UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 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 Code


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

Title of Each Class		Name of Each Exchange on Which Registered
Common 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. YES X NO __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 filer o

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.

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.

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.

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.

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		2005
Commercial, Financial and Agricultural	$	30,371,000	$	32,115,000	$	30,209,000	$	29,097,000	$	30,443,000
Real Estate – Construction		41,558,000		68,278,000		80,486,000		85,902,000		77,499,000
Real Estate – Mortgage		171,465,000		147,435,000		141,237,000		73,666,000		72,020,000
Installment loans to individuals		50,453,000		53,827,000		52,291,000		45,179,000		38,714,000
Lease Financing		7,291,000		4,636,000		8,345,000		9,439,000		6,662,000
Total 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		Total
Commercial, Financial and Agricultural	$	16,879,000	$	11,175,000	$	2,317,000	$	30,371,000
Real Estate - Construction		40,727,000		831,000		-		41,558,000
Real Estate – Mortgage		8,299,000		28,212,000		134,954,000		171,465,000
Installment loans to individuals		375,000		1,299,000		48,779,000		50,453,000
Lease Financing		461,000		6,830,000		-		7,291,000
Total 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		Total
Commercial, Financial and Agricultural	$	9,794,000	$	3,698,000	$	13,492,000
Real Estate - Construction		631,000		200,000		831,000
Real Estate – Mortgage		143,925,000		19,241,000		163,166,000
Installment loans to individuals		50,078,000		-		50,078,000
Lease Financing		6,830,000		-		6,830,000
Total	$	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.

Commercial loans are often larger and may involve greater risks than other types of lending. Because payments on such 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.

Construction loans involve additional risks because loan funds are advanced based on the 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.

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.

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.

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

	At December 31,
	2009			2008			2007
Amount outstanding at year end	$	20,436,000		$	22,186,000		$	16,700,000
Weighted average interest rate at year end		4.9	%		4.8	%		5.0	%
Maximum outstanding at any month end	$	22,186,000		$	22,186,000		$	16,700,000
Average outstanding	$	21,962,000		$	12,975,000		$	6,327,000
Weighted 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.

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.

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.

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.

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.

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.

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.

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.

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

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

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

In addition to the financial strength and cash flow characteristics of the borrower in each case, we often secure our loans with real estate collateral. As of December 31, 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.

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.

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.

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.

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.

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.

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.

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 Market
Year	Quarter	High price	Low price
2009	4th	$1.52	$0.42
	3rd	1.80	1.08
	2nd	3.39	0.70
	1st	1.63	0.50
2008	4th	$3.50	$0.88
	3rd	5.50	2.49
	2nd	5.54	2.90
	1st	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.

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.

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.

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.

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

Name	Director Since (1)	Position Held With Us
S. David Brandt, Esq. (2) (3) (5) (8)	1990	Director

Jeffrey Dubrow (7)	1990	Director

A. Theodore Eckenhoff (2) (3) (5) (8)	1990	Chairman of the Board, Director

R. Scott Horner (6) (7)	1998	Executive Vice President and Chief Financial Officer, Director

James L. Kaltenbach, M.D. (2) (4) (6) (7)	1992	Director

Robert H. King (2) (3) (6) (7)	1993	President and Chief Executive Officer, Director

G. Edward Koenig, Jr. (3) (7)	2007	Director

John J. Maley, Jr., CPA (2) (3) (4)	2007	Director

Ronald P. Sandmeyer (2) (3) (4) (8)	1990	Director

Jeffrey P. Taylor (2) (4) (5)	1990	Director

James 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.

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.

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.

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

· 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”).

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		Total
Robert H. King, President and Chief Executive Officer	2009	$	210,097	$	-	$	-	$	-	$	-	$	-	$	271 (5)	$	210,368
Robert H. King, President and Chief Executive Officer	2008	$	214,424	$	-	$	-	$	28,600 (2)	$	12,077	$	-	$	338 (5)	$	255,439
John Herninko, Executive Vice President and Senior Loan Officer	2009	$	136,315	$	-	$	-	$	-	$	-	$	-	$	967 (5)	$	137,282
	2008	$	137,923	$	-	$	-	$	21,450 (3)	$	10,749	$	-	$	4,307 (5)	$	174,429
R. Scott Horner, Executive Vice President and Chief Financial Officer	2009	$	135,303	$	-	$	-	$	-	$	-	$	-	$	970 (5)	$	136,273
	2008	$	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.

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.

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.

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.

Outstanding Equity Awards at Fiscal Year End

	OPTION AWARDS								STOCK AWARDS
Name	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 Vested
Robert 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

(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		Total
S. David Brandt, Esq.	$	7,425	$	-	$	-	$	-	$	-	$	-	$	7,425
Jeffrey Dubrow	$	7,875	$	-	$	-	$	-	$	-	$	-	$	7,875
A. Theodore Eckenhoff	$	14,100	$	-	$	-	$	-	$	-	$	-	$	14,100
James L. Kaltenbach, M.D.	$	12,975	$	-	$	-	$	-	$	-	$	-	$	12,975
G. Edward Koenig	$	12,900	$	-	$	-	$	-	$	-	$	-	$	12,900
John J. Maley, Jr., CPA	$	12,675	$	-	$	-	$	-	$	-	$	-	$	12,675
Ronald P. Sandmeyer	$	10,575	$	-	$	-	$	-	$	-	$	-	$	10,575
Jeffrey P. Taylor	$	8,700	$	-	$	-	$	-	$	-	$	-	$	8,700
James 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.

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	251,448
Equity compensation plans not approved by shareholders	not applicable	not applicable	not applicable
Total	566,638	$7.20	251,448

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%

(1)

(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.

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.

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		2008
Audit fees (a)	$	239,000	$	170,000
Audit-related fees (b)		17,000		22,000
Tax fees (c)		33,000		25,000
All 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)

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.

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. King
		Robert H. King
		President 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. Kaltenbach
Robert H. King	James L. Kaltenbach, M.D.
President, Chief Executive Officer	Director
and Director
(Principal Executive Officer)	/s/ G. Edward Koenig, Jr.
	G. Edward Koenig, Jr.
/s/ R. Scott Horner	Director
R. Scott Horner
Executive 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. Sandmeyer
Dale F. Braun, Jr.	Ronald P. Sandmeyer
Senior Vice President and Controller	Director
(Principal Accounting Officer)


/s/ A. Theodore Eckenhoff	Jeffrey P. Taylor, P.E.
A. Theodore Eckenhoff	Director
Chairman


/s/ S. David Brandt
S. David Brandt, Esq	James Yoh, PhD.
Director	Director


/s/ Jeffrey Dubrow
Jeffrey Dubrow
Director

Sterling Banks, Inc.

Financial Report

December 31, 2009

F-1

Contents

Management’s Discussion and Analysis	F-3
Report of Independent Registered Public Accounting Firm	F-19
Financial Statements
Consolidated Balance Sheets	F-20
Consolidated Statements of Operations	F-22
Consolidated Statements of Shareholders’ Equity	F-23
Consolidated Statements of Cash Flows	F-24
Notes to Consolidated Financial Statements	F-25

F-2

MANAGEMENT’S DISCUSSION 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								2007
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Assets
Loans, 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		4.14
Federal funds sold		16,310			20		0.12			9,321			176		1.89			9,452			485		5.13
Due from banks		269			-		0.12			210			2		1.00			3,420			173		5.04
Total interest-earning assets		352,417			18,858		5.35			345,314			22,300		6.46			368,417			25,834		7.01
Allowance for loan losses		(9,887	)							(2,938	)							(2,610	)
Other assets		43,666								49,573								42,278
Total Assets	$	386,496							$	391,949							$	408,085
Liabilities and shareholders’ equity
Time deposits	$	200,548			5,920		2.95		$	192,268			7,570		3.94		$	219,735			10,569		4.81
NOW/MMDA/savings accounts		108,777			887		0.82			105,077			1,374		1.31			99,205			2,263		2.28
Borrowings		21,962			1,063		4.84			12,975			690		5.32			6,327			371		5.86
Total interest-bearing liabilities		331,287			7,870		2.38			310,320			9,634		3.10			325,267			13,203		4.06
Noninterest-bearing demand deposits		33,452								37,901								41,166
Other liabilities		79								836								368
Shareholders’ equity		21,678								42,892								41,284
Total liabilities and shareholders’ equity	$	386,496							$	391,949							$	408,085
Net interest income				$	10,988							$	12,666							$	12,631
Interest rate spread (3)							2.97								3.36								2.95
Net 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 in 2009, $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-bearing liabilities.

(4)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

F-6

The following table presents a summary of the changes in interest income and expense by both rate and volume for the periods indicated and including interest income from loans held for sale:

	Year Ended December 31, 2009 Compared to Year Ended December 31, 2008									Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
	Variance Due to Changes In									Variance Due to Changes In
	Average 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 and due 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	)		319,000
Total 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		2005
Commercial, Financial and Agricultural	$	30,371,000	$	32,115,000	$	30,209,000	$	29,097,000	$	30,443,000
Real Estate – Construction		41,558,000		68,278,000		80,486,000		85,902,000		77,499,000
Real Estate – Mortgage		171,465,000		147,435,000		141,237,000		73,666,000		72,020,000
Installment loans to individuals		50,453,000		53,827,000		52,291,000		45,179,000		38,714,000
Lease Financing		7,291,000		4,636,000		8,345,000		9,439,000		6,662,000
Total 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			2005
Restructured 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			-			329,000
Real Estate – Mortgage		523,000			178,000			180,000			-			-
Installment loans to individuals		26,000			77,000			88,000			103,000			118,000
Total loans accruing, but past due 90 days or more		634,000			2,707,000			2,644,000			178,000			447,000
Nonaccrual 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			447,000
Other Real Estate Owned		1,100,000			923,000			-			-			-
Total nonperforming assets	$	24,407,000		$	14,167,000		$	7,182,000		$	446,000		$	447,000
Non-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 450 decreased 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					2005
Allocation of allowance for loan losses:	Amount		% Gross Loans			Amount		% Gross Loans			Amount		% Gross Loans			Amount		% Gross Loans			Amount		% Gross Loans
Commercial, 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		29
Real Estate – Mortgage		4,628,000		57			2,029,000		48			788,000		45			441,000		30			262,000		27
Installment loans to individuals		1,936,000		17			668,000		18			133,000		17			189,000		19			219,000		30
Lease Financing		-		2			-		2			-		2			-		4			-		3
Total 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			2005
Balance at beginning of period	$	8,531,000		$	2,891,000		$	1,760,000		$	1,154,000		$	913,000
Charge-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			-			1,000
Real Estate – Construction		76,000			-			-			-			-
Real Estate – Mortgage		1,000			3,000			8,000			1,000			1,000
Installment loans to individuals		28,000			8,000			3,000			1,000			-
Lease Financing		-			-			-			-			-
		166,000			13,000			12,000			2,000			2,000
Net 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			284,000
Allowance 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		$	1,154,000

Average loans outstanding (1)	$	302,291,000		$	307,333,000		$	302,834,000		$	254,695,000		$	240,472,000

Net 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		2007
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment Securities Available-for-Sale
U.S. Government agencies and corporations	$	8,092,000	$	8,107,000	$	3,995,000	$	4,028,000	$	29,267,000	$	29,257,000
Municipalities		4,305,000		4,378,000		4,941,000		4,772,000		7,324,000		7,310,000
Mortgage-backed		21,549,000		21,613,000		15,250,000		15,297,000		11,563,000		11,528,000
Total investment securities Available-for-Sale	$	33,946,000	$	34,098,000	$	24,186,000	$	24,097,000	$	48,154,000	$	48,095,000

Investment Securities Held-to-Maturity
U.S. Government agencies and corporations	$	100,000	$	100,000	$	100,000	$	100,000	$	100,000	$	100,000
Municipalities		-		-		-		-		-		-
Mortgage-backed		9,098,000		9,362,000		19,784,000		19,892,000		6,754,000		6,697,000
Total investment securities Held-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, 2009
	Within 1 Year					After 1 Year Through 5 Years					After 5 Years Through 10 Years					After 10 Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Investment Securities	(Dollars in thousands)

Available-for-Sale at amortized cost:
U.S. Government agencies and corporations	$	-		-		$	-		-		$	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 and corporations	$	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					2007
	Amount		%			Amount		%			Amount		%
Noninterest bearing demand deposits	$	30,864,000		9.3	%	$	35,873,000		10.9	%	$	37,246,000		10.7	%
Interest bearing demand deposits		35,002,000		10.6			35,076,000		10.7			44,223,000		12.7
Savings deposits		66,783,000		20.2			66,747,000		20.3			60,775,000		17.4
Time deposits, under $100,000		168,236,000		50.9			161,112,000		49.0			167,563,000		48.0
Time deposits, $100,000 or more		29,841,000		9.0			29,786,000		9.1			39,151,000		11.2
Total 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, 2009
3 months or less	$	24,871,000
Over 3 months through 6 months		2,908,000
Over 6 months through 12 months		1,226,000
Over 1 year		836,000
Total	$	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, 2009
	Daily Average		Average			Percent
	Balance		Rate			of Total
Interest bearing demand deposits	$	41,959,000		0.3	%		12.2	%
Savings deposits		66,818,000		1.1			19.5
Time deposits		200,548,000		3.0			58.4
Total interest-bearing deposits		309,325,000					90.1
Noninterest-bearing demand deposits		33,452,000					9.9
Total deposits	$	342,777,000					100.0	%

	Year Ended December 31, 2008
	Daily Average		Average			Percent
	Balance		Rate			of Total
Interest bearing demand deposits	$	42,302,000		0.9	%		12.6	%
Savings deposits		62,775,000		1.6			18.7
Time deposits		192,268,000		3.9			57.4
Total interest-bearing deposits		297,345,000					88.7
Noninterest-bearing demand deposits		37,901,000					11.3
Total deposits	$	335,246,000					100.0	%

F-14

	Year Ended December 31, 2007
	Daily Average		Average			Percent
	Balance		Rate			of Total
Interest bearing demand deposits	$	44,702,000		1.9	%		12.4	%
Savings deposits		54,503,000		2.6			15.2
Time deposits		219,735,000		4.8			61.0
Total interest-bearing deposits		318,940,000					88.6
Noninterest-bearing demand deposits		41,166,000					11.4
Total 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			2007
Loss 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/M
Average 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, 2007
Leverage 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	$	709,000
2011		679,000
2012		608,000
2013		566,000
2014		566,000
Thereafter		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, 2009
	3 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 15 years		Over 15 years		Total
	(In thousands)
Interest-Earning Assets:
Loans (1)	$	58,533	$	20,044	$	36,605	$	49,474	$	49,446	$	70,599	$	284,701
Investment securities:
Held-to-maturity		663		1,346		723		433		-		6,033		9,198
Available-for-sale		976		2,395		1,736		3,394		17,498		7,947		33,946
Restricted stock		1,866		-		-		-		-		-		1,866
Federal funds sold		4,545		-		-		-		-		-		4,545
Due from banks		101		-		-		-		-		-		101
Total interest-earning assets	$	66,684	$	23,785	$	39,064	$	53,301	$	66,944	$	84,579	$	334,357

Sterling Banks, Inc. 10-K