UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C.  20549


____________


FORM
10-KSB





[X]
            Annual
      report pursuant to section 13 or 15 (d) of the Securities Exchange Act of
      1934For
      the fiscal year ended December 31,
      2007


-OR-


[   ]
            Transition
      report pursuant to section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from ___________ to
  _____________.


Commission
File No. 333-133649





STERLING BANKS,
INC.


(Name of
Small Business Issuer in its Charter)





New
      Jersey
            20-4647587(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      E.I.N.)





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





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


Securities
registered pursuant to Section 12(b) of the Act:  Common Stock, par value
$2.00 per share
 (Title of Class)
 
 Securities
registered pursuant to Section 12(g) of the Act:  None
 (Title of
Class)


Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.  [ ]





Check
whether the registrant: (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange  Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days.  YESX  NO
__





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.  [ ]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): YESNO X





State
registrant’s revenues for its most recent fiscal year: $26,744,000.





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 March
14,2008,was $29,933,172 ($5.90 per
share times 5,073,419 shares of Common Stock held by
non-affiliates).





As of
March 14, 2008, there were 5,843,362 outstanding shares of the registrant's
Common Stock.





DOCUMENTS
INCORPORATED BY REFERENCE





1.
Portions of the Proxy Statement to Shareholders for the 2008 Annual Meeting of
Shareholders. (Part III)





Transitional
Small Business Disclosure Format (check one):  YES ___  NO
X





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-KSB 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 and earnings of the Company; inflation;
changes in interest rates; changes in loan portfolio quality; changes in the
rate of deposit withdrawals; changes in the volume of loan refinancings; the
timely development of and acceptance of new products and services of the Company
and the perceived overall value of these products and services by users,
including the features, pricing and quality  compared to competitors'
products and services; the impact of changes in financial services laws and
regulations (including laws
concerning  taxes,  banking,  securities and
insurance); technological changes; changes in consumer spending and saving
habits; the impact of additional costs incurred by the Company in connection
with the merger; the ability of the management of the Company to achieve the
anticipated benefits of the merger; 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 $410.5 million as of December 31, 2007.  Our
main office is located in Mount Laurel, New Jersey with ten other Community
Banking Centers located in Burlington and Camden Counties, New
Jersey.  We believe that this geographic area represents a stable and
attractive banking market with a diversified and expanding
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 it serves,
and having first-hand knowledge of customers and their needs for financial
services enable it 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.





2




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 expand 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 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 merger of Peoples
Savings Bank, the Bank acquired four new branches.  The Merger and the
transactions associated with the Merger have provided the basis for the
substantial transition of the Company to its current size and
structure.





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.





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 Mount Laurel (November 1997), Southampton
Township-Vincentown (December 1998), Maple Shade (May 1999), Medford (May 2000),
Voorhees (November 2005), and Delran (June 2007).  In addition, as a
result of the Merger, we have acquired three branches in Bordentown, Florence
and Evesham Township-Marlton (March 2007).  Each of these full-service
Community Banking Centers is carefully positioned to deliver competitively
priced and personalized products and services over expanded banking hours during
both traditional and non-traditional hours of availability.  We are
continuing to plan the development of a cohesive network of community-focused
branches.  We are actively evaluating a number of additional 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.
Sterling offers 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, expanded 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.




3




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.  We have maintained high overall credit quality
through the establishment and consistent observance of prudent lending policies
and practices.  In addition, senior management and the Board of
Directors are actively involved in the loan development and approval
process.





Experienced
Personnel.  The members of our executive management have an
average of 32 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, 2007, our loan portfolio totaled approximately $312.2 million, excluding
loans held for sale.





At
December 31, 2007, our lending limit to one borrower under applicable
regulations was approximately $7.6 million, or approximately 15% of capital
funds.





Loans are
generated through marketing efforts, our present customers, walk-in customers
and referrals.  We have been able to maintain a high overall credit
quality through the establishment and observance of prudent lending policies and
practices and sound management.  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.





4




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) review of select 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, excluding net deferred fees, by
type of loan at the dates indicated.  The change in the mix below
between 2006 and 2007 is a direct result of the Merger.





At
      December 31,2007
            2006Type of
      Loans:
            Amount
            
            Percent
            Amount
            
            PercentCommercial
            $
            196,370,000
            
            62.8
            %
            $
            167,790,000
            
            69.1
            %Residential
      Mortgage
            
            61,779,000
            
            19.8
            
            
            27,643,000
            
            11.4Consumer
            
            54,429,000
            
            17.4
            
            
            47,426,000
            
            19.5Total
            $
            312,578,000
            
            100.0
            %
            $
            242,859,000
            
            100.0
            %





Loan Maturity.The following
table sets forth the contractual maturity of the Company's loan portfolio at
December 31, 2007.  The table does not include prepayments or
scheduled principal repayments.


Due
      within
                  1
      year
                
                
                Due
      after 1
                  through 5
      years
                
                
                Due
      after
                  5
      years
                
                
                TotalCommercial
                
                $
                98,286,000
                
                
                $
                24,023,000
                
                
                $
                74,061,000
                
                
                $
                196,370,000Residential
      Mortgage
                
                
                848,000
                
                
                
                8,462,000
                
                
                
                52,469,000
                
                
                
                61,779,000Consumer
                
                
                1,054,000
                
                
                
                2,749,000
                
                
                
                50,626,000
                
                
                
                54,429,000Total
      amount due
                
                $
                100,188,000
                
                
                $
                35,234,000
                
                
                $
                177,156,000
                
                
                $
                312,578,000


The
following table sets forth the dollar amount of all loans due after December 31,
2007, which have predetermined interest rates and which have floating or
adjustable interest rates.


Fixed
      Rates
                
                
                Floating
      or
                  Adjustable
      Rates
                
                
                TotalCommercial
                
                $
                133,451,000
                
                
                $
                62,919,000
                
                
                $
                196,370,000Residential
      Mortgage
                
                
                48,817,000
                
                
                
                12,962,000
                
                
                
                61,779,000Consumer
                
                
                53,985,000
                
                
                
                444,000
                
                
                
                54,429,000Total
                
                $
                236,253,000
                
                
                $
                76,325,000
                
                
                $
                312,578,000


Commercial
Loans





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





We have
established written underwriting guidelines for commercial loans.  In
granting commercial loans, 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 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.




5




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





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





Commercial 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.





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 6 to 12
months.





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





Residential
Mortgage Loans





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





Consumer
Loans





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





Investment
Portfolio





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





6




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 may 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 $10.5 million
from the FHLB as of December 31, 2007 with $9.5 million maturing in 30 days or
less at floating rates and $1.0 maturing in less than two years with a fixed
rate of 4.06% and which cannot be prepaid without penalty.




7




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, 2007.  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 to paid-in capital of the Bank.  The remaining $1.5
million was retained at the Company for future use.





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





At
      December 31,2007
            2006Amount
      outstanding at year end
            $16,500,000
            
            $  5,885,000Weighted
      average interest rate at year end
            5.0
            %
            3.5
            %Maximum
      outstanding at any month end
            $16,500,000
            
            $14,835,000Average
      outstanding
            $  6,202,000
            
            $12,247,000Weighted
      average interest rate during the year
            5.9
            %
            3.4
            %





Competition





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





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





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





8


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





Regulation





General.Sterling Banks, Inc. is a
bank holding company incorporated under the laws of the State of New Jersey on
February 28, 2006 for the sole purpose of becoming the holding company of
Sterling Bank.  At the 2006 Annual Meeting of Shareholders held on
December 12, 2006, shareholders of the Bank approved a proposal to reorganize
the Bank into the holding company form of organization in accordance with a Plan
of Acquisition.  The Company recognized the assets and liabilities
transferred at the carrying amounts in the accounts of the Bank as of March 16,
2007, the effective date of the reorganization.





Sterling
Bank is a commercial bank, which commenced opera­tions on December 7,
1990.  The Bank is chartered by the New Jersey Department of Banking
and Insurance and is a member of the Federal Reserve System and the Federal
Deposit Insurance Corporation.  The Bank maintains its principal
office at 3100 Route 38 in Mount Laurel, New Jersey and has eleven 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 insured up to a maximum of $100,000
per depositor under the Bank Insurance Fund of the FDIC.  The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk-based assessment system, deposit insurance premium
rates range from zero to 27 basis points.  Our deposit insurance
premium has been assessed at ten basis points of deposits.





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.




9


In 2007, we paid three cash dividends
of $0.03 per share.  In 2006, we paid four quarterly cash dividends of
$0.03 per share.  The Company did not pay a cash dividend in the
fourth quarter of 2007 and there is no assurance that the Company will resume
paying cash dividends in the future.  Our future dividend policy is
subject to the discretion of our Board of Directors and will depend upon a
number of factors, including future earnings, financial conditions, cash needs,
general business conditions and applicable dividend
limitations.  Further, the Company's ability to pay cash dividends to
shareholders will depend largely on the Bank’s ability to pay dividends to the
Company. We have distributed a 5% stock dividend, accounted for as a stock
split, each year during the period from 1997 through 2002 and from 2004 through
2006.  In 2007, we distributed a 21 for 20 stock split, effected in
the form of a 5% common stock dividend.  We may consider declaring
additional stock splits in the future; however, we have not yet made any
determination whether to declare or distribute additional stock
splits.





Capital Adequacy
Guidelines.  The Federal Reserve Board has adopted risk based
capital guidelines for member banks such as us.  The required minimum
ratio of total capital to 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, 2007, we exceeded the required ratios for classification as “well
capitalized.”  For additional discussion of capital requirements, we
refer you to Note 14, Regulatory Matters of the Notes to our Consolidated
Financial Statements.





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.




10





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, 2007.




11




USA PATRIOT
Act.The USA
PATRIOT Act of 2001, which was recently renewed, 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, which became law in July
2002, has required changes in some of our corporate governance, securities
disclosure and compliance practices.  In response to the requirements
of that Act, the SEC and Nasdaq have promulgated new rules and listing standards
covering a variety of subjects.  Compliance with these new rules and
listing standards has significantly increased our legal and financial and
accounting costs, and we expect these increased costs to
continue.   In addition, compliance with the requirements has
taken 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-KSB
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 must comply with this requirement beginning with this annual
report.  In addition, beginning with our 2009 fiscal year, the
independent registered public accounting firm auditing the Company’s financial
statements must attest to and report on the effectiveness of the Company’s
internal control over financial reporting, although proposals to exempt companies of our size are being
discussed.  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,
investors could lose confidence in the reliability of our financial statements,
which could result in a decrease in the value of our securities.




Employees.  As of
December 31, 2007, we had 116 full-time and 25 part-time
employees.  Our employees are not represented by a collective
bargaining agent.  We believe the relationship with our employees to
be good.




12




Item
2.  Description of Property.





(a)
            Location and Condition of
      Property.





The
Company currently operates 11 bank branches; 6 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,
Mount Laurel, Vincentown, Maple Shade, Bordentown and Florence, New Jersey
containing 3,000, 7,200, 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, 2008.





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





(b)
            Investment
      Policies.





See "Item
1.  Business" above for a general description of the Company's
investment policies.  The Company's investments are primarily acquired
to produce income, and to a lesser extent, possible capital gain.  The
Company’s investment policies may be changed by the Investment Committee and/or
the Board of Directors, without shareholder approval.





(1) Investments in Real Estate or
Interests in Real Estate.See Item 2(a), “Location and
Condition of Property,” above, and Note 9, “Bank Premises and Equipment,” to the
Notes to Consolidated Financial Statements in the consolidated financial
statements appearing in the exhibits of this Annual Report.





(2) Investments in Real Estate
Mortgages.  The Company receives real estate mortgages in the
ordinary course of its lending activities; the Company services those mortgages
that it holds.  See Item 1, “Description of Business - Lending
Activities.”





(3) Investments in Securities of or
Interests in Persons Primarily Engaged in Real Estate
Activities.  With the exception of purchases of mortgage-backed
securities issued by the U.S. government-sponsored enterprises, the Company does
not invest in securities of or interest in persons primarily engaged in real
estate activities.  See Item 1, “Description of Business – Investment
Portfolio,” and Note  4, “Investment Securities,” to the Notes to
Consolidated Financial Statements in the consolidated financial statements
appearing in the exhibits of this Annual Report.


13


(c)
            Description of Real Estate and
      Operating Data.





See
information set forth above in Item 2(a), “Location and Condition of Property,”
above, and in Note 9, “Bank Premises and Equipment,” to the Notes to
Consolidated Financial Statements in the consolidated financial statements
appearing in the exhibits of this Annual Report.  In management’s
view, the Company’s properties are adequately covered by insurance.





Item
3. Legal Proceedings.





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





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





No matters were submitted to a vote of the shareholders
of the Company during the fourth quarter of the fiscal year ended December 31,
2007.





PART
II





Item
5.  Market for Common Equity and Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.





The
following table shows the stock option exercises in 2007.  Only
employees of the Company exercised such options in 2007.  The information provided in the table below does not
give effect to the 21 for 20 stock split.





Date
              Exercised
      Shares
              Price01/12/07
              3,104
              $  6.6601/19/07
              776
              6.6603/13/07
              1,277
              7.2003/13/07
              579
              8.0404/27/07
              7,757
              6.66


The stock
option exercises on January 12, 2007, January 19, 2007 and March 13, 2007 were
exempt offers and sales under Section 3(a)(2) of the Securities
Act.  The exercise on April 27, 2007 was exempt under Section 4(2) of
the Securities Act.





Our
common stock is listed on the Nasdaq Capital Market.  The number of
shareholders of record of our common stock, as of December 31, 2007, was
533.





For
information with respect to Equity Compensation Plans see Item 11(d),
“Securities Authorized for Issuance under Equity Compensation
Plans.”





14




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





NASDAQ Stock
      MarketYear
              Quarter
              
              High
      price
              
              
              Low
      price2007
              4th
              
              $
              8.22
              
              
              $
              6.233rd
              
              
              9.99
              
              
              
              7.502nd
              
              
              10.19
              
              
              
              7.801st
              
              
              11.12
              
              
              
              9.002006
              4th
              
              $
              11.22
              
              
              $
              9.653rd
              
              
              11.85
              
              
              
              9.722nd
              
              
              13.01
              
              
              
              10.821st
              
              
              16.71
              
              
              
              10.66


Dividends





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




In 2006, we paid four cash dividends of
$0.03 per share.  In 2007, we paid three cash dividends of $0.03 per
share.  The Company did not pay a cash dividend in the fourth quarter
of 2007 and there is no assurance that the Company will resume paying cash
dividends in the future.  Future payments of dividends, if any, is
subject to the discretion of our Board of Directors and will depend upon a
number of factors, including future earnings, financial conditions, cash needs,
general business conditions and applicable legal limitations, including meeting
regulatory capital requirements.  Further, the Company's ability to
pay cash dividends to shareholders will depend largely on the Bank’s ability to
pay dividends to the Company.





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





Item
6.  Management's Discussion and Analysis or Plan of
Operation.





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.




15




Factors
That May Affect Future Results





Risks
Related to Our Business





Our
success will depend upon our ability to effectively manage our future
growth.





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. In addition, as a result of the recent acquisition of Farnsworth
Bancorp, Inc., our growth may be limited by our regulatory capital
level.





The
regulatory capital of the combined company is reduced by goodwill incurred in
connection with the Merger.




The Merger was accounted for by the
Company as a purchase, and the amount by which the purchase price exceeds the
fair value of the net tangible and identifiable intangible assets acquired by
the Company through the Merger was recorded as goodwill, which was approximately
$11.7 million. Because goodwill reduces regulatory capital, the Merger has made
it more difficult for the Company to meet its regulatory capital
requirements.  As a result, in May 2007, the Company raised $6.0
million through the issuance by its subsidiary, Sterling Capital Trust I, of
trust preferred securities.  The Company invested $4.5 million of
these proceeds in the Bank.  The Company has agreed with the FRB to
maintain sufficient capital to be considered well capitalized following the
Merger and we believe as of December 31, 2007 that we continue to meet this
requirement.





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.  Management
maintains an allowance for loan losses based upon, among other things,
historical experience, an evaluation of economic conditions and regular reviews
of delinquencies and loan portfolio quality.  Based upon such factors,
management makes various assumptions and judgments about the ultimate
collectibility of the loan portfolio and provides an allowance for loan losses
based upon a percentage of the outstanding balances and for specific loans when
their ultimate collectibility is considered questionable.





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, 2007, our allowance for loan losses was approximately $2.9 million,
which represented 0.93% of outstanding loans.  At such date, we had
five 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.





16




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





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





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 could adversely affect 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.





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, 2007, 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.  If real estate prices in our markets
decline, the value of the real estate collateral securing our loans could be
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.





17




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 Corporate Services 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.





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





At December 31, 2007, our lending limit
per borrower was approximately $7.6 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.





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, the 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,”
above.




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 did not pay a cash dividend in the fourth quarter of 2007 and
there is no assurance that the Company will resume paying cash dividends in the
future.  Future payment of cash dividends, if any, will be at the
discretion of the Board of Directors and will be dependent upon a number of
factors including financial condition, cash needs, general business conditions
and applicable legal limitations, including meeting regulatory capital
requirements.  See Item 5, “Market for Common Equity and Related
Stockholder Matters,” above.




18




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





As of
March 15, 2008, our directors and executive officers beneficially owned
approximately 1,067,000 shares, or approximately 17%, of our common stock,
including options with the vested right to purchase approximately 297,000
shares, in the aggregate, of our common stock at exercise prices ranging from
$6.27 to $10.90 per share.  In addition, approximately 7% of our
common stock is controlled by a non-management shareholder.  Also,
approximately 5% of our common stock is control by an institutional
investor.  Because of the large percentage of stock held by our
directors and executive officers and other significant shareholders, these
persons could influence the outcome of any matter submitted to a vote of our
shareholders.





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





We are
currently authorized to issue up to 15,000,000 shares of common
stock.  Of that amount, approximately 5,843,362 shares were issued and
outstanding as of March 15, 2008.  On March 16, 2007, we completed the
Plan of Merger with Farnsworth Bancorp, Inc., for which the Holding Company
issued approximately 768,438 shares of common stock.  Our Board of
Directors has authority, without action or vote of the shareholders (except to
the extent required under applicable rules of the Nasdaq Capital Market), to
issue all or part of the authorized but unissued shares.  A total of
518,168 shares of common stock have been reserved for issuance under options
outstanding on March 15, 2008.  As of March 15, 2008, options to
purchase a total of 373,043 shares were exercisable and had exercise prices
ranging from $6.27 to $10.90.  Any such issuance will dilute the
percentage ownership interest of shareholders and may further dilute the book
value of our common stock.  Further, we
are proposing two new stock option plans with 300,000 and 600,000 additional
shares authorized, that, if approved by our shareholders, would provide for new
shares to be issued.





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





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.




19




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.




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.





20




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
or 10-KSB 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 must comply with this requirement beginning with this
annual report.  In addition, beginning with our 2009 fiscal year, the
independent registered public accounting firm auditing the Company’s financial
statements must attest to and report on the effectiveness of the Company’s
internal control over financial reporting.  The costs associated with
the implementation of this requirement, including documentation and testing,
have not been estimated by us.  If we are ever unable to conclude that
we have effective internal control over financial reporting or, if our
independent auditors are unable to provide us with an unqualified report as to
the effectiveness of our internal control over financial reporting for any
future year-ends as required by Section 404, we
may incur additional costs to rectify the deficiency and investors could
lose confidence in the reliability of our financial statements, either of which
could result in a decrease in the value of our securities.





Item
7.  Financial Statements.





The
Company's financial statements listed under Item 13 are included as an exhibit
to this Annual Report.





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





Not applicable.





Item
8A(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.





21




Management’s 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, 2007.  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, 2007, 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





There
were no changes in the Company’s internal control over financial reporting in
the quarter ended December 31, 2007 that materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





Item
8B. Other Information.





Not applicable.





PART
III





The
Company will file a definitive proxy statement for its 2008 Annual Meeting of
Shareholders pursuant to Regulation 14A (the “Proxy Statement”) within 120 days
after the end of the fiscal year covered by this annual report on Form 10-KSB
(i.e., by April 29, 2008); accordingly, certain information that is required
under Part III of this annual report on Form 10-KSB is omitted from this report
and will be included in the Proxy Statement, and is incorporated herein by
reference to the Proxy Statement.




Item
9.  Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.





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





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





22




Item
10.  Executive Compensation.





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




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





(a)           Security Ownership of
Certain Beneficial Owners





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





(b)           Security Ownership of
Management





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





(c)
            Changes in
      Control





Management
      of the Registrant knows of no arrangements, including any pledge by any
      person of securities of the Registrant, the operation of which may at a
      subsequent date result in a change in control of the
      Registrant.





2.           Securities Authorized for
Issuance under Equity Compensation Plans





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
            518,168
            
            $8.43
            
            0Equity
      compensation plans not approved by shareholders
            not
      applicable
            
            not applicable
            
            not applicableTotal
            518,168
            
            $8.43
            
            0





Item
12.  Certain Relationships and Related Transactions.





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




23




Item
13.  Exhibits.





(a) 
Listed below are all financial statements and exhibits filed as part of this
Report.





1.
            The consolidated statements of financial condition of
      Sterling Banks, Inc. as ofDecember
      31, 2007 and 2006 and the related consolidated statements of
              operations,
      shareholders’ equity and cash flows for the years ended December 31, 2007
      and 2006 together with the related notes.2.
            Schedules
      omitted as they are not applicable.3.
            The
      following exhibits are included in this Report or incorporated herein by
      reference:(a)
            List
      of Exhibits:2.1
            Plan
      of Acquisition, dated April 26, 2006 by and between Sterling Bank
      andSterling
      Banks, Inc. (a)2.2
            Agreement
      and Plan of Merger, dated June 23, 2006, by and among
    SterlingBanks,
      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
            Change
      in Control Severance Agreement dated December 26, 2007 between
      theCompany,
      the Bank and R. Scott Horner (g), (h)10.5
            Change
      in Control Severance Agreement dated December 26, 2007 between
      theCompany,
      the Bank and John Herninko (g), (h)10.6
            Employment
      agreement dated January 26, 2006 between the Bank and Robert
      H.King
      (f), (g)10.7
            Amendment
      to Employment Agreement dated December 26, 2007 between the
      Bankand
      Robert H. King (g)10.8
            Lease
      dated as of April 3, 1990, as amended, for headquarters facility in
      MountLaurel,
      New Jersey (e)23.1
            Consent of McGladrey & Pullen, LLP, Independent
      Registered Public AccountingFirm31.1
            CEO Certification required under Section 302 of Sarbanes
      – Oxley Act of 200231.2
            CFO Certification required under Section 302 of Sarbanes
      – Oxley Act of 200232.1
            CEO Certification required under Section 906 of Sarbanes
      – Oxley Act of 200232.2
            CFO Certification required under Section 906 of Sarbanes
      – Oxley Act of 2002(a)
            Incorporated
      by reference to Exhibit 2.1 of Sterling Banks, Inc.;
      RegistrationStatement
      on Form S-4 (File no. 333-133649).(b)
            Incorporated
      by reference to Exhibit 2.2 of Sterling Banks, Inc.;
      RegistrationStatement
      on Form S-4 (File no. 333-133649).(c)
            Incorporated
      by reference to Exhibit 3.1 of Sterling Banks, Inc.;
      RegistrationStatement
      on Form S-4 (File no. 333-133649).(d)
            Incorporated
      by reference to Exhibit 3.4 of Sterling Banks, Inc.;
      RegistrationStatement
      on Form S-4 (File no. 333-133649).




24


(e)
            Incorporated
      by reference to the Bank’s Annual Report on Form 10-KSB for
      theyear
      ended December 31, 2003.(f)
            Incorporated
      by reference to the Bank’s Current Report on Form 8-K dated
      January25,
      2006.(g)
            Management
      contract or compensatory plan or arrangement.(h)
            Incorporated
      by reference to the Bank’s Current Report on Form 8-K
  datedJanuary
      4, 2008.





Item
14.  Principal Accountant Fees and Services.





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




25


SIGNATURES





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





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


Date:
March 25, 2008





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
March 25, 2008.





/s/ Robert H.
      King
            /s/ Benjamin D.
      Goldman, EsqRobert
      H. King
            Benjamin
      D. Goldman, Esq.President,
      Chief Executive Officer
            Directorand
      Director(Principal
      Executive Officer)
            /s/ James L.
      Kaltenbach, M.D.James
      L. Kaltenbach, M.D./s/ R. Scott
      Horner
            DirectorR.
      Scott HornerExecutive
      Vice President, Chief
            /s/ G. Edward Koenig,
      Jr.Financial
      Officer and Director
            G.
      Edward Koenig, Jr.(Principal
      Financial Officer)
            Director/s/ Dale F. Braun,
      Jr.
            /s/ John J. Maley,
      Jr., CPADale
      F. Braun, Jr.
            John
      J. Maley, Jr., CPASenior
      Vice President and Controller
            Director(Principal
      Accounting Officer)/s/ Luis G.
      Rogers/s/ A. Theodore
      Eckenhoff
            Luis
      G. RogersA.
      Theodore Eckenhoff
            DirectorChairman/s/ Ronald P.
      Sandmeyer/s/ Howard E.
      Needleman
            Ronald
      P. SandmeyerHoward
      E. Needleman
            DirectorVice
      Chairman/s/ Jeffrey P. Taylor,
      P.E./s/ S. David Brandt,
      Esq
            Jeffrey
      P. Taylor, P.E.S.
      David Brandt, Esq
            DirectorDirector/s/ Jeffrey
      DubrowJeffrey
      DubrowDirector














26