UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C.  20549
 ____________
 
 FORM 10-K
 
 (Mark One)
  Annual report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2009
 
 -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 CodeRegistrant's telephone number, including area code:  (856) 273-5900
  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(b) 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   YES  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. [x]





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 filero


Non-accelerated filer                                                      o                                           Smaller reporting companyx


(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 30,2009,was $9,858,318 ($1.87 per share times 5,271,828 shares of Common Stock held by non-affiliates).





As of April 13, 2010, there were 5,843,362 outstanding shares of the registrant's Common Stock.

















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 increase in the cost of FDIC insurance; technological changes; changes in consumer spending and saving habits; findings of the Bank’s examinations by the Federal Reserve Bank of Philadelphia (the “FRB”); 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 close the transaction with Roma Financial, trends in interest rates; 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 $369.8 million as of December 31, 2009.  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.





On March 17, 2010, the Company and Roma Financial Corporation (“Roma”), the parent company of Roma Bank (“Roma Bank”), entered into an Agreement and Plan of Merger pursuant to which the Company will merge with a newly formed subsidiary of Roma (the “Roma Merger”).  Under the terms of the merger agreement, which has been approved by the boards of directors of both the Company and Roma, Roma will acquire all of the outstanding shares of the Company for a total purchase price of approximately $14.7 million in cash, or $2.52 per share for each share of common stock outstanding.  Concurrent with the Roma Merger, it is expected that the Bank will merge with and into Roma Bank.  It is expected that the Roma Merger will be completed in the third quarter of 2010.  For additional disclosure about the Roma Merger, see the Company’s Current Report on Form 8-K filed on March 19, 2010.







4


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 acquired four branches in Bordentown, Florence and Evesham Township-Marlton (March 2007) and one that was subsequently closed in Mount Laurel (September 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.





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.








5
 
 
 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 34 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.





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, 2009, our loan portfolio totaled approximately $300.5 million.





At December 31, 2009, our lending limit to one borrower under applicable regulations was approximately $4.9 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.











6











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 31,2009


2008


2007


2006


2005Commercial, Financial and Agricultural

$
30,371,000


$
32,115,000


$
30,209,000


$
29,097,000


$
30,443,000Real Estate – Construction


41,558,000



68,278,000



80,486,000



85,902,000



77,499,000Real Estate – Mortgage


171,465,000



147,435,000



141,237,000



73,666,000



72,020,000Installment loans to individuals


50,453,000



53,827,000



52,291,000



45,179,000



38,714,000Lease Financing


7,291,000



4,636,000



8,345,000



9,439,000



6,662,000Total loans

$
301,138,000


$
306,291,000


$
312,568,000


$
243,283,000


$
225,338,000





Loan Maturity.The following table sets forth the contractual maturity of the Company's loan portfolio at December 31, 2009.





Due within

1 year


Due after 1

through 5 years


Due after

5 years


TotalCommercial, Financial and Agricultural

$
16,879,000


$
11,175,000


$
2,317,000


$
30,371,000Real Estate - Construction


40,727,000



831,000



-



41,558,000Real Estate – Mortgage


8,299,000



28,212,000



134,954,000



171,465,000Installment loans to individuals


375,000



1,299,000



48,779,000



50,453,000Lease Financing


461,000



6,830,000



-



7,291,000Total amount due

$
66,741,000


$
48,347,000


$
186,050,000


$
301,138,000





The following table sets forth the dollar amount of all loans due after December 31, 2010, which have predetermined interest rates and which have floating or adjustable interest rates.





Fixed Rates


Floating or

Adjustable Rates


TotalCommercial, Financial and Agricultural

$
9,794,000


$
3,698,000


$
13,492,000Real Estate - Construction


631,000



200,000



831,000Real Estate – Mortgage


143,925,000



19,241,000



163,166,000Installment loans to individuals


50,078,000



-



50,078,000Lease Financing


6,830,000



-



6,830,000Total

$
211,258,000


$
23,139,000


$
234,397,000





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.






7





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.





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, 2009, 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 72% of the real estate – construction loan portfolio as of December 31, 2009.





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.











8





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.  In addition, and as a result of the current economic environment, we have also provided mini-permanent financing on certain former construction loans where the certificate of occupancy has been obtained and where the permanent financing was lost to the borrower by independent third parties.  These loans are generally for three years with a twenty-five year amortization.  As of December 31, 2009, approximately $10 million was outstanding in these mini-permanent loans.





Installment Loans to Individuals





We offer a full range of consumer installment loans.  Installment loans to individuals 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.





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.














9





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 $14.2 million from the FHLB as of December 31, 2009, with $2.2 million maturing within 1 year, with a fixed rate of 3.43%, $2.2 million maturing within two years, with a fixed rate of 3.85%, $2.3 million maturing within three years, with a fixed rate of 4.11%, and $7.5 million maturing within four years, with a fixed rate of 4.25%, none of which can be prepaid without penalty.





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.  During the second, third and fourth quarters of 2009, the Company elected to defer the interest payments due.  Further, pursuant to the terms of the Agreement with the Regulators, the Company will not make any interest payments in the future without prior approval from the Regulators.  For additional disclosure, see Note 20, Written Agreement of the Notes to our Consolidated Financial Statements.





10





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





At December 31,2009


2008


2007Amount outstanding at year end

$
20,436,000


$
22,186,000


$
16,700,000Weighted average interest rate at year end


4.9
%


4.8
%


5.0
%Maximum outstanding at any month end

$
22,186,000


$
22,186,000


$
16,700,000Average outstanding

$
21,962,000


$
12,975,000


$
6,327,000Weighted average interest rate during the year


4.8
%


5.3
%


5.9
%





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 85 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.





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.








11








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 that 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, 2013.  The FDIC has established a risk-based assessment system for all insured depository institutions.  Under the risk-based assessment system in 2009, deposit insurance premium rates range from 7 to 77.5 basis points, with our deposit insurance premium having been assessed at 32 basis points of deposits.  In 2009, the FDIC adopted an interim rule which permits the FDIC to impose an emergency special assessment of up to 10 basis points on all insured depository institutions whenever, 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”).




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.







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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, 2009, we exceeded the required ratios for classification as “adequately capitalized.”  For additional discussion of capital requirements, we refer you to Note 13, 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.





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.





On July 28, 2009, the Company and the Bank entered into a Written Agreement (the “Agreement”) with the FRB and the New Jersey Department of Banking and Insurance (collectively, the “Regulators”).  The Agreement is based on findings of the Regulators identified in an examination of the Bank that commenced on January 5, 2009.  Pursuant to this Agreement, neither the Company nor Bank is permitted to declare or pay any dividends.  For additional discussion of capital requirements, we refer you to Note 20, Written Agreement of the Notes to our Consolidated Financial Statements.




In 2009 and 2008, we did not pay a cash dividend, and we have no plans to do so in 2010.  Our future dividend policy is subject the terms of the Agreement and 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.





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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.





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, 2009.








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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 2010 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, 2013.  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 June 30, 2010, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts).





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.







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Employees.  As of December 31, 2009, we had 95 full-time and 20 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 71% 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 collectability 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 collectability is considered questionable.





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, 2009, our allowance for loan losses was $9.9 million, which represented 3.30% of outstanding loans.  At such date, we had 50 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.








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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, 2013.  These developments will cause the premiums assessed to us by the FDIC to increase.





On February 27, 2009, the FDIC announced an interim rule imposing 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.





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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.





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.








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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, 2009, approximately 71% 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, 2009, our lending limit per borrower was approximately $4.9 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.





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.






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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 pursuant to the Agreement and 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 December 31, 2009, our directors and executive officers beneficially owned approximately 806,000 shares, or approximately 14%, of our common stock, including options with the vested right to purchase approximately 234,000 shares, in the aggregate, of our common stock at exercise prices ranging from $3.80 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 controlled 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.





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 December 31, 2009.  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 566,638 shares of common stock have been granted and are outstanding on December 31, 2009. As of December 31, 2009, options to purchase a total of 311,248 shares were exercisable and had exercise prices ranging from $3.80 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.








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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 and continuing in 2009, 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.











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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.




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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 2010 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.











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Risks Related to the Roma Merger





If the Roma Merger is not completed, the Company will continue to be subject to the written agreement that it entered into with the Federal Reserve Bank of Philadelphia and the New Jersey Department of Banking and Insurance.





The Company entered into a written agreement with the FRB and the New Jersey Department of Banking and Insurance relating to the conduct of its business and addressing various matters, including credit underwriting standards, reserve levels for nonperforming loans, regulatory capital levels and earnings, as well as management concerns which resulted from these credit, capital and earnings concerns. If the Roma Merger is not completed, these factors may limit the conduct of the Company’s business and may result in a reduction of earnings of the Company.  This in turn may prolong the Bank’s inability to pay dividends to the Company without regulatory approval, eliminating the Company’s ability to pay distributions on its trust preferred securities and dividends on its common stock.  Further, the actions that the Company may be required to take to comply with the Agreement may include obtaining additional capital.  No assurance can be given that the Company would be successful in raising additional capital, or if the additional capital can be obtained that it would be on terms favorable to the Company and not detrimental to the interests of the Company’s shareholders.





The need for regulatory approval may delay the date of completion of the Roma Merger or may diminish the benefits of the Roma Merger.





Roma is required to obtain approval of the merger from the Office of Thrift Supervision prior to completing the Roma Merger.  Satisfying any requirements of the Office of Thrift Supervision may delay the date of completion of the Roma Merger and may adversely affect the Company’s results of operations. If the Company is required to increase its allowance for loan losses, its nonperforming assets increase, or it continues to incur losses as a result of such delay, Roma may have the right to terminate the merger agreement under certain provisions of the merger agreement.





If the performance of our loan portfolio continues to deteriorate, our nonperforming assets will increase and we will need to increase our allowance for loan losses, which may give Roma the right to terminate the merger agreement and elect not to complete the Roma Merger.





If our loan portfolio continues to deteriorate, our nonperforming assets will increase and we may need to increase our allowance for loan losses.  Roma has the right to terminate the merger agreement if our nonperforming assets for the period from January 1, 2010 through the closing date exceed $30,000,000.   In addition, if we are required to increase our allowance for loan losses, it will increase our losses and decrease our stockholders’ equity and tangible common equity.  If our tangible common equity is less than $9,900,000 at the closing date, Roma has the right to terminate the merger agreement and elect not to complete the Roma Merger.





The Roma Merger may distract management from their other responsibilities.





The Roma Merger could cause the management of the Company to focus its time and energies on matters relating to the merger that would otherwise be directed to the business and operations of the Company.  Any such distraction on the part of the Company’s management, if significant, could affect its ability to service existing business and develop new business and adversely affect the business and earnings of the Company if the Roma Merger is not consummated.





24





If the Roma Merger is not completed, the Company will have incurred substantial expenses without its shareholders realizing the expected benefits.





If the Roma Merger is not completed, the Company expects to incur approximately $300,000 in merger-related expenses, exclusive of any termination fee.  These expenses would likely have an adverse impact on the earnings of the Company.  No assurance can be given that the Roma Merger will be completed.





The termination fee and the restrictions on solicitation contained in the merger agreement may discourage other companies from trying to acquire the Company.





Until completion or termination of the Roma Merger, the Company is prohibited from soliciting, initiating, encouraging, or with some exceptions, considering any inquiries or proposals that may lead to a proposal or offer for a merger or other business combination transaction with any person other than Roma. In addition, the Company has agreed to pay a termination fee of $745,000 to Roma under certain specified circumstances.  These provisions could discourage other companies from trying to acquire the Company even though those other companies might be willing to offer greater value to the Company shareholders than Roma has agreed to pay in the merger.  Absent the successful completion of a business combination with another company, the payment of the termination fee would have a material adverse effect on the financial condition of the Company.





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.





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.








25





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.  Reserved.





PART II





Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases 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, 2009, was 498.





For information with respect to Equity Compensation Plans see Item 12 (“Equity Compensation Plan Information”).





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 price2009
4th

$1.52


$0.423rd

1.80


1.082nd

3.39


0.701st

1.63


0.502008
4th

$3.50


$0.883rd

5.50


2.492nd

5.54


2.901st

7.25


4.75





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 and the Agreement.  See "Item 1. Description of Business – Regulation – Restriction on Dividends".




In 2009 and 2008, we did not pay a cash dividend, and we have no plans to do so in 2010.  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.








26








Future payments of dividends, if any, is subject to the Agreement and 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.








27





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 are effective 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, 2009.  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, 2009, the Company’s internal control over financial reporting is effective based on those criteria.  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.





Changes in Internal Control over Financial Reporting





The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.  As disclosed in management’s quarterly reports on internal control over financial reporting, filed in the Company’s Quarterly Report on Form 10-Q/A for the three and six months ended and the three and nine months ended June 30 and September 30, 2009, respectively, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30 and September 30, 2009 identified a material weakness in our internal control over financial reporting.




28





Our conclusion was primarily related to our review and reassessment of management’s policies and procedures for the monitoring and timely evaluation of and revision to management’s approach for assessing credit risk inherent in the loan portfolio to reflect changes in the economic environment in the allowance for loan losses.  The Company is in the process of establishing new policies and procedures with respect to how management’s approach for assessing credit risk inherent in the loan portfolio to reflect changes in the economic environment in the allowance for loan losses will be completed on a timely basis.





The Company has restated its condensed consolidated financial statements as of and for the three and six months and three and nine months ended June 30 and September 30, 2009, respectively, on Form 10Q/A.




Other than the change discussed above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.





Item 9B. Other Information.





Not applicable.





PART III





Item 10. Directors, Executive Officers and Corporate Governance.





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires the Company’s executive officers and directors, and persons who own more than 10% of the Common Stock (collectively, “Reporting Persons”), to file reports of ownership and changes in ownership of the Common Stock with the Securities and Exchange Commission and to provide copies of those reports to the Company.  The Company is not aware of any person who presently is the beneficial owner, as defined under Section 16(a), of more than 10% of its Common Stock.  Based solely upon a review of the copies of such forms received by the Company or written representations from Reporting Persons, the Company believes that, with respect to fiscal year 2009, all Reporting Persons complied with all applicable filing requirements under Section 16(a).





Board of Directors





The bylaws of the Company provide that the Board of Directors shall consist of not less than five nor more than 25 directors, with the exact number fixed by the Board of Directors.  The Board of Directors currently consists of eleven members.  Directors serve for a term of one year and until their successors are duly elected and qualified.








29





The following table sets forth certain information concerning the Board of Directors:





Name
Director Since (1)
Position Held With UsS. David Brandt, Esq. (2) (3) (5) (8)
1990
DirectorJeffrey Dubrow (7)
1990
DirectorA. Theodore Eckenhoff (2) (3) (5) (8)
1990
Chairman of the Board, DirectorR. Scott Horner (6) (7)
1998
Executive Vice President and Chief Financial Officer, DirectorJames L. Kaltenbach, M.D. (2) (4) (6) (7)
1992
DirectorRobert H. King (2) (3) (6) (7)
1993
President and Chief Executive Officer, DirectorG. Edward Koenig, Jr. (3) (7)
2007
DirectorJohn J. Maley, Jr., CPA (2) (3) (4)
2007
DirectorRonald P. Sandmeyer (2) (3) (4) (8)
1990
DirectorJeffrey P. Taylor (2) (4) (5)
1990
DirectorJames W. Yoh, PhD. (4) (7)
2001
Director_________________________________

(1)Refers to the year the individual first became a director of Sterling Bank and/or the Company.

(2)         Executive Committee

(3)         Loan Committee

(4)         Audit Committee

(5)         Compensation Committee

(6)         Asset/Liability Management and Investment Committee

(7)         Community Reinvestment Committee

(8)         Governance and Nominating Committee





Biographical Information and Qualifications





The principal occupation of and certain other information about, each of our directors and executive officers is set forth below.





Directors





S. David Brandt, Esq.,75, has been an attorney in the firm of Hyland Levin, LLP, from 2009 to the present.  From 2002 until 2009, Mr. Brandt was a partner at the law firm of Ballard Spahr Andrews & Ingersoll, LLP in Voorhees, New Jersey.  From 1971 until 2001, Mr. Brandt was a partner at the law firm of Brandt, Haughey in Moorestown, New Jersey.  Mr. Brandt has been a member of Sterling Bank’s (the “Bank”) Board of Directors since 1990 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. Brandt, the Board of Directors considered as important his legal expertise in real estate development which enhances the Board’s understanding of local and regional markets and their impact on the Company.








30








Jeffrey Dubrow, 49, has been President of Duco Corporation, a custom builder and developer, since 1983 and, since 1991, Mr. Dubrow has been the managing partner of Sibo Partners, an investment company, each of which is located in Moorestown, New Jersey.  Since 2001, Mr. Dubrow has been owner of Duco Holdings LLC and since 2003 he has been owner of Mansfield Land Investment Corporation.  Mr. Dubrow was the President of CPB Inc., an architectural millwork company located in Winslow, New Jersey, from 1995 until its sale in 2002.  Mr. Dubrow has been a member of Sterling Bank’s Board of Directors since 1990 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. Dubrow, the Board of Directors considered his ability to exercise independent judgment and extensive involvement in residential construction and real estate which strengthens the knowledge of the Board on this area.





A. Theodore Eckenhoff, 72, has been self-employed as a farmer since 2002.  From 1982 until 2002, Mr. Eckenhoff was President and Chief Executive Officer of Eckenhoff Buick in Cherry Hill, New Jersey.  Mr. Eckenhoff has been a member of Sterling Bank’s Board of Directors since 1990 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. Eckenhoff, the Board of Directors considered as important his years of business and management experience as well as his community involvement which has enhanced the Company through his leadership of the Board.





R. Scott Horner, 59, has been our Executive Vice President and Chief Financial Officer since 1997, a member of Sterling Bank’s Board of Directors since 1998 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. Horner, the Board of Directors considered as important his management, leadership and financial background in banking which has enhanced the Board's understanding of the industry.





James L. Kaltenbach, M.D., 67, is a physician and has been a principal of South Jersey Pediatric Associates since January 1982, a member of Sterling Bank’s Board of Directors since 1992 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. Kaltenbach, the Board of Directors considered as important his ability to exercise independent judgment and involvement with the local community which brings extensive knowledge to his position as Chairman of the Community Reinvestment Act Committee.




Robert H. King, 62, has served as our President and Chief Executive Officer and as a member of Sterling Bank’s Board of Directors since 1993 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. King, the Board of Directors considered as important his political and business experience and financial expertise which has been invaluable to the Company.





G. Edward Koenig, Jr., 68, is a licensed real estate sales agent for Falconer & Bell Realtors in Bordentown, New Jersey.  Mr. Koenig is a past chairman and current member and trustee of the Burlington County Military Affairs Committee.  Mr. Koenig has been a member of Sterling Bank’s and the Company’s Board of Directors since 2007.  In nominating Mr. Koenig, the Board of Directors considered as important, his hard work and integrity, involvement with the community and residential real estate expertise which adds to the board's understanding of local markets.




John J. Maley, Jr., CPA, 61, is the owner of John J. Maley, Jr. CPA/RMA accounting practice in Bordentown City formed in 1985.  Mr. Maley is also a licensed public school accountant and certified municipal finance officer.  Mr. Maley has been a member of Sterling Bank’s and the Company’s Board of Directors since 2007.  In nominating Mr. Maley, the Board of Directors considered as important his extensive accounting knowledge and involvement with the community, bringing this knowledge to his position as Chair of the Loan Committee.






31





Ronald P. Sandmeyer, 79, has served as Chairman of the Board of Sandmeyer Steel Company in Philadelphia, Pennsylvania since 1998, and served as President and CEO from 1969 to 1998.  He is a Co-Founder, past Chairman and past President of Sterling Bank and a member of Sterling Bank’s Board of Directors since 1990 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. Sandmeyer, the Board of Directors considered as important his years of business and academic experience as well as his long term commitment to the Company which enhances the overall expertise of the Board.




Jeffrey P. Taylor, 58, has served in the Engineering Department for the Township of Burlington, New Jersey since 2008.  From 2005 until 2008, Mr. Taylor served as City Engineer/Director, City of Burlington, New Jersey.  From 1997 until 2005, Mr. Taylor served as President of Environmental Resolutions, Inc., an environmental engineering firm in Mount Laurel, New Jersey.  Mr. Taylor has been a member of Sterling Bank’s Board of Directors since 1990 and a member of the Company’s Board of Directors since 2006. In nominating Mr. Taylor, the Board of Directors considered as important his management background and ability to exercise independent judgment which has strengthened his roll as Chair of the Audit Committee.




James W. Yoh, PhD., 63, has been President and Chief Executive Officer of Galaxy Technology LLC since June 2004.  From 1988 until July 2005, Mr. Yoh also served as President and Chief Executive Officer of Galaxy Scientific Corporation.  Dr. Yoh has been a member of Sterling Bank’s Board of Directors since 2001 and a member of the Company’s Board of Directors since 2006.  In nominating Mr. Yoh, the Board of Directors considered as important his years of business and academic experience and accomplishments which have been invaluable to the Company.





Executive Officers (who are not also directors)





John Herninko, 61, has been an Executive Vice President of Sterling Bank and the Company since 2007 and Senior Vice President since 1997 and our Senior Loan Officer since 1995.  From 1994 until 1995, Mr. Herninko served as a Vice President in our commercial lending area.





Dale F. Braun, Jr., 46, has been a Senior Vice President of Sterling Bank and the Company since 2006 and our Controller since 1998.  From 1993 until 1998, Mr. Braun served as our Accounting Manager.





Kimberly A. Johnson, 46, has been a Senior Vice President of Sterling Bank and the Company since 2006 and has served as our Administrative Officer since 1998.  From 1992 until 1998, Ms. Johnson served as one of our mangers, concentrating in both retail banking and consumer lending areas.





Theresa S. Valentino Congdon,52, has been a Senior Vice President and Senior Retail Officer of Sterling Bank since 2001 and the Company since 2006.  From 1990 to 2001, Ms. Valentino Congdon served as one of our Vice Presidents, concentrating in both the commercial and consumer lending areas.





Meetings and Committees of the Board





During 2009, the Company’s Board of Directors held 12 regular meetings and 1 special meeting, and Sterling Bank’s Board of Directors held 12 regular meetings.  Established committees of the Board of Directors are the Executive Committee, Loan Committee, Audit Committee, Compensation Committee, Asset/Liability Management and Investment Committee, Community Reinvestment Committee and Governance and Nominating Committee.  In addition, the Board has created ad-hoc committees from time to time for particular purposes.





32


No Director attended fewer than 75% of the total meetings of the Board of Directors and committees on which such Director served during the year ended December 31, 2009, other than Director Yoh.





Governance and Nominating Committee and Nomination of Directors





The Governance and Nominating Committee consists of Directors Eckenhoff (Chair), Brandt and Sandmeyer. The Governance and Nominating Committee monitors corporate governance matters, reviews possible candidates for the Board of Directors and recommends qualified candidates for election as directors of the Company. The Governance and Nominating Committee operates under a formal charter that governs its duties and standards of performance, a copy of which is available on our website (www.sterlingnj.com).





Under state and federal banking law, the directors of the Company are subject to extensive scrutiny.  In addition, state banking law requires directors to maintain a minimum ownership level in the Company’s Common Stock.  While all director candidates must satisfy strong ethical standards, there are no express minimum qualifications for director candidates.  Historically, the Company has considered the following criteria in connection with the evaluation of director candidates:




·
How their service as a director will benefit the Company


·
How they are expected to interact with the full Board of Directors and management


·
Director candidates should come from the Company’s market areas


·
Their business leadership and local community involvement





In addition, since the Company’s inception, share ownership also has been a significant factor in selecting candidates for director, and will continue to be a significant factor in the Governance and Nominating Committee’s review process.





The Governance and Nominating Committee will consider director nominees recommended by shareholders in accordance with the procedures set forth in the Company’s Bylaws.  Anyone wishing to submit a candidate must provide written notice recommending the candidate for election at the next Annual Meeting of the shareholders to the Secretary of the Company at 3100 Route 38, Mount Laurel, New Jersey 08054, not later than the latest date upon which shareholder proposals must be submitted for inclusion in the Company’s proxy statement under the federal securities laws or, if no such rules apply, at least 90 days in advance of the anniversary of the preceding year’s Annual Meeting.  If the election will be held via special meeting, the notice must be given at least 30 days prior to the printing of the Company’s proxy materials or, if no such proxy materials are being distributed, at least the close of business on the fifth day following the date on which notice of such meeting is given to the shareholder. The notification must include:





·
The name and address of each proposed nominee


·
The name and residence address of the shareholder


·
The number of shares of stock owned by the shareholder


33
 
 · A description of any arrangements or understandings between the shareholder, each nominee and any other person pursuant to which the nomination
 was made by the shareholder


·
Such other information regarding the nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had the nominee been nominated by the Board of Directors


·
The consent of each nominee to serve as a director of the Company if so elected





Candidates nominated by shareholders must meet all regulatory qualifications as well as conditions for coverage under the Company’s insurance policies.  Shareholder nominees will be evaluated on the basis of the same criteria that all other director nominees are evaluated.





Historically, the Board of Directors has acted as a group to identify individuals who could be considered as viable Board members.  The Company expects to continue that practice.  When an individual director identifies a potential candidate, he or she will be encouraged to bring that individual’s name to the Governance and Nominating Committee for consideration.  In evaluating all potential candidates, the Governance and Nominating Committee will strive to complement and strengthen the skills within the existing Board to maintain a balance of knowledge, experience and capability.  The Company has not engaged a third party or parties to identify or evaluate or assist in evaluating potential nominees for directorship.





Audit Committee





The Audit Committee presently consists of Directors Taylor (Chair), Eckenhoff (Ex-Officio), Kaltenbach, Maley, Sandmeyer, and Yoh.  The Audit Committee assists the Board of Directors in fulfilling its oversight of the audit and integrity of the Company’s financial statements; the qualifications, independence and performance of the Company’s independent auditor; the adequacy and effectiveness of the Company’s accounting, auditing and financial reporting processes; and the Company’s compliance with legal and regulatory requirements.  The duties of the Audit Committee include the selection and appointment of the Company’s independent auditor, and meeting with the Company’s independent auditor, with and without management present, to discuss the conduct of its audit and the overall integrity of the Company’s accounting, auditing, and financial reporting processes.





Our Board of Directors has determined that the Company does not have an “audit committee financial expert” (as defined in regulations adopted under the Securities Exchange Act of 1934) serving on the Audit Committee.  However, the Board believes that the substantial financial and business experience and knowledge of the members of the Audit Committee are sufficient to enable the Audit Committee to properly perform all of its duties and responsibilities.  The Board of Directors annually reviews the Audit Committee charter and a copy is available on our website (www.sterlingnj.com).  The Audit Committee meets on a regular basis at least quarterly, and it met 8 times during the year ended December 31, 2009.





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 following table sets forth certain information regarding our President and Chief Executive Officer and our two most highly-compensation executive officers who were serving as such as of the fiscal year ended December 31, 2009 (the “Named Executive Officers”).







34




Summary Compensation Table




Name

and

Principal

Position
Year
Salary

Bonus

Stock

Awards

Option

Awards

(1)

Non-Equity

Incentive Plan Compensation

Nonqualified

Deferred Compensation Earnings

All Other

Compensation

TotalRobert H.

King,

President

and Chief

Executive

Officer
2009
$
210,097

$
-

$
-

$
-

$
-

$
-

$
271

(5)

$
210,3682008
$
214,424

$
-

$
-

$
28,600

(2)

$
12,077

$
-

$
338

(5)

$
255,439John

Herninko,

Executive

Vice

President

and Senior

Loan

Officer
2009
$
136,315

$
-

$
-

$
-

$
-

$
-

$
967

(5)

$
137,2822008
$
137,923

$
-

$
-

$
21,450

(3)

$
10,749

$
-

$
4,307

(5)

$
174,429R. Scott

Horner,

Executive

Vice

President

and Chief

Financial

Officer
2009
$
135,303

$
-

$
-

$
-

$
-

$
-

$
970

(5)

$
136,2732008
$
137,234

$
-

$
-

$
21,450

(4)

$
11,400

$
-

$
4,080

(5)

$
174,164





(1)
The amounts reported in this column reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.





(2)
20,000 options are exercisable at $3.80 and expire on 6/24/18.





(3)
9,239 options are exercisable at $10.90 and expire on 3/28/16.  6,000 options are exercisable at $7.70 and expire on 11/27/17.  15,000 options are exercisable at $3.80 and expire on 6/24/18.





(4)
9,116 options are exercisable at $10.90 and expire on 3/28/16.  6,000 options are exercisable at $7.70 and expire on 11/27/17.  15,000 options are exercisable at $3.80 and expire on 6/24/18.





(5)
Represents employer contributions to the Company’s 401(k) plan.











35





Narrative Disclosure to Summary Compensation Table





The executive compensation policies of the Company are designed to foster the complementary objectives of attracting and retaining quality executive leadership and maximizing shareholder growth. Base salary is a critical element of executive compensation because it provides our executive officers with a base level of bi-weekly income.  Base compensation is set annually within these midpoints based upon internal factors involving the individual executive’s experience, past performance, job scope and complexity and external factors involving general economic conditions and overall corporate performance.  The Company also grants stock options under its Employee Stock Option Plans (defined below) and cash incentives under its Incentive Compensation Plan (defined below) in an effort to link compensation to the Company’s long-term growth and to provide executives with an incentive to achieve and surpass targeted performance goals.  The annual short term incentive opportunities available under the Incentive Compensation Plan reward executive and senior officers for the achievement of the Company and for individual performance objectives.  The Employee Stock Option Plans provides equity-incentives that create a long-term link between the compensation provided to executive officers with gains realized by shareholders.





Employment/Change-in-Control Agreements





The Company has entered into an employment agreement with Mr. King effective January 25, 2006, as amended on December 26, 2007, for a term of three years (“Term of Employment”) and extending daily until Mr. King reaches the age of 65.  The agreement provides for salary and benefits to be paid to Mr. King for services rendered as President and Chief Executive Officer.  Mr. King’s current salary is $210,097 and he also is eligible to receive discretionary bonuses.  The Company may terminate Mr. King’s employment without Cause (as defined in the agreement), or Mr. King may terminate his employment with Good Reason (as defined in the agreement) with 30 days written notice to the Company.  If the Company terminates Mr. King’s employment without Cause or if Mr. King terminates his employment with Good Reason, the Company shall pay Mr. King an amount equal to three times his highest annualized base salary during the Term of Employment plus an average of the annual bonuses paid to him during the three years preceding the year of termination.  This amount shall be paid over a three period in 36 equal monthly installments.  In addition, Mr. King shall receive a continuation of any welfare benefits he would be participating in at the time of termination for a period of three years.





The above payments of salary, bonus and continuation of benefits also apply in the event of a “change in control”, except that Mr. King has 180 days from that event occurring to terminate his employment.  If a “change in control” as defined in Mr. King’s employment agreement were to have occurred on December 31, 2009, Mr. King would have been entitled to receive approximately $683,887 in the aggregate, plus continuation of his welfare benefits he was receiving from the Company, if his employment had been terminated without Cause or if he terminated it with Good Reason.







36





The Company has employed John Herninko as its Senior Loan Officer since 1995 and as an Executive Vice President since 2007.  Mr. Herninko does not have an employment contract with the Company and is an “at will” employee.  His current salary is $136,315, he participates in the Incentive Compensation Plan and he may receive discretionary bonuses.





The Company has employed R. Scott Horner as its Executive Vice President and Chief Financial Officer since 1997.  Mr. Horner does not have an employment contract with the Company and is an “at will” employee.  His current salary is $135,303, he participates in the Incentive Compensation Plan and he may receive discretionary bonuses.





The Company has entered into change-in-control agreements with Mr. Herninko and Mr. Horner which provides for their employment for a term of 24 months (“Term of Employment”) from the date of any change in control at their then base salary and with benefits at least comparable to those received by them prior to the change in control.  The agreements provide that in the event the Company terminates their employment for any reason other than for Cause (as defined in the agreement), or within 30 days of any “change in control” they elect to terminate their employment, they shall be entitled to receive a lump sum cash amount equal to two times their salary and shall receive a continuation of their normal benefits for the balance of the Term of Employment.  In the event that the Company terminates their employment during the final 23 months of their Term of Employment, or they terminate their employment for Good Reason (as defined in the agreement), they will be entitled to receive their current salary as of the date of termination payable in equal monthly installments for the duration of the Term of Employment, as well as a continuation of normal benefits and certain fringe benefits, including two times the value of the Company’s annual reimbursement limit for club dues and automobile expenses.  As a condition to the receipt of any post-termination payments under the agreements, they are required to execute a release agreement, which, among other things, releases the Company from any claim arising out of their employment with the Company, and prohibits them from disparaging the Company.  If they should die during the Term of Employment following any such termination, the Company shall pay to his executors, administrators or personal representatives a lump sum in cash equal to the aggregate amount of the remaining salary payments for the Term of Employment.  A “change in control” is defined in the agreement to mean a consolidation or merger of the Company, in which the Company is not the continuing or surviving entity; any sale, lease, exchange or other transfer of substantially all of the Company’s assets; or any person or group (not including present members of the Board of Directors) becoming the beneficial owner of 25% or more of the Company’s outstanding voting securities.  If a “change in control” was to have occurred on December 31, 2009 and Mr. Herninko and Mr. Horner had each elected to terminate their employment with the Company, they would have been entitled to receive approximately $272,630 and $270,606, respectively, under these agreements, plus a continuation of their existing benefits as noted.





Incentive Compensation Plan




In 2007, the Company adopted an incentive compensation plan for selected executives of the Company.  Each executive officer participates in the incentive plan.  Awards under the incentive plan are based on a series of criteria which are established annually by the Board of Directors. Awards are, however, subject to the discretion of the Board of Directors.  The maximum cash incentive that any named executive officer may receive under the incentive plan is 25% of the individual's annual salary.  The performance goals consist of targets for return on assets, as compared to a regional peer group; targets for return on assets, as compared to all New Jersey banks as a group; and a qualitative assessment of the individual's contributions during the annual period of the review.  Each assessment area is weighted as 33% of the formula.  The annual assessments are completed during the first quarter of the year and consider the progress of the Company and the individual during the previous annual period.  The Compensation Committee of the Board of Directors, consisting of independent directors, is responsible to the Board for administration of the program.  All awards under the incentive plan are paid in cash in a lump sum payment.  During 2009, there were no such awards given under the plan.








37





Employees Stock Option Plans





As a part of the reorganization of the Bank, the Company adopted and assumed the Bank’s 1998 Employee Stock Option Plan and 2003 Employee Stock Option Plan (the “Bank Plans”).  In 2008, the Company’s shareholders approved the Company’s 2008 Employee Stock Option (together with the Bank Plans, the “Employee Stock Option Plans”).  The Employee Stock Option Plans were adopted by the Company to provide full-time officers and employees with an added incentive to perform at a high level and encourage the employee’s continued employment at the Bank by increasing their proprietary interest in the success of the Company and the Bank.  Options to purchase up to 691,104 shares of our common stock may be granted under the Employee Stock Option Plans.  A total of 468,656 shares have been reserved for issuance under options outstanding as of December 31, 2009.  Persons eligible to receive options under the Employee Stock Option Plans are the management employees of the Bank, but exclude persons who may own 10% or more of the outstanding common stock at the time of the grant.  As of December 31, 2009, approximately 37 officers and employees the Company and the Bank were eligible to hold options to purchase under the Employee Option Plans.  The Employee Stock Option Plans contemplate the grant of incentive stock options.  All future grants of employee options, if any, will be granted under the 2008 Employee Stock Option Plan.





There were no individual awards of stock options made in 2009.  The individual awards of stock options made to the Named Executive Officers during 2008 were determined by the Board of Directors based on the recommendation of the Option Committee. In making the recommendation, the Option Committee considered the total number of options to be granted and the profitability of the Bank and the Company as well as the level of individual performance and contribution to the Company of each of the Named Executive Officers.








38






Outstanding Equity Awards at Fiscal Year EndOPTION AWARDS

STOCK AWARDSName

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable

Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

Option

Exercise

Price
Option

Expiration

Date

Number

of

Shares

or Units

of Stock

that

have

not

Vested
Market

Value

of

Shares

or

units

of

Stock

that

have

not

Vested
Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

that have

not

Vested
Equity

Incentive

Plan

Awards

Market or

Payout

Value of

Unearned

Shares,

Units or

Other

Rights

that have

not

VestedRobert

H. King

(1)

1,445


-


-

$
6.48
03/25/13

-

-

-

-60,775


-


-


8.23
04/26/14

-

-

-

-23,153


-


-


8.70
03/22/15

-

-

-

-2,000


18,000


-


3.80
06/24/18

-

-

-

-John

Herninko

(2)

4,020


-


-


6.86
12/01/10

-

-

-

-1,445


-


-


6.48
03/25/13

-

-

-

-4,863


-


-


7.66
11/25/13

-

-

-

-8,682


-


-


9.07
11/23/14

-

-

-

-2,894


-


-


8.70
03/22/15

-

-

-

-2,771


6,468


-


10.90
05/28/16

-

-

-

-1,200


4,800


-


7.70
11/27/17

-

-

-

-1,500


13,500


-


3.80
06/24/18

-

-

-

-R. Scott

Horner

(3)

4,020


-


-


6.86
12/01/10

-

-

-

-1,445


-


-


6.48
03/25/13

-

-

-

-4,863


-


-


7.66
11/25/13

-

-

-

-8,682


-


-


9.07
11/23/14

-

-

-

-2,894


-


-


8.70
03/22/15

-

-

-

-2,734


6,382


-


10.90
05/28/16

-

-

-

-1,200


4,800


-


7.70
11/27/17

-

-

-

-1,500


13,500


-


3.80
06/24/18

-

-

-

-





(1) All unexercised options granted to Mr. King vested as of 12/31/09, except the awards expiring 06/24/18, which vest as follow:





06/24/18 Expiration


06/24/10 = 2,000


06/24/11 = 2,000


06/24/12 = 2,000


06/24/13 = 2,000


06/24/14 = 2,000


06/24/15 = 2,000


06/24/16 = 2,000


06/24/17 = 2,000


06/24/18 = 2,000





(2) All unexercised options granted to Mr. Herninko vested as of 12/31/09, except the awards expiring 05/28/16, 11/27/17 and 06/24/18, which vest as follow:





05/28/16 Expiration                              11/27/17 Expiration                               06/24/18 Expiration




01/01/10 = 924                                       11/28/10 = 600                                       06/24/10 = 1,500


01/01/11 = 924
11/28/11 = 600
06/24/11 = 1,500


01/01/12 = 924
11/28/12 = 600
06/24/12 = 1,500


01/01/13 = 924
11/28/13 = 600
06/24/13 = 1,500


01/01/14 = 924
11/28/14 = 600
06/24/14 = 1,500


01/01/15 = 924
11/28/15 = 600
06/24/15 = 1,500


01/01/16 = 924
11/28/16 = 600
06/24/16 = 1,500


08/27/17 = 600
06/24/17 = 1,500 06/24/18 = 1,500









39





(3) All unexercised options granted to Mr. Horner vested as of 12/31/09, except the awards expiring 05/28/16, 11/27/17 and 06/24/18, which vest as follow:





05/28/16 Expiration                              11/27/17 Expiration                               06/24/18 Expiration


01/01/10 = 912                                       11/28/10 = 600                                       06/24/10 = 1,500


01/01/11 = 912
11/28/11 = 600
06/24/11 = 1,500


01/01/12 = 911
11/28/12 = 600
06/24/12 = 1,500


01/01/13 = 912
11/28/13 = 600
06/24/13 = 1,500


01/01/14 = 911
11/28/14 = 600
06/24/14 = 1,500


01/01/15 = 912
11/28/15 = 600
06/24/15 = 1,500


01/01/16 = 912
11/28/16 = 600
06/24/16 = 1,500


08/27/17 = 600
06/24/17 = 1,500


06/24/18 = 1,500




















Directors’ Compensation





The following table sets forth the compensation paid to our directors for the fiscal year ended December 31, 2009:





Name

Fees

Earned or

Paid in

Cash


Stock

Awards


Option

Awards


Non-Equity

Incentive Plan

Compensation


Nonqualified

Deferred

Compensation

Earnings


All Other

Compensation


TotalS. David

Brandt, Esq.

$
7,425


$
-


$
-


$
-


$
-


$
-


$
7,425Jeffrey

Dubrow

$
7,875


$
-


$
-


$
-


$
-


$
-


$
7,875A. Theodore

Eckenhoff

$
14,100


$
-


$
-


$
-


$
-


$
-


$
14,100James L.

Kaltenbach,

M.D.

$
12,975


$
-


$
-


$
-


$
-


$
-


$
12,975G. Edward

Koenig

$
12,900


$
-


$
-


$
-


$
-


$
-


$
12,900John J.

Maley, Jr.,

CPA

$
12,675


$
-


$
-


$
-


$
-


$
-


$
12,675Ronald P.

Sandmeyer

$
10,575


$
-


$
-


$
-


$
-


$
-


$
10,575Jeffrey P.

Taylor

$
8,700


$
-


$
-


$
-


$
-


$
-


$
8,700James W.

Yoh, Ph.D.

$
6,675


$
-


$
-


$
-


$
-


$
-


$
6,675





Compensation Arrangements





For each regular meeting of the Board of Directors attended in person, each member will receive $600.  Members of the committees of the Board of Directors receive $450 for attendance at each committee meeting.





Directors’ fees are not paid to any Director who is also an employee of the Company.  Directors are reimbursed for their reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors and committees of the Board.








40





Directors Stock Option Plan





As a part of the Reorganization of the Bank, the Company adopted and assumed the Bank’s 1998 Director Stock Option Plan (the “1998 Director Plan”).  The 1998 Director Plan expired in 2003.  In 2008, the Company’s shareholders approved the Company’s 2008 Director Stock Option Plan (the “2008 Director Plan”).  The 2008 Director Plan was adopted to provide non-employee directors of the Company an incentive to contribute to the growth and prosperity of the Company and to assist the Company in attracting and retaining directors through a grant of common stock.





The aggregate number of shares which may be issued pursuant to the exercise of options granted under both director plans is 126,982.  A total of 97,982 shares have been reserved for issuance under options outstanding as of December 31, 2009.  Each plan is administered by the Option Committee.  As of December 31, 2009, 9 directors of the Company were eligible to hold options under the 2008 Director Plan.  All future option grants, if any, will be granted under the 2008 Director Option Plan.





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








Equity Compensation Plan Information





The following table sets forth information regarding our equity compensation plans as of December 31, 2009:





Plan Category
Number of shares

of Common Stock

to be issued upon

exercise of

outstanding

options

(a)

Weighted-average

exercise price of

outstanding options

(b)

Number of shares of

Common Stock remaining

available for future

issuance under equity

compensation plans

(excluding options

reflected in column (a))

(c)Equity compensation plans approved

by shareholders
566,638

$7.20

251,448Equity compensation plans not

approved by shareholders
not applicable

not applicable

not applicableTotal
566,638

$7.20

251,448











41





Security Ownership of 5% Holders
 
 The following table sets forth certain information, as of December 31, 2009, with respect to the beneficial ownership of shares of Common Stock by each shareholder known by us to be the beneficial owner of more than five percent (5%) of the outstanding shares of Common Stock.  Except as indicated in the footnotes to the table, the persons and entities named in the table have sole voting and investment power with respect to all shares of common stock which they respectively own beneficially.


Number of

Shares

Beneficially

Owned (1)

Percent of

Company

Common

Stock (1)Jeffrey P. Orleans (2)
387,017

6.62%Wellington Management Company, LLP (3)
308,843

5.29%





(1)
Beneficial ownership is based on 5,843,362 outstanding shares of common stock as of December 31, 2009.  The securities “beneficially owned” by an individual are determined in accordance with the regulations of the Securities and Exchange Commission and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power.  A person is also deemed to beneficially own shares of common stock which such person does not own but has the right to acquire as of December 31, 2009.




(2)
Based solely on information provided to us by the named beneficial owner, Jeffrey P. Orleans, One Greenwood Square, 3333 Street Road, Bensalem, Pennsylvania 19020.  Mr. Orleans owns 342,424 shares directly and has voting and investment power over, and 44,593 shares owned by Orleans Investment Land Associates, LP, a limited partnership of which Mr. Orleans owns 100% of the corporate general partner.  Mr. Orleans is the Chairman and Chief Executive Officer of Orleans Homebuilders, Inc.




(3)
Information provided by Schedule 13F under the Securities Exchange Act of 1934 filed by the named beneficial owner, Wellington Management Company, LLP, 75 State Street, Boston, MA, 02109 in its capacity as investment advisor, are owned of record by clients of Wellington Management.  Wellington Management has sole power to vote on 224,685 shares and sole power to dispose of all 308,843 shares.







Security Ownership of Management





The following table sets forth certain information, as of March 31, 2010, with respect to the beneficial ownership of shares of Common Stock by each of our directors and executive officers.  Each director and/or executive officer is also a director and/or executive officer of our subsidiaries (Sterling Bank and Sterling Banks Capital Trust I).  Except as indicated in the footnotes to the table, the persons and entities named in the table have sole voting and investment power with respect to all shares of common stock which they respectively own beneficially.  The address for each person below is 3100 Rout 38, Mt. Laurel, New Jersey 08054.





Number of

Shares

Beneficially

Owned (1)

Percent of

Company

Common

Stock (1)S. David Brandt, Esq. (2)

Director
27,846

0.48%Dale F. Braun, Jr. (3)

Senior Vice President and Controller
28,506

0.49%Jeffrey Dubrow (4)

Director
22,132

0.38%A. Theodore Eckenhoff (5)

Chairman of the Board
84,361

1.44%John Herninko (6)

Executive Vice President and Senior Lending Officer
33,673

0.58%R. Scott Horner (7)

Director, Executive Vice President and Chief Financial Officer
70,828

1.21%Kimberly A. Johnson (8)

Senior Vice President and Corporate Services Officer
29,654

0.51%James L. Kaltenbach, M.D. (9)

Director
39,033

0.67%Robert H. King (10)

Director, President and Chief Executive Officer
132,049

2.26%G. Edward Koenig (11)

Director
21,102

0.36%John J. Maley, Jr., CPA (12)

Director
17,877

0.31%Ronald P. Sandmeyer (13)

Director
133,692

2.29%Jeffrey P. Taylor (14)

Director
126,361

2.16%Theresa S. Valentino Congdon  (15)

Senior Vice President and Senior Retail Officer
30,733

0.53%James W. Yoh, PhD. (16)

Director
11,645

0.20%All Directors and Executive Officers of the Company as a Group (15 persons) (17)
809,492

13.85%








42







(1)
Beneficial ownership is based on 5,843,362 outstanding shares of common stock as of December 31, 2009.  The securities “beneficially owned” by an individual are determined in accordance with the regulations of the Securities and Exchange Commission and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power.  A person is also deemed to beneficially own shares of common stock which such person does not own but has the right to acquire as of December 31, 2009.




(2)
Includes 4,253 shares held by Mr. Brandt’s wife, 2,779 shares held by Mr. Brandt in an Individual Retirement Account and an option to purchase 3,509 shares.




(3) Includes 7,167 shares held jointly with Mr. Braun’s wife and an option to purchase 21,339 shares.




(4)
Includes 810 shares held by Mr. Dubrow as custodian for his child, 1,528 shares held in an Individual Retirement Account and an option to purchase 3,509 shares.




(5)
Includes 7,450 shares held by Mr. Eckenhoff’s wife, 8,138 shares held in an Individual Retirement account, and an option to purchase 3,509 shares.




(6)
Includes 4,047 shares held jointly with Mr. Herninko’s wife, 1,326 shares held in an Individual Retirement Account and an option to purchase 28,300 shares.




(7)
Includes 29,359 shares held jointly with Mr. Horner’s wife, 13,219 shares held in an Individual Retirement Account and an option to purchase 28,250 shares.




(8) Includes 8,415 shares held jointly with Ms. Johnson’s husband and an option to purchase 21,239 shares.




(9)
Includes 34,810 shares held in an Individual Retirement Account, 714 shares held by Dr. Kaltenbach’s wife, and an option to purchase 3,509 shares.




(10) Includes 44,426 shares held jointly with Mr. King’s wife and an option to purchase 87,373 shares.




(11)
Includes 13,216 shares held by Mr. Koenig’s wife, 2,857 shares held in an Individual Retirement account and an option to purchase 710 shares.




(12) Includes 1,786 shares held jointly with Mr. Maley’s wife and an option to purchase 710 shares.




(13)
Includes 32,632 shares held by Mr. Sandmeyer’s wife as custodian for their grandchildren, 43,417 shares held jointly with his wife and an option to purchase 3,509 shares.




(14)
Includes 51,634 shares held by Mr. Taylor’s wife, 363 shares held by Mr. Taylor’s wife as custodian for their son, 11,637 held in an Individual Retirement Account, and an option to purchase 3,509 shares.




(15)
Includes 740 shares held as custodian for Ms Valentino Congdon’s son and an option to purchase 25,978 shares.




(16) Includes an option to purchase 3,005 shares.




(17) Includes 237,958 shares subject to options.






43




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





Director Independence





The Company is listed on the NASDAQ Capital Market and follows the NASDAQ listing standards for Board and committee independence.  Under NASDAQ Rule 5605(a)(2), a director is not considered to be independent if he also an executive officer or employee of the Company.  Accordingly, Mr. King, our President and Chief Executive Officer and Mr. Horner, our Executive Vice President and Chief Financial Officer, are not independent. The Board of Directors considered relationships and other arrangements, if any, with each director when director independence was reviewed, including the Company’s relationships with the law firm with which Director Brandt is affiliated, and has determined that all directors other than Directors King and Horner are independent under the applicable NASDAQ listing standards.





Certain Transactions





We have had, and expect in the future to have, banking transactions in the ordinary course of business with our directors and executive officers (and their associates).  All loans by us to such persons (i) were made in the ordinary course of business, (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (iii) did not involve more than the normal risk of collectability or present other unfavorable features.





As of December 31, 2009, we had total loans and loan commitments outstanding to directors and their affiliates of approximately $2.4 million and no loans outstanding to executive officers.





We believe that such transactions were on terms at least as favorable to us as we would have received in transactions with an unrelated party.





Other Transactions





Mr. Brandt, a director and shareholder in the Company was a partner at the law firm of Ballard Spahr Andrews & Ingersoll LLP.  Ballard Spahr has provided the Company with legal services for several years.  In 2009, the Company paid Ballard Spahr $22,000 in fees for such services.





Item 14.  Principal Accountant Fees and Services.





Independent Auditors





The Audit Committee of the Board of Directors has selected the firm of McGladrey & Pullen, LLP, independent accountants as auditors of the Company to examine and report to shareholders on the consolidated financial statements of the Company for the fiscal year ending on December 31, 2009.  McGladrey & Pullen, LLP (or its predecessor entity), has been the Company’s and the Bank’s independent accountants since the fiscal year ended December 31, 1993.  The Audit Committee of the Board of Directors has determined that the provision of the services set forth under “Audit Fees” below, is compatible with maintaining the independence of McGladrey & Pullen, LLP with respect to the Bank for the fiscal year ended December 31, 2009.








44





Audit Fees





The following table presents fees for professional services rendered by McGladrey & Pullen, LLP for the audit of the Company’s annual consolidated financial statements for the fiscal years ended December 31, 2009 and 2008 and fees billed for other services rendered by McGladrey & Pullen, LLP and RSM McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP) for fiscal years 2009 and 2008:





2009


2008Audit fees (a)

$
239,000


$
170,000Audit-related fees (b)


17,000



22,000Tax fees (c)


33,000



25,000All other fees (d)


45,000



42,000


_________________________________




(a)
Fees for 2009 and 2008 consist of fees for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s quarterly reports.




(b)
Fees for 2009 and 2008 consist of fees for audit of the Company’s 401k Plan and review of Form S-8 filed with the SEC.




(c)
Tax service fees for compliance work, as well as tax planning and tax advice.




(d)
All other fees consist of regulatory compliance work performed.







Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor




The Audit Committee pre-approves all audit and permissible non-audit services provided to the Company by the independent auditor.  These services may include audit services, audit-related services, tax services and other services.  The Audit Committee has adopted policies and procedures for the pre-approval of services provided by the independent auditor.  Such policies and procedures provide that management and the independent auditor shall jointly submit to the Audit Committee a schedule of audit and non-audit services for approval as part of the Annual Plan for each fiscal year.  In addition, the policies and procedures provide that the Audit Committee may also pre-approve particular services not in the Annual Plan on a case-by-case basis.  Management must provide a detailed description of each proposed service and the projected fees and costs (or a range of such fees and costs) for the service.  The policies and procedures require management and the independent auditor to provide quarterly updates to the Audit Committee regarding services rendered to date and services yet to be performed.




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, 2009 and 2008 and the related consolidated statements of operations, shareholders’ equity and cash flows for the years ended December 31, 2009 and 2008 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)






45




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)


10.11 Written Agreement between Sterling Banks, Inc., Sterling Bank, The Federal Reserve bank of Philadelphia and the New Jersey Department of Banking
 and Insurance (k)


23.1      Consent of McGladrey & Pullen, LLP, Independent Registered Public Accounting Firm


31.1      CEO Certification required under Section 302 of Sarbanes – Oxley Act of 2002


31.2      CFO Certification required under Section 302 of Sarbanes – Oxley Act of 2002


32.1      CEO Certification required under Section 906 of Sarbanes – Oxley Act of 2002


32.2 CFO Certification required under Section 906 of Sarbanes – Oxley Act of 2002







(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 datedJanuary 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.


(k)
Incorporated by reference to Company’s Current Report on Form 8-K dated August 3,2009.








46





SIGNATURES








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, 2010.




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
















Date: April 15, 2010


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, 2010.
 
 /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/ Ronald P. SandmeyerDale F. Braun, Jr.
Ronald P. SandmeyerSenior Vice President and Controller
Director(Principal Accounting Officer)/s/ A. Theodore Eckenhoff
Jeffrey P. Taylor, P.E.A. Theodore Eckenhoff
DirectorChairman/s/ S. David BrandtS. David Brandt, Esq
James Yoh, PhD.Director
Director/s/ Jeffrey DubrowJeffrey DubrowDirector





























47











Sterling Banks, Inc.
 
 
 
 Financial Report
 December 31, 2009
    F-1
   Contents
 
 
 Management’s Discussion and Analysis
F-3Report of Independent Registered Public Accounting Firm
F-19Financial StatementsConsolidated Balance Sheets
F-20Consolidated Statements of Operations
F-22Consolidated Statements of Shareholders’ Equity
F-23Consolidated Statements of Cash Flows
F-24Notes to Consolidated Financial Statements
F-25
 
 
 
  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 $369.8 million as of December 31, 2009.  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 Farnsworth 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
 
 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 our annual impairment testing in 2008, 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.
 
 In connection with our annual impairment testing in the fourth quarter of 2009, we reassessed the carrying value of the core deposit intangible and determined that the value of the core deposit relationship was at or above its carrying value.  We further reassessed the estimated remaining useful life of five years and determined no change was warranted.
 
 
 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.
 
 During 2009, the Company updated its analysis of whether a valuation allowance should be recorded against its deferred tax assets.  Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized.  The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence.  In making such judgments, significant weight is given to evidence that can be objectively verified.  Cumulative and continued near-term losses represent significant negative evidence that caused the Company to conclude that a $5.2 million deferred tax valuation allowance was required because the Company has determined it can no longer meet the more likely than not threshold for recognizing this asset.
 
 To the extent that the Company generates taxable income in a given year, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense.  Any remaining deferred tax asset valuation allowance will ultimately reverse through income tax expense when the Company can demonstrate a sustainable return to profitability that would lead management to conclude that it is more likely than not that the deferred tax asset will be utilized during the carryforward period.
 
 Results of Operations for the Years Ended December 31, 2009 and 2008
 
 Net Loss
 
 Net loss decreased $5.8 million, or 35.8%, to a net loss of $10.4 million for the year ended December 31, 2009 compared to a net loss of $16.2 million for the year ended December 31, 2008.  The decrease in net loss was mainly the result of impairment charges of $11.8 million in goodwill intangibles in 2008 associated with the Merger and an increase in income tax expense of $4.8 million in 2009, primarily as a result of the deferred tax valuation allowance, and an increase in FDIC insurance of $0.8 million.  Loss per share (basic and diluted) decreased $1.01 per share, or 36.3%, to a net loss of $1.77 per share for the year ended December 31, 2009 compared to a net loss of $2.78 per share for the year ended December 31, 2008.
   F-5
 
 
 Net Interest Income and Average Balances
 
 Net interest income after the provision for loan losses decreased $1.0 million, or 15.2%, to $5.6 million for the year ended December 31, 2009 from $6.6 million for the year ended December 31, 2008.  The provision for loan losses decreased $0.7 million to $5.4 million for the year ended December 31, 2009 from $6.1 million for the year ended December 31, 2008.  The net interest margin decreased to 3.12% for the year ended December 31, 2009 from 3.67% for the year ended December 31, 2008.  The decrease in the net interest margin is primarily a result of a decrease in interest income on loans as a result of an increase in loans on nonaccrual status.  Yield on interest-earning assets decreased to 5.35% for the year ended December 31, 2009 from 6.46% for the year ended December 31, 2008.  The average cost of interest-bearing liabilities decreased to 2.38% for the year ended December 31, 2009 compared to 3.10% for the year ended December 31, 2008.
 
 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)2009


2008


2007Average

Balance


Interest


Average

Rate


Average

Balance


Interest


Average

Rate


Average

Balance


Interest


Average

RateAssetsLoans, net (1)

$
287,546


$
16,968



5.90
%

$
299,544


$
20,580



6.87
%

$
298,195


$
22,802



7.65
%Investment securities (2)


48,292



1,870



3.87



36,239



1,542



4.26



57,350



2,374



4.14Federal funds sold


16,310



20



0.12



9,321



176



1.89



9,452



485



5.13Due from banks


269



-



0.12



210



2



1.00



3,420



173



5.04Total interest-earningassets


352,417



18,858



5.35



345,314



22,300



6.46



368,417



25,834



7.01Allowance for loanlosses


(9,887
)










(2,938
)










(2,610
)Other assets


43,666











49,573











42,278Total Assets

$
386,496










$
391,949










$
408,085Liabilities and shareholders’ equityTime deposits

$
200,548



5,920



2.95


$
192,268



7,570



3.94


$
219,735



10,569



4.81NOW/MMDA/savingsaccounts


108,777



887



0.82



105,077



1,374



1.31



99,205



2,263



2.28Borrowings


21,962



1,063



4.84



12,975



690



5.32



6,327



371



5.86Total interest-bearingliabilities


331,287



7,870



2.38



310,320



9,634



3.10



325,267



13,203



4.06Noninterest-bearingdemand  deposits


33,452











37,901











41,166Other liabilities


79











836











368Shareholders’ equity


21,678











42,892











41,284Total liabilities andshareholders’ equity

$
386,496










$
391,949










$
408,085Net interest income





$
10,988










$
12,666










$
12,631Interest rate spread (3)










2.97











3.36











2.95Net interest margin (4)










3.12











3.67











3.43
 (1)
Includes loans held for sale.  Also includes loan fees, which are not material, but excludes overdrafts and nonaccrual loans of $14,745 in2009, $7,789 in 2008 and $4,639 in 2007.
 (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-bearingliabilities.
 (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, 2009

Compared to Year Ended

December 31, 2008


Year Ended December 31, 2008

Compared to Year Ended

December 31, 2007Variance 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

$
(824,000
)

$
(2,788,000
)

$
(3,612,000
)

$
104,000


$
(2,326,000
)

$
(2,222,000
)Investment securities


514,000



(186,000
)


328,000



(875,000
)


43,000



(832,000
)Federal funds sold anddue from banks


132,000



(290,000
)


(158,000
)


(171,000
)


(309,000
)


(480,000
)Total interest income


(178,000
)


(3,264,000
)


(3,442,000
)


(942,000
)


(2,592,000
)


(3,534,000
)Interest Expense:Deposits


360,000



(2,497,000
)


(2,137,000
)


(869,000
)


(3,019,000
)


(3,888,000
)Borrowings


478,000



(105,000
)


373,000



389,000



(70,000
)


319,000Total interest expense


838,000



(2,602,000
)


(1,764,000
)


(480,000
)


(3,089,000
)


(3,569,000
)Net interest income

$
(1,016,000
)

$
(662,000
)

$
(1,678,000
)

$
(462,000
)

$
497,000


$
35,000
 
 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 rate.
 
 Noninterest Income
 
 Total noninterest income decreased $232,000, or 23.5%, to $757,000 for the year ended December 31, 2009 from $989,000 for the year ended December 31, 2008, primarily from a decrease in gains on sales of investment securities and fixed assets and a decrease in miscellaneous fees.  Service charges on deposit accounts increased $4,000, or 1.6%, to $256,000 for the year ended December 31, 2009 from $252,000 for the year ended December 31, 2008.  Gains on sales of investment securities and fixed assets decreased $100,000, or 95.2%, to $5,000 for the year ended December 31, 2009 from $105,000 for the year ended December 31, 2008.  Miscellaneous fees decreased $136,000, or 21.5%, to $496,000 for the year ended December 31, 2009 from $632,000 for the year ended December 31, 2008, primarily from a decrease in prepayment penalties on loans of $31,000, and a one time fee for the sale of branch rights of a former Farnsworth location in 2008 of $35,000.
 
 Noninterest Expenses
 
 Total noninterest expenses decreased $11.9 million, or 44.9%, to $14.6 million for the year ended December 31, 2009 from $26.5 million for the year ended December 31, 2008.  The decrease was primarily as a result of an impairment charge of $11.8 million in goodwill in 2008 associated with the Merger.
 
 Compensation and benefits decreased $0.9 million, or 12.5%, to $6.3 million for the year ended December 31, 2009 from $7.2 million for the year ended December 31, 2008.  This decrease was primarily from a decrease in bonuses paid of $381,000, a decrease in staffing levels of $345,000, including the consolidation of one of our Mount Laurel branches with our Maple Shade branch in November 2008, and a decrease in 401(k) matching of $90,000.
 
  F-7
  
 Occupancy, equipment and data processing expense decreased $75,000, or 2.0%, to $3.6 million for the year ended December 31, 2009 from $3.7 million for the year ended December 31, 2008.  This decrease resulted primarily from a decrease in software depreciation.
 
 Marketing and business development expense decreased $212,000, or 29.5%, to $506,000 for the year ended December 31, 2009 from $718,000 for the year ended December 31, 2008.  This decrease reflects a general reduction in promotional expenses.
 
 Professional services increased $313,000, or 30.2%, to $1,351,000 for the year ended December 31, 2009 from $1,038,000 for the year ended December 31, 2008.  This increase was primarily due to increased strategic planning and loan workout 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.
 
 FDIC insurance increased $784,000, or 201.0%, to $1,174,000 for the year ended December 31, 2009 from $390,000 for the year ended December 31, 2008.  This increase was primarily the result of an increase in premiums, including a special one time industry assessment of $183,000.
 
 Losses on sales or impairment of fixed assets and repossessed property increased $166,000, or 488.2%, to $200,000 for the year ended December 31, 2009 from $34,000 for the year ended December 31, 2008.  This increase includes a partial write down on the Company’s former Gaither Road office of $82,000.
 
 Other operating expenses increased $179,000, or 20.2%, to $1,064,000 for the year ended December 31, 2009 from $885,000 for the year ended December 31, 2008.  This increase was primarily the result of an increase in repossessed property expenses.
 
 Income Taxes
 
 We recorded income tax expense of $2,095,000 on loss before taxes of $8,259,000 for the year ended December 31, 2009.  During the second quarter of 2009, management determined that there was a need for a valuation allowance on the Company’s deferred tax assets.  Based on forecasts of the Company’s future profitability, management concluded full recognition of these tax assets was unlikely because it is more likely than not that this portion of the deferred tax assets will not be realized as a result of cumulative tax losses and uncertainties of future taxable income.  During the year ended December 31, 2008, we recorded an income tax benefit of $2,699,000 on loss before taxes of $18,927,000, resulting in an effective tax rate of 14.3% for the 2008 period.
  Financial Condition
 
 General
 
 Our total assets decreased $9.3 million, or 2.5%, to $369.8 million at December 31, 2009 from $379.1 million at December 31, 2008.  This decrease was mainly due to a decline in loans outstanding and the recording of a tax valuation allowance.
 
 Loan Portfolio
 
 Total loans, excluding loans held for sale, decreased $5.1 million, or 1.7%, to $300.5 million at December 31, 2009 from $305.6 million at December 31, 2008.  The decrease in loans was primarily due to $4.2 million in charge-offs and normal contractual loan payments/payoffs in the loan portfolio.
   F-8
  
 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 31,2009


2008


2007


2006


2005Commercial, Financial and Agricultural

$
30,371,000


$
32,115,000


$
30,209,000


$
29,097,000


$
30,443,000Real Estate – Construction


41,558,000



68,278,000



80,486,000



85,902,000



77,499,000Real Estate – Mortgage


171,465,000



147,435,000



141,237,000



73,666,000



72,020,000Installment loans to individuals


50,453,000



53,827,000



52,291,000



45,179,000



38,714,000Lease Financing


7,291,000



4,636,000



8,345,000



9,439,000



6,662,000Total loans

$
301,138,000


$
306,291,000


$
312,568,000


$
243,283,000


$
225,338,000
 
 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, 2009 and 2008, loans past due 90 days or more and still accruing interest were $634,000 and $2,707,000, respectively.  Total non-accruing loans were $16,437,000 and $9,895,000 at December 31, 2009 and 2008, respectively.  Gross interest income of approximately $1,201,000 and $586,000 would have been recorded under the original terms of these loans in 2009 and 2008, respectively.
 
 
 F-9
 
  
 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 31,2009


2008


2007


2006


2005Restructured loans:Commercial, Financial and Agricultural

$
39,000


$
-


$
-


$
-


$
-Real Estate – Construction


1,189,000



642,000



-



-



-Real Estate – Mortgage


4,907,000



-



-



-



-Installment loans to individuals


101,000



-



-



-



-6,236,000



642,000



-



-



-Loans accruing, but past due 90 days or more:Commercial, Financial and Agricultural


85,000



92,000



27,000



75,000



-Real Estate – Construction


-



2,360,000



2,349,000



-



329,000Real Estate – Mortgage


523,000



178,000



180,000



-



-Installment loans to individuals


26,000



77,000



88,000



103,000



118,000Total loans accruing, but past due 90 days or more


634,000



2,707,000



2,644,000



178,000



447,000Nonaccrual Loans:Commercial, Financial and Agricultural


3,000



-



-



268,000



-Real Estate – Construction


14,274,000



9,840,000



3,656,000



-



-Real Estate - Mortgage


2,160,000



55,000



882,000



-



-Total nonaccrual loans


16,437,000



9,895,000



4,538,000



268,000



-Total nonperforming loans


23,307,000



13,244,000



7,182,000



446,000



447,000Other Real Estate Owned


1,100,000



923,000



-



-



-Total nonperforming assets

$
24,407,000


$
14,167,000


$
7,182,000


$
446,000


$
447,000Non-performing loans/Total loans (1)


7.76
%


4.33
%


2.30
%


0.18
%


0.17
%Non-performing assets/Total assets


6.60
%


3.74
%


1.75
%


0.13
%


0.13
%Allowance for loan losses/Total non-performing loans


42.54
%


64.41
%


40.25
%


394.62
%


258.82
%
 
 (1) Includes loans held for sale.
 
 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, 2009, there were 110 such loans totaling $47,083,000.  Management believes that they have provided an adequate allowance for such loans and are aggressively pursuing collection from the borrowers.
 
 
 F-10
 
  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.
 
 The allowance for loan losses is calculated under FASB ASC Topic 310 and ASC Topic 450.  Non-performing and impaired loans are evaluated under FASB ASC Topic 310, using either the fair value of collateral or present value of future cash flows method.  In our case, all non-performing and impaired loans are evaluated using the fair value of collateral method since all the non-performing and impaired loans are collateralized by real estate.  When a loan is evaluated using this method, a new appraisal(s) of the primary and secondary collateral is obtained and compared to the outstanding balance of the loan.  For non-collateral dependent loans, a specific reserve is added to the allowance for loan losses if a collateral shortfall exists.  For collateral dependent loans, a write down is charged against the allowance for loan losses.
 
 The Company had $26.7 million of impaired loans as of December 31, 2009 and may be segmented as follows:
  Real Estate – Construction
=
65%Real Estate – Mortgage
=
34%Installment loans to individuals
=
1%100%
 
 Of the impaired loans, $16.4 million were on nonaccrual status as of December 31, 2009.  Using the methods described above, $0.7 million was deemed the collateral shortfall associated with these loans using the FASB ASC Topic 310 method.  This is a decrease of $2.1 million in specific valuation reserves from December 31, 2008.
 
 The Company utilizes a risk rating system on all loans under FASB ASC Topic 450, which takes into account loans with similar characteristics and historical loss experience related to each group.  In addition, qualitative adjustments are made for levels and trends in delinquencies and nonaccruals, downturns in specific industries, changes in credit policy, experience and ability of staff, national and local economic conditions and concentrations of credit within the portfolio.  The total loans outstanding in each group of loans with similar characteristics is multiplied by the sum 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 FASB ASC Topic 450.
 
 Total loans analyzed under FASB ASC Topic 450decreased by $14.3 million from December 31, 2008 to December 31, 2009 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 FASB ASC Topic 450 increased by $3.5 million during this period.
   
 F-11
 
 
 Factors that influenced management’s judgment in 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 31,2009


2008


2007


2006


2005Allocation of allowance

for loan losses:

Amount


% Gross Loans


Amount


% Gross Loans


Amount


% Gross Loans


Amount


% Gross Loans


Amount


% Gross LoansCommercial, Financial and

Agricultural

$
985,000



10
%

$
353,000



10
%

$
124,000



10
%

$
78,000



12
%

$
47,000



11
%Real Estate – Construction


2,366,000



14



5,481,000



22



1,846,000



26



1,052,000



35



626,000



29Real Estate – Mortgage


4,628,000



57



2,029,000



48



788,000



45



441,000



30



262,000



27Installment loans to individuals


1,936,000



17



668,000



18



133,000



17



189,000



19



219,000



30Lease Financing


-



2



-



2



-



2



-



4



-



3Total loans

$
9,915,000



100
%

$
8,531,000



100
%

$
2,891,000



100
%

$
1,760,000



100
%

$
1,154,000



100
%
 
 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 31,2009


2008


2007


2006


2005Balance at beginning of period

$
8,531,000


$
2,891,000


$
1,760,000


$
1,154,000


$
913,000Charge-offs:Commercial, Financial, Agricultural


(479,000
)


(32,000
)


(242,000
)


-



(18,000
)Real Estate – Construction


(3,359,000
)


(70,000
)


-



-



-Real Estate – Mortgage


(182,000
)


(237,000
)


-



-



-Installment loans to individuals


(152,000
)


(124,000
)


(58,000
)


(1,000
)


(27,000
)Lease Financing


-



-



-



-



-(4,172,000
)


(463,000
)


(300,000
)


(1,000
)


(45,000
)Recoveries:Commercial, Financial, Agricultural


61,000



2,000



1,000



-



1,000Real Estate – Construction


76,000



-



-



-



-Real Estate – Mortgage


1,000



3,000



8,000



1,000



1,000Installment loans to individuals


28,000



8,000



3,000



1,000



-Lease Financing


-



-



-



-



-166,000



13,000



12,000



2,000



2,000Net recoveries (charge-offs)


(4,006,000
)


(450,000
)


(288,000
)


1,000



(43,000
)Provision for loan loss


5,390,000



6,090,000



401,000



605,000



284,000Allowance for credit losses in acquired bank


-



-



1,018,000



-



-Balance at end of period

$
9,915,000


$
8,531,000


$
2,891,000


$
1,760,000


$
1,154,000Average loans outstanding (1)

$
302,291,000


$
307,333,000


$
302,834,000


$
254,695,000


$
240,472,000Net charge-offs as a percentage of average loans


1.33
%


0.15
%


0.10
%


0.00
%


0.02
%(1) Includes loans held for sale and non-accruing loans
 
  F-12
  
 
 Investment Securities Portfolio
 
 The following table presents the amortized cost and approximate fair values at the dates listed and for each major category of our investment securities:
 
 At December 31,2009


2009


2008


2008


2007


2007Amortized

Cost


Fair Value


Amortized

Cost


Fair Value


Amortized

Cost


Fair ValueInvestment SecuritiesAvailable-for-SaleU.S. Governmentagencies and corporations

$
8,092,000


$
8,107,000


$
3,995,000


$
4,028,000


$
29,267,000


$
29,257,000Municipalities


4,305,000



4,378,000



4,941,000



4,772,000



7,324,000



7,310,000Mortgage-backed


21,549,000



21,613,000



15,250,000



15,297,000



11,563,000



11,528,000Total investment securitiesAvailable-for-Sale

$
33,946,000


$
34,098,000


$
24,186,000


$
24,097,000


$
48,154,000


$
48,095,000Investment SecuritiesHeld-to-MaturityU.S. Governmentagencies and corporations

$
100,000


$
100,000


$
100,000


$
100,000


$
100,000


$
100,000Municipalities


-



-



-



-



-



-Mortgage-backed


9,098,000



9,362,000



19,784,000



19,892,000



6,754,000



6,697,000Total investment securitiesHeld-to-Maturity

$
9,198,000


$
9,462,000


$
19,884,000


$
19,992,000


$
6,854,000


$
6,797,000
 
 The following table presents the amortized cost maturity distribution and weighted average yield of the investment securities portfolio of the Company as of December 31, 2009.  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, 2009Within 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 andcorporations

$
-



-


$
-



-


$
8,092



4.02
%

$
-



-


$
8,092



4.02
%Municipalities


-



-



637



4.57
%


760



5.26
%


2,908



5.92
%


4,305



5.60
%Mortgage-backed securities


838



4.29
%


461



3.92
%


757



4.52
%


19,493



4.17
%


21,549



4.18
%Total securities available-for-sale

$
838



4.29
%

$
1,098



4.30
%

$
9,609



4.16
%

$
22,401



4.40
%

$
33,946



4.32
%Held-to-Maturity at amortized cost:U.S. Government agencies andcorporations

$
100



1.00
%

$
-



-


$
-



-


$
-



-


$
100



1.00
%Mortgage-backed securities


461



4.17
%


1,155



4.91
%


-



-



7,482



4.54
%


9,098



4.46
%Total securities held-to-maturity

$
561



3.60
%

$
1,155



4.91
%

$
-



-


$
7,482



4.54
%

$
9,198



4.42
%
 
 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.
 
 
 F-13
 
 
 
 Deposits
 
 Total deposits increased $2.1 million, or 0.6%, to $330.7 million at December 31, 2009 from $328.6 million at December 31, 2008.  Noninterest-bearing demand deposits decreased $5.0 million, or 13.0%, to $30.9 million at December 31, 2009 from $35.9 million at December 31, 2008.  Interest bearing demand accounts decreased $0.1 million, or 0.3%, to $35.0 million at December 31, 2009 from $35.1 million at December 31, 2008.  Savings deposits increased $0.1 million, or 0.1%, to $66.8 million at December 31, 2009 from $66.7 million at December 31, 2008.  Time deposits under $100,000 increased $7.1 million, or 4.4%, to $168.2 million at December 31, 2009 from $161.1 million at December 31, 2008.  Jumbo time deposits were $29.8 million at December 31, 2009 and 2008.
 
 The following table represents categories of our deposits at the dates listed:
 
 At December 31,2009


2008


2007Amount


%


Amount


%


Amount


%Noninterest bearingdemand deposits

$
30,864,000



9.3
%

$
35,873,000



10.9
%

$
37,246,000



10.7
%Interest bearingdemand deposits


35,002,000



10.6



35,076,000



10.7



44,223,000



12.7Savings deposits


66,783,000



20.2



66,747,000



20.3



60,775,000



17.4Time deposits,under $100,000


168,236,000



50.9



161,112,000



49.0



167,563,000



48.0Time deposits,$100,000 or more


29,841,000



9.0



29,786,000



9.1



39,151,000



11.2Total Deposits

$
330,726,000



100.0
%

$
328,594,000



100.0
%

$
348,958,000



100.0
%
 
 The following table describes the maturity of time deposits of $100,000 or more at December 31, 2009:
 
 At December 31, 20093 months or less

$
24,871,000Over 3 months through 6 months


2,908,000Over 6 months through 12 months


1,226,000Over 1 year


836,000Total

$
29,841,000
 
 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, 2009, 2008 and 2007:
 
 Year Ended December 31, 2009Daily Average


Average


PercentBalance


Rate


of TotalInterest bearing demand deposits

$
41,959,000



0.3
%


12.2
%Savings deposits


66,818,000



1.1



19.5Time deposits


200,548,000



3.0



58.4Total interest-bearing deposits


309,325,000







90.1Noninterest-bearing demand deposits


33,452,000







9.9Total deposits

$
342,777,000







100.0
%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
%    F-14
    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
%
 
 Borrowings
 
 At December 31, 2009 and 2008, the Company had advances from the FHLB totaling $14.2 million and $16.0 million, respectively.  This decrease in advances was a result of scheduled maturities.  The advances, as of December 31, 2009, have maturities of less than four years and rates ranging from 3.43% to 4.25%.  These advances require the Company to pledge certain securities ($16,400,000 at December 31, 2009) in our investment portfolio to the FHLB, and these advances cannot be prepaid without penalty.
 
 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, 2009.  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.During the second, third and fourth quarters of 2009, the Company elected to defer the interest payments due.  Further, pursuant to the terms of the Agreement with the Regulators, the Company will not make any interest payments in the future without prior approval from the Regulators.   See Note 20, Written Agreement of the Notes to our Consolidated Financial Statements.
 
 Return on Equity and Assets
  At December 31,2009


2008


2007Loss on average assets


(2.68
)%


(4.14
)%


(0.12
)%Loss on average equity


(47.76
)%


(37.83
)%


(1.22
)%Dividend payout ratio


N/M



N/M



N/MAverage equity to average assets ratio


5.61
%


10.94
%


10.12
%
 
 N/M = Not meaningful
 
 
 F-15
   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, 2009, the Company had an aggregate availability of $39.2 million in secured and unsecured overnight lines of credit from its correspondent banks for the purchasing of federal funds.
 
 As of December 31, 2009, the Bank met all capital adequacy requirements and we believe we are “adequately capitalized” under the regulatory framework for prompt corrective action.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank’s capital levels do not allow the Bank to accept brokered deposits without prior approval from regulators.  As of December 31, 2009, the Bank did not have any brokered deposits.  Further, the Bank is subject to certain interest rate restrictions that can be paid for its deposits without prior approval from regulators.
 
 To be “well capitalized” under the regulatory framework for prompt corrective action, our Leverage, Tier I and Total Risk Based ratios must be at least 5.00%, 6.00% and 10.00%, respectively.  Our actual capital ratios, which we believe are sufficient for the Bank to be “adequately capitalized”, are presented in the following table:
 
 “Adequately Capitalized”

Actual at

December 31, 2009

Actual at

December 31, 2008

Actual at

December 31, 2007Leverage ratio (1)

4.00%

5.52%

7.21%

8.28%Tier I capital to risk-weighted assets

4.00%

7.36%

9.25%

10.21%Total capital to risk-weighted assets

8.00%

8.64%

10.52%

11.13%
 
 (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, 2009 and 2008, commitments to extend credit and unused lines of credit amounted to approximately $34.4 million and $45.4 million, respectively, and standby letters of credit were approximately $4.1 million and $5.0 million, respectively.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statements of financial condition.
 
 
 
 F-16
 
 
 
 
 
 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, 2009, the required future minimum rental payments under these leases are as follows:
 
 Years Ending December 31,2010

$
709,0002011


679,0002012


608,0002013


566,0002014


566,000Thereafter


3,434,000$
6,562,000
 
 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-17
 
  
 The following table summarizes repricing intervals for interest-earning assets and interest-bearing liabilities as of December 31, 2009, 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, 20093 months or less


Over 3 months through 1 year


Over 1 year through 3 years


Over 3 years through 5 years


Over 5 years through 15years


Over15 years


Total(In thousands)Interest-Earning Assets:Loans (1)

$
58,533


$
20,044


$
36,605


$
49,474


$
49,446


$
70,599


$
284,701Investment securities:Held-to-maturity


663



1,346



723



433



-



6,033



9,198Available-for-sale


976



2,395



1,736



3,394



17,498



7,947



33,946Restricted stock


1,866



-



-



-



-



-



1,866Federal funds sold


4,545



-



-



-



-



-



4,545Due from banks


101



-



-



-



-



-



101Total interest-earning assets

$
66,684


$
23,785


$
39,064


$
53,301


$
66,944


$
84,579


$
334,357Interest-Bearing Liabilities:Interest bearing demand accounts

$
35,002


$
-


$
-


$
-


$
-


$
-


$
35,002Savings accounts


66,783



-



-



-



-



-



66,783Time deposits


40,405



137,086



17,969



2,617



-



-



198,077Borrowings


-



2,250



10,686



7,500



-



-



20,436Total interest-bearing liabilities

$
142,190


$
139,336


$
28,655


$
10,117


$
-


$
-


$
320,298Interest rate sensitive gap

$
(75,506
)

$
(115,551
)

$
10,409


$
43,184


$
66,944


$
84,579


$
14,059Cumulative interest rate sensitive gap

$
(75,506
)

$
(191,057
)

$
(180,648
)

$
(137,464
)

$
(70,520
)

$
14,059Cumulative gap/Total assets


(20.4
%)


(51.7
%)


(48.9
%)


(37.2
%)


(19.1
%)


3.8
%
 _________________
 (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-18
  
 
 
 
 Report of 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, 2009 and 2008, 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, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
 
 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, 2009 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, 2010
 
 
 McGladrey & Pullen, LLP is a member firm of RSM International –
 an affiliation of separate and independent legal entities.
   
 F-19
   
 Sterling Banks, Inc. and SubsidiaryConsolidated Balance SheetsDecember  31, 2009 and 2008Assets

2009


2008Cash and cash due from banks

$
10,765,000


$
13,054,000Federal funds sold


4,545,000



472,000Cash and cash equivalents


15,310,000



13,526,000Investment securities held-to-maturity, at cost (fair value of $9,462,000and $19,992,000 at December 31, 2009 and 2008, respectively)


9,198,000



19,884,000Investment securities available-for-sale, at fair value


34,098,000



24,097,000Total investment securities


43,296,000



43,981,000Restricted stock, at cost


1,866,000



2,448,000Loans held for sale


-



2,000Loans


300,499,000



305,626,000Less: allowance for loan losses


(9,915,000
)


(8,531,000
)Net loans


290,584,000



297,095,000Core deposit intangible asset, net


1,978,000



2,374,000Premises and equipment, net


8,164,000



8,526,000Branch property held for sale


505,000



596,000Accrued interest receivable and other assets


8,098,000



10,557,000Total assets

$
369,801,000


$
379,105,000
   F-20
  
 Sterling Banks, Inc. and SubsidiaryConsolidated Balance SheetsDecember  31, 2009 and 2008Liabilities and Shareholders' Equity

2009


2008LiabilitiesDeposits:Noninterest-bearing

$
30,864,000


$
35,873,000Interest-bearing


299,862,000



292,721,000Total deposits


330,726,000



328,594,000Federal Home Loan Bank advances


14,250,000



16,000,000Subordinated debentures


6,186,000



6,186,000Accrued interest payable and other accrued liabilities


1,653,000



1,204,000Total liabilities


352,815,000



351,984,000Commitments and Contingencies (Notes 5, 7, 8, 15 and 20)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, 2009 and 2008


11,687,000



11,687,000Additional paid-in capital


29,841,000



29,767,000Accumulated deficit


(24,633,000
)


(14,279,000
)Accumulated other comprehensive income (loss)


91,000



(54,000
)Total shareholders' equity


16,986,000



27,121,000Total liabilities and shareholders' equity

$
369,801,000


$
379,105,000See Notes to Consolidated Financial Statements.
    F-21
 
 
 Sterling Banks, Inc. and SubsidiaryConsolidated Statements of OperationsYears Ended December 31, 2009 and 20082009


2008Interest and dividend incomeInterest and fees on loans

$
16,968,000


$
20,580,000Interest and dividends on securities


1,870,000



1,542,000Interest on due from banks


-



2,000Interest on Federal funds sold


20,000



176,000Total interest and dividend income


18,858,000



22,300,000Interest expenseInterest on deposits


6,807,000



8,944,000Interest on Federal Home Loan Bank advances and overnight borrowings


639,000



273,000Interest on subordinated debentures


424,000



417,000Total interest expense


7,870,000



9,634,000Net interest income


10,988,000



12,666,000Provision for loan losses


5,390,000



6,090,000Net interest income after provision for loan losses


5,598,000



6,576,000Noninterest incomeService charges


256,000



252,000Gains on sales of available-for-sale securities


5,000



95,000Gains on sales of premises and equipment


-



10,000Miscellaneous fees and other


496,000



632,000Total noninterest income


757,000



989,000Noninterest expensesCompensation and benefits


6,328,000



7,183,000Occupancy, equipment and data processing


3,595,000



3,670,000Marketing and business development


506,000



718,000Professional services


1,351,000



1,038,000Goodwill impairment losses


-



11,752,000FDIC insurance


1,174,000



390,000Amortization and impairment loss of core deposit intangible asset


396,000



822,000Impairment or disposal of fixed assets


75,000



-Losses on sales and impairment of repossessed property


125,000



34,000Other operating expenses


1,064,000



885,000Total noninterest expenses


14,614,000



26,492,000Loss before income tax expense (benefit)


(8,259,000
)


(18,927,000
)Income tax expense (benefit)


2,095,000



(2,699,000
)Net loss

$
(10,354,000
)

$
(16,228,000
)Net loss per common share:Basic and Diluted

$
(1.77
)

$
(2.78
)Weighted average shares outstanding:Basic and Diluted


5,843,000



5,843,000See Notes to Consolidated Financial Statements.
 
 
 
 F-22
 
 
 
 
 Sterling Banks, Inc. and SubsidiaryConsolidated Statements of Shareholders' EquityYears Ended December 31, 2009 and 2008Retained


AccumulatedAdditional


Earnings


Other


TotalCommon Stock


Paid-In


(Accumulated


Comprehensive


Shareholders'Shares


Amount


Capital


Deficit)


Income (Loss)


EquityDecember 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 income






















(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
)

$
27,121,000Comprehensive income:Net loss


-



-



-



(10,354,000
)


-



(10,354,000
)Change in net unrealized loss onsecurities available-for-sale, net ofreclassification adjustment and taxeffects


-



-



-



-



145,000



145,000Total comprehensive loss






















(10,209,000
)Stock compensation


-



-



74,000



-



-



74,000December 31, 2009


5,843,362


$
11,687,000


$
29,841,000


$
(24,633,000
)

$
91,000


$
16,986,000See Notes to Consolidated Financial Statements.
   F-23
    Sterling Banks, Inc. and SubsidiaryConsolidated Statements of Cash FlowsYears Ended December 31, 2009 and 20082009


2008Cash Flows From Operating ActivitiesNet loss

$
(10,354,000
)

$
(16,228,000
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization of premises and equipment


994,000



1,091,000Provision for loan losses


5,390,000



6,090,000Net amortization of purchase premiums on securities


385,000



80,000Net amortization and impairment loss of core deposit intangible


396,000



822,000Goodwill impairment charge


-



11,752,000Stock compensation


74,000



59,000Realized gain on sales or calls of securities available-for-sale


(5,000
)


(95,000
)Realized loss (gain) on sales, write down or retirement of buildings and equipment


75,000



(10,000
)Realized loss or write down of repossessed property


125,000



34,000Realized gain on loans held for sale


-



(12,000
)Deferred income tax expense (benefit)


3,616,000



(2,699,000
)Proceeds from sale of loans held for sale


2,000



1,072,000Originations of loans held for sale


-



(1,024,000
)Changes in operating assets and liabilities:Increase in accrued interest receivable and other assets


(1,076,000
)


(393,000
)Increase (Decrease) in accrued interest payable and other accrued liabilities


449,000



(329,000
)Net cash provided by operating activities


71,000



210,000Cash Flows From Investing ActivitiesPurchases of securities available-for-sale


(23,829,000
)


(10,564,000
)Purchases of securities held-to-maturity


-



(15,322,000
)Proceeds from sales or calls of securities available-for-sale


6,725,000



5,470,000Proceeds from maturities of securities available-for-sale


-



26,350,000Proceeds from maturities of securities held-to-maturity


169,000



-Proceeds from principal payments on mortgage-backed securities available-for-sale


7,203,000



2,787,000Proceeds from principal payments on mortgage-backed securities held-to-maturity


10,278,000



2,232,000Purchases of restricted stock


(219,000
)


(2,465,000
)Proceeds from sale of restricted stock


801,000



2,246,000Net (increase) decrease in loans


(523,000
)


6,134,000Proceeds from sales of other real estate owned


1,342,000



-Proceeds from sales of equipment


17,000



55,000Purchases of premises and equipment


(633,000
)


(507,000
)Cash paid for acquisition


-



(24,000
)Net cash provided by investing activities


1,331,000



16,392,000Cash Flows From Financing ActivitiesNet decrease in noninterest-bearing deposits


(5,009,000
)


(1,373,000
)Net increase (decrease) in interest-bearing deposits


7,141,000



(18,991,000
)Proceeds from Federal Home Loan Bank Advances


-



5,500,000Repayments of Federal Home Loan Bank Advances


(1,750,000
)


-Net cash provided by (used in) financing activities


382,000



(14,864,000
)Increase in cash and cash equivalents


1,784,000



1,738,000Cash and Cash Equivalents, beginning


13,526,000



11,788,000Cash and Cash Equivalents, ending

$
15,310,000


$
13,526,000Supplemental Disclosure of Cash Flow Information:Cash paid during the year for interest on deposits and borrowed funds

$
7,685,000


$
9,820,000Transfers of loans to other real estate owned

$
1,644,000


$
923,000See Notes to Consolidated Financial Statements.
   F-24
     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 that 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 is not consolidated because it does not meet the requirements.  All significant inter-company balances and transactions have been eliminated.
 
 Accounting Standards Codification:  The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009.  At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative.  The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
 
 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 earnings.  The Company has not held and does not intend to hold trading securities.
 
 
 F-25
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 1.   Description of Business and Summary of Significant Accounting Policies (Continued)
  At December 31, 2009 and 2008, 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, temporary losses, or non-credit related other-than-temporary losses reported as a separate component of other comprehensive income, net of the related income tax effect.
 
 Also, at December 31, 2009 and 2008, 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.”
 
 Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation.  Declines in the fair value of individual debt securities below their cost that are deemed to be other-than-temporary result in write-downs of the individual securities to their fair value.  Debt securities that are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses to the extent impairment is related to credit losses.  The amount of the impairment for debt securities related to other factors is recognized in other comprehensive income (loss).  In evaluating whether an impairment is temporary or other-than-temporary, management first considers whether the Company intends to sell the security or it is more-likely-than-not that the Company will be required to sell the security prior to recovery.  In these circumstances, the loss is determined to be other-than-temporary and the difference between the security’s fair value and its amortized cost is reflected as a loss in the statement of operations.
 
 If management does not intend to sell the security and likely will not be required to sell the security prior to the forecasted recovery, management evaluates whether it expects to recover the entire amortized cost of the debt security or if there is a credit loss.  In evaluating whether there is a credit loss, management considers various qualitative factors which include (1) the length of time and the extent to which the fair value has been less than cost, (2) the reasons for the decline in the fair value, and (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events.  If, based on an analysis of these factors, management concludes that there is a credit loss, management then calculates the expected cash flows and records a loss in earnings equal to the difference between the amortized cost of the debt security and the expected cash flows.  The portion of the decline in fair value that is due to factors other than credit loss is recognized in other comprehensive income.  No investment securities held by the Company as of December 31, 2009 and 2008 were subjected to a writedown due to credit related other-than-temporary impairment.
 
 Interest income from securities adjusted for the amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the contractual lives of the related securities.  Realized gains and losses, determined using the amortized cost value of the specific securities sold, are included in noninterest income in the statement of operations.
 
 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.
 
   F-26
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Note 1.   Description of Business and Summary of Significant Accounting Policies (Continued)
  Restricted stock has no quoted market value and is subject to redemption restrictions.  Management reviews for impairment based on the ultimate recoverability of the cost basis in the stock.  The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines.  Management considers such criteria as the significance of the decline in net assets, if any, of the companies, the length of time this situation has persisted, commitments by the companies to make payments required by law or regulation, the impact of legislative and regulatory changes on the customer base of the companies and the liquidity position of the companies.
 
 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.
 
 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.
   F-27
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Note 1.   Description of Business and Summary of Significant Accounting Policies (Continued)
 
 Various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses as an integral part of their examination process.  Such agencies may require the Company to recognize additions or reductions to the allowance based on their judgments of information available to them at the time of their examination.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
 
 The allowance consists of specific and general components.  The specific component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-impaired loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process.  Other qualitative adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
 
 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 under FASB ASC Topic 450, Contingencies.  Accordingly, the Company does not separately identify individual residential mortgage and consumer loans for impairment disclosures.
 
 Other Real Estate Owned:  Real estate acquired through foreclosure of loans is carried at the lower of cost or fair value less costs to sell, establishing a new cost basis.  After foreclosure, valuations are periodically performed by management and the assets continue to be carried at the lower of cost or fair value less estimated costs to sell.  Revenue and expenses from operations and changes from any direct write-downs as a result of periodic valuations are charged to operations.  Other real estate owned, included with other assets, was $1,100,000 and $923,000 at December 31, 2009, respectively.
 
 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 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-28
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 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.
 
 Branches Held for Sale:  The Company has one branch (Gaither Road) that is no longer in use and is being held for sale.   In 2009, impairment was identified on this location and a write down of $82,000 was recorded.
 
 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.  The Company recorded an impairment of its core deposit intangible asset in 2008.
 
 Core Deposit Intangibles:  Core deposit intangibles arise from purchase business combinations.  On March 16, 2007, we completed our merger with the former Farnsworth Bancorp, Inc.  We were deemed to be the purchaser for accounting purposes and thus recognized a core deposit intangible asset in connection with the merger.  The establishment and subsequent amortization of this intangible asset requires several assumptions including, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives.  If the value of the core deposit intangible or the customer relationship intangible is determined to be less than the carrying value in future periods, a write down would be taken through a charge to our earnings.  The most significant element in evaluation of these intangibles is the attrition rate of the acquired deposits.  If such attrition rate accelerates from that which we expected, the intangible is reduced by a charge to earnings.  The attrition rate related to deposit flows is influenced by many factors, the most significant of which are alternative yields for deposits available to customers and the level of competition from other financial institutions and financial services companies.  See Note 19 for further discussion.
   F-29
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 1.   Description of Business and Summary of Significant Accounting Policies (Continued)
 
 Income Taxes:  Deferred income taxes arise principally from the difference between the income tax basis of an asset or liability and its reported amount in the financial statements, at the statutory income tax rates expected to be in effect when the taxes are actually paid or recovered.  Deferred income tax assets are reduced by a valuation allowance when, based on the weight of evidence available, it is more likely than not that all or some portion of the net deferred tax assets may not be realized.
 
 When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions.  Tax positions that meet the more-likely-than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  It is the Company’s policy to recognize interest and penalties related to the unrecognized tax liabilities within income tax expense in the statements of operations.
 
 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 2009 and 2008 are as follows:
 
 2009


2008Unrealized holding gains on available-for-sale securities

$
246,000


$
65,000Reclassification adjustment for gains realized in income


(5,000
)


(95,000
)Net unrealized gains (losses)


241,000



(30,000
)Tax effect


96,000



(12,000
)Net-of-tax amount

$
145,000


$
(18,000
)
 
 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.
 
 Loss Per Common Share:  Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the year.  Diluted loss per common share considers common share equivalents (when dilutive) outstanding during each year.  Options to purchase common stock were excluded from the 2009 and 2008 computations because of the net losses incurred.
   F-30
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 1.   Description of Business and Summary of Significant Accounting Policies (Continued)
 
 Loss per common share has been computed based on the following for the years ended December 31, 2009 and 2008:
 
 2009


2008Net loss

$
(10,354,000
)

$
(16,228,000
)Average number of common shares outstanding


5,843,000



5,843,000Effect of dilutive options


-



-Average number of common shares outstanding used tocalculate diluted loss per common share


5,843,000



5,843,000
 
 Stock-Based Employee Compensation:  The Company has a stock-based employee compensation plan which is more fully described in Note 14.  The Company records compensation expense equal to the fair value of all equity-based compensation over the vesting period of each award.  The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards.
 
 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 core deposit intangible, the valuation of deferred tax assets and the fair value disclosures of financial instruments.
 
 Fair Value:  Effective January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurement, which provides a framework for measuring fair value under generally accepted accounting principles.  FASB ASC Topic 820 applies to all financial instruments that are being measured and reported on a fair value basis.  Nonfinancial assets and nonfinancial liabilities that are recognized and disclosed at fair value on a nonrecurring basis under FASB ASC Topic 820 were delayed to fiscal years beginning after November 15, 2008.  Accordingly, effective January 1, 2009, the Company began disclosing the fair value of Other Real Estate Owned (OREO) and branch property held for sale that was previously deferred under the provisions of this guidance.  See Note 16 for further discussion.
 
 Recent Accounting Pronouncements:
 
 FASB ASC Topic 260, Earnings Per Share
  On January 1, 2009, FASB ASC Topic 260, Earnings Per Share  became effective, and provides that unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and should be included in the computation of basic earnings per share using the two class method.  At December 31, 2009 the Company did not have any shares which were considered participating securities.
 
 
 F-31
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 1.  Description of Business and Summary of Significant Accounting Policies (Continued)
 
 FASB ASC Topic 320, Investments - Debt and Equity Securities
 
 FASB ASC Topic 320 provides new guidance on the recognition and presentation of an other-than-temporary impairment (“OTTI”) and requires additional disclosures.  The recognition provisions within this new guidance apply only to our debt securities classified as available-for-sale and held-to-maturity, while the presentation and disclosure requirements within this new guidance apply to both our debt and equity securities.  An impaired debt security will be considered other-than-temporarily impaired if we have the intent to sell or we will more likely than not be required to sell the security prior to recovery of the amortized cost.  In these situations the OTTI recognized in net income (loss) is equal to the difference between amortized cost and fair value.  If we do not expect recovery of the entire cost basis, even if we have no intention on selling the security, it will be considered an OTTI as well.  In this situation the new guidance requires that we recognize OTTI by separating the loss between the amount representing the credit loss and the amount relating to other factors.  Credit losses will be recognized in net income, and losses relating to other factors will be recognized in other comprehensive income (“OCI”).  FASB ASC Topic 320 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  FASB ASC Topic 320 requires a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption with a corresponding adjustment to accumulated OCI for that portion representing losses related to factors other than credit quality.  We adopted FASB ASC Topic 320 effective April 1, 2009.  The change in accounting principle had no impact on the recorded amounts in the consolidated financial statements.  The effects of the adoption of this new disclosure guidance are depicted in Note 3 – Investment Securities.
 
 FASB ASC Topic 820, Fair Value Measurements and Disclosures (Accounting Standards Update No. 2009-5)
 
 FASB ASC Topic 820 (Accounting Standards Update No. 2009-5) provides additional guidance on: a) determining when the volume and level of activity for the asset or liability has significantly decreased; b) identifying circumstances in which a transaction is not orderly; and c) understanding the fair value measurement implications of both (a) and (b).  This new guidance requires several new disclosures, including the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, in both interim and annual periods.  The Company adopted this new guidance on April 1, 2009.  Adoption of this new guidance did not have a significant impact on the Company’s financial position or results of operations.
 
 FASB ASC Topic 855, Subsequent Events
 
 New authoritative guidance under FASB ASC Topic 855, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued (i.e., complete in a form and format that complies with GAAP and approved for issuance).  However, FASB ASC Topic 855 does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions.
 
 There are two types of subsequent events to be evaluated under this Statement:
 
 Recognized subsequent events - An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.
   F-32
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 1.  Description of Business and Summary of Significant Accounting Policies (Continued)
 
 Non-recognized subsequent events - An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but that arose after the balance sheet date but before financial statements are issued or are available to be issued.  Some non-recognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading.  For such events, an entity must disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.
 
 FASB ASC Topic 855 is effective for interim and annual periods ending after June 15, 2009.  Accordingly, management has evaluated subsequent events through the date the financial statements were issued and determined, other than the events described in Note 21, no recognized or non-recognized subsequent events warranted inclusion or disclosure in the financial statements as of December 31, 2009.
 
 FASB ASC Topic 860, Transfers and Servicing
 
 New authoritative accounting guidance under FASB ASC Topic 860 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets.  The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period.  The new authoritative accounting guidance under ASC Topic 860 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.
  Note 2.   Cash and Due From Banks
  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 through 2013, 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 $2,898,000 and $3,962,000 at December 31, 2009 and 2008, respectively.
 
 
 
 
 F-33
 
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 3.   Investment Securities
  The Company’s investment securities as of December 31, 2009 were as follows:
 
 Gross


GrossAmortized


Unrealized


Unrealized


FairCost


Gains


Losses


ValueAvailable-for-saleU.S. Government agencies and corporations

$
8,092,000


$
61,000


$
(46,000
)

$
8,107,000Mortgage-backed securities


21,549,000



286,000



(222,000
)


21,613,000Municipal securities


4,305,000



73,000



-



4,378,000Total securities available-for-sale

$
33,946,000


$
420,000


$
(268,000
)

$
34,098,000Held-to-maturityU.S. Government agencies and corporations

$
100,000


$
-


$
-


$
100,000Mortgage-backed securities


9,098,000



264,000



-



9,362,000Total securities held-to-maturity

$
9,198,000


$
264,000


$
-


$
9,462,000
 
 The Company’s investment securities as of December 31, 2008 were as follows:
 
 Gross


GrossAmortized


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
 
 Mortgage-backed securities held by the Company consist of certificates that are guaranteed by an agency of the United States government.
 
 
 
 F-34
 
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Note 3.   Investment Securities (Continued)
  The amortized cost and estimated market value of debt securities at December 31, 2009 by contractual maturities are shown below.  Expected maturities may differ from contractual maturities for mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties; therefore, these securities are not included in the maturity categories in the following maturity schedule.
 
 December 31, 2009Available-for-sale


Held-to-maturityAmortized Cost


Fair Value


Amortized Cost


Fair ValueMaturing within one year

$
-


$
-


$
100,000


$
100,000Maturing after one year, but within five years


637,000



641,000



-



-Maturing after five years, but within ten years


8,852,000



8,876,000



-



-Maturing after ten years


2,908,000



2,968,000



-



-Mortgage-backed securities


21,549,000



21,613,000



9,098,000



9,362,000Total securities

$
33,946,000


$
34,098,000


$
9,198,000


$
9,462,000
 
 Proceeds from sales or calls of in­vestment securities available-for-sale during 2009 and 2008 were $6,725,000 and $5,470,000, respectively.  Gross gains of $5,000 and $95,000, respectively, were realized on those transactions.
 
 Securities with a carrying value of $27,464,000 and $20,445,000 were pledged to secure public deposits and Federal Home Loan Bank advances at December 31, 2009 and 2008, respectively.
 
 Included in “Interest and dividends on securities” in the Statements of Operations was $180,000 and $204,000 of tax-exempt interest income for 2009 and 2008, 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, 2009 is as follows:
 
 Continuous Unrealized Losses


Continuous Unrealized LossesExisting for Less Than 12 Months


Existing for More Than 12 MonthsUnrealized





UnrealizedFair Value


Losses


Fair Value


LossesAvailable-for-sale:U.S. Government agencies and corporations

$
3,954,000


$
(46,000
)

$
-


$
-Mortgage-backed securities


10,360,000



(222,000
)


-



-14,314,000



(268,000
)


-



-Held-to-maturity:Mortgage-backed securities


-



-



-



-Total temporarily impaired securities

$
14,314,000


$
(268,000
)

$
-


$
-
    F-35
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 3.   Investment Securities (Continued)
  At December 31, 2009, 2 U.S. Government agencies and corporations and 6 mortgage-backed securities were in an unrealized loss position.  At December 31, 2008, 32 mortgage-backed securities and 7 municipal securities were in an unrealized loss position.  Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and extent to which fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the Company intends to sell its investment in the issuer and (4) whether the Company will more likely than not be required to sell the investment before recovery of the cost basis, which may be maturity.  Management has evaluated the securities in an unrealized loss position as of December 31, 2009 and 2008 based upon the considerations noted above and believes that the unrealized losses in the securities portfolio are attributable to changes in market interest rates and are not credit related.  Therefore, unrealized losses in the portfolios are considered 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, 2008 is as follows:
 
 Continuous Unrealized Losses


Continuous Unrealized LossesExisting for Less Than 12 Months


Existing 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
)

$
-


$
-
 
 Note 4.   Loans
  The composition of net loans as of December 31, 2009 and 2008 are as follows:
 
 2009


2008Commercial, Financial and Agricultural

$
30,371,000


$
32,115,000Real Estate - Construction


41,558,000



68,278,000Real Estate – Mortgage


171,465,000



147,435,000Installment loans to individuals


50,453,000



53,827,000Lease Financing


7,291,000



4,636,000Unrealized Loan Fees


(639,000
)


(665,000
)Total loans


300,499,000



305,626,000Less:  allowance for loan losses


(9,915,000
)


(8,531,000
)Net loans

$
290,584,000


$
297,095,000
   F-36
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 5.   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 2009 and 2008 is as follows:
 
 2009


2008Balance, beginning of year

$
4,924,000


$
4,268,000Additions


784,000



3,606,000Payments


(548,000
)


(1,144,000
)Reclassification as non-related party


(2,743,000
)


(1,806,000
)Balance, end of year

$
2,417,000


$
4,924,000
 
 At December 31, 2009 and 2008, 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, 2009 and 2008, commitments to extend credit and unused lines of credit amounted to approximately $683,000 and $1,133,000, respectively.  Standby letters of credit were approximately $68,000 and $20,000 as of December 31, 2009 and 2008, respectively.  These amounts are included in loan commitments and standby letters of credit (Note 7).
 
 Note 6.   Allowance for Loan Losses
  Changes in the allowance for loan losses for the years ended December 31, 2009 and 2008 are as follows:
 
 2009


2008Balance, beginning of year

$
8,531,000


$
2,891,000Provision for loan losses


5,390,000



6,090,000Loans charged off


(4,172,000
)


(463,000
)Recoveries of loans previously charged off


166,000



13,000Balance, end of year

$
9,915,000


$
8,531,000
 
 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, 2009 and 2008, the carrying value of impaired loans was $26,725,000 and $17,694,000, respectively.  The average recorded investment in impaired loans during 2009 and 2008 was $23,215,000 and $10,348,000, 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 $684,000 and $2,802,000 were included in the allowance for loan losses at December 31, 2009 and 2008, for impaired loans totaling $2,634,000 and $11,881,000, respectively.
   F-37
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Note 6.   Allowance for Loan Losses (Continued)
  Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction of the interest rate on the loan, payment extensions, forbearance, or other actions intended to maximize collection.  At December 31, 2009 and 2008, troubled debt restructurings were $6,236,000 and $642,000, respectively, exclusive of those that became non-accrual.  Loans past due 90 days or more and still accruing interest were $634,000 and $2,707,000 at December 31, 2009 and 2008, respectively.  Total non-accruing loans, included in impaired loans, were $16,437,000 and $9,895,000 at December 31, 2009 and 2008, respectively.  Interest income on impaired loans amounted to $1,020,000 in 2009 and $655,000 in 2008.  Interest income was not recognized on a cash basis for any loan on nonaccrual in 2009 and 2008.
 
 Note 7.   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, 2009 and 2008, commitments to extend credit and unused lines of credit amounted to approximately $34,360,000 and $45,413,000, respectively, and standby letters of credit were approximately $4,134,000 and $4,997,000, respectively.  During 2009 and 2008, 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 8.   Premises and Equipment
  Premises and equipment at December 31, 2009 and 2008 consisted of the following:
 
 2009


2008Land

$
1,328,000


$
1,328,000Premises and leasehold improvements


9,012,000



8,551,000Furniture and equipment


4,513,000



4,647,000Total premises and equipment, at cost


14,853,000



14,526,000Less: accumulated depreciation and amortization


(6,689,000
)


(6,000,000
)Premises and equipment, net

$
8,164,000


$
8,526,000
 
    F-38
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 8.   Premises and Equipment (Continued)
  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, 2009, the required future minimum rental payment under these leases is as follows:
 
 Years Ending December 31,2010

$
709,0002011


679,0002012


608,0002013


566,0002014


566,000Thereafter


3,434,000$
6,562,000
 
 Rent expense was $794,000 and $767,000 in 2009 and 2008, respectively.
 
 Note 9.   Deposits
  Deposits at December 31, 2009 and 2008 consisted of the following:
 
 2009


2008Noninterest bearing demand deposits

$
30,864,000


$
35,873,000Interest bearing demand deposits


35,002,000



35,076,000Savings deposits


66,783,000



66,747,000Time deposits of $100,000 or more


29,841,000



29,786,000Other time deposits


168,236,000



161,112,000Total deposits

$
330,726,000


$
328,594,000
 
 At December 31, 2009, the scheduled maturities of time deposits are as follows:
 
 Years Ending December 31,2010

$
177,491,0002011


16,807,0002012


1,162,0002013


725,0002014


1,892,000$
198,077,000
 
 Interest expense on time deposits of $100,000 or more was approximately $811,000 and $1,108,000 for the years ended December 31, 2009 and 2008, respectively.
   F-39
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 10. 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, 2009 and 2008, there were $14,250,000 and $16,000,000, respectively, in advances outstanding.
 
 Borrowed funds outstanding at December 31, 2009 mature in 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 3.43% 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, 2009 and 2008, investment securities with a carrying value of $16,388,000 and $18,400,000 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, 2009 and 2008.  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.During the second, third and fourth quarters of 2009, the Company elected to defer the interest payments due.  Further, pursuant to the terms of the Agreement with the Regulators, the Company will not make any interest payments in the future without prior approval from the Regulators (Note 20).
 
 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, 2009 and 2008, the aggregate availability under such lines of credit was $39,228,000 and $89,688,000, respectively.
 
 Note 11. Shareholders’ Equity
  Sterling Banks, Inc. was incorporated in 2006 for the sole purpose of becoming the holding company for the Bank.  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.
 
 The Company did not pay a cash dividend in either 2009 or 2008.
   F-40
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Note 11. Shareholders’ Equity (Continued)
  During 2009 and 2008, no stock options were exercised.
 
 Note 12. Income Taxes
  Income tax expense (benefit) for the years ended December 31, 2009 and 2008 consisted of the following:
 
 2009


2008Current tax expenseFederal

$
(1,521,000
)

$
-State


-



-Deferred tax expense (benefit)


3,616,000



(2,699,000
)$
2,095,000


$
(2,699,000
)
 
 Income tax expense (benefit) differs from the expected statutory amount principally due to the deferred tax asset valuation allowance, a nondeductible goodwill impairment charge in 2008 and non-taxable interest income earned by the Company.  A reconciliation of the Company’s effective income tax rate with the Federal rate for the years ended 2009 and 2008 is as follows:
 
 2009


2008Tax benefit at statutory rate (35%)

$
(2,890,000
)

$
(6,624,000
)Tax free interest income


(55,000
)


(71,000
)Goodwill impairment


-



3,996,000Other, net


187,000



(195,000
)State income taxes, net of federal tax benefit


(444,000
)


6,000Valuation allowance recorded


5,214,000



-Benefit of income taxed at lower rates


83,000



189,000$
2,095,000


$
(2,699,000
)
 
 
 F-41
 
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 12. 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, 2009 and 2008, are as follows:
 
 Deferred tax assets:

2009


2008Net operating loss carryforwards

$
2,058,000


$
1,649,000Allowance for loan losses


3,569,000



3,282,000Premises and equipment


46,000



41,000Net unrealized loss on securities available for sale


-



35,000Stock compensation


68,000



38,000Interest on nonaccrual loans


825,000



300,000Total deferred tax asset


6,566,000



5,345,000Valuation allowance


(5,214,000
)


-Total deferred tax asset, net of valuation allowance


1,352,000



5,345,000Deferred tax liabilities:Net unrealized gain on securities available for sale


61,000



-Core deposit intangible and loan premium


531,000



634,000Deferred loan cost


4,000



48,000Other


60,000



255,000Total deferred tax liabilities


656,000



937,000Net deferred tax asset

$
696,000


$
4,408,000
 
 During 2009, the Company updated its analysis of whether a valuation allowance should be recorded against its deferred tax assets.  Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized.  The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence.  In making such judgments, significant weight is given to evidence that can be objectively verified.  Cumulative and continued near-term losses represent significant negative evidence that caused the Company to conclude that a $5.2 million deferred tax valuation allowance was required because the Company has determined it can no longer meet the more likely than not threshold for recognizing this asset.
 
 To the extent that the Company generates taxable income in a given year, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense.  Any remaining deferred tax asset valuation allowance will ultimately reverse through income tax expense when the Company can demonstrate a sustainable return to profitability that would lead management to conclude that it is more likely than not that the deferred tax asset will be utilized during the carryforward period.
   F-42
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 12. Income Taxes (Continued)
  At December 31, 2009, the Company had a $4,000,000 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 of Farnsworth Bancorp in 2007 and which are subject to certain income tax limitations.
 
 The Company did not recognize any interest or penalties related to income tax during the years ended December 31, 2009 or 2008 and did not accrue interest or penalties.  The Company does not have an accrual for uncertain tax positions as of December 31, 2009 or 2008, 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 all years 2006 and thereafter are subject to further examination by tax authorities.
 
 Note 13. 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.
 
 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, 2009 and 2008, that the Bank met all capital adequacy requirements to which it is subject.
 
 As of December 31, 2009, management believes the Bank is adequately capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events that management believes have changed the Bank’s category.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank’s capital levels do not allow the Bank to accept brokered deposits without prior approval from regulators.  As of December 31, 2009, the Bank did not have any brokered deposits.  Further, the Bank is subject to certain interest rate restrictions that can be paid for its deposits without prior approval from regulators.
 
 
 
 F-43
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 13. Regulatory Matters (Continued)
 
 At December 31, 2009, 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)

$
24,553,000



8.64
%
>

$
22,733,000

>


8.0
%
>

$
28,416,000

>


10.0
%Tier 1 Capital(To Risk Weighted Assets)

$
20,922,000



7.36
%
>

$
11,367,000

>


4.0
%
>

$
17,050,000

>


6.0
%Tier 1 Capital(to Average Assets)

$
20,922,000



5.52
%
>

$
15,149,000

>


4.0
%
>

$
18,937,000

>


5.0
%
 
 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
%
 
 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 2009 and 2008, no cash dividends were declared and paid.
 
 Note 14. 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, may be matched in part at the discretion of the Company.  Employee and matching contributions are immediately vested.  During 2009 and 2008, the Company made $24,000 and $114,000, 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 2009 or 2008.
 
 
 F-44
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 14. Benefit Plans (Continued)
  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 35,107 shares of common stock for the Employee Plan and 26,982 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 10,847 options remaining available for grant as of December 31, 2009.
 
 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 29,000 options remaining available for grants, respectively, as of December 31, 2009.
 
 Information regarding stock options outstanding at December 31, 2009 and 2008 is as follows:
 
 Number


Weighted Average

Weighted Average

Remaining

Aggregateof Shares


Exercise Price

Contractual Term

Intrinsic ValueOutstanding, December 31, 2007


518,168


$
8.43Granted


175,200


$
3.92Expired/terminated


(88,193
)

$
7.75Exercised


-



-Outstanding, December 31, 2008


605,175


$
7.22Granted


-



-Expired/terminated


(38,537
)

$
7.57Exercised


-


$
-Outstanding, December 31, 2009


566,638


$
7.20

6.1 years

$
-Exercisable at December 31, 2009


311,248


$
8.15

4.6 years

$
-
 
 During 2009 and 2008, the number of options that vested was 29,954 and 15,191, respectively.
 
 
 F-45
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 14. Benefit Plans (Continued)
  A summary of unvested stock options outstanding at December 31, 2009 is as follows:
 
 Weighted AverageGrant DateShares


Fair ValueUnvested stock options:Outstanding 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


$
2.11Granted


-


$
-Vested


(29,954
)

$
2.19Exercised/forfeited


(11,640
)

$
2.26Outstanding at December 31, 2009


255,390


$
2.10
 
 The Company did not award any stock options in 2009.  In 2008, the Company granted 175,200 options with an average exercise price of $3.92 to employees and directors that vest in equal annual installments over ten years.  The Company used the Black-Scholes option pricing model in determining the grant date fair value of 2008 awards.  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.  The fair values of options granted in 2008 were estimated at the date of grant based on the following assumptions: risk free interest rate of 4.1%, volatility of 23%, expected life of options of 9 years, and expected dividend yield of 0.0%.
 
 The Company recognized $74,000 and $59,000 in compensation costs in 2009 and 2008, respectively, related to stock options.  As of December 31, 2009, there was approximately $559,000 of total unrecognized compensation cost related to stock option awards which is expected to be recognized over a weighted average period of 8.1 years.
 
 Note 15. 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.
   F-46
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
 Note 15. Commitments and Contingencies (Continued)
  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, 2009, the Company was not a party to any material legal proceedings.
 
 Note 16. Fair Value Measurements
  FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable.  The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in valuation techniques the Company is required to provide the following information according to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
 
 Financial assets and liabilities carried at fair value will be classified and disclosed as follows:
 
 Level 1  Inputs
 ·
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 ·
Generally, this includes debt and equity securities traded in an active exchange market (i.e. New York Stock Exchange), as well as certain US Treasury and US Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.
 
 Level 2 Inputs
 · Quoted prices for similar assets or liabilities in active markets.
 · Quoted prices for identical or similar assets or liabilities in markets that are not active.
 ·
Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”
 ·
Generally, this includes US Government and agency mortgage-backed securities, corporate debt securities, and loans held for sale.
 
 Level 3 Inputs
 ·
Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.
 ·
These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
   F-47
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 16. Fair Value Measurements (Continued)
  Fair Value on a Recurring Basis
 
 Certain assets and liabilities are measured at fair value on a recurring basis.  The following tables present the assets and liabilities carried on the balance sheet by caption and by level within the FASB ASC Topic 820 hierarchy (as described above) as of December 31, 2009 and 2008.
 
 2009

Level 1


Level 2


Level 3


TotalFinancial AssetsInvestment securities available-for-saleU.S. Government agencies and

Corporations

$
-


$
8,107,000


$
-


$
8,107,000Mortgage-backed securities

$
-


$
21,613,000


$
-


$
21,613,000Municipal securities

$
-


$
4,378,000


$
-


$
4,378,000
 
 2008

Level 1


Level 2


Level 3


TotalFinancial AssetsInvestment securities available-for-saleU.S. Government agencies and

Corporations

$
-


$
4,028,000


$
-


$
4,028,000Mortgage-backed securities

$
-


$
15,297,000


$
-


$
15,297,000Municipal securities

$
-


$
4,772,000


$
-


$
4,772,000
 
 Securities Portfolio
 
 The fair value of securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (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 tables present the assets and liabilities carried on the balance sheet by caption and by level within the FASB ASC Topic 820 hierarchy (as described above) as of December 31, 2009 and 2008.
 
 2009

Level 1


Level 2


Level 3


TotalFinancial AssetsImpaired loans

$
-


$
-


$
26,725,000


$
26,725,000
 
 2008

Level 1


Level 2


Level 3


TotalFinancial AssetsImpaired loans

$
-


$
-


$
17,694,000


$
17,694,000
   F-48
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Note 16. Fair Value Measurements (Continued)
  2009

Level 1


Level 2


Level 3


TotalNon-Financial AssetsOther real estate owned

$
-


$
-


$
1,100,000


$
1,100,000Branch held for sale

$
-


$
-


$
505,000


$
505,000
 
 Impaired Loans
 
 The carrying value of impaired loans is derived in accordance with FASB ASC Topic 310, “Receivables”.  Fair value is determined based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.  Appraised and reported values may be discounted based on management’s historical knowledge and changes in market conditions from the time of valuation.  The valuation allowance for impaired loans is included in the allowance for loan losses in the balance sheets. The valuation allowances for impaired loans at December 31, 2009 and 2008 were $684,000 and $2,802,000, respectively.  During the twelve months ended December 31, 2009, the valuation allowance for impaired loans decreased $2,118,000 from $2,802,000 at December 31, 2008 as a result of loans being collected or charged off in full or in part.
 
 Other Real Estate Owned and Branch Held For Sale
 
 Foreclosed real estate and branch held for sale are carried at fair value, less estimated costs to sell.  The fair value was determined using appraisals or other sources of market value.  Discounts are based on management’s review and changes in market conditions (Level 3 inputs).
 
 Fair Value of Financial Instruments (FASB ASC Topic 825 Disclosure)
 
 FASB ASC Topic 825, Disclosures About Fair Value of Financial Instruments, requires the disclosure of the estimated fair value of financial instruments, including those financial instruments for which the Company did not elect the fair value option.  The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.
 
 The following methods and assumptions were used to estimate the fair value under FASB ASC Topic 825 of each class of financial instruments.
 
 Cash and Cash Equivalents:  The carrying amounts of cash and due from banks and federal funds sold approximate fair value.
 
 Investment Securities Held-to-Maturity:  The fair value of securities held-to-maturity is based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.  These financial instruments are not carried at fair value on a recurring basis.
 
 Restricted Stock:  The carrying value of restricted stock approximates fair value based on redemption provisions.
 
 Loans (except collateral dependent impaired loans):  Fair values are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, residential mortgage and other consumer.  Each loan category is further segmented into groups by fixed and adjustable rate interest terms and by performing and non-performing categories.
   F-49
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 16. Fair Value Measurements (Continued)
  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.
 
 Accrued Interest Receivable and Payable:  The fair value of interest receivable and payable is estimated to approximate the carrying amounts.
 
 Deposits:  In accordance with the FASB ASC Topic 825, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand.  The fair value of time deposits is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.
 
 Borrowed Funds:  The fair value of borrowings is calculated by discounting scheduled cash flows through the estimated maturity date using current market rates.
 
 
 F-50
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 16.   Fair Value Measurements (Continued)
 
 Estimated Fair Values:  The estimated fair values of the Company’s material financial instruments as of December 31, 2009 are as follows:
 
 Carrying Value


Fair ValueFinancial Assets:Cash and due from banks

$
10,765,000


$
10,765,000Federal funds sold

$
4,545,000


$
4,545,000Investment securities, held-to-maturity

$
9,198,000


$
9,462,000Investment securities, available-for-sale

$
34,098,000


$
34,098,000Restricted stock

$
1,886,000


$
1,886,000Loans, net of allowance for loan losses

$
290,584,000


$
288,668,000Accrued interest receivable

$
1,290,000


$
1,290,000Financial Liabilities:Noninterest-bearing demand deposits

$
30,864,000


$
30,864,000Interest-bearing deposits

$
299,862,000


$
293,361,000Borrowed funds

$
20,436,000


$
17,988,000Accrued interest payable

$
612,000


$
612,000
 
 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-51
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 16.  Fair Value Measurements (Continued)
 
 The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, and, as the fair value for these financial instruments is not material, these disclosures are not included above.
 
 Limitations:  Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments.  These estimates do not reflect any premium or discount which could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
 
 Fair value estimates are provided for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates, and have generally not been considered in the Company’s estimates.
 
 Note 17. 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 31,2009Interest income

$
4,592,000


$
4,764,000


$
4,791,000


$
4,711,000Interest expense


1,628,000



1,902,000



2,124,000



2,216,000Net interest income


2,964,000



2,862,000



2,667,000



2,495,000Provision for loan losses


-



-



5,390,000



-Noninterest income


175,000



177,000



174,000



231,000Noninterest expenses


3,591,000



3,618,000



3,966,000



3,439,000Loss before income tax expense (benefit)


(452,000
)


(579,000
)


(6,515,000
)


(713,000
)Income tax expense (benefit)


(816,000
)


-



3,175,000



(264,000
)Net income (loss)

$
364,000


$
(579,000
)

$
(9,690,000
)

$
(449,000
)Net income (loss) per common share:Basic and Diluted

$
0.06


$
(0.09
)

$
(1.66
)

$
(0.08
)
 
 
 F-52
 
 
 
 Note 17. Quarterly Financial Data (unaudited) (Continued)
  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


194,000



283,000



208,000



304,000Noninterest expenses


15,904,000



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 and Diluted

$
(2.71
)

$
0.01


$
(0.07
)

$
(0.01
)
 
 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 18. 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 31,2009


2008AssetsCash and cash equivalents

$
353,000


$
840,000Investment in subsidiary


23,177,000



32,236,000Other assets


10,000



262,000Total assets

$
23,540,000


$
33,338,000Liabilities and Shareholders' EquitySubordinated debentures

$
6,186,000


$
6,186,000Other liabilities


368,000



31,000Shareholders’ equity


16,986,000



27,121,000Total liabilities and shareholders’ equity

$
23,540,000


$
33,338,000
   F-53
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 18. Parent Company Only Financial Statements (Continued)
  Statement of OperationsYear Ended


Year EndedDecember 31,


December 31,2009


2008IncomeDividends from subsidiaries

$
13,000


$
13,000Total income

$
13,000


$
13,000ExpensesInterest on subordinated debentures


424,000



417,000Other expenses


285,000



280,000Total expenses


709,000



697,000Loss before income tax expense (benefit)


(696,000
)


(684,000
)Income tax expense (benefit)


54,000



(232,000
)Equity in undistributed loss of subsidiary


(9,604,000
)


(15,776,000
)Net loss

$
(10,354,000
)

$
(16,228,000
)
 
 Statement of Cash FlowsYear Ended


Year EndedDecember 31,


December 31,2009


2008Cash Flows From Operating ActivitiesNet loss

$
(10,354,000
)

$
(16,228,000
)Adjustments to reconcile net loss to net cash used in operating activities:Stock compensation


74,000



59,000Equity in undistributed loss of subsidiary


9,604,000



15,776,000Changes in operating assets and liabilities:Decrease (Increase) in accrued interest receivable and other assets


252,000



(230,000
)Increase (Decrease) in accrued interest payable and other accrued liabilities


337,000



(15,000
)Net cash used in operating activities


(87,000
)


(638,000
)Cash Flows From Investing ActivitiesPayments for investment in subsidiaries


(400,000
)


-Net cash used in investing activities


(400,000
)


-Cash Flows From Financing ActivitiesDividends paid


-



-Proceeds from issuance of subordinated debentures


-



-Net cash provided by financing activities


-



-Decrease in cash and cash equivalents


(487,000
)


(638,000
)Cash and Cash Equivalents, beginning


840,000



1,478,000Cash and Cash Equivalents, ending

$
353,000


$
840,000
  
 F-54
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 19. 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.  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 had been recorded and carried on the balance sheet from the Farnsworth merger.  As a result, no goodwill was recorded as of December 31, 2009 or 2008.
 
 Intangible assets are core deposit intangibles which amounted to approximately $2.0 million and $2.4 million at December 31, 2009 and 2008, 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 done in the fourth quarter of 2008, 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.
 
 During the fourth quarter of 2009, we assessed the carrying value of the core deposit intangible and determined that the value of the core deposit intangible was at or above its carrying value; accordingly, its carrying value and remaining life have not been further adjusted.
 
 The activity for the core deposit intangible asset is depicted below:
 
 2009


2008Balance beginning of year

$
2,374,000


$
3,196,000Amortization expense


(396,000
)


(347,000
)Impairment charge


-



(475,000
)Balance end of year

$
1,978,000


$
2,374,000
 
 Amortization expense for the core deposit intangible is expected to be $396,000 for each of the years 2010 through 2013 and $394,000 for 2014.
   F-55
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note 20.  Written Agreement
  On July 28, 2009, the Company and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia and the New Jersey Department of Banking and Insurance (collectively, the “Regulators”).  The Agreement is based on findings of the Regulators identified in an examination of the Bank that commenced on January 5, 2009.
  Under the terms of the Agreement, the Bank agreed, among other things, to engage, within 30 days of the Agreement, an independent consultant acceptable to the Regulators to assess the Bank’s staffing needs and the qualifications and performance of all senior executive officers of the Bank and to prepare a written report. Within 45 days of receipt of such report, the Bank agreed to submit to the Regulators a written management plan addressing the findings of the report.  In addition, within 60 days of the Agreement, the Bank will submit to the Regulators written plans to: strengthen board oversight of the management and operation of the Bank; strengthen the Bank’s management of commercial real estate; strengthen lending and credit administration, which includes a prohibition on the capitalization of interest; improve the periodic review and grading of the Bank’s loan portfolio; improve the Bank’s position regarding past due loans, problem loans, adversely classified loans; improve the Bank’s internal audit program; maintain sufficient capital at the Bank; improve the Bank’s earnings; improve management of the Bank’s liquidity position; and correct criticisms detailed in the Regulators’ examination report of the Bank’s compliance with all federal laws relating to anti-money laundering. The Bank has also agreed to maintain an adequate allowance for loan and lease losses; charge-off or collect assets classified as “loss” in the Regulators’ examination report that have not been previously collected or charged off, and not to extend or renew any credit to or for the benefit of any borrower who is obligated to the Bank on an extension of credit that has been charged off or classified as “loss” in the Regulators’ examination report.  Under the Agreement, neither the Company nor Bank is permitted to declare or pay any dividends.  The Company has also agreed not to distribute any interest, principal or other sums on trust preferred securities; issue, increase or guarantee any debt; nor purchase or redeem any shares of the Company’s stock.
  Pursuant to the Agreement, the Board of Directors of the Company and the Bank appointed a joint Compliance Committee to monitor and coordinate the Company’s and the Bank’s compliance with the provisions of the Agreement, to obtain prior approval for the appointment of new directors, to approve the hiring or change in responsibilities of senior executive officers, and to comply with restrictions on severance payments and indemnification payments to institution affiliated parties. Failure to comply with the provisions of the Agreement could subject the Company and/or the Bank to additional enforcement actions. We believe that the Company and or the Bank have already implemented or are acting in accordance with most of the requirements of the Agreement, and we intend to take such actions as may be necessary to enable the Company and or the Bank to comply with the remaining requirements of the Agreement.  However, there can be no assurance that the Company and or the Bank will be able to comply fully with the provisions of the Agreement, or that efforts to comply with the Agreement will not have adverse effects on the operations and financial condition of the Company or the Bank.
  The Agreement does not affect the Bank’s ability to continue to conduct its banking business with customers in a normal fashion.  The Bank’s deposits will remain insured by the FDIC to the maximum limits allowed by law.  The Agreement will remain effective and enforceable until stayed, modified, terminated or suspended in writing by the Regulators.
   F-56
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Note 21.   Subsequent Event
  On March 18, 2010, the Company announced that the Board of Directors approved an Agreement and Plan of Merger providing for the Company to merge with and into a subsidiary of Roma Financial in exchange for a cash payment.  Under the terms of the merger agreement, which has been approved by the boards of directors of both companies, Roma Financial will acquire all of the outstanding shares of the Company for a total purchase price of approximately $14.7 million in cash, or $2.52 per share for each share of common stock outstanding.  It is expected that the merger will be consummated in the third quarter of 2010.
  The transaction is subject to certain conditions, including requisite regulatory approval, the approval of the Company’s stockholders, and the Company maintaining its financial condition through the closing such that the Company’s nonperforming assets, inclusive of troubled debt restructurings, do not exceed $30.0 million for the period from January 1, 2010 through the Closing Date, and the Company’s tangible common equity capital being not less than $9.9 million on the Closing Date.  At December 31, 2009, Sterling's tangible common equity capital was $15.0 million, and its non-performing assets, inclusive of troubled debt restructurings, were $24.4 million.
  In the event that the Company is unsuccessful in completing the Plan of Merger with Roma, the Company may pursue other opportunities including seeking a new acquirer, raising capital externally, such as through a public offering or private placement, and/or raising capital internally, such as the selling of assets and/or cutting costs in an effort to increase earnings.
  
    F-57