanding (1)
                  
                  $
                  307,333,000
                  
                  
                  $
                  302,834,000
                  
                  
                  $
                  254,695,000
                  
                  
                  $
                  240,472,000
                  
                  
                  $
                  183,098,000Net
      charge-offs as a percentage of average loans
                  
                  
                  0.15
                  %
                  
                  
                  0.10
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.02
                  %
                  
                  
                  0.00
                  %(1)
      Includes loans held for sale and non-accruing loans
 
 Investment
Securities Portfolio
 
 The
following table presents the amortized cost and approximate market values at the
dates listed and for each major category of our investment
securities:
 
 At
      December 31,2008
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2006Amortized
                                Cost
                              
                              
                              Estimated
                                Fair Value
                              
                              
                              Amortized
                                Cost
                              
                              
                              Estimated
                                Fair Value
                              
                              
                              Amortized
                                Cost
                              
                              
                              Estimated
                                Fair ValueInvestment
      Securities
                                Available-for-SaleU.S.
      Government
                                agencies
      and corporations
                              
                              $
                              3,995,000
                              
                              
                              $
                              4,028,000
                              
                              
                              $
                              29,267,000
                              
                              
                              $
                              29,257,000
                              
                              
                              $
                              30,263,000
                              
                              
                              $
                              29,559,000Municipalities
                              
                              
                              4,941,000
                              
                              
                              
                              4,772,000
                              
                              
                              
                              7,324,000
                              
                              
                              
                              7,310,000
                              
                              
                              
                              4,507,000
                              
                              
                              
                              4,398,000Mortgage-backed
                              
                              
                              15,250,000
                              
                              
                              
                              15,297,000
                              
                              
                              
                              11,563,000
                              
                              
                              
                              11,528,000
                              
                              
                              
                              13,856,000
                              
                              
                              
                              13,569,000Total
      investment securities
                                Available-for-Sale
                              
                              $
                              24,186,000
                              
                              
                              $
                              24,097,000
                              
                              
                              $
                              48,154,000
                              
                              
                              $
                              48,095,000
                              
                              
                              $
                              48,626,000
                              
                              
                              $
                              47,526,000Investment
      Securities
                                Held-to-MaturityU.S.
      Government
                                agencies
      and corporations
                              
                              $
                              100,000
                              
                              
                              $
                              100,000
                              
                              
                              $
                              100,000
                              
                              
                              $
                              100,000
                              
                              
                              $
                              25,000
                              
                              
                              $
                              25,000Municipalities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              875,000
                              
                              
                              
                              875,000Mortgage-backed
                              
                              
                              19,784,000
                              
                              
                              
                              19,892,000
                              
                              
                              
                              6,754,000
                              
                              
                              
                              6,697,000
                              
                              
                              
                              8,392,000
                              
                              
                              
                              8,187,000Total
      investment securities
                                Held-to-Maturity
                              
                              $
                              19,884,000
                              
                              
                              $
                              19,992,000
                              
                              
                              $
                              6,854,000
                              
                              
                              $
                              6,797,000
                              
                              
                              $
                              9,292,000
                              
                              
                              $
                              9,087,000
 
 F-12
 The
following table presents the maturity distribution and weighted average yield of
the investment securities portfolio of the Company as of December 31,
2008.  Mortgage-backed securities principal repayment provisions are
shown based on contractual maturity.  Weighted average yields on
tax-exempt obligations have been computed on a taxable equivalent
basis.
 
 At
      December 31, 2008Within
      1 Year
                            
                            
                            After
      1 Year
                              Through
      5 Years
                            
                            
                            After
      5 Years
                              Through
      10 Years
                            
                            
                            After
      10 Years
                            
                            
                            TotalAmount
                            
                            
                            Yield
                            
                            
                            Amount
                            
                            
                            Yield
                            
                            
                            Amount
                            
                            
                            Yield
                            
                            
                            Amount
                            
                            
                            Yield
                            
                            
                            Amount
                            
                            
                            YieldInvestment
      Securities
                            
                            (Dollars
      in thousands)Available-for-Sale
      at amortized cost:U.S.
      Government agencies and
                              corporations
                            
                            $
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            2,000
                            
                            
                            
                            4.38
                            %
                            
                            $
                            1,995
                            
                            
                            
                            4.97
                            %
                            
                            $
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            3,995
                            
                            
                            
                            4.67
                            %Municipalities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,032
                            
                            
                            
                            4.73
                            %
                            
                            
                            2,909
                            
                            
                            
                            5.80
                            %
                            
                            
                            4,941
                            
                            
                            
                            5.36
                            %Mortgage-backed
      securities
                            
                            
                            400
                            
                            
                            
                            4.50
                            %
                            
                            
                            1,528
                            
                            
                            
                            4.22
                            %
                            
                            
                            1,592
                            
                            
                            
                            4.25
                            %
                            
                            
                            11,730
                            
                            
                            
                            4.89
                            %
                            
                            
                            15,250
                            
                            
                            
                            4.74
                            %Total
      securities available-for-sale
                            
                            $
                            400
                            
                            
                            
                            4.50
                            %
                            
                            $
                            3,528
                            
                            
                            
                            4.31
                            %
                            
                            $
                            5,619
                            
                            
                            
                            4.68
                            %
                            
                            $
                            14,639
                            
                            
                            
                            5.07
                            %
                            
                            $
                            24,186
                            
                            
                            
                            4.86
                            %Held-to-Maturity
      at amortized cost:U.S.
      Government agencies and
                              corporations
                            
                            $
                            100
                            
                            
                            
                            1.00
                            %
                            
                            $
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            100
                            
                            
                            
                            1.00
                            %Mortgage-backed
      securities
                            
                            
                            172
                            
                            
                            
                            3.99
                            %
                            
                            
                            2,252
                            
                            
                            
                            4.09
                            %
                            
                            
                            323
                            
                            
                            
                            3.88
                            %
                            
                            
                            17,037
                            
                            
                            
                            3.72
                            %
                            
                            
                            19,784
                            
                            
                            
                            3.77
                            %Total
      securities held-to-maturity
                            
                            $
                            272
                            
                            
                            
                            2.52
                            %
                            
                            $
                            2,252
                            
                            
                            
                            4.09
                            %
                            
                            $
                            323
                            
                            
                            
                            3.88
                            %
                            
                            $
                            17,037
                            
                            
                            
                            3.72
                            %
                            
                            $
                            19,884
                            
                            
                            
                            3.76
                            %
 
 Investments
consist of mortgage-backed securities, U.S. Government agency securities and
tax-free municipal securities.  We use the investment portfolio to
provide adequate liquidity to the Company, to assist in managing interest rate
risk and to provide a reasonable rate of return.
 
 Deposits
 
 Total
deposits decreased $20.4 million, or 5.8%, to $328.6 million at December 31,
2008 from $349.0 million at December 31, 2007.  This decrease was
mainly due to management’s efforts to decrease the Bank’s reliance on time
deposits.  Noninterest-bearing demand deposits decreased $1.3 million,
or 3.7%, to $35.9 million at December 31, 2008 from $37.2 million at December
31, 2007.  Interest bearing demand accounts decreased $9.1 million, or
20.7%, to $35.1 million at December 31, 2008 from $44.2 million at December 31,
2007.  Savings deposits increased $5.9 million, or 9.8%, to $66.7
million at December 31, 2008 from $60.8 million at December 31,
2007.  Time deposits under $100,000 decreased $6.5 million, or 3.8%,
to $161.1 million at December 31, 2008 from $167.6 million at December 31,
2007.  Jumbo time deposits decreased $9.4 million, or 23.9%, to $29.8
million at December 31, 2008 from $39.2 million at December 31,
2007.
 
 The
following table represents categories of our deposits at the dates
listed:
 
 At
      December 31,2008
                    
                    
                    2007
                    
                    
                    2006Amount
                    
                    
                    %
                    
                    
                    Amount
                    
                    
                    %
                    
                    
                    Amount
                    
                    
                    %Noninterest
      bearing
                      demand
      deposits
                    
                    $
                    35,873,000
                    
                    
                    
                    10.9
                    %
                    
                    $
                    37,246,000
                    
                    
                    
                    10.9
                    %
                    
                    $
                    39,021,000
                    
                    
                    
                    13.2
                    %Interest
      bearing
                      demand
      deposits
                    
                    
                    35,076,000
                    
                    
                    
                    10.7
                    
                    
                    
                    44,223,000
                    
                    
                    
                    10.7
                    
                    
                    
                    36,936,000
                    
                    
                    
                    12.5Savings
      deposits
                    
                    
                    66,747,000
                    
                    
                    
                    20.3
                    
                    
                    
                    60,775,000
                    
                    
                    
                    20.3
                    
                    
                    
                    38,852,000
                    
                    
                    
                    13.2Time
      deposits,
                      under
      $100,000
                    
                    
                    161,112,000
                    
                    
                    
                    49.0
                    
                    
                    
                    167,563,000
                    
                    
                    
                    49.0
                    
                    
                    
                    146,284,000
                    
                    
                    
                    49.5Time
      deposits,
                      $100,000
      or more
                    
                    
                    29,786,000
                    
                    
                    
                    9.1
                    
                    
                    
                    39,151,000
                    
                    
                    
                    9.1
                    
                    
                    
                    34,197,000
                    
                    
                    
                    11.6Total
      Deposits
                    
                    $
                    328,594,000
                    
                    
                    
                    100.0
                    %
                    
                    $
                    348,958,000
                    
                    
                    
                    100.0
                    %
                    
                    $
                    295,290,000
                    
                    
                    
                    100.0
                    %
 
 F-13
 
 The
following table describes the maturity of time deposits of $100,000 or more at
December 31, 2008:
 
 At
      December 31, 20083
      months or less
                
                $
                23,590,000Over
      3 months through 6 months
                
                
                977,000Over
      6 months through 12 months
                
                
                3,528,000Over
      1 year
                
                
                1,691,000Total
                
                $
                29,786,000
 
 The
following tables detail the average deposit amount, the average interest rate
paid and the percentage of each category to total deposits for the years ended
December 31, 2008 and 2007:
 
 Year
      Ended December 31, 2008Daily
      Average
                            
                            
                            Average
                            
                            PercentBalance
                            
                            
                            Rate
                            
                            Of
      TotalInterest
      bearing demand deposits
                            
                            $
                            42,302,000
                            
                            
                            
                            0.9
                            %
                            
                            
                            12.6
                            %Savings
      deposits
                            
                            
                            62,775,000
                            
                            
                            
                            1.6
                            
                            
                            
                            18.7Time
      deposits
                            
                            
                            192,268,000
                            
                            
                            
                            3.9
                            
                            
                            
                            57.4Total
      interest-bearing deposits
                            
                            
                            297,345,000
                            
                            
                            
                            
                            
                            
                            
                            88.7Noninterest-bearing
      demand deposits
                            
                            
                            37,901,000
                            
                            
                            
                            
                            
                            
                            
                            11.3Total
      deposits
                            
                            $
                            335,246,000
                            
                            
                            
                            
                            
                            
                            
                            100.0
                            %Year
      Ended December 31, 2007Daily
      Average
                            
                            
                            Average
                            
                            PercentBalance
                            
                            
                            Rate
                            
                            Of
      TotalInterest
      bearing demand deposits
                            
                            $
                            44,702,000
                            
                            
                            
                            1.9
                            %
                            
                            
                            12.4
                            %Savings
      deposits
                            
                            
                            54,503,000
                            
                            
                            
                            2.6
                            
                            
                            
                            15.2Time
      deposits
                            
                            
                            219,735,000
                            
                            
                            
                            4.8
                            
                            
                            
                            61.0Total
      interest-bearing deposits
                            
                            
                            318,940,000
                            
                            
                            
                            
                            
                            
                            
                            88.6Noninterest-bearing
      demand deposits
                            
                            
                            41,166,000
                            
                            
                            
                            
                            
                            
                            
                            11.4Total
      deposits
                            
                            $
                            360,106,000
                            
                            
                            
                            
                            
                            
                            
                            100.0
                            %Year
      Ended December 31, 2006Daily
      Average
                            
                            
                            Average
                            
                            PercentBalance
                            
                            
                            Rate
                            
                            Of
      TotalInterest
      bearing demand deposits
                            
                            $
                            36,614,000
                            
                            
                            
                            2.5
                            %
                            
                            
                            12.2
                            %Savings
      deposits
                            
                            
                            42,897,000
                            
                            
                            
                            2.3
                            
                            
                            
                            14.4Time
      deposits
                            
                            
                            185,903,000
                            
                            
                            
                            4.3
                            
                            
                            
                            62.1Total
      interest-bearing deposits
                            
                            
                            265,414,000
                            
                            
                            
                            
                            
                            
                            
                            88.7Noninterest-bearing
      demand deposits
                            
                            
                            33,928,000
                            
                            
                            
                            
                            
                            
                            
                            11.3Total
      deposits
                            
                            $
                            299,342,000
                            
                            
                            
                            
                            
                            
                            
                            100.0
                            %
 
 Borrowings
 
 At
December 31, 2008 and 2007, the Company had advances from the FHLB totaling
$16.0 million and $10.5 million, respectively.  This increase in
advances was a result of management’s decision to manage the net interest margin
with less reliance on higher yielding time deposits in 2008.  The
advances, as of December 31, 2008, have maturities of less than five years and
rates ranging from 3.16% to 4.25%.  These advances require the Company
to pledge certain securities ($18,400,000 at December 31, 2008) in our
investment portfolio to the FHLB, and these advances cannot be prepaid without
penalty.
 
 
 F-14
 
 On May 1,
2007, Sterling Banks Capital Trust I, a Delaware statutory business trust and a
wholly-owned subsidiary of the Company (the “Trust”), issued $6.2 million of
variable rate capital trust pass-through securities to investors.  The
variable interest rate re-prices quarterly after five years at the three month
LIBOR plus 1.70% and was 6.744% as of December 31, 2008.  The Trust
purchased $6.2 million of variable rate junior subordinated deferrable interest
debentures from the Company.  The debentures are the sole asset of the
Trust.  The terms of the junior subordinated debentures are the same
as the terms of the capital securities.  The Company has also fully
and unconditionally guaranteed the obligations of the Trust under the capital
securities.  The capital securities are redeemable by the Company on
or after May 1, 2012 at par or earlier if the deduction of related interest for
federal income taxes is prohibited, classification as Tier I Capital is no
longer allowed, or certain other contingencies arise.  The capital
securities must be redeemed upon final maturity of the subordinated debentures
on May 1, 2037.  Proceeds of approximately $4.5 million were
contributed in 2007 to paid-in capital of the Bank.  The remaining
$1.5 million was retained at the Company for future use.  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.
 
 Return
on Equity and Assets
  At
      December 31,2008
                          
                          2007
                          
                          2006Return
      (Loss) on average assets
                          
                          
                          (4.14
                          )%
                          
                          
                          (0.12
                          )%
                          
                          
                          0.21
                          %Return
      (Loss) on average equity
                          
                          
                          (37.83
                          )%
                          
                          
                          (1.22
                          )%
                          
                          
                          2.14
                          %Dividend
      payout ratio
                          
                          
                          N/M
                          
                          
                          
                          N/M
                          
                          
                          
                          80.00
                          %Average
      equity to average assets ratio
                          
                          
                          10.94
                          %
                          
                          
                          10.12
                          %
                          
                          
                          9.93
                          %
 
 N/M = Not
meaningful
 
 Liquidity
and Capital Resources
  Liquidity
represents an institution’s ability to generate cash or otherwise obtain funds
at reasonable rates to satisfy commitments to borrowers and demands of
depositors.  Our primary sources of funds are deposits, proceeds from
principal and interest payments on loans and investments, sales of investment
securities available-for-sale and borrowings.  While maturities and
scheduled amortization of loans and investments are a predictable source of
funds, deposit flows, loan prepayments and mortgage-backed securities
prepayments are influenced by interest rates, economic conditions, and
competition.  Competition for deposits may require banks to increase
the rates payable on deposits or expand their branch networks to adequately grow
deposits in the future.
 
 We
monitor our liquidity position on a daily basis.  We use overnight
federal funds and interest- bearing deposits in other banks to absorb daily
excess liquidity.  Conversely, overnight federal funds may be
purchased to satisfy daily liquidity needs.  Federal funds are sold or
purchased overnight through correspondent banks, one of which diversifies the
holdings to an approved group of banks throughout the country.  At
December 31, 2008, the Company had an aggregate availability of $89.7 million in
secured and unsecured overnight lines of credit from its correspondent banks for
the purchasing of federal funds.
 
 As of
December 31, 2008, the Bank met all capital adequacy requirements and we believe
we are “well capitalized” under the regulatory framework for prompt corrective
action.  To be categorized as “well capitalized,” the Bank must
maintain minimum leverage, Tier I and total capital ratios as set forth in the
following table.
 
 F-15
  Our
actual capital ratios are presented in the following table:
 
 “Well
      Capitalized”
                
                Actual
      at
                  December
      31, 2008
                
                Actual
      at
                  December
      31, 2007
                
                Actual
      at
                  December
      31, 2006Leverage
      ratio (1)
                
                5.00%
                
                7.21%
                
                8.28%
                
                10.39%Tier
      I capital to risk-weighted assets
                
                6.00%
                
                9.25%
                
                10.21%
                
                13.09%Total
      capital to risk-weighted assets
                
                10.00%
                
                10.52%
                
                11.13%
                
                13.77%
 
 (1) Tier
I capital to quarterly average of total assets.
 
 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.  As of December 31, 2008 and 2007, commitments to extend
credit and unused lines of credit amounted to approximately $45,413,000 and
$57,624,000, respectively, and standby letters of credit were approximately
$4,997,000 and $5,161,000, respectively.  These instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
in the statements of financial condition.
 
 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.
These instruments involve, to varying degrees, elements of off-balance sheet
risk in excess of the amount recognized in the statements of financial
condition.  At December 31, 2008, the required future minimum rental
payments under these leases are as follows:
 
 Years
      Ending December 31,2009
                
                $
                692,0002010
                
                
                705,0002011
                
                
                675,0002012
                
                
                604,0002013
                
                
                562,000Thereafter
                
                
                5,115,000$
                8,353,000
 
 The
off-balance sheet arrangements discussed above did not and are not reasonably
likely to have a material impact on the Company’s Consolidated Financial
Statements.
 
 Asset
and Liability Management
  Important
to the concept of liquidity is the management of interest-earning assets and
interest-bearing liabilities.  An interest rate sensitive asset or
liability is one that, within a defined time period, either matures or
experiences an interest rate change in line with general market
rates.  Interest rate sensitivity measures the relative volatility of
a bank’s interest margin resulting from changes in market interest
rates.  Through asset and liability management, we seek to position
ourselves to contend with changing interest rates.
 
 F-16
   The
following table summarizes repricing intervals for interest-earning assets and
interest-bearing liabilities as of December 31, 2008, and the difference or
“gap” between them on an actual and cumulative basis for the periods
indicated.  A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities.  During a period of falling interest rates, a positive
gap would tend to adversely affect net interest income, while a negative gap
would tend to result in an increase in net interest income.  During a
period of rising interest rates, a positive gap would tend to result in an
increase in net interest income while a negative gap would tend to affect net
interest income adversely.  Items presented in this table are
categorized as to remaining maturity or next repricing date.
 
 At
      December 31, 20083
      months
                                                                                                                                                                                    or less
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Over
      3months
                                                                                                                                                                                    through
      1
                                                                                                                                                                                    year
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Over
      1
                                                                                                                                                                                    year
                                                                                                                                                                                    through
      3
                                                                                                                                                                                    years
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Over
      3
                                                                                                                                                                                    years
                                                                                                                                                                                    through
      5
                                                                                                                                                                                    years
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Over
      5
                                                                                                                                                                                    years
                                                                                                                                                                                    through
      15
                                                                                                                                                                                    years
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Over
                                                                                                                                                                                    15 years
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Total(In
      thousands)Interest-Earning
      Assets:Loans
      (1)
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  77,765
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  34,942
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  33,662
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  41,666
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  43,086
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  65,372
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  296,493Investment
      securities:Held-to-maturity
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  355
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  757
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  3,040
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  318
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  323
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  15,091
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  19,884Available-for-sale
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  223
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1,489
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  4,637
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  7,053
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  10,749
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  35
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  24,186Restricted
      stock
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,448
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,448Federal
      funds sold
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  472
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  472Due
      from banks
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  145
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  145Total
      interest-earningassets
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  81,408
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  37,188
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  41,339
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  49,037
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  54,158
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  80,498
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  343,628Interest-Bearing
      Liabilities:Interest
      bearing demandaccounts
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  35,076
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  35,076Savings
      accounts
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  66,748
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  66,747Time
      deposits
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  55,526
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  88,858
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  45,585
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  928
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  190,898Borrowings
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1,750
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  4,500
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  15,936
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  22,186Total
      interest-bearing liabilities
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  157,350
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  90,608
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  50,085
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  16,864
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  -
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  314,907Interest
      rate sensitive gap
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (75,942
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (53,420
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (8,746
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  32,173
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  54,158
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  80,498
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  28,721Cumulative
      interest rate
                                                                                                                                                                                    sensitive
      gap
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (75,942
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (129,362
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (138,108
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (105,935
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  (51,777
                                                                                                                                                                                  )
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  28,721Cumulative
      gap/Total assets
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  (19.9
                                                                                                                                                                                  %)
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  (33.9
                                                                                                                                                                                  %)
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  (36.2
                                                                                                                                                                                  %)
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  (27.7
                                                                                                                                                                                  %)
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  (13.6
                                                                                                                                                                                  %)
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  7.5
                                                                                                                                                                                  %
 _________________
 (1)
Includes loans held for sale, but excludes loan fees and nonaccrual loans.
 
 The
method used to analyze interest rate sensitivity in the table above has a number
of limitations.  Certain assets and liabilities may react differently
to changes in interest rates even though they reprice or mature in the same or
similar time periods.  The interest rates on certain assets and
liabilities may change at different times than changes in market interest rates,
with some changing in advance of changes in market rates and some lagging behind
changes in market rates.  Also, certain assets (e.g., adjustable rate
loans) often have provisions that limit changes in interest rates each time the
interest rate changes and on a cumulative basis over the life of the
loan.  Additionally, the actual prepayments and withdrawals in the
event of a change in interest rates may differ significantly from those assumed
in the calculations shown in the table.  Finally, the ability of
borrowers to service their debt may decrease in the event of an interest rate
increase.
   F-17
  
  Reportof Independent Registered Public Accounting
Firm
 
 
 
 To the
Board of Directors and Shareholders
 Sterling
Banks, Inc.
 
 
 We have
audited the accompanying consolidated balance sheets of Sterling Banks, Inc. and
Subsidiary (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
the years then ended.  These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe our audits provide a reasonable basis for
our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sterling Banks, Inc. and
Subsidiary as of December 31, 2008 and 2007, and the results of their operations
and their cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.
 
 As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2008, the Company adopted Statement of Financial Accounting Standards No.
157, Fair Value
Measurements.
 
 We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2008
included in the accompanying Management’s Report on Internal Control over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
 
 
 
 Blue
Bell, Pennsylvania
 April 15,
2009
 
 
 F-18
 
 
 SterlingBanks, Inc. and SubsidiaryConsolidated
      Balance SheetsDecember  31,
      2008 and 2007Assets
                                          
                                          2008
                                          
                                          
                                          2007Cash
      and cash due from banks
                                          
                                          $
                                          13,054,000
                                          
                                          
                                          $
                                          11,554,000Federal
      funds sold
                                          
                                          
                                          472,000
                                          
                                          
                                          
                                          234,000Cash
      and cash equivalents
                                          
                                          
                                          13,526,000
                                          
                                          
                                          
                                          11,788,000Investment
      securities held-to-maturity, at cost (fair value of
      $19,992,000and
      $6,797,000 at December 31, 2008 and 2007, respectively)
                                          
                                          
                                          19,884,000
                                          
                                          
                                          
                                          6,854,000Investment
      securities available-for-sale, at fair value
                                          
                                          
                                          24,097,000
                                          
                                          
                                          
                                          48,095,000Total
      investment securities
                                          
                                          
                                          43,981,000
                                          
                                          
                                          
                                          54,949,000Restricted
      stock, at cost
                                          
                                          
                                          2,448,000
                                          
                                          
                                          
                                          2,229,000Loans
      held for sale
                                          
                                          
                                          2,000
                                          
                                          
                                          
                                          38,000Loans
                                          
                                          
                                          305,626,000
                                          
                                          
                                          
                                          312,210,000Less:
      allowance for loan losses
                                          
                                          
                                          (8,531,000
                                          )
                                          
                                          
                                          (2,891,000
                                          )Net
      loans
                                          
                                          
                                          297,095,000
                                          
                                          
                                          
                                          309,319,000Goodwill
      and core deposit intangible asset, net
                                          
                                          
                                          2,374,000
                                          
                                          
                                          
                                          14,924,000Premises
      and equipment, net
                                          
                                          
                                          9,122,000
                                          
                                          
                                          
                                          9,751,000Accrued
      interest receivable and other assets
                                          
                                          
                                          10,557,000
                                          
                                          
                                          
                                          7,487,000Total
      assets
                                          
                                          $
                                          379,105,000
                                          
                                          
                                          $
                                          410,485,000
 
 F-19
 Sterling
      Banks, Inc. and SubsidiaryConsolidated
      Balance SheetsDecember  31,
      2008 and 2007Liabilities
      and Shareholders' Equity
                            
                            2008
                            
                            
                            2007LiabilitiesDeposits:Noninterest-bearing
                            
                            $
                            35,873,000
                            
                            
                            $
                            37,246,000Interest-bearing
                            
                            
                            292,721,000
                            
                            
                            
                            311,712,000Total
      deposits
                            
                            
                            328,594,000
                            
                            
                            
                            348,958,000Federal
      Home Loan Bank advances
                            
                            
                            16,000,000
                            
                            
                            
                            10,500,000Subordinated
      debentures
                            
                            
                            6,186,000
                            
                            
                            
                            6,186,000Accrued
      interest payable and other accrued liabilities
                            
                            
                            1,204,000
                            
                            
                            
                            1,533,000Total
      liabilities
                            
                            
                            351,984,000
                            
                            
                            
                            367,177,000Commitments
      and Contingencies (Notes 8, 9 and 16)Shareholders'
      EquityPreferred
      stock,10,000,000
      shares authorized; no shares issued and outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock,$2
      par value, 15,000,000 shares authorized; 5,843,362 sharesissued
      and outstanding at December 31, 2008 and 2007
                            
                            
                            11,687,000
                            
                            
                            
                            11,687,000Additional
      paid-in capital
                            
                            
                            29,767,000
                            
                            
                            
                            29,708,000Retained
      earnings (accumulated deficit)
                            
                            
                            (14,279,000
                            )
                            
                            
                            1,949,000Accumulated
      other comprehensive loss
                            
                            
                            (54,000
                            )
                            
                            
                            (36,000
                            )Total
      shareholders' equity
                            
                            
                            27,121,000
                            
                            
                            
                            43,308,000Total
      liabilities and shareholders' equity
                            
                            $
                            379,105,000
                            
                            
                            $
                            410,485,000See
      Notes to Consolidated Financial Statements.
 
 F-20
 
 Sterling Banks, Inc. and
      SubsidiaryConsolidated Statements of OperationsYears
      Ended December 31, 2008 and 20072008
                                        
                                        
                                        2007Interest
      and dividend incomeInterest
      and fees on loans
                                        
                                        $
                                        20,580,000
                                        
                                        
                                        $
                                        22,802,000Interest
      and dividends on securities
                                        
                                        
                                        1,542,000
                                        
                                        
                                        
                                        2,374,000Interest
      on due from banks
                                        
                                        
                                        2,000
                                        
                                        
                                        
                                        173,000Interest
      on Federal funds sold
                                        
                                        
                                        176,000
                                        
                                        
                                        
                                        485,000Total
      interest and dividend income
                                        
                                        
                                        22,300,000
                                        
                                        
                                        
                                        25,834,000Interest
      expenseInterest
      on deposits
                                        
                                        
                                        8,944,000
                                        
                                        
                                        
                                        12,832,000Interest
      on Federal Home Loan Bank advances and overnight
borrowings
                                        
                                        
                                        273,000
                                        
                                        
                                        
                                        93,000Interest
      on subordinated debentures
                                        
                                        
                                        417,000
                                        
                                        
                                        
                                        278,000Total
      interest expense
                                        
                                        
                                        9,634,000
                                        
                                        
                                        
                                        13,203,000Net
      interest income
                                        
                                        
                                        12,666,000
                                        
                                        
                                        
                                        12,631,000Provision
      for loan losses
                                        
                                        
                                        6,090,000
                                        
                                        
                                        
                                        401,000Net
      interest income after provision for loan losses
                                        
                                        
                                        6,576,000
                                        
                                        
                                        
                                        12,230,000Noninterest
      incomeService
      charges
                                        
                                        
                                        252,000
                                        
                                        
                                        
                                        280,000Miscellaneous
      fees and other
                                        
                                        
                                        703,000
                                        
                                        
                                        
                                        638,000Total
      noninterest income
                                        
                                        
                                        955,000
                                        
                                        
                                        
                                        918,000Noninterest
      expensesCompensation
      and benefits
                                        
                                        
                                        7,183,000
                                        
                                        
                                        
                                        7,235,000Occupancy,
      equipment and data processing
                                        
                                        
                                        3,670,000
                                        
                                        
                                        
                                        3,470,000Marketing
      and business development
                                        
                                        
                                        718,000
                                        
                                        
                                        
                                        741,000Professional
      services
                                        
                                        
                                        1,038,000
                                        
                                        
                                        
                                        850,000Goodwill
      impairment losses
                                        
                                        
                                        11,752,000
                                        
                                        
                                        
                                        -Amortization
      and impairment loss of core deposit intangible asset
                                        
                                        
                                        822,000
                                        
                                        
                                        
                                        275,000Other
      operating expenses
                                        
                                        
                                        1,275,000
                                        
                                        
                                        
                                        1,351,000Total
      noninterest expenses
                                        
                                        
                                        26,458,000
                                        
                                        
                                        
                                        13,922,000Loss
      before income tax benefit
                                        
                                        
                                        (18,927,000
                                        )
                                        
                                        
                                        (774,000
                                        )Income
      tax benefit
                                        
                                        
                                        (2,699,000
                                        )
                                        
                                        
                                        (269,000
                                        )Net
      loss
                                        
                                        $
                                        (16,228,000
                                        )
                                        
                                        $
                                        (505,000
                                        )Net
      loss per common share:Basic
      and Diluted
                                        
                                        $
                                        (2.78
                                        )
                                        
                                        $
                                        (0.09
                                        )Weighted
      average shares outstanding:Basic
      and Diluted
                                        
                                        
                                        5,843,000
                                        
                                        
                                        
                                        5,676,000See
      Notes to Consolidated Financial Statements.
 
 
 F-21
  Sterling Banks, Inc. and
      SubsidiaryConsolidated Statements of Shareholders'
      EquityYears
      Ended December 31, 2008 and 2007Retained
                                                                          
                                                                          
                                                                          AccumulatedAdditional
                                                                          
                                                                          
                                                                          Earnings
                                                                          
                                                                          
                                                                          Other
                                                                          
                                                                          
                                                                          TotalCommon
      Stock
                                                                          
                                                                          
                                                                          Paid-In
                                                                          
                                                                          
                                                                          (Accumulated
                                                                          
                                                                          
                                                                          Comprehensive
                                                                          
                                                                          
                                                                          Shareholders'Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          Capital
                                                                          
                                                                          
                                                                          Deficit)
                                                                          
                                                                          
                                                                          Income
      (Loss)
                                                                          
                                                                          
                                                                          EquityDecember
      31, 2006
                                                                          
                                                                          
                                                                          4,783,568
                                                                          
                                                                          
                                                                          $
                                                                          9,567,000
                                                                          
                                                                          
                                                                          $
                                                                          22,930,000
                                                                          
                                                                          
                                                                          $
                                                                          2,931,000
                                                                          
                                                                          
                                                                          $
                                                                          (660,000
                                                                          )
                                                                          
                                                                          $
                                                                          34,768,000Comprehensive
      income:Net
      loss
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (505,000
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (505,000
                                                                          )Change
      in net unrealized loss onsecurities
      available-for-sale, net ofreclassification
      adjustment and taxeffects
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          624,000
                                                                          
                                                                          
                                                                          
                                                                          624,000Total
      comprehensive income
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          119,000Cash
      dividends paid ($0.09 per share)
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (477,000
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (477,000
                                                                          )Common
      stock split effected in the form
                                                                            of
      a 5% common stock dividend
                                                                          
                                                                          
                                                                          277,863
                                                                          
                                                                          
                                                                          
                                                                          556,000
                                                                          
                                                                          
                                                                          
                                                                          (558,000
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (2,000
                                                                          )Stock
      compensation
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          26,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          26,000Net
      proceeds from issuance of commonstock
                                                                          
                                                                          
                                                                          13,493
                                                                          
                                                                          
                                                                          
                                                                          27,000
                                                                          
                                                                          
                                                                          
                                                                          64,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          91,000Acquisition
      of Farnsworth Bancorp, Inc.
                                                                          
                                                                          
                                                                          768,438
                                                                          
                                                                          
                                                                          
                                                                          1,537,000
                                                                          
                                                                          
                                                                          
                                                                          7,246,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          8,783,000December
      31, 2007
                                                                          
                                                                          
                                                                          5,843,362
                                                                          
                                                                          
                                                                          
                                                                          11,687,000
                                                                          
                                                                          
                                                                          
                                                                          29,708,000
                                                                          
                                                                          
                                                                          
                                                                          1,949,000
                                                                          
                                                                          
                                                                          
                                                                          (36,000
                                                                          )
                                                                          
                                                                          
                                                                          43,308,000Comprehensive
      income:Net
      loss
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (16,228,000
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (16,228,000
                                                                          )Change
      in net unrealized loss onsecurities
      available-for-sale, net ofreclassification
      adjustment and taxeffects
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (18,000
                                                                          )
                                                                          
                                                                          
                                                                          (18,000
                                                                          )Total
      comprehensive loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (16,246,000
                                                                          )Stock
      compensation
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          59,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          59,000December
      31, 2008
                                                                          
                                                                          
                                                                          5,843,362
                                                                          
                                                                          
                                                                          $
                                                                          11,687,000
                                                                          
                                                                          
                                                                          $
                                                                          29,767,000
                                                                          
                                                                          
                                                                          $
                                                                          (14,279,000
                                                                          )
                                                                          
                                                                          $
                                                                          (54,000
                                                                          )
                                                                          
                                                                          $
                                                                          27,121,000See
      Notes to Consolidated Financial Statements.
  F-22
 
 Sterling Banks, Inc. and SubsidiaryConsolidated Statements of Cash
FlowsYears
      Ended December 31, 2008 and 20072008
                                  
                                  
                                  2007Cash
      Flows From Operating ActivitiesNet
      loss
                                  
                                  $
                                  (16,228,000
                                  )
                                  
                                  $
                                  (505,000
                                  )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
                                  
                                  
                                  1,091,000
                                  
                                  
                                  
                                  1,020,000Provision
      for loan losses
                                  
                                  
                                  6,090,000
                                  
                                  
                                  
                                  401,000Net
      amortization of purchase premiums on securities
                                  
                                  
                                  80,000
                                  
                                  
                                  
                                  49,000Net
      amortization and impairment loss of core deposit
intangible
                                  
                                  
                                  822,000
                                  
                                  
                                  
                                  275,000Goodwill
      impairment charge
                                  
                                  
                                  11,752,000
                                  
                                  
                                  
                                  -Stock
      compensation
                                  
                                  
                                  59,000
                                  
                                  
                                  
                                  26,000Realized
      gain on sales of securities available-for-sale
                                  
                                  
                                  (95,000
                                  )
                                  
                                  
                                  (5,000
                                  )Realized
      gain on sales or retirement of equipment
                                  
                                  
                                  (10,000
                                  )
                                  
                                  
                                  (6,000
                                  )Realized
      loss on repossessed property
                                  
                                  
                                  34,000
                                  
                                  
                                  
                                  -Deferred
      income tax benefit
                                  
                                  
                                  (2,699,000
                                  )
                                  
                                  
                                  (269,000
                                  )Realized
      gain on loans held for sale
                                  
                                  
                                  (12,000
                                  )
                                  
                                  
                                  -Proceeds
      from sale of loans held for sale
                                  
                                  
                                  1,072,000
                                  
                                  
                                  
                                  5,500,000Originations
      of loans held for sale
                                  
                                  
                                  (1,024,000
                                  )
                                  
                                  
                                  (3,920,000
                                  )Changes
      in operating assets and liabilities:Increase
      in accrued interest receivable and other assets
                                  
                                  
                                  (393,000
                                  )
                                  
                                  
                                  (199,000
                                  )Decrease
      in accrued interest payable and other accrued liabilities
                                  
                                  
                                  (329,000
                                  )
                                  
                                  
                                  (2,260,000
                                  )Net
      cash provided by operating activities
                                  
                                  
                                  210,000
                                  
                                  
                                  
                                  107,000Cash
      Flows From Investing ActivitiesPurchases
      of securities available-for-sale
                                  
                                  
                                  (10,564,000
                                  )
                                  
                                  
                                  (4,595,000
                                  )Purchases
      of securities held-to-maturity
                                  
                                  
                                  (15,322,000
                                  )
                                  
                                  
                                  (75,000
                                  )Proceeds
      from sales of securities available-for-sale
                                  
                                  
                                  5,470,000
                                  
                                  
                                  
                                  20,416,000Proceeds
      from maturities of securities available-for-sale
                                  
                                  
                                  26,350,000
                                  
                                  
                                  
                                  3,000,000Proceeds
      from maturities of securities held-to-maturity
                                  
                                  
                                  -
                                  
                                  
                                  
                                  875,000Proceeds
      from principal payments on mortgage-backed securities
      available-for-sale
                                  
                                  
                                  2,787,000
                                  
                                  
                                  
                                  2,409,000Proceeds
      from principal payments on mortgage-backed securities
      held-to-maturity
                                  
                                  
                                  2,232,000
                                  
                                  
                                  
                                  1,620,000Purchases
      of restricted stock
                                  
                                  
                                  (2,465,000
                                  )
                                  
                                  
                                  (2,308,000
                                  )Proceeds
      from sale of restricted stock
                                  
                                  
                                  2,246,000
                                  
                                  
                                  
                                  1,515,000Net
      decrease in loans
                                  
                                  
                                  6,134,000
                                  
                                  
                                  
                                  6,505,000Proceeds
      from sales of equipment
                                  
                                  
                                  55,000
                                  
                                  
                                  
                                  29,000Purchases
      of premises and equipment
                                  
                                  
                                  (507,000
                                  )
                                  
                                  
                                  (1,701,000
                                  )Cash
      acquired in (paid for) acquisition, net of cash paid
                                  
                                  
                                  (24,000
                                  )
                                  
                                  
                                  3,096,000Net
      cash provided by investing activities
                                  
                                  
                                  16,392,000
                                  
                                  
                                  
                                  30,786,000Cash
      Flows From Financing ActivitiesNet
      proceeds from issuance of common stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  91,000Dividends
      paid
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (477,000
                                  )Net
      decrease in noninterest-bearing deposits
                                  
                                  
                                  (1,373,000
                                  )
                                  
                                  
                                  (1,175,000
                                  )Net
      decrease in interest-bearing deposits
                                  
                                  
                                  (18,991,000
                                  )
                                  
                                  
                                  (50,879,000
                                  )Proceeds
      from issuance of subordinated debentures
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,186,000Proceeds
      from Federal Home Loan Bank Advances
                                  
                                  
                                  5,500,000
                                  
                                  
                                  
                                  4,207,000Net
      cash used in financing activities
                                  
                                  
                                  (14,864,000
                                  )
                                  
                                  
                                  (42,047,000
                                  )Increase
      (decrease) in cash and cash equivalents
                                  
                                  
                                  1,738,000
                                  
                                  
                                  
                                  (11,154,000
                                  )Cash
      and Cash Equivalents, beginning
                                  
                                  
                                  11,788,000
                                  
                                  
                                  
                                  22,942,000Cash
      and Cash Equivalents, ending
                                  
                                  $
                                  13,526,000
                                  
                                  
                                  $
                                  11,788,000Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the year for:Interest
      on deposits and borrowed funds
                                  
                                  $
                                  9,820,000
                                  
                                  
                                  $
                                  13,311,000Income
      taxes
                                  
                                  $
                                  1,000
                                  
                                  
                                  $
                                  175,000See
      Notes to Consolidated Financial Statements.
 
  F-23
 NOTESTO CONSOLIDATED FINANCIAL
STATEMENTS
 
  Note
1.   Description of Business and Summary of Significant
Accounting Policies
  Description of
Business:  Sterling Banks, Inc. is a bank holding company
headquartered in Mount Laurel, NJ.  Through its subsidiary, Sterling
Banks, Inc. 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.
 
 The
accounting and financial reporting policies of the Sterling Banks, Inc. and
Subsidiary (the “Company”) conform to accounting principles generally accepted
in the United States of America and to general practices within the banking
industry.  The policies that materially affect the determination of
financial position, results of operations and cash flows are summarized
below.
 
 Financial
Statements:  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, in accordance with Financial Accounting Standards Board (“FASB”)
Interpretation No. 46, Consolidation of Variable Interest
Entities, is not consolidated because it does not meet the
requirements.  All significant inter-company balances and transactions
have been eliminated.
 
 Investment
Securities:  Investment securities are classified under one of
the following categories at the date of purchase: “Held-to-Maturity” and
accounted for at historical cost, adjusted for accretion of discounts and
amortization of premiums; “Available-for-Sale” and accounted for at fair value,
with unrealized gains and losses reported as accumulated other comprehensive
income (loss), a separate component of shareholders’ equity; or “Trading” and
accounted for at fair value, with unrealized gains and losses reported as a
component of net income.  The Company has not held and does not intend
to hold trading securities.
 
 At
December 31, 2008 and 2007, the Company has 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 unrealized gains or temporary losses
reported as a separate component of other comprehensive income, net of the
related income tax effect.
 
 Also, at
December 31, 2008 and 2007, the Company reported investments in securities,
which were carried at cost, adjusted for amortization of premiums and accretion
of discounts.  The Company has the intent and ability to hold these
investment securities to maturity considering all reasonably foreseeable events
or conditions.  These securities are classified as
“held-to-maturity.”
 
 F-24
 
  Note
1.   Description of Business and Summary of Significant
Accounting Policies (Continued)
  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
amortization of premiums and accretion of discounts, computed by using the
interest method over their contractual lives, are recognized in interest
income.  Gains and losses on the sale of such securities are accounted
for on the specific identification basis.
 
 Restricted
Stock:  Restricted stock includes investments in the common
stocks of the Federal Reserve Bank of Philadelphia, the Federal Home Loan Bank
of New York, and the Atlantic Central Bankers Bank, for which no markets exists
and, accordingly, are carried at cost.
 
 Loans:  The
Company originates residential mortgage, commercial and consumer loans to
customers located principally in Burlington County and Camden County in southern
New Jersey.  The ability of the Company’s debtors to honor their
contracts is dependent upon general economic conditions in this area, including
the real estate market, employment conditions and the interest rate
market.
 
 Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans.  Interest income is
accrued on the unpaid principal balance.  Loan origination fees, net
of certain direct origination costs, are deferred and recognized as an
adjustment to the related loan yield using the interest method.
 
 A loan is
considered to be delinquent when payments have not been made according to
contractual terms, typically evidenced by nonpayment of a monthly installment by
the due date.  The accrual of interest on residential mortgage and
commercial loans is discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of
collection.  Consumer and other personal loans are typically charged
off no later than 180 days past due.  In all cases, loans are placed
on nonaccrual status or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
 
 Interest
accrued but not collected for loans that are placed on nonaccrual status or
charged off is reversed against interest income.  The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual.  Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
 
 Allowance for Loan
Losses:  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.
 
 F-25
 Note
1.   Description of Business and 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.
 
 Loans Held for
Sale:  Loans held for sale consist of student loans generated
from an agreement the Company has with SLM Corporation.  The Company
funds loans made by SLM to students for a period of 30 to 45
days.  SLM is contractually obligated to purchase the loans at face
value, plus accrued interest, within 45 days.  Loans held for sale are
recorded at the lower of aggregate cost or estimated fair
value.  Interest income is accrued on the unpaid principal
balance.
 
 Concentration of Credit
Risk:  The Company’s loans are generally to diversified
customers in Burlington County and Camden County, New Jersey.  The
concentrations of credit by type of loan are set forth in Note
5.  Generally, loans are collateralized by assets of the borrower and
are expected to be repaid from the cash flow or proceeds from the sale of
selected assets of the borrower.
 
 Mortgage-backed
securities held by the Company generally consist of certificates that are
guaranteed by an agency of the United States government.
 
 Segment
Reporting:  The Company operates one reporting segment of
business, “community banking.”  Through its community banking segment,
the Company provides a broad range of retail and commercial banking
services.
 
 F-26
  
 Note
1.   Description of Business and Summary of Significant
Accounting Policies (Continued)
  Transfers of Financial
Assets:  Transfers of financial assets are accounted for as
sales, when control over the assets has been surrendered.  Control
over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
 
 Interest Rate
Risk:  The Company is principally engaged in the business of
attracting deposits from the general public and using these deposits, together
with other borrowed funds, to make commercial, residential mortgage, and
consumer loans, and to invest in overnight and term investment
securities.  Inherent in such activities is the potential for the
Company to assume interest rate risk, which results from differences in the
maturities and repricing characteristics of assets and
liabilities.  For this reason, management regularly monitors the level
of interest rate risk and the poten­tial impact on results of
operations.
 
 Premises and
Equipment:  Premises and equipment are stated at cost less
accumulated depreciation and amortization.  Depreciation is computed
and charged to expense using the straight-line method over the estimated useful
lives of the assets.  Leasehold improve­ments are amortized to
expense over the shorter of the term of the respective lease or the estimated
useful life of the improvements.
 
 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 of property and equipment have occurred to
date.  The Company recorded an impairment of its core deposit
intangible asset in 2008.
 
 Goodwill and Other
Intangibles Assets:  Goodwill represented the excess of cost
over fair value of net assets acquired of Farnsworth Bancorp, Inc. (Note
2).  The Company accounts for goodwill in accordance with Statement of
Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible
Assets.”  Goodwill is subject to annual testing for
impairment.  The Company tests goodwill for impairment using the
two-step process prescribed by SFAS No. 142.  The first step tests for
potential impairment, while the second step measures the amount of impairment,
if any.  See Note 20 for further discussion.
 
 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.
 
 F-27
  
 
 Note
1.   Description of Business and Summary of Significant
Accounting Policies (Continued)
  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.
 
 Comprehensive
Income:  Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net
income.  However, certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities are reported as a
separate component of the equity section of the balance sheet.  Such
items, along with net income, are components of comprehensive
income.
 
 The
components of other comprehensive income (loss) and related tax effects for 2008
and 2007 are as follows:
 
 2008
                
                
                2007Unrealized
      holding gains on available-for-sale securities
                
                $
                65,000
                
                
                $
                1,045,000Reclassification
      adjustment for gains realized in income
                
                
                (95,000
                )
                
                
                (5,000
                )Net
      unrealized gains (losses)
                
                
                (30,000
                )
                
                
                1,040,000Tax
      effect
                
                
                12,000
                
                
                
                (416,000
                )Net-of-tax
      amount
                
                $
                (18,000
                )
                
                $
                624,000
 
 Statement of Cash
Flows:  For the purpose of the statement of cash flows, cash
equivalents are defined as cash and due from banks and other short-term
investments with an original maturity, when purchased, of ninety days or
less.  For the purposes of the statement of cash flows, the change in
loans and deposits are shown on a net basis.
 
 Earnings Per Common
Share:  Basic earnings per common share is computed by dividing
net income by the weighted average number of common shares outstanding during
the year.  Diluted earnings per common share consider common share
equivalents (when dilutive) outstanding during each year.  Certain
options to purchase common stock were excluded from the 2008 and 2007
computations because of the net losses incurred.  The Company uses the
treasury stock method in calculating diluted earnings per common
share.  Earnings per common share have been computed based on the
following for the years ended December 31, 2008 and 2007:
 
 F-28
 
 
 Note
1.   Description of Business and Summary of Significant
Accounting Policies (Continued)
 
 2008
                
                
                2007Net
      loss
                
                $
                (16,228,000
                )
                
                $
                (505,000
                )Average
      number of common shares outstanding
                
                
                5,843,000
                
                
                
                5,676,000Effect
      of dilutive options
                
                
                -
                
                
                
                -Average
      number of common shares outstanding used tocalculate
      diluted earnings per common share
                
                
                5,843,000
                
                
                
                5,676,000
 
 Stock-Based Employee
Compensation:  The Company has a stock-based employee
compensation plan which is more fully described in Note 15.  The
Company follows Financial Accounting Standards Board ("FASB") Statement No. 123
Share-Based Payment
(Revised 2004) ("SFAS 123R") to account for stock options.  SFAS 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.
 
 Use of
Estimates:  The preparation of financial statements in
accordance with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.  The principal estimates that are particularly
susceptible to significant change in the near term relate to the allowance for
loan losses, the valuation of goodwill and other intangible assets, the
valuation of deferred tax assets and the fair value disclosures of financial
instruments.
 
 Fair
Value:  Effective January 1, 2008, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurement, which
provides a framework for measuring fair value under generally accepted
accounting principles.  SFAS No. 157 applies to all assets and
liabilities that are being measured and reported on a fair value basis, with the
exception of nonfinancial assets and nonfinancial liabilities that are
recognized and disclosed at fair value on a nonrecurring basis for which fair
value disclosures have been delayed under FASB Staff Position (FSP) No. 157-2
Effective Date of FASB Statement No. 157 to
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years.
 
 F-29
  
 Note
1.   Description of Business and Summary of Significant
Accounting Policies (Continued)
 
 FSP 157-2 –Effective
Date of FASB Statement No. 157:  SFAS No.
157, Fair Value
Measurements became effective for fiscal years beginning after November
15, 2007.  However, the FASB has deferred the effective date in SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities (except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis – at least annually) with the issuance of FASB Staff Position
(FSP) 157-2, Effective Date of
FASB Statement No. 157 to fiscal years beginning after November 15,
2008.  This deferral does not apply to entities that have issued
interim or annual financial statements that include application of the
measurement and disclosure provisions of SFAS No. 157.  This FSP lists
examples of items for which deferral would or would not apply, including
nonfinancial assets and nonfinancial liabilities initially measured at fair
value in a business combination or other new basis event, but not measured at
fair value in subsequent periods (nonrecurring fair value
measures).  Financial Assets and Financial Liabilities are defined in
FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments.  The Company does not expect the
adoption of the FSP will have a material impact on its statement of financial
condition or results of operations.
 
 FSP 157-3 –Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active:  FSP
157-3 was issued on October 10, 2008 and became effective upon
issuance.  This FSP applies to financial assets within the scope of
accounting pronouncements that require or permit fair value measurements in
accordance with SFAS No. 157 and clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.
 
 This FSP
was effective upon issuance, including prior periods for which financial
statements had not been issued.  Revisions resulting from a change in
valuation technique or its application are accounted for as a change in
accounting estimate (SFAS No. 154, Accounting Changes and Error
Corrections).  The disclosure provisions of SFAS No. 154 for a
change in accounting estimate are not required for revisions resulting from a
change in valuation technique or its application.  Adoption of the FSP
did not have a material impact on the Company’s statement of financial condition
or results of operations.
 
 The
Company also adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, on January 1, 2008.  SFAS No.
159 allows an entity one irrevocable option to elect fair value accounting for
the initial and subsequent measurement of certain financial assets on a
contract-by-contract basis.  SFAS No. 159 requires that the difference
between the carrying value before election of the fair value option and the fair
value of these instruments be recorded as an adjustment to beginning retained
earnings in the period of adoption.  The Company has not elected the
fair value option for any existing financial assets or liabilities and
consequently did not have any adoption related adjustments.
 
 Recent Accounting
Pronouncements:
 
 SFAS
No. 141R, Business Combinations, and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
 
 In
December 2007, the FASB issued SFAS No. 141R and SFAS No. 160.  These
new standards significantly change the accounting for and reporting of business
combination transactions and noncontrolling interests (previously referred to as
minority interests) in consolidated financial statements.
 
 F-30
 
 
 Note
1.  Description of Business and Summary of Significant Accounting
Policies (Continued)
 
 Both
standards are effective for fiscal years beginning on or after December 15,
2008, with early adoption prohibited.  These Statements are effective
for the Company beginning on January 1, 2009.  Adoption of the
Statements will only have an impact if the Company enters into a business
combination after January 1, 2009.
 
 Note
2.  Business Combination
  On March
16, 2007, Farnsworth Bancorp, Inc. (“Farnsworth”), which was the parent company
of Peoples Savings Bank, based in Bordentown, New Jersey, merged (the “Merger”)
with and into the Company, with the Company as the surviving
entity.  At the same time, Peoples Savings Bank merged (the “Bank
Merger”, and, together with the Merger, the “Transaction”) into the Bank with
the Bank as the surviving entity.  The Transaction has been accounted
for as a purchase and the results of operations of Farnsworth since the
acquisition date have been included in the Company’s consolidated financial
statements.  The purchase price of approximately $18.3 million, which
consisted of 768,438 shares (806,860 shares as a result of the stock split in
2007) of Company common stock valued at $11.43 per share ($10.89 per share as a
result of the stock split in 2007) ($8,784,000) and cash of $9.5 million, was
allocated based upon the fair value of the assets and liabilities acquired as
follows:
 
 Loans,
      net
              $74,702,000Investments
              20,785,000Core
      deposit intangible asset
              3,471,000Deposits
              (105,722,000)Other,
      net (including acquired cash and cash equivalents of
      $12,598,000)
              13,296,000Net
      fair value of assets acquired
              6,532,000Purchase
      price, including acquisition costs
              18,284,000Goodwill
              $11,752,000
 
 Pro forma
unaudited operating result for the year ended December 31, 2007, giving effect
to the Transaction as if it had occurred as of January 1, 2007 is as
follows:
 
 2007Interest
      income
                $26,739,000Interest
      expense
                13,906,000Net
      income (loss)
                (1,251,000)Basic
      and Diluted EPS
                (0.22)
 
 These
unaudited pro forma results have been prepared for comparative purposes only and
include certain adjustments.  All adjustments were tax
effected.  They do not purport to be indicative of the results of
operations that actually would have resulted had the combination occurred on
January 1, 2007 or of future results of operations of the consolidated
entities.
 
 Note
3.   Cash and Due From Bank
  The
Company maintains various deposit accounts with other banks to meet normal funds
transaction requirements, to satisfy deposit reserve requirements, and to
compensate other banks for certain correspondent services.  These
accounts are normally insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000 per account, however, on a temporary basis during 2009,
these accounts are being insured up to at least $250,000 per
account.  Management is responsible for assessing the credit risk of
its correspondent banks.  The reserve requirements pertaining to the
Federal Reserve Bank were $3,962,000 and $4,982,000 at December 31, 2008 and
2007, respectively.
  F-31
 Note
4.   Investment Securities
  The
Company’s investment securities as of December 31, 2008 were as
follows:
 
 Gross
                      
                      
                      Gross
                      
                      
                      EstimatedAmortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      FairCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueAvailable-for-saleU.S.
      Government agencies and corporations
                      
                      $
                      3,995,000
                      
                      
                      $
                      33,000
                      
                      
                      $
                      -
                      
                      
                      $
                      4,028,000Mortgage-backed
      securities
                      
                      
                      15,250,000
                      
                      
                      
                      76,000
                      
                      
                      
                      (29,000
                      )
                      
                      
                      15,297,000Municipal
      securities
                      
                      
                      4,941,000
                      
                      
                      
                      -
                      
                      
                      
                      (169,000
                      )
                      
                      
                      4,772,000Total
      securities available-for-sale
                      
                      $
                      24,186,000
                      
                      
                      $
                      109,000
                      
                      
                      $
                      (198,000
                      )
                      
                      $
                      24,097,000Held-to-maturityU.S.
      Government agencies and corporations
                      
                      $
                      100,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      100,000Mortgage-backed
      securities
                      
                      
                      19,784,000
                      
                      
                      
                      129,000
                      
                      
                      
                      (21,000
                      )
                      
                      
                      19,892,000Total
      securities held-to-maturity
                      
                      $
                      19,884,000
                      
                      
                      $
                      129,000
                      
                      
                      $
                      (21,000
                      )
                      
                      $
                      19,992,000
 
 The
Company’s investment securities as of December 31, 2007 were as
follows:
 
 Gross
                      
                      
                      Gross
                      
                      
                      EstimatedAmortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      FairCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueAvailable-for-saleU.S.
      Government agencies and corporations
                      
                      $
                      29,267,000
                      
                      
                      $
                      45,000
                      
                      
                      $
                      (55,000
                      )
                      
                      $
                      29,257,000Mortgage-backed
      securities
                      
                      
                      11,563,000
                      
                      
                      
                      42,000
                      
                      
                      
                      (77,000
                      )
                      
                      
                      11,528,000Municipal
      securities
                      
                      
                      7,324,000
                      
                      
                      
                      49,000
                      
                      
                      
                      (63,000
                      )
                      
                      
                      7,310,000Total
      securities available-for-sale
                      
                      $
                      48,154,000
                      
                      
                      $
                      136,000
                      
                      
                      $
                      (195,000
                      )
                      
                      $
                      48,095,000Held-to-maturityU.S.
      Government agencies and corporations
                      
                      $
                      100,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      100,000Mortgage-backed
      securities
                      
                      
                      6,754,000
                      
                      
                      
                      7,000
                      
                      
                      
                      (64,000
                      )
                      
                      
                      6,697,000Total
      securities held-to-maturity
                      
                      $
                      6,854,000
                      
                      
                      $
                      7,000
                      
                      
                      $
                      (64,000
                      )
                      
                      $
                      6,797,000
 
 
 F-32
   Note
4.   Investment Securities (Continued)
  The
amortized cost and estimated market value of debt securities at December 31,
2008 by contractual maturities are shown below.  Expected maturities
may differ from contractual maturities for mortgage-backed securities because
the mortgages underlying the securities may be called or prepaid without any
penalties; therefore, these securities are not included in the maturity
categories in the following maturity schedule.
 
 December
      31, 2008Available-for-sale
                
                
                Held-to-maturityAmortized
                
                
                Estimated
                
                
                Amortized
                
                
                EstimatedCost
                
                
                Fair
      Value
                
                
                Cost
                
                
                Fair
      ValueMaturing
      within one year
                
                $
                -
                
                
                $
                -
                
                
                $
                100,000
                
                
                $
                100,000Maturing
      after one year, but within five years
                
                
                2,000,000
                
                
                
                2,016,000
                
                
                
                -
                
                
                
                -Maturing
      after five years, but within ten years
                
                
                4,027,000
                
                
                
                3,981,000
                
                
                
                -
                
                
                
                -Maturing
      after ten years
                
                
                2,909,000
                
                
                
                2,803,000
                
                
                
                -
                
                
                
                -Mortgage-backed
      securities
                
                
                15,250,000
                
                
                
                15,297,000
                
                
                
                19,784,000
                
                
                
                19,892,000Total
      securities
                
                $
                24,186,000
                
                
                $
                24,097,000
                
                
                $
                19,884,000
                
                
                $
                19,992,000
 
 Proceeds
from sales of in­vestment securities available-for-sale during 2008 and 2007
were $5,470,000 and $20,416,000, respectively.  Gross gains of $95,000
and $5,000, respectively, were realized on those transactions.
 
 Securities
with a carrying value of $20,445,000 and $16,440,000 were pledged to secure
public deposits and Federal Home Loan Bank advances at December 31, 2008 and
2007, respectively.
 
 Included
in “Interest and dividends on securities” in the Statements of Operations was
$204,000 and $198,000 of tax-exempt interest income for 2008 and 2007,
respectively.
 
 The fair
value of securities with unrealized losses by length of time that the individual
securities have been in a continuous loss position at December 31, 2008 is as
follows:
 
 Continuous
      Unrealized Losses
                
                
                Continuous
      Unrealized Losses ExistingExisting
      for Less Than 12 Months
                
                
                for
      More Than 12 MonthsUnrealized
                
                
                
                
                
                UnrealizedFair
      Value
                
                
                Losses
                
                
                Fair
      Value
                
                
                LossesAvailable-for-sale:U.S.
      Government agencies and corporations
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Mortgage-backed
      securities
                
                
                6,407,000
                
                
                
                (29,000
                )
                
                
                -
                
                
                
                -Municipal
      securities
                
                
                4,772,000
                
                
                
                (169,000
                )
                
                
                -
                
                
                
                -11,179,000
                
                
                
                (198,000
                )
                
                
                -
                
                
                
                -Held-to-maturity:Mortgage-backed
      securities
                
                
                3,502,000
                
                
                
                (21,000
                )
                
                
                -
                
                
                
                -Total
      temporarily impaired securities
                
                $
                14,681,000
                
                
                $
                (219,000
                )
                
                $
                -
                
                
                $
                -
 
 F-33
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Note
4.   Investment Securities (Continued)
  At
December 31, 2008, 32 mortgage-backed securities and 7 municipal securities were
in an unrealized loss position.  Management believes that the
deterioration in value is attributable to changes in market interest rates and
not the credit quality of the issuer.  This factor, coupled with the
fact the Company has both the intent and ability to hold securities for a period
of time sufficient to allow for any anticipated recovery in fair value,
substantiates that the unrealized losses in the available-for-sale portfolio are
temporary.
 
 The fair
value of securities with unrealized losses by length of time that the individual
securities have been in a continuous loss position at December 31, 2007 is as
follows:
 
 Continuous
      Unrealized Losses
                
                
                Continuous
      Unrealized Losses ExistingExisting
      for Less Than 12 Months
                
                
                for
      More Than 12 MonthsUnrealized
                
                
                
                
                
                UnrealizedFair
      Value
                
                
                Losses
                
                
                Fair
      Value
                
                
                LossesAvailable-for-sale:U.S.
      Government agencies and corporations
                
                $
                -
                
                
                $
                -
                
                
                $
                15,240,000
                
                
                $
                (55,000
                )Mortgage-backed
      securities
                
                
                1,084,000
                
                
                
                (3,000
                )
                
                
                6,444,000
                
                
                
                (74,000
                )Municipal
      securities
                
                
                -
                
                
                
                -
                
                
                
                3,614,000
                
                
                
                (63,000
                )1,084,000
                
                
                
                (3,000
                )
                
                
                25,298,000
                
                
                
                (192,000
                )Held-to-maturity:Mortgage-backed
      securities
                
                
                -
                
                
                
                -
                
                
                
                5,700,000
                
                
                
                (64,000
                )Total
      temporarily impaired securities
                
                $
                1,084,000
                
                
                $
                (3,000
                )
                
                $
                30,998,000
                
                
                $
                (256,000
                )
 
 Note
5.   Loans
  The
composition of net loans as of December 31, 2008 and 2007 are as
follows:
 
 2008
                
                
                2007Commercial,
      Financial and Agricultural
                
                $
                32,115,000
                
                
                $
                30,209,000Real
      Estate - Construction
                
                
                68,278,000
                
                
                
                80,486,000Real
      Estate – Mortgage
                
                
                147,435,000
                
                
                
                141,237,000Installment
      loans to individuals
                
                
                53,827,000
                
                
                
                52,291,000Lease
      Financing
                
                
                4,636,000
                
                
                
                8,345,000Unrealized
      Loan Fees
                
                
                (665,000
                )
                
                
                (358,000
                )Total
      loans
                
                
                305,626,000
                
                
                
                312,210,000Less:  allowance
      for loan losses
                
                
                (8,531,000
                )
                
                
                (2,891,000
                )Net
      loans
                
                $
                297,095,000
                
                
                $
                309,319,000
 
 
 F-34
 
  Note
6.   Loans to Related Parties
  Loans to
related parties include loans made to executive officers, directors and their
affiliated interests.  Management believes that the Company has not
entered into any transactions with these individuals or entities that were less
favorable to the Company than they would have been for similar transactions with
other borrowers.
 
 An
analysis of the activity in related party loans for 2008 and 2007 is as
follows:
 
 2008
                
                
                2007Balance,
      beginning of year
                
                $
                4,268,000
                
                
                $
                4,899,000Additions
                
                
                3,606,000
                
                
                
                3,713,000Payments
                
                
                (1,144,000
                )
                
                
                (3,295,000
                )Reclassification
      as non-related party
                
                
                (1,806,000
                )
                
                
                (1,049,000
                )Balance,
      end of year
                
                $
                4,924,000
                
                
                $
                4,268,000
 
 At
December 31, 2008 and 2007, these loans are current as to payment of principal
and interest.
 
 In
addition, the Company has financial instruments with off-balance sheet risk with
certain related parties including loan commitments made to executive officers,
directors and their affiliated interests.  As of December 31, 2008 and
2007, commitments to extend credit and unused lines of credit amounted to
approximately $1,133,000 and $1,967,000, respectively.  Standby
letters of credit were approximately $20,000 and $242,000 as of December 31,
2008 and 2007, respectively.  These amounts are included in loan
commitments and standby letters of credit (Note 8).
 
 Note
7.   Allowance for Loan Losses
  Changes
in the allowance for loan losses for the years ended December 31, 2008 and 2007
are as follows:
 
 2008
                
                
                2007Balance,
      beginning of year
                
                $
                2,891,000
                
                
                $
                1,760,000Provision
      for loan losses
                
                
                6,090,000
                
                
                
                401,000Loans
      charged off
                
                
                (463,000
                )
                
                
                (300,000
                )Recoveries
      of loans previously charged off
                
                
                13,000
                
                
                
                12,000Allowance
      for credit losses in acquired bank
                
                
                -
                
                
                
                1,018,000Balance,
      end of year
                
                $
                8,531,000
                
                
                $
                2,891,000
 
 The
Company identifies a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement.  Payments received on impaired loans are recorded as
interest income unless collection of the remaining recorded investment is
doubtful, in which event payments received are recorded as a reduction of
principal.  At December 31, 2008 and 2007, the carrying value of
impaired loans was $17,694,000 and $7,031,000, respectively.  The
average recorded investment in impaired loans during 2008 and 2007 was
$10,348,000 and $5,059,000, respectively.  Such loans are valued based
on the present value of expected future cash flows discounted at the loans’
effective interest rates and/or the fair value of collateral if a loan is
collateral dependent.  Specific allocations of $2,802,000 and $338,000
were included in the allowance for loan losses at December 31, 2008 and 2007,
for impaired loans totaling $11,881,000 and $1,708,000,
repectively.
   F-35
 Note
7.   Allowance for Loan Losses (Continued)
  At
December 31, 2008 and 2007, troubled debt restructurings were $642,000 and $0,
respectively.  Loans past due 90 days or more and still accruing
interest were $2,707,000 and $2,644,000 at December 31, 2008 and 2007,
respectively.  Total non-accruing loans, included in impaired loans,
were $9,895,000 and $4,538,000 at December 31, 2008 and 2007,
respectively.  Interest income on impaired loans amounted to $655,000
in 2008 and $83,000 in 2007.
 
 Note
8.   Loan Commitments and Standby Letters of
Credit
  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, which are conditional commit­ments issued by the Company to
guarantee the performance of an obligation of a customer to a third
party.  Both arrangements have credit risk essentially the same as
that involved in extending loans, and are subject to the Company’s normal credit
policies.  Collateral may be obtained based on management’s credit
assessment of the customer.  The Company’s exposure to loss in the
event of nonperformance by the other party to the financial instrument is
represented by the contractual amount of those instruments.
 
 As of
December 31, 2008 and 2007, commitments to extend credit and unused lines of
credit amounted to approximately $45,413,000 and $57,624,000, respectively, and
standby letters of credit were approximately $4,997,000 and $5,161,000,
respectively.  During 2008 and 2007, the majority of these commitments
and standby letters of credit were at a variable rate of interest.
 
 Such
commitments generally have fixed expiration dates or other termination
clauses.  Since many commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
 
 Note
9.   Premises and Equipment
  Premises
and equipment at December 31, 2008 and 2007 consisted of the
following:
 
 2008
                
                
                2007Land
                
                $
                1,364,000
                
                
                $
                1,364,000Premises
      and improvements
                
                
                9,142,000
                
                
                
                9,078,000Furniture
      and equipment
                
                
                4,647,000
                
                
                
                4,620,000Total
      premises and equipment, at cost
                
                
                15,153,000
                
                
                
                15,062,000Less:
      accumulated depreciation and amortization
                
                
                (6,031,000
                )
                
                
                (5,311,000
                )Premises
      and equipment, net
                
                $
                9,122,000
                
                
                $
                9,751,000
 
 The
estimated useful lives for calculating deprecia­tion and amortization on
furniture and equipment are between three and seven years.  Premises
and leasehold improvements are depreciated over the lesser of the economic life
or the term of the related lease, generally ranging from three to twenty-five
years.
 
 The
Company leases certain of its branches under various operating leases expiring
through 2027.  The Company is required to pay operating expenses for
all leased properties.  At December 31, 2008, the required future
minimum rental payment under these leases is as follows:
  F-36
 
  Note
9.   Premises and Equipment (Continued)
  Years
      Ending December 31,2009
                
                $
                692,0002010
                
                
                705,0002011
                
                
                675,0002012
                
                
                604,0002013
                
                
                562,000Thereafter
                
                
                5,115,000$
                8,353,000
 
 Rent
expense was $767,000 and $714,000 in 2008 and 2007, respectively.
 
 Note
10. Deposits
  Deposits
at December 31, 2008 and 2007 consisted of the following:
 
 2008
                
                
                2007Noninterest
      bearing demand deposits
                
                $
                35,873,000
                
                
                $
                37,246,000Interest
      bearing demand deposits
                
                
                35,076,000
                
                
                
                44,223,000Savings
      deposits
                
                
                66,747,000
                
                
                
                60,775,000Time
      deposits of $100,000 or more
                
                
                29,786,000
                
                
                
                39,151,000Other
      time deposits
                
                
                161,112,000
                
                
                
                167,563,000Total
      deposits
                
                $
                328,594,000
                
                
                $
                348,958,000
 
 At
December 31, 2008, the scheduled maturities of time deposits are as
follows:
 
 Years
      Ending December 31,2009
                
                $
                144,385,0002010
                
                
                43,996,0002011
                
                
                1,589,0002012
                
                
                392,0002013
                
                
                536,000$
                190,898,000
 
 Interest
expense on time deposits of $100,000 or more was approximately $1,108,000 and
$2,087,000 for the years ended December 31, 2008 and 2007,
respectively.
 
 Note
11. Borrowed
Funds and Availability Under Lines of Credit
  The
Company is a member of the Federal Home Loan Bank of New York.  Such
membership permits the Company to obtain funding in the form of
advances.  At December 31, 2008 and 2007, there were $16,000,000 and
$10,500,000, respectively, in advances outstanding.
 
 F-37
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Note
11. Borrowed
Funds and Availability Under Lines of Credit (Continued)
  Borrowed
funds outstanding at December 31, 2008 mature in 2009 ($1,750,000), 2010
($2,250,000), 2011 ($2,250,000), 2012 ($2,250,000) and 2013 ($7,500,000) and
bear interest at fixed rates ranging from 3.16% to 4.25%.
 
 Federal
Home Loan Bank of New York advances require the Company to provide collateral,
which may be in the form of a blanket lien on the Company’s assets or through a
pledge, assignment, or delivery of specific assets.  At December 31,
2008 and 2007, investment securities with a carrying value of $18,400,000 and
$12,075,000 were pledged, assigned, and delivered as collateral for outstanding
advances.  These advances cannot be prepaid without
penalty.  The agreement also requires that the Company maintain a
certain percentage of its assets in home mortgage assets, which may include
mortgage-backed securities, and that the Company purchase a certain amount of
Federal Home Loan Bank of New York common stock.  Both requirements
follow formulas established by the Federal Home Loan Bank of New
York.
 
 On May 1,
2007, Sterling Banks Capital Trust I, a Delaware statutory business trust and a
wholly-owned subsidiary of the Company, issued $6.2 million of variable rate
capital trust pass-through securities (“capital securities”) to
investors.  The variable interest rate re-prices quarterly after five
years at the three month LIBOR plus 1.70% and was 6.744% as of December 31, 2008
and 2007.  Sterling Banks Capital Trust I purchased $6.2 million of
variable rate junior subordinated deferrable interest debentures from the
Company.  The debentures are the sole asset of the
Trust.  The terms of the junior subordinated debentures are the same
as the terms of the capital securities.  The Company has also fully
and unconditionally guaranteed the obligations of the Trust under the capital
securities.  The capital securities are redeemable by the Company on
or after May 1, 2012 at par, or earlier if the deduction of related interest for
federal income taxes is prohibited, classification as Tier I Capital is no
longer allowed, or certain other contingencies arise.  The capital
securities must be redeemed upon final maturity of the subordinated debentures
on May 1, 2037.  Proceeds of approximately $4.5 million were
contributed in 2007 to paid-in capital of the Bank.  The remaining
$1.5 million was retained at the Company for future use.  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.
 
 The
Company maintains the ability to borrow funds on an overnight basis under
secured and unsecured lines of credit with correspondent banks.  At
December 31, 2008 and 2007, the aggregate availability under such lines of
credit was $89,688,000 and $106,691,000, respectively.
 
 Note
12. Shareholders’
Equity
  Sterling
Banks, Inc. was incorporated in 2006 for the sole purpose of becoming the
holding company for 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.  Pursuant to the Plan of
Acquisition, each outstanding share of Sterling Bank was converted into one
share of Sterling Banks, Inc.   Sterling Banks, Inc. transferred
the assets and liabilities 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.  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.
  F-38
 
 Note
12. Shareholders’
Equity (Continued)
  The
Company did not pay a cash dividend in 2008.  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
2008, no stock options were exercised.  During 2007, 13,493 stock
options were exercised at a range of $6.66 to $8.04 per share.
 
 In March
2007, the Company issued 768,438 shares (806,860 shares as a result of the stock
split in 2007) of common stock in connection with the acquisition of Farnsworth
Bancorp, Inc. (Note 2).
 
 Note
13. Income
Taxes
  Income
tax expense (benefit) for the years ended December 31, 2008 and 2007 consisted
of the following:
 
 2008
                
                
                2007Current
      tax expenseFederal
                
                $
                -
                
                
                $
                -State
                
                
                -
                
                
                
                -Deferred
      tax benefit
                
                
                (2,699,000
                )
                
                
                (269,000
                )$
                (2,699,000
                )
                
                $
                (269,000
                )
 
 Income
tax expense (benefit) differs from the expected statutory amount principally due
to the nondeductible goodwill impairment charge and non-taxable interest income
earned by the Company.  A reconciliation of the Company’s effective
income tax rate with the Federal rate for 2008 and 2007 is as
follows:
 
 2008
                
                
                2007Tax
      benefit at statutory rate (35%)
                
                $
                (6,624,000
                )
                
                $
                (271,000
                )Tax
      free interest income
                
                
                (71,000
                )
                
                
                (69,000
                )Goodwill
      impairment
                
                
                3,996,000
                
                
                
                -Other,
      net
                
                
                (195,000
                )
                
                
                133,000State
      income taxes, net of federal tax benefit
                
                
                6,000
                
                
                
                (70,000
                )Benefit
      of income taxed at lower rates
                
                
                189,000
                
                
                
                8,000$
                (2,699,000
                )
                
                $
                (269,000
                )
 
  F-39
 
 
 
 Note
13. Income
Taxes (Continued)
  The tax
effects of temporary differences between the book and tax basis of assets and
liabilities which give rise to the Company’s net deferred tax asset, which is
included in “Accrued interest receivable and other assets,” at December 31, 2008
and 2007, are as follows:
 
 2008
                
                
                2007Allowance
      for loan losses
                
                $
                3,282,000
                
                
                $
                1,057,000Net
      operating loss carryforwards
                
                
                1,649,000
                
                
                
                1,668,000Core
      deposit intangible and loan premium
                
                
                (634,000
                )
                
                
                (907,000
                )Securities
      available-for-sale
                
                
                35,000
                
                
                
                24,000Other,
      net
                
                
                35,000
                
                
                
                (74,000
                )Property
      and equipment
                
                
                41,000
                
                
                
                (71,000
                )Net
      deferred tax asset
                
                $
                4,408,000
                
                
                $
                1,697,000
 
 Realization
of deferred tax assets is dependent on generating sufficient taxable
income.  Although realization is not assured, management estimates
that it is more likely than not that all of the net deferred tax asset will be
realized.  However, the amount of the net deferred tax asset
considered realizable could be reduced if estimates of future taxable income in
the foreseeable future are reduced.
 
 At
December 31, 2008, the Company had a $3,000,000 net operating loss carry forward
available which begins expiring in 2027.  In addition, the Company has
federal and state net operating loss carryforwards of approximately $1,300,000
and $2,500,000, respectively, that are related to the acquisition discussed in
Note 2 and which are subject to certain income tax limitations.
 
 The
Company adopted FASB Interpretation 48 as of January 1, 2007.  The
adoption did not have a material impact on the Company’s financial position or
results of operations.  The Company did not recognize or accrue any
interest or penalties related to income tax during the years ended December 31,
2008 and 2007.  The Company does not have an accrual for uncertain tax
positions as of December 31, 2008 and 2007, as deductions taken and benefits
accrued are based on widely understood administrative practices and procedures
and are based on clear and unambiguous tax law.  Tax returns for 2005
and thereafter are subject to future examination by tax
authorities.
 
 Note
14. Regulatory
Matters
  Capital
Ratios:  The Bank is subject to various regulatory capital
requirements administered by the 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 Bank’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.
 
 F-40
 
 
 
 Note
14. Regulatory
Matters (Continued)
 
 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 (as defined) to average assets (as
defined).  Management believes, as of December 31, 2008 and 2007, that
the Bank met all capital adequacy requirements to which it is
subject.
 
 As of
December 31, 2008, management believes the Bank is well capitalized under the
regulatory framework for prompt correction action.  To be categorized
as well capitalized the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table.  There are no
conditions or events that management believes have changed the Bank’s
category.
 
 At
December 31, 2008, the Bank’s actual capital amounts and ratios are presented in
the following table:
 
 To
      Be WellFor
      Capital
                    
                    Capitalized
      Under PromptActual
                    
                    Adequacy
      Purposes
                    
                    Corrective
      Action ProvisionsAmount
                    Ratio
                    
                    Amount
                    
                    Ratio
                    
                    Amount
                    
                    RatioTotal
      Capital(To
      Risk Weighted Assets)
                    $32,134,000
                    10.52%
                    >
                    $24,428,000
                    >
                    8.0%
                    >
                    $30,535,000
                    >
                    10.0%Tier
      1 Capital(To
      Risk Weighted Assets)
                    $28,258,000
                    9.25%
                    >
                    $12,214,000
                    >
                    4.0%
                    >
                    $18,321,000
                    >
                    6.0%Tier
      1 Capital(to
      Average Assets)
                    $28,258,000
                    7.21%
                    >
                    $15,675,000
                    >
                    4.0%
                    >
                    $19,594,000
                    >
                    5.0%
 
 At
December 31, 2007, the Bank’s actual capital amounts and ratios are presented in
the following table:
 
 To
      Be WellFor
      Capital
                    
                    Capitalized
      Under PromptActual
                    
                    Adequacy
      Purposes
                    
                    Corrective
      Action ProvisionsAmount
                    Ratio
                    
                    Amount
                    
                    Ratio
                    
                    Amount
                    
                    RatioTotal
      Capital(To
      Risk Weighted Assets)
                    $35,923,000
                    11.13%
                    >
                    $25,824,000
                    >
                    8.0%
                    >
                    $32,280,000
                    >
                    10.0%Tier
      1 Capital(To
      Risk Weighted Assets)
                    $32,957,000
                    10.21%
                    >
                    $12,912,000
                    >
                    4.0%
                    >
                    $19,368,000
                    >
                    6.0%Tier
      1 Capital(to
      Average Assets)
                    $32,957,000
                    8.28%
                    >
                    $15,926,000
                    >
                    4.0%
                    >
                    $19,907,000
                    >
                    5.0%
 
 Restriction on the Payment
of Dividends:  Certain limitations exist on the availability of
the Company’s undistributed net assets for the payment of cash dividends without
prior approval from regulatory authorities.  During 2008 and 2007,
cash dividends were declared and paid in the amount of $0 and $477,000,
respectively.
 
 F-41
 
 
 Note
15. Benefit
Plans
  Savings
Plan:  The Company maintains a defined contribution savings
plan under Section 401(k) of the Internal Revenue Code for its eligible
employees.  Under the Plan, employee contributions, up to 6% of gross
salary, are matched in part at the discretion of the
Company.  Employee and matching contributions are immediately
vested.  During 2008 and 2007, the Company made approximately $114,000
and $107,000, respectively, in matching contributions.  The Company
may elect to make an additional discretionary profit sharing contribution to the
Plan each calendar year.  Such contributions would be vested based on
length of credited service.  No discretionary contributions were made
in 2008 or 2007.
 
 Stock Option
Plan:  In 1998, the shareholders approved the Sterling 1998
Employee Stock Option Plan and the Sterling 1998 Director Stock Option Plan
(collectively the “Plans”).  The Plans are qualified as an “incentive
stock option plan” under Section 422 of the Internal Revenue
Code.  Reserved for issuance upon the exercise of options granted by
an Option Committee of the Board of Directors is an aggregate of 53,402 shares
of common stock for the Employee Plan and 29,277 shares of common stock for the
Director Plan.  There are no options available for grant under these
plans.
 
 In 2003,
the shareholders approved the Sterling 2003 Employee Stock Option
Plan.  Reserved for issuance upon the exercise of options granted or
to be granted by the Compensation Committee of the Board of Directors is an
aggregate of 355,997 shares of common stock for this Plan.  There are
no options available for grant as of December 31, 2008.
 
 In 2008,
the shareholders approved the Sterling 2008 Employee Stock Option Plan and the
Sterling 2008 Director Stock Option Plan.  Reserved for issuance upon
the exercise of options granted or to be granted by an Option Committee of the
Board of Directors is an aggregate of 300,000 shares of common stock for the
Employee Plan and 100,000 shares of common stock for the Director
Plan.  There are 211,601 and 21,900 options remaining available for
grants, respectively, as of December 31, 2008.
 
 Information
regarding stock options outstanding at December 31, 2008 and 2007 is as
follows:
 
 Weighted
      AverageNumber
              Weighted
      Average
              Remaining
              Aggregateof
      Shares
              Exercise
      Price
              Contractual
      Term
              Intrinsic
      ValueOutstanding,
      January 1, 2007
              457,094
              $8.54Granted
              83,881
              $7.70Expired/terminated
              (9,314)
              $9.66Exercised
              (13,493)
              $6.77Outstanding,
      December 31, 2007
              518,168
              $8.43Granted
              175,200
              $3.92Expired/terminated
              (88,193)
              $7.75Exercised
              -
              $     -Outstanding,
      December 31, 2008
              605,175
              $7.22
              7.0
              $     -Exercisable
      at December 31, 2008
              308,191
              $8.33
              5.0
              $     -
 
 F-42
 
 
 Note
15. Benefit
Plans (Continued)
  The total
intrinsic value of options exercised during the years ended December 31, 2008
and 2007 was $0 and $32,000, respectively.  During 2008 and 2007, the
number of options that vested was 15,191 and 6,804, respectively.
 
 A summary
of unvested stock options outstanding at December 31, 2008 is as
follows:
 
 Weighted
      AverageGrant
      DateShares
              Fair
      ValueUnvested
      stock options:Outstanding
      at January 1, 2007
              70,548
              $3.38Granted
              83,881
              $2.53Vested
              (6,804)
              $3.38Exercised/forfeited
              (2,500)
              $3.61Outstanding
      at December 31, 2007
              145,125
              $2.97Granted
              175,200
              $1.50Vested
              (15,191)
              $2.97Exercised/forfeited
              (8,150)
              $1.99Outstanding
      at December 31, 2008
              296,984
              $2.11
 
 During
2008 and 2007, the Company granted 175,200 and 83,881 options, respectively,
with an average exercise price of $3.92 and $7.70, respectively, to employees
and directors that vest in equal annual installments over ten
years.  The Company recognized $59,000 and $26,000 in compensation
costs in 2008 and 2007, respectively, related to these stock
options.  The Company used the Black-Scholes option pricing model in
determining actual compensation cost for 2008 and 2007,
respectively.  The expected life of the options was estimated based on
historical employee behavior and represents the period of time that options
granted are expected to be outstanding.  Expected volatility of the
Company’s stock price was based on historical volatility over the period
commensurate with the expected life of the options.  The risk-free
interest rate is the U.S. Treasury rate commensurate with the expected life of
the options on the date of grant.  The expected dividend yield is the
projected annual yield based on the grant date stock price.  The
weighted average estimated value per option was $1.50 in 2008 and $2.53 in
2007.  The fair values of options granted in 2008 and 2007 were
estimated at the date of grant based on the following assumptions: risk free
interest rate of 4.1% and 5.0%, respectively, volatility of 23% and 20%,
respectively, expected life of options of 9 years and 8 years, respectively, and
expected dividend yield of 0.00% and 1.0%, respectively.
 
 As of
December 31, 2008, there was approximately $633,000 of total unrecognized
compensation cost related to stock option awards which is expected to be
recognized over a weighted average period of 9.1 years.  The 175,200
options granted during 2008 remain unvested at December 31, 2008.  Of
the 83,881 options granted in 2007, 75,494 remain unvested at December 31,
2008.
 
 F-43
 Note
16. Commitments
and Contingencies
  The
Company has entered into “change in control” agreements with certain key members
of management, which provide for continued payment of certain employment
salaries and benefits in the event of a change in control, as
defined.
 
 The
Company is from time to time a party to routine litigation in the normal course
of its business.  Management does not believe that the resolution of
this litigation will have a material adverse effect on the financial condition
or results of operations of the Company.  However, the ultimate
outcome of any such litigation, as with litigation generally, is inherently
uncertain and it is possible that some litigation matters may be resolved
adversely to the Company.  At December 31, 2008, the Company was not a
party to any material legal proceedings.
 
 Note
17. Fair
Value Measurements
  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 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.
 
 
 F-44
 
 
 Note
17. Fair
Value Measurements (Continued)
  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 December 31, 2008.
 
 Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    TotalFinancial
      AssetsInvestment
      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 (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 December 31, 2008.
 
 Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    TotalFinancial
      AssetsImpaired
      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
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.
 
 F-45
 
 
 Note
17. Fair
Value Measurements (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 December 31, 2008 was $2,802,000.  During the
twelve months ended December 31, 2008, the valuation allowance for impaired
loans increased $2,464,000 from $338,000 at December 31, 2007.
 
 Fair Value of Financial
Instruments (SFAS 107 Disclosure)
 
 SFAS 107,
Disclosures About Fair Value
of Financial Instruments, requires the disclosure of the estimated fair
value of financial instruments, including those financial instruments for which
the Company did not elect the fair value option.  The methodology for
estimating the fair value of financial assets and liabilities that are measured
on a recurring or nonrecurring basis are discussed above.
 
 The
following methods and assumptions were used to estimate the fair value under
SFAS No. 107 of each class of financial instruments.
 
 Cash and Cash
Equivalents:  The carrying amounts of cash and due from banks
and federal funds sold approximate fair value.
 
 Investment Securities
Held-to-Maturity:  The fair value of securities
held-to-maturity is based on quoted market prices, where
available.  If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.  These
financial instruments are not carried at fair value on a recurring
basis.
 
 Restricted
Stock:  The carrying value of restricted stock approximates
fair value based on redemption provisions.
 
 Loans (except collateral
dependent impaired loans):  Fair values are estimated for
portfolios of loans with similar financial characteristics.  Loans are
segregated by type such as commercial, residential mortgage and other
consumer.  Each loan category is further segmented into groups by
fixed and adjustable rate interest terms and by performing and non-performing
categories.
 
 The fair
value of performing loans is typically calculated by discounting scheduled cash
flows through their estimated maturity, using estimated market discount rates
that reflect the credit and interest rate risk inherent in each group of
loans.  The estimate of maturity is based on contractual maturities
for loans within each group, or on the Company’s historical experience with
repayments for each loan classification, modified as required by an estimate of
the effect of current economic conditions.
 
 Fair
value for nonperforming loans that are not collateral dependent is based on the
discounted value of expected future cash flows, discounted using a rate
commensurate with the risk associated with the likelihood of repayment and/or
the fair value of collateral (if repayment of the loan is collateral
dependent).
 
 For all
loans, assumptions regarding the characteristics and segregation of loans,
maturities, credit risk, cash flows, and discount rates are judgmentally
determined using specific borrower and other available information.
 
 The
carrying amounts reported for loans held for sale approximates fair
value.
  F-46
 Note
17.   Fair Value Measurements (Continued)
 
 Accrued Interest Receivable
and Payable:  The fair value of interest receivable and payable
is estimated to approximate the carrying amounts.
 
 Deposits:  In
accordance with the SFAS No. 107, the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, savings, NOW and money
market accounts, is equal to the amount payable on demand.  The fair
value of time deposits is based on the discounted value of contractual cash
flows, where the discount rate is estimated using the market rates currently
offered for deposits of similar remaining maturities.
 
 Borrowed
Funds:  The fair value of borrowings is calculated by
discounting scheduled cash flows through the estimated maturity date using
current market rates.
 
 Estimated Fair
Values:  The estimated fair values of the Company’s material
financial instruments as of December 31, 2008 are as follows:
 
 Carrying
      Value
                                                                    
                                                                    
                                                                    Fair
      ValueFinancial
      Assets:Cash
      and due from banks
                                                                    
                                                                    $
                                                                    13,054,000
                                                                    
                                                                    
                                                                    $
                                                                    13,054,000Federal
      funds sold
                                                                    
                                                                    $
                                                                    472,000
                                                                    
                                                                    
                                                                    $
                                                                    472,000Investment
      securities, held-to-maturity
                                                                    
                                                                    $
                                                                    19,884,000
                                                                    
                                                                    
                                                                    $
                                                                    19,992,000Investment
      securities, available-for-sale
                                                                    
                                                                    $
                                                                    24,097,000
                                                                    
                                                                    
                                                                    $
                                                                    24,097,000Restricted
      stock
                                                                    
                                                                    $
                                                                    2,448,000
                                                                    
                                                                    
                                                                    $
                                                                    2,448,000Loans
      held for sale
                                                                    
                                                                    $
                                                                    2,000
                                                                    
                                                                    
                                                                    $
                                                                    2,000Loans,
      net of allowance for loan losses
                                                                    
                                                                    $
                                                                    297,095,000
                                                                    
                                                                    
                                                                    $
                                                                    299,648,000Accrued
      interest receivable
                                                                    
                                                                    $
                                                                    1,740,000
                                                                    
                                                                    
                                                                    $
                                                                    1,740,000Financial
      Liabilities:Noninterest-bearing
      demand deposits
                                                                    
                                                                    $
                                                                    35,873,000
                                                                    
                                                                    
                                                                    $
                                                                    35,873,000Interest-bearing
      deposits
                                                                    
                                                                    $
                                                                    292,721,000
                                                                    
                                                                    
                                                                    $
                                                                    288,303,000Borrowed
      funds
                                                                    
                                                                    $
                                                                    22,186,000
                                                                    
                                                                    
                                                                    $
                                                                    19,340,000Accrued
      interest payable
                                                                    
                                                                    $
                                                                    427,000
                                                                    
                                                                    
                                                                    $
                                                                    427,000
 
 F-47
   Note
17. Fair
Value Measurements (Continued)
  The
estimated fair values of the Company’s material financial instruments as of
December 31, 2007 are as follows:
 
 Carrying
      Value
                                                                
                                                                
                                                                Fair
      ValueFinancial
      Assets:Cash
      and due from banks
                                                                
                                                                $
                                                                11,554,000
                                                                
                                                                
                                                                $
                                                                11,554,000Federal
      funds sold
                                                                
                                                                $
                                                                234,000
                                                                
                                                                
                                                                $
                                                                234,000Investment
      securities, held-to-maturity
                                                                
                                                                $
                                                                6,854,000
                                                                
                                                                
                                                                $
                                                                6,797,000Investment
      securities, available-for-sale
                                                                
                                                                $
                                                                48,095,000
                                                                
                                                                
                                                                $
                                                                48,095,000Restricted
      stock
                                                                
                                                                $
                                                                2,229,000
                                                                
                                                                
                                                                $
                                                                2,229,000Loans
      held for sale
                                                                
                                                                $
                                                                38,000
                                                                
                                                                
                                                                $
                                                                38,000Loans,
      net of allowance for loan losses
                                                                
                                                                $
                                                                309,319,000
                                                                
                                                                
                                                                $
                                                                305,332,000Accrued
      interest receivable
                                                                
                                                                $
                                                                1,910,000
                                                                
                                                                
                                                                $
                                                                1,910,000Financial
      Liabilities:Noninterest-bearing
      demand deposits
                                                                
                                                                $
                                                                37,246,000
                                                                
                                                                
                                                                $
                                                                37,246,000Interest-bearing
      deposits
                                                                
                                                                $
                                                                311,712,000
                                                                
                                                                
                                                                $
                                                                312,347,000Borrowed
      funds
                                                                
                                                                $
                                                                16,686,000
                                                                
                                                                
                                                                $
                                                                16,685,000Accrued
      interest payable
                                                                
                                                                $
                                                                613,000
                                                                
                                                                
                                                                $
                                                                613,000
 
 The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, and, as the fair value for these
financial instruments is not material, these disclosures are not included
above.
 
 Limitations:  Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instruments.  These
estimates do not reflect any premium or discount which could result from
offering for sale at one time the Company’s entire holdings of a particular
financial instrument.  Because no market exists for a significant
portion of the Company’s financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision.  Changes in assumptions could significantly
affect the estimates.
 
 Fair
value estimates are provided for existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.  In addition, the tax ramifications related to
the realization of unrealized gains and losses can have a significant effect on
fair value estimates, and have generally not been considered in the Company’s
estimates.
  F-48
   Note
18. Quarterly
Financial Data (unaudited)
  The
following represents summarized unaudited quarterly financial data of the
Company which, in the opinion of management, reflects adjustments (comprising
only normal recurring accruals) necessary for fair presentation.
 
 Three
      Months EndedDecember 31,
                    
                    
                    September 30,
                    
                    
                    June 30,
                    
                    
                    March 31,2008Interest
      income
                    
                    $
                    5,207,000
                    
                    
                    $
                    5,464,000
                    
                    
                    $
                    5,594,000
                    
                    
                    $
                    6,035,000Interest
      expense
                    
                    
                    2,217,000
                    
                    
                    
                    2,121,000
                    
                    
                    
                    2,381,000
                    
                    
                    
                    2,915,000Net
      interest income
                    
                    
                    2,990,000
                    
                    
                    
                    3,343,000
                    
                    
                    
                    3,213,000
                    
                    
                    
                    3,120,000Provision
      for loan losses
                    
                    
                    5,585,000
                    
                    
                    
                    105,000
                    
                    
                    
                    400,000
                    
                    
                    
                    -Noninterest
      income
                    
                    
                    160,000
                    
                    
                    
                    283,000
                    
                    
                    
                    208,000
                    
                    
                    
                    304,000Noninterest
      expenses
                    
                    
                    15,870,000
                    
                    
                    
                    3,382,000
                    
                    
                    
                    3,656,000
                    
                    
                    
                    3,550,000Income
      (loss) before income tax expense
                      (benefit)
                    
                    
                    (18,305,000
                    )
                    
                    
                    139,000
                    
                    
                    
                    (635,000
                    )
                    
                    
                    (126,000
                    )Income
      tax expense (benefit)
                    
                    
                    (2,482,000
                    )
                    
                    
                    60,000
                    
                    
                    
                    (235,000
                    )
                    
                    
                    (42,000
                    )Net
      income (loss)
                    
                    $
                    (15,823,000
                    )
                    
                    $
                    79,000
                    
                    
                    $
                    (400,000
                    )
                    
                    $
                    (84,000
                    )Net
      income (loss) per common share:Basic
                    
                    $
                    (2.71
                    )
                    
                    $
                    0.01
                    
                    
                    $
                    (0.07
                    )
                    
                    $
                    (0.01
                    )Diluted
                    
                    $
                    (2.71
                    )
                    
                    $
                    0.01
                    
                    
                    $
                    (0.07
                    )
                    
                    $
                    (0.01
                    )
 
 Three
      Months EndedDecember 31,
                      
                      
                      September 30,
                      
                      
                      June 30,
                      
                      
                      March 31,2007Interest
      income
                      
                      $
                      6,476,000
                      
                      
                      $
                      6,774,000
                      
                      
                      $
                      6,943,000
                      
                      
                      $
                      5,641,000Interest
      expense
                      
                      
                      3,291,000
                      
                      
                      
                      3,533,000
                      
                      
                      
                      3,646,000
                      
                      
                      
                      2,733,000Net
      interest income
                      
                      
                      3,185,000
                      
                      
                      
                      3,241,000
                      
                      
                      
                      3,297,000
                      
                      
                      
                      2,908,000Provision
      for loan losses
                      
                      
                      300,000
                      
                      
                      
                      -
                      
                      
                      
                      45,000
                      
                      
                      
                      56,000Noninterest
      income
                      
                      
                      298,000
                      
                      
                      
                      219,000
                      
                      
                      
                      232,000
                      
                      
                      
                      169,000Noninterest
      expenses
                      
                      
                      3,762,000
                      
                      
                      
                      3,602,000
                      
                      
                      
                      3,474,000
                      
                      
                      
                      3,084,000Income
      (loss) before income tax expense
                        (benefit)
                      
                      
                      (579,000
                      )
                      
                      
                      (142,000
                      )
                      
                      
                      10,000
                      
                      
                      
                      (63,000
                      )Income
      tax expense (benefit)
                      
                      
                      (215,000
                      )
                      
                      
                      (48,000
                      )
                      
                      
                      8,000
                      
                      
                      
                      (14,000
                      )Net
      income (loss)
                      
                      $
                      (364,000
                      )
                      
                      $
                      (94,000
                      )
                      
                      $
                      2,000
                      
                      
                      $
                      (49,000
                      )Net
      income (loss) per common share:Basic
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      0.00
                      
                      
                      $
                      (0.01
                      )Diluted
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      0.00
                      
                      
                      $
                      (0.01
                      )
 
 F-49
 
 
 
 Note
18. Quarterly
Financial Data (unaudited) (Continued)
  The
fourth quarter of 2008 contained significant adjustments relating to the
impairment of goodwill in the amount of $11,752,000 and provisions to the
allowance for loan losses in the amount of $5,585,000 as a result of significant
deterioration in credit quality and overall declining condition of the financial
services sector.
 
 Note
19. Parent
Company Only Financial Statements
  Condensed
financial information of the parent company (Sterling Banks, Inc.) only is
presented in the following three tables:
 
 Balance
      SheetDecember
      31,
                
                
                December
      31,2008
                
                
                2007AssetsCash
      and cash equivalents
                
                $
                840,000
                
                
                $
                1,478,000Investment
      in subsidiary
                
                
                32,236,000
                
                
                
                48,031,000Other
      assets
                
                
                262,000
                
                
                
                31,000Total
      assets
                
                $
                33,338,000
                
                
                $
                49,540,000Liabilities
      and Shareholders' EquitySubordinated
      debentures
                
                $
                6,186,000
                
                
                $
                6,186,000Other
      liabilities
                
                
                31,000
                
                
                
                46,000Shareholders’
      equity
                
                
                27,121,000
                
                
                
                43,308,000Total
      liabilities and shareholders’ equity
                
                $
                33,338,000
                
                
                $
                49,540,000
 
 Statement
      of OperationsYear
      Ended
                                December
      31,
                              
                              
                              Period
                                March
      16, 2007Through
                                December
      31,2008
                              
                              
                              2007IncomeDividends
      from subsidiaries
                              
                              $
                              13,000
                              
                              
                              $
                              604,000Total
      income
                              
                              $
                              13,000
                              
                              
                              
                              604,000ExpensesInterest
      on subordinated debentures
                              
                              
                              417,000
                              
                              
                              
                              278,000Other
      expenses
                              
                              
                              280,000
                              
                              
                              
                              355,000Total
      expenses
                              
                              
                              697,000
                              
                              
                              
                              633,000Loss
      before income tax benefit
                              
                              
                              (684,000
                              )
                              
                              
                              (29,000
                              )Income
      tax benefit
                              
                              
                              (232,000
                              )
                              
                              
                              (27,000
                              )Equity
      in undistributed loss of subsidiary
                              
                              
                              (15,776,000
                              )
                              
                              
                              (503,000
                              )Net
      loss
                              
                              $
                              (16,228,000
                              )
                              
                              $
                              (505,000
                              )
  F-50
 Note
19. Parent
Company Only Financial Statements (Continued)
  Statement
      of Cash FlowsPeriodMarch
      16, 2007Year
      Ended
                                
                                
                                ThroughDecember
      31,
                                  2008
                                
                                
                                December
      31,
                                  2007Cash
      Flows From Operating ActivitiesNet
      loss
                                
                                $
                                (16,228,000
                                )
                                
                                $
                                (505,000
                                )Adjustments
      to reconcile net income to net cash provided by (used in)operating
      activities:Stock
      compensation
                                
                                
                                59,000
                                
                                
                                
                                20,000Equity
      in undistributed loss of subsidiary
                                
                                
                                15,776,000
                                
                                
                                
                                503,000Changes
      in operating assets and liabilities:Increase
      in accrued interest receivable and other assets
                                
                                
                                (230,000
                                )
                                
                                
                                (31,000
                                )Increase
      (decrease) in accrued interest payable and other accrued
      liabilities
                                
                                
                                (15,000
                                )
                                
                                
                                46,000Net
      cash provided by (used in) operating activities
                                
                                
                                (638,000
                                )
                                
                                
                                33,000Cash
      Flows From Investing ActivitiesPayments
      for investment in subsidiaries
                                
                                
                                -
                                
                                
                                
                                (4,407,000
                                )Net
      cash used in investing activities
                                
                                
                                -
                                
                                
                                
                                (4,407,000
                                )Cash
      Flows From Financing ActivitiesDividends
      paid
                                
                                
                                -
                                
                                
                                
                                (334,000
                                )Proceeds
      from issuance of subordinated debentures
                                
                                
                                -
                                
                                
                                
                                6,186,000Net
      cash provided by financing activities
                                
                                
                                -
                                
                                
                                
                                5,852,000Increase
      (decrease) in cash and cash equivalents
                                
                                
                                (638,000
                                )
                                
                                
                                1,478,000Cash
      and Cash Equivalents, beginning
                                
                                
                                1,478,000
                                
                                
                                
                                -Cash
      and Cash Equivalents, ending
                                
                                $
                                840,000
                                
                                
                                $
                                1,478,000
 
 Note
20. Goodwill
and Intangible Assets
  Goodwill
and intangible assets 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 goodwill and other intangible assets in connection with the
merger.  The goodwill was assigned to our one reporting unit,
banking.  As a general matter, goodwill generated from purchase
business combinations is deemed to have an indefinite life and is not subject to
amortization and is instead tested for impairment at least
annually.  Core deposit intangibles arising from acquisitions was
being amortized over their estimated useful lives, originally estimated to be 10
years.
 
 In 2008,
the extreme volatility in the banking industry that first started to surface in
the latter part of 2007 had a significant impact on banking companies and the
price of banking stocks, including our common stock.  During the
fourth quarter of 2008, the Company performed its annual impairment
analysis.  Based on this analysis, we wrote off $11.8 million of
goodwill in the fourth quarter of 2008, which represented all of the goodwill
that resulted from the Merger.
 
 F-51
 
 
 
 Note
20. Goodwill
and Intangible Assets (Continued)
  Intangible
assets are core deposit intangibles which amounted to approximately $2.4 million
and $3.2 million at December 31, 2008 and 2007, respectively.  The
establishment and subsequent amortization of these intangible assets 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 or
loans.  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 or loan flows is influenced by many
factors, the most significant of which are alternative yields for loans and
deposits available to customers and the level of competition from other
financial institutions and financial services companies.  In
connection with the goodwill impairment testing discussed previously, we also
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.  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.  Amortization expense, in addition to the impairment
charge, was $347,000 in 2008 and $205,000 in 2007.  Aggregate
amortization expense for the intangible asset is estimated at $396,000 for each
of the years 2009 through 2013.
   
 F-52