**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
      1934


For
      the
      fiscal year ended December
      31, 2006


-OR-


o Transition report pursuant to section 13 or 15(d) of the Securities Exchange
      Act
      of 1934


For
      the
      transition period from ___________ to _____________.





**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. YES X 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): YES  NO X





State
      registrant’s revenues for its most recent fiscal year: $23,197,000.





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
      15 **,** 2007 **,** was
      $41,834,902 ($10.20 per share times 4,101,461 shares of Common Stock held by
      non-affiliates).





As
      of
      March 15, 2007, there were 4,787,448 outstanding shares of the registrant's
      Common Stock.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Annual Report to Shareholders for the Fiscal Year ended December 31,
      2006. (Part II)





Portions
      of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be
      held on May 22, 2007, which is expected to be filed by us with the Commission
      within 120 days after the close of our 2006 fiscal year. (Part III)





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





**Annual
        Report on Form 10-KSB**
 **For
        the Fiscal Year Ended December 31, 2006**
 
 **TABLE
        OF CONTENTS**
 
 **PART
                  I**
              PageExplanatory
                  Note
              1Forward-Looking
                  Statements
              1Item
                  1
              Description
                  of Business
              2Item
                  2
              Description
                  of Property
              11Item
                  3
              Legal
                  Proceedings
              12Item
                  4
              Submission
                  of Matters to a Vote of Security
                  Holders
              12**PART
                  II**Item
                  5
              Market
                  for Common Equity and Related Stockholder
                  Matters
              13Item
                  6
              Management’s
                  Discussion and Analysis or Plan of
                  Operation
              15Item
                  7
              Financial
                  Statements
              21Item
                  8
              Changes
                  in and Disagreements with Accountants on Accounting
                  And
                  Financial Disclosure
              21Item
                  8A
              Controls
                  and Procedures
              21Item
                  8B
              Other
                  Information
              21**PART
                  III**Item
                  9
              Directors,
                  Executive Officers, Promoters and Control
                  Persons; Compliance
                  with Section 16(a) of the Exchange Act
              22Item
                  10
              Director
                  and Executive Officer
                  Compensation
              22Item
                  11
              Security
                  Ownership of Certain Beneficial Owners and
                  Management And
                  Related Stockholder Matters
              22Item
                  12
              Certain
                  Relationships and Related
                  Transactions
              23Item
                  13
              Exhibits
              23Item
                  14
              Principal
                  Account Fees and Services
              24Signatures
              25










**PART
      I**





**Explanatory
      Note**





Sterling
      Banks, Inc. (the “Holding Company”) is the successor to Sterling Bank (the
“Bank”) 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. This Form 10-KSB for the fiscal year ended December 31,
      2006, is filed under the name of the Holding Company, however, all information
      contained herein represents solely the financial information of the Bank. All
      references to “we,” "us," "our," and “ours” and similar terms in this
      report refer to the Bank.




**Forward-Looking
      Statements**




The
      Bank
      may from time to time make written or oral "forward-looking statements",
      including statements contained in the Bank's filings with the Board of Governors
      of the Federal Reserve System and the Holding 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 Bank, which are made in good faith by the Bank 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 Bank's plans, objectives, expectations, estimates and intentions, which
      are subject to change based on various important factors (some of which are
      beyond the Bank's control). The following factors, among others, could cause
      the
      Bank'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 Bank 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 Holding Company and the Bank;
      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
      Bank and the Holding 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 Bank in connection
      with the Merger; the success or failure of the Bank’s integration of the
      operations of Peoples Savings Bank; the ability of the management of the
      Bank to achieve the anticipated benefits of the Merger; and the success of
      the
      Bank and the Holding Company at managing the risks resulting from these factors.





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














1




**Item
      1. Description of Business.**





**General**





We
      are a
      community bank headquartered in Burlington County, New Jersey, with assets
      of
      $337.2 million as of December 31, 2006. Our main office is located in Mount
      Laurel, New Jersey and our six other Community Banking Centers are 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 we serve, and having first-hand knowledge of
      customers and their needs for financial services enable us to compete
      effectively and efficiently.





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.





**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), and Voorhees (November 2005). The Bank has signed a lease,
      subject to receipt of appropriate regulatory approvals, to build and operate
      a
      branch in Delran Township, Burlington County, New Jersey. Management anticipates
      that the branch, our sixth in Burlington County and eighth overall, will open
      in
      the second quarter of 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.






2




**Maintaining
      a Community Focus.** Sterling
      Bank 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.





**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. Sterling Bank
      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 31 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.






3





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, 2006,
      our
      loan portfolio totaled approximately $243.3 million, excluding loans held for
      sale.





At
      December 31, 2006, our lending limit to one borrower under applicable
      regulations was approximately $5.6 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.





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 Bank's loan
      portfolio by type of loan at the dates indicated.




At
                December 31,2006
            
            
            2005Type
                of Loans:
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentCommercial
            
            $
            167,581,000
            
            
            68.9
            %
            $
            154,046,000
            
            
            68.3
            %Consumer
            
            
            48,018,000
            
            
            19.7
            
            
            41,175,000
            
            
            18.3Residential
                Mortgage
            
            
            27,684,000
            
            
            11.4
            
            
            30,117,000
            
            
            13.4Total
            
            $
            243,283,000
            
            
            100.0
            %
            $
            225,338,000
            
            
            100.0
            %





**Loan
      Maturity.** The
      following table sets forth the contractual maturity of the Bank's loan portfolio
      at December 31, 2006. 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
              
              $
              99,051,000
              
              $
              28,047,000
              
              $
              40,483,000
              
              $
              167,581,000Consumer
              
              
              1,465,000
              
              
              3,018,000
              
              
              43,535,000
              
              
              48,018,000Residential
                  Mortgage
              
              
              366,000
              
              
              1,724,000
              
              
              25,594,000
              
              
              27,684,000Total
                  amount due
              
              $
              100,882,000
              
              $
              32,789,000
              
              $
              109,612,000
              
              $
              243,283,000








4




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
              
              $
              42,922,000
              
              $
              25,608,000
              
              $
              68,530,000Consumer
              
              
              46,047,000
              
              
              506,000
              
              
              46,553,000Residential
                  Mortgage
              
              
              14,300,000
              
              
              13,018,000
              
              
              27,318,000Total
              
              $
              103,269,000
              
              $
              39,132,000
              
              $
              142,401,000




**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.





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
      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.






5





**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.





**Loans
      Held for Sale**





Loans
      held for sale consist almost entirely of student loans generated from an
      agreement we have with SLM Corporation. We fund loans made by SLM to students
      for a period of 30 to 45 days. SLM is contractually obligated to purchase the
      loans from us within 45 days. SLM has reduced the number of loans it funds
      through us and we expect that these loans will eventually be funded entirely
      by
      SLM.





**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 in accordance with the guidelines of the Investment Committee.
      The Board of Directors reviews our investment portfolio on a quarterly basis.








6




**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,
      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 Bank's lending and investment activities
      as well as for general business purposes; however, should the need arise, the
      Bank may access the Federal Reserve Bank discount window to supplement its
      supply of lendable funds and to meet deposit withdrawal requirements. The Bank
      maintains the ability to borrow funds on an overnight basis under secured and
      unsecured lines of credit with correspondent banks. In addition, the Bank has
      advances from the FHLB as of December 31, 2006 with maturities of less than
      one
      year and cannot be prepaid without penalty.





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





At
                December 31,2006
            
            2005Amount
                outstanding at year end
            
            $
            5,885,000
            
            $
            15,641,000Weighted
                average interest rate at year end
            
            
            3.5
            %
            
            3.1
            %Maximum
                outstanding at any month end
            
            $
            14,835,000
            
            $
            34,002,000Average
                outstanding
            
            $
            12,247,000
            
            $
            21,824,000Weighted
                average interest rate during the year
            
            
            3.4
            %
            
            2.8
            %






7




**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 60 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**





The
      description of the regulatory provisions below are those applicable to the
      Bank.
      As noted above, on March 16, 2007, the Bank became a wholly-owned subsidiary
      of
      a new holding company, Sterling Banks, Inc. Sterling Banks, Inc. is subject
      to
      additional regulations.




**General.** We
      are a
      New Jersey-chartered commercial bank. We are a member of the Federal Reserve
      System and are subject to supervision and examination by the New Jersey
      Department of Banking and Insurance and by the Federal Reserve Bank of
      Philadelphia. In addition, because our deposits are insured by the FDIC, we
      are
      subject to regulation and/or examination by the FDIC. We are subject to numerous
      laws and governmental regulations, some of which are highlighted below. These
      laws and regulations impose restrictions on activities, minimum capital
      requirements, lending and deposit restrictions and various other requirements.






8




**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 zero basis points of
      deposits.





**Restrictions
      on Dividends.** Dividend
      payments to our shareholders 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 our surplus (generally, additional paid-in capital plus retained
      earnings) would be less than 50% of our 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.





In
      both
      2005 and 2006, we paid four quarterly cash dividends of $0.03 per share.
      Subsequent to December 31, 2006, the Bank declared a cash dividend of $0.03
      per
      common share payable on February 21, 2006 to shareholders of record as of
      February 5, 2006. The Holding Company's ability to pay cash dividends to
      shareholders will depend on our ability to pay dividends to the Holding Company.
      Future payment of cash 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. We have distributed a 5% stock dividend each year during the
      period from 1997 through 2002 and from 2004 through 2006. We may consider
      declaring additional stock dividends in the future; however, we have not yet
      made any determination whether to declare or pay additional stock
      dividends.





**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, 2006, we
      exceeded the required ratios for classification as “well capitalized.” For
      additional discussion of capital requirements, we refer you to Note 13,
      Regulatory Matters of the Notes to our Financial Statements.




9




**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.





**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 our annual report for
      our 2007 fiscal year, although proposals to exempt companies of our size
      are being discussed. In addition, beginning with our 2008 fiscal year, the
      public accounting firm auditing the Bank’s financial statements must attest to
      and report on management’s assessment of the effectiveness of the Bank’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, 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, 2006, we had 89 full-time and 22 part-time employees. Our employees
      are not represented by a collective bargaining agent. We believe the
      relationship with our employees to be good.








10




**Item
      2. Description of Property.**





(a)
            **Location
                and Condition of Property.**





The
      Bank
      currently operates 7 bank branches; 4 are owned and 3 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 5 successive 5 year renewals at the Bank’s
      option. The Bank has signed a lease, subject to receipt of appropriate
      regulatory approvals, to build and operate a branch in Delran Township,
      Burlington County, New Jersey. The lease will be for 20 years with 4 successive
      5 year renewals. Management anticipates that this office will open during the
      second quarter of 2007. In addition, we own branch offices located in Cherry
      Hill, Mount Laurel, Vincentown and Maple Shade, New Jersey containing 3,000,
      7,200, 6,400 and 3,300 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 Bank’s business.





(b)
            **Investment
                Policies.**





See
      "Item
      1. Business" above for a general description of the Bank's investment policies.
      The Bank's investments are primarily acquired to produce income, and to a lesser
      extent, possible capital gain.





(1) **Investments
      in Real Estate or Interests in Real Estate.** See
      Item
      2(a), “Location and Condition of Property,” above, and Note 8, “Bank Premises
      and Equipment,” to the Notes to Financial Statements in the financial statements
      appearing in the Annual Report, which is incorporated herein by
      reference.




(2) **Investments
      in Real Estate Mortgages.** The Bank
      receives real estate mortgages in the ordinary course of its lending activities;
      the Bank 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 Bank 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 3, “Investment
      Securities,” to the Notes to Financial Statements in the financial statements
      appearing in the Annual Report, which is incorporated herein by reference.





(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 8, “Bank Premises and Equipment,” to the Notes to Financial
      Statements in the financial statements appearing in the Annual Report, which
      is
      incorporated herein by reference. In management’s view, the Bank’s properties
      are adequately covered by insurance.





11





**Item
      3. Legal Proceedings.**





The
      Bank,
      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 Bank’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 Bank.





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





On
      December 12, 2006, the Bank held its annual shareholders meeting. The following
      matters were voted upon at the meeting and the final votes on the proposal
      were
      recorded as follows:





·  To
      elect
      twelve (12) persons to the Board of Directors of the Bank to hold office for
      a
      one-year term and until their successors are duly elected and
      qualified;




For
            
            AbstainS.
                David Brandt, Esq.
            4,369,704
            
            252,427Jeffrey
                Dubrow
            4,586,949
            
            35,182A.
                Theodore Eckenhoff
            4,584,575
            
            37,556Benjamin
                D. Goldman
            4,586,799
            
            35,332R.
                Scott Horner
            4,584,989
            
            37,142James
                L. Kaltenbach, M.D.
            4,554,986
            
            67,145Robert
                H. King
            4,582,884
            
            39,247Howard
                E. Needleman
            4,585,382
            
            36,749Luis
                G. Rogers
            4,576,194
            
            45,937Ronald
                P. Sandmeyer
            4,547,753
            
            74,378Jeffrey
                P. Taylor
            4,513,719
            
            108,412James
                W. Yoh, Ph.D.
            4,575,373
            
            46,758






12







·  To
      approve of the Reorganization whereby the Bank will be reorganized into the
      holding company form of organization and will become a wholly-owned subsidiary
      of a newly-formed holding company called Sterling Banks, Inc.;




For
            Against
            Abstain3,288,832
            65,252
            2,975







·  To
      approve of the 2006 Employee Stock Option Plan;




For
            Against
            Abstain3,149,321
            173,549
            34,188







·  To
      approve a proposal whereby the Board of Directors shall be authorized to adjourn
      or postpone the Annual Meeting in order to solicit additional proxies if there
      are not enough votes at the time of the Annual Meeting to constitute a quorum
      or
      to approve the Reorganization or the 2006 Employee Stock Option Plan;
      and




For
            Against
            Abstain4,281,854
            317,233
            23,044







·  To
      transact such other business as may properly come before the Annual Meeting
      or
      any adjournments thereof.




All
      twelve members of the Board of Directors were re-elected and the Plan of
      Reorganization was approved.





**PART
      II**





**Item
      5. Market for Common Equity and Related Stockholder Matters.**





In
      May
      2005, the Bank completed the sale of a total of 1,437,500 shares of Common
      Stock, par value $2.00 per share, in a public offering at $9.75 per share,
      and
      the Bank received net proceeds of approximately $12.8 million. The offer and
      sale of these shares of common stock w as exempt
      from registration under the Securities Act of 1933 pursuant to section 3(a)(2) thereof.






13





The
      following table shows the stock option exercises in 2006. Only employees of
      the
      Bank exercised such options in 2006.




Date
            
            Exercised
                Shares
            
            Price01/05/06
            
            
            1,478
            
            $
            6.9901/05/06
            
            
            367
            
            
            8.4401/05/06
            
            
            525
            
            
            10.0001/23/06
            
            
            368
            
            
            8.4404/21/06
            
            
            500
            
            
            10.0005/11/06
            
            
            1,277
            
            
            9.0105/11/06
            
            
            1,216
            
            
            7.5605/11/06
            
            
            1,274
            
            
            6.9105/11/06
            
            
            1,654
            
            
            8.4405/24/06
            
            
            2,100
            
            
            10.0006/22/06
            
            
            368
            
            
            8.4406/22/06
            
            
            1,050
            
            
            10.0010/31/06
            
            
            1,552
            
            
            6.6611/27/06
            
            
            4,654
            
            
            6.6612/29/06
            
            
            1,552
            
            
            6.66




Stock
      option exercises are also exempt offers and sales under Section 3(a)(2) of
      the
      Securities Act.





The
      number of shareholders of record of common stock, as of December 31, 2006,
      was
      242.





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





The
      table
      below presents the high and low sales prices reported for our common stock
      as
      reported by the NASDAQ Capital Market for the periods indicated.





NASDAQ
                Capital MarketYear
            Quarter
            High
                price
            Low
                price2006
            4th
            $11.78
            $10.133rd
            12.45
            10.212nd
            13.66
            11.361st
            17.55
            11.192005
            4th
            $12.50
            $10.513rd
            12.51
            10.552nd
            12.00
            9.751st
            11.98
            10.00




**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
      both
      2005 and 2006, we paid four quarterly cash dividends of $0.03 per share.
      Subsequent to December 31, 2006, the Bank declared a cash dividend of $0.03
      per
      common share payable on February 21, 2006 to shareholders of record as of
      February 5, 2006. The Holding Company's ability to pay cash dividends to
      shareholders will depend on our ability to pay dividends to the Holding Company.
      Future payment of cash 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.






14





We
      have
      distributed a 5% stock dividend each year during the period from 1997 through
      2002 and from 2004 through 2006. We may consider declaring additional stock
      dividends 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 Financial Condition and Results of Operations” of the Bank’s Annual
      Report to Shareholders for the fiscal year ended December 31, 2006 (the “Annual
      Report”) is incorporated herein by reference.





**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 will be reduced by goodwill incurred
      in connection with the Merger.**




The
      Merger will be accounted for by the Holding 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 Holding Company through
      the
      Merger will be recorded as goodwill. Based on the financial information of
      Farnsworth as of June 30, 2006, the estimated pro forma goodwill of the Holding
      Company will be approximately $9.8 million, but the actual amount of goodwill
      is
      based on many factors and could exceed that amount. Because goodwill reduces
      regulatory capital, the Merger will make it more difficult for the Holding
      Company and the Bank to meet their regulatory capital requirements.
      The Bank and the Holding Company have agreed with the FRB to maintain sufficient
      capital to be considered well capitalized following the Merger. We currently
      expect that upon completion of the Merger, we will have sufficient regulatory
      capital to meet or slightly exceed the minimum capital required to be considered
      well capitalized. However, actions that we or the Holding Company might take
      following the Merger in order to increase regulatory capital could have the
      effect of limiting growth or reducing profitability.




**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.






15





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





As
      of
      December 31, 2006, our allowance for loan losses was approximately $1.8 million,
      which represented 0.72% of outstanding loans. At such date, we had two loans
      on
      non-accrual 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.





**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 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.





**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.






16





**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.





**If
      we are unable to successfully integrate the businesses of Peoples Savings
      Bank and Sterling Bank, the Holding Company’s business and earnings may be
      adversely affected.**




The
      success of the Merger will depend, in part, on our ability to realize the
      estimated costs savings from combining the businesses of Sterling Bank and
      Peoples Savings Bank. While the management of Sterling Bank and Peoples
      Savings Bank believe that our cost saving estimates are achievable, it is
      possible that these potential cost savings could be more difficult to achieve
      than anticipated. Our cost saving estimates will depend upon the ability to
      combine the businesses of Sterling Bank and Peoples Savings Bank in a
      manner that permits those savings to be realized. Integration of the businesses
      will involve consolidation of the operations, systems and procedures of the
      two
      institutions in order to eliminate redundant functions and costs and to operate
      on a consistent basis. We cannot assure you that it will be able to integrate
      the two operations without encountering difficulties, including the possible
      loss of employees or customers, disruptions in the delivery of services or
      inconsistencies in standards, controls, procedures and policies. Such
      difficulties could interfere with its ability to fully realize the expected
      benefits of the Merger.




**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, 2006, approximately 65% of our loans, including loans held for
      sale, 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.





**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; R. Scott Horner, our Executive Vice
      President and Chief Financial Officer; Dale F. Braun, Jr., our Senior Vice
      President and Controller; John Herninko, our Senior Vice President and Senior
      Loan Officer; 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.






17





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





At
      December 31, 2006 our lending limit per borrower was approximately $5.6 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
      approved for quotation on the Nasdaq Capital Market, it is not assured that
      an
      active trading market 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 a limited history of paying cash dividends on our common stock and there
      are restrictions on our ability to pay cash dividends.**





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, there is no assurance that the Bank
      will continue to pay cash dividends. 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.





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





As
      of
      March 15, 2007, our directors and executive officers beneficially owned
      approximately 976,000 shares, or approximately 19%, of our common stock,
      including options to purchase approximately 290,000 shares, in the aggregate,
      of
      our common stock at exercise prices ranging from $6.58 to $11.44 per share.
      In
      addition, approximately 8% of our common stock is controlled by a non-management
      shareholder. Also, approximately 6% 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.






18





**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 4,787,448 shares were issued and outstanding as of March
      15, 2007. 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, bringing the total of shares issued and outstanding to
      approximately 5,555,886 shares. 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. In addition, 505,037 shares of Common Stock
      have
      been reserved for issuance under our stock option plans. A total of 432,534
      shares of common stock have been reserved for issuance under options outstanding
      on March 15, 2007. As of March 15, 2007, options to purchase a total of 365,227
      shares were exercisable and had exercise prices ranging from $6.58 to $11.44.
      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**





**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.





**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.






19




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.**




The
      Sarbanes-Oxley Act of 2002, which became law in July 2002, may require future
      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 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 our annual
      report for our 2007 fiscal year. In addition, beginning with our 2008
      fiscal year, the public accounting firm auditing the Bank’s financial statements
      must attest to and report on management’s assessment of the effectiveness of the
      Bank’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, investors could lose confidence in the
      reliability of our financial statements, which could result in a decrease in
      the
      value of our securities.





**Item
      7. Financial Statements.**





The
      Bank's financial statements listed under Item 13 are incorporated herein by
      reference.





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





Not
      applicable .





**Item
      8A. Controls and Procedures.**





The
      Bank’s management, under the supervision and with the participation of its Chief
      Executive Officer and the Chief Financial Officer, evaluated, as of the end
      of
      the period covered by this report, the effectiveness of the design and operation
      of the Bank’s disclosure controls and procedures, as defined in Rule 13a-15
      under the Securities Exchange Act of 1934. Based on that evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that the Bank’s
      disclosure controls and procedures were effective as of the end of the Bank’s
      fiscal year ended December 31, 2006. There were no changes in the Bank’s
      internal control over financial reporting identified in connection with the
      evaluation that occurred during the Bank’s fourth fiscal quarter that have
      materially affected, or are reasonably likely to materially affect, the Bank’s
      internal control over financial reporting.





**Item
      8B. Other Information.**





Not
      applicable.








21


**PART
      III**





**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 Bank’s Proxy Statement for the 2007 Annual Meeting of
      Shareholders (the “Proxy Statement”) is incorporated herein by reference.





**Code
      of Ethics.** The
      Bank
      has adopted a Code of Ethics for the Bank’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 Bank, 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 Federal Reserve Board or by any other means approved by
      the
      Federal Reserve Board.





**Item
      10. Director and Executive Officer 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.






22





(d) 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
            436,414
            
            $8.94
            
            72,503Equity
                compensation plans not approved
              by
                shareholders
            not
                applicable
            
            not
                applicable
            
            not
                applicableTotal
            436,414
            
            $8.94
            
            72,503





**Item
      12. Certain Relationships and Related Transactions.**





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





**Item
      13. Exhibits.**





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





1.
            The
                statements of financial condition of Sterling Bank as of December
                31, 2006
                and 2005 and the related statements of operations, shareholders'
                equity
                and cash flows for the years ended December 31, 2006 and 2005 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
                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 Bank (c)3.2
            Bylaws
                of Sterling Bank, as amended (c)3.3
            Certificate
                of Incorporation of Sterling Banks, Inc. (d)3.4
            Bylaws
                of Sterling Banks, Inc. (e)4.1
            Specimen
                certificate for shares of common stock of Sterling Bank
                (c)10.1
            1994
                Employee Stock Option Plan (f)10.2
            1998
                Employee Stock Option Plan (f)10.3
            2003
                Employee Stock Option Plan (f)






23






10.4
            Employment
                agreement dated January 26, 2006 between the Bank and Robert H. King
                (g),
                (h)10.5
            Letter
                agreement dated January 15, 1998 between the Bank and R. Scott Horner
                (c),
                (h)10.6
            Letter
                agreement dated January 15, 1998 between the Bank and John Herninko
                (c),
                (h)10.7
            Letter
                agreement dated January 15, 1998 between the Bank and Theresa S.
“Sherri”
                Valentino Congdon (c), (h)10.8
            Lease
                dated as of April 3, 1990, as amended, for headquarters facility
                in Mount
                Laurel, New Jersey (f)13.1
            Portions
                of the Bank’s Annual Report to Shareholders for the fiscal year ended
                December 31, 200623.1
            Consent
              of McGladrey & Pullen, LLP, Independent Registered Public Accounting
              Firm31.1
            CEO
                Certification required under Section 302 of Sarbanes - Oxley Act
                of
                200231.2
            CFO
                Certification required under Section 302 of Sarbanes - Oxley Act
                of
                200232.1
            CEO
                Certification required under Section 906 of Sarbanes - Oxley Act
                of
                200232.2
            CFO
                Certification required under Section 906 of Sarbanes - Oxley Act
                of
                2002







(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 the Bank’s Registration Statement on Form 10-SB, as
                amended by Amendment No. 1, dated August 13, 2003.(d)
            Incorporated
                by reference to Exhibit 3.1 of Sterling Banks, Inc.; Registration
                Statement on Form S-4 (File no. 333-133649).(e)
            Incorporated
                by reference to Exhibit 3.4 of Sterling Banks, Inc.; Registration
                Statement on Form S-4 (File no. 333-133649).(f)
            Incorporated
                by reference to the Bank’s Annual Report on Form 10-KSB for the year ended
                December 31, 2003.(g)
            Incorporated
                by reference to the Bank’s Current Report on Form 8-K dated January 25,
                2006.(h)
            Management
                contract or compensatory plan or
                arrangement.





**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.







24





**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 OfficerDate:
                March 29, 2007





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 29, 2007.





/s/
                Robert H. King
            /s/
                Benjamin D. GoldmanRobert
                H. King
            Benjamin
                D. GoldmanPresident,
                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.Dale
                F. Braun, Jr.
            John
                J. Maley, Jr.Senior
                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__________________
            Ronald
                P. SandmeyerHoward
                E. Needleman
            DirectorVice
                Chairman/s/
                Jeffery P. Taylor, P.E._________________
            Jeffrey
                P. Taylor, P.E.S.
                David Brandt, Esq.
            DirectorDirector/s/
                James Yoh, Ph.D/s/
                Jeffrey Dubrow
            James
                Yoh, PhD.Jeffrey
                Dubrow
            DirectorDirector




25