Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - Sterling Banks, Inc. | ex32.htm |
EX-15 - EXHIBIT 15 - Sterling Banks, Inc. | ex15.htm |
EX-31.1 - EXHIBIT 31.1 - Sterling Banks, Inc. | ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - Sterling Banks, Inc. | ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q/A
(Amendment
No.1)
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended: September 30, 2009
or
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ____________ to ____________
Commission
File No. 333-133649
STERLING BANKS,
INC.
(Exact
name of registrant as specified in its charter)
New Jersey
|
20-4647587
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification Number)
|
3100 Route 38, Mount Laurel,
New Jersey 08054
(Address
of principal executive offices) (Zip Code)
856-273-5900
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.Yes
X No
___
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes_____No_____
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):YES NO
X
Number of shares outstanding of the
registrant’s common stock, par value $2.00 per share, outstanding as of November
24, 2009: 5,843,362
STERLING
BANKS, INC.
FORM
10-Q/A
FOR
THE QUARTER ENDED SEPTEMBER 30, 2009
INDEX
Part I
|
FINANCIAL
INFORMATION
|
Page
|
Item
1.
|
Consolidated
Financial Statements
|
|
Balance
Sheets
|
||
Statements
of Operations
|
||
Statements
of Shareholders’ Equity
|
||
Statements
of Cash Flows
|
||
Notes
to Consolidated Financial Statements
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
|
|
and
Results of Operations
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
Item
4T.
|
Controls
and Procedures
|
|
Part II
|
OTHER
INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
|
Item
1A.
|
Risk
Factors
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
Item
5.
|
Other
Information
|
|
Item
6.
|
Exhibits
|
|
SIGNATURES
|
EXHIBITS
Exhibit
15
|
|
Exhibit
31.1
|
|
Exhibit
31.2
|
|
Exhibit
32
|
|
|
3
EXPLANATORY
NOTE
Sterling
Banks, Inc. (the “Company”) is filing this Amendment No. 1 to its Quarterly
Report on Form 10−Q for the quarter ended September 30, 2009, originally filed
with the Securities and Exchange Commission (the “SEC”) on November 25, 2009
(the “Original Filing”), to amend and restate the Company’s unaudited
consolidated financial statements as of and for the three and nine months ended
September 30, 2009.
The
allowance for loan losses was increased and provision for loan losses was
decreased from amounts previously reported to reflect changes to the qualitative
reserve factors used to determine the general reserves and impairment amounts
for specific reserves that the Company’s wholly owned subsidiary, Sterling Bank
(the “Bank”), utilized in calculating its allowance for loan losses as of June
30, 2009. The adjustment in the qualitative reserve factors and
impaired amounts reflected second quarter trends in delinquent, classified and
non-performing loans in the Bank’s loan portfolio, which were raised as part of
the Bank’s recent regulatory examination by the Federal Reserve Bank of
Philadelphia (the “FRB”) as was concluded by the issuance of a Report of
Examination dated November 30, 2009. This regulatory examination
issue was raised but unresolved at the time of the Original Filing with the
SEC. As a result of subsequent discussions
with the FRB, the Company concluded that the allowance for loan losses as of
June 30, 2009 should be increased by $5.0 million and determined to establish a
valuation allowance for deferred tax assets of $5.6 million as of and for the
three months ended June 30, 2009. These adjustments also impacted
reported amounts in the Original Filing. The decision to restate the
second quarter and third quarter financial statements was approved by the Board
of Directors of Sterling Banks, Inc. on January 14, 2010.
As a
result of the changes noted above, the Bank’s September 30, 2009 capital ratios
continue to be below the level considered “well capitalized” and the Bank
continues to be considered “adequately capitalized” by established regulatory
standards.
The
Company also reassessed the effectiveness of the disclosure controls and
procedures and of the design and operations of its internal controls over
financial reporting. Based on that evaluation and due to the
restatement of the unaudited consolidated financial statements as of and for the
three and six months ended June 30 and September 30, 2009, the Company concluded
that its internal controls over financial reporting were not effective as of
June 30 and September 30, 2009. The Company’s conclusion was
primarily related to the Company’s review and reassessment of management’s
policies and procedures for the monitoring and timely evaluation of and revision
to management’s approach for assessing credit risk inherent in the loan
portfolio to reflect changes in the economic environment.
The
information in this Amendment has been updated to give effect to the
restatement. The Company has not modified nor updated the information
in the Original Filing, except as necessary to reflect the effects of the
restatements described above. This Amendment continues to speak as of
the dates described herein, and the Company has not updated the disclosures
contained in the Original Filing to reflect any events that occurred subsequent
to such dates. Information not affected by the restatement is
unchanged and reflects the disclosures made at the time of the Original
Filing.
Based on
the foregoing, only the following items have been amended:
· Part I
– Financial Information:
· Item 1
– Financial Statements
· Item 2
– Management’s Discussion and Analysis of Financial Condition and Results of
Operations
· Item 3
– Quantitative and Qualitative Disclosures About Market Risk
· Item 4T
– Controls and Procedures
For the
convenience of the reader, this Form 10−Q/A sets forth the initial Form 10-Q in
its entirety, although the Company is only amending those portions affected by
the restatement described above.
4
In
addition, as required by Rule 12b−15 under the Securities Exchange Act of 1934,
as amended, new, currently-dated certifications of our principal executive
officer and principal financial officer are filed herewith as Exhibits 31.1,
31.2, and 32.
5
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders
Sterling
Banks, Inc.
We have
reviewed the accompanying consolidated balance sheet of Sterling Banks, Inc. and
Subsidiary (the “Company”) as of September 30, 2009, the related consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 2009 and 2008, and the related statements of shareholders' equity
and cash flows for the nine-month periods ended September 30, 2009 and
2008. These consolidated financial statements are the responsibility
of the Company's management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit
conducted in accordance with the standards of the Public Company Accounting
Oversight Board, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to the accompanying consolidated financial statements referred to above for them
to be in conformity with U.S. generally accepted accounting
principles.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board, the consolidated balance sheet of the Company as of
December 31, 2008, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for the year then ended (not presented
herein); and in our report dated April 15, 2009, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2008, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Blue
Bell, Pennsylvania
March 8,
2010
McGladrey
& Pullen, LLP is a member firm of RSM International –
an
affiliation of separate and independent legal entities.
6
Part
I. Financial Information
Item 1.
Financial Statements
STERLING
BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER
30, 2009 AND DECEMBER 31, 2008
September
30,
2009
(Unaudited
and Restated)
(See
Note 2)
|
December
31,
2008
|
|||||||
ASSETS
|
||||||||
Cash
and cash due from banks
|
$ | 9,071,000 | $ | 13,054,000 | ||||
Federal
funds sold
|
19,498,000 | 472,000 | ||||||
Cash
and cash equivalents
|
28,569,000 | 13,526,000 | ||||||
Investment
securities held-to-maturity, at cost (fair value of
$12,174,000
at
September 30, 2009 and $19,992,000 at December 31, 2008)
|
11,802,000 | 19,884,000 | ||||||
Investment
securities available-for-sale, at fair value
|
35,340,000 | 24,097,000 | ||||||
Total
investment securities
|
47,142,000 | 43,981,000 | ||||||
Restricted
stock, at cost
|
2,014,000 | 2,448,000 | ||||||
Loans
held for sale
|
- | 2,000 | ||||||
Loans
|
296,914,000 | 305,626,000 | ||||||
Less:
allowance for loan losses
|
(10,607,000 | ) | (8,531,000 | ) | ||||
Total
net loans
|
286,307,000 | 297,095,000 | ||||||
Core
deposit intangible asset, net
|
2,077,000 | 2,374,000 | ||||||
Bank
premises and equipment, net
|
8,297,000 | 8,526,000 | ||||||
Branch
Property Held for Sale
|
505,000 | 596,000 | ||||||
Accrued
interest receivable and other assets
|
8,176,000 | 10,557,000 | ||||||
Total
assets
|
$ | 383,087,000 | $ | 379,105,000 |
See
Notes to Consolidated Financial Statements
7
STERLING BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER
30, 2009 AND DECEMBER 31, 2008
September
30,
2009
(Unaudited
and Restated)
(See
Note 2)
|
December
31,
2008
|
|||||||
LIABILITIES
Deposits
|
||||||||
Noninterest-bearing
|
$ | 31,367,000 | $ | 35,873,000 | ||||
Interest-bearing
|
311,836,000 | 292,721,000 | ||||||
Total
deposits
|
343,203,000 | 328,594,000 | ||||||
Federal
Home Loan Bank advances
|
15,250,000 | 16,000,000 | ||||||
Subordinated
debentures
|
6,186,000 | 6,186,000 | ||||||
Accrued
interest payable and other accrued liabilities
|
1,606,000 | 1,204,000 | ||||||
Total
liabilities
|
366,245,000 | 351,984,000 | ||||||
COMMITMENTS
AND CONTINGENCIES (Note 3)
|
||||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Preferred
stock, no par value, 10,000,000 shares authorized, none
issued
or
outstanding
|
- | - | ||||||
Common
stock,
$2
par value, 15,000,000 shares authorized; 5,843,362 issued and
outstanding
at September 30, 2009 and December 31, 2008
|
11,687,000 | 11,687,000 | ||||||
Additional
paid-in capital
|
29,823,000 | 29,767,000 | ||||||
Accumulated
deficit
|
(24,997,000 | ) | (14,279,000 | ) | ||||
Accumulated
other comprehensive income (loss)
|
329,000 | (54,000 | ) | |||||
Total
shareholders' equity
|
16,842,000 | 27,121,000 | ||||||
Total liabilities and
shareholders' equity
|
$ | 383,087,000 | $ | 379,105,000 |
See
Notes to Consolidated Financial Statements
8
STERLING BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
For
the three months ended September 30,
2009
|
For
the three months ended September 30,
2008
|
For
the nine months ended September 30,
2009
|
For
the nine months ended September 30,
2008
|
|||||||||||||
(Restated)
|
(Restated)
|
|||||||||||||||
(See
Note 2)
|
(See
Note 2)
|
|||||||||||||||
INTEREST
INCOME
|
||||||||||||||||
Interest
and fees on loans
|
$ | 4,294,000 | $ | 5,125,000 | $ | 12,799,000 | $ | 15,839,000 | ||||||||
Interest
and dividends on securities
|
465,000 | 318,000 | 1,450,000 | 1,093,000 | ||||||||||||
Interest
on due from banks and federal funds sold
|
5,000 | 21,000 | 17,000 | 161,000 | ||||||||||||
Total
interest and dividend income
|
4,764,000 | 5,464,000 | 14,266,000 | 17,093,000 | ||||||||||||
INTEREST
EXPENSE
|
||||||||||||||||
Interest
on deposits
|
1,632,000 | 1,985,000 | 5,442,000 | 6,994,000 | ||||||||||||
Interest
on Federal Home Loan Bank advances and
overnight
borrowings
|
163,000 | 31,000 | 484,000 | 110,000 | ||||||||||||
Interest
on subordinated debentures
|
107,000 | 105,000 | 316,000 | 313,000 | ||||||||||||
Total
interest expense
|
1,902,000 | 2,121,000 | 6,242,000 | 7,417,000 | ||||||||||||
Net
interest income
|
2,862,000 | 3,343,000 | 8,024,000 | 9,676,000 | ||||||||||||
PROVISION
FOR LOAN LOSSES
|
- | 105,000 | 5,390,000 | 505,000 | ||||||||||||
Net
interest income after provision for loan losses
|
2,862,000 | 3,238,000 | 2,634,000 | 9,171,000 | ||||||||||||
NONINTEREST
INCOME
|
||||||||||||||||
Service
charges
|
64,000 | 65,000 | 194,000 | 188,000 | ||||||||||||
Gains
on sales of available-for-sale securities
|
- | - | 5,000 | 95,000 | ||||||||||||
Gains
on sales of fixed assets
|
- | 1,000 | - | 5,000 | ||||||||||||
Miscellaneous
fees and other
|
113,000 | 217,000 | 383,000 | 507,000 | ||||||||||||
Total
noninterest income
|
177,000 | 283,000 | 582,000 | 795,000 | ||||||||||||
NONINTEREST
EXPENSES
|
||||||||||||||||
Compensation
and benefits
|
1,580,000 | 1,719,000 | 4,780,000 | 5,516,000 | ||||||||||||
Occupancy,
equipment and data processing
|
887,000 | 923,000 | 2,714,000 | 2,751,000 | ||||||||||||
Marketing
and business development
|
125,000 | 124,000 | 393,000 | 419,000 | ||||||||||||
Professional
services
|
336,000 | 246,000 | 960,000 | 681,000 | ||||||||||||
FDIC
insurance
|
371,000 | 90,000 | 870,000 | 303,000 | ||||||||||||
Amortization
of core deposit intangible asset
|
99,000 | 86,000 | 297,000 | 261,000 | ||||||||||||
Impairment
or disposal of fixed assets
|
- | - | 84,000 | - | ||||||||||||
Losses
on sales and impairment of repossessed
property
|
- | - | 77,000 | - | ||||||||||||
Other
operating expenses
|
220,000 | 194,000 | 848,000 | 657,000 | ||||||||||||
Total
noninterest expenses
|
3,618,000 | 3,382,000 | 11,023,000 | 10,588,000 | ||||||||||||
INCOME
(LOSS) BEFORE INCOME TAX
EXPENSE
(BENEFIT)
|
(579,000 | ) | 139,000 | (7,807,000 | ) | (622,000 | ) | |||||||||
INCOME
TAX EXPENSE (BENEFIT)
|
- | 60,000 | 2,911,000 | (217,000 | ) | |||||||||||
NET
INCOME (LOSS)
|
$ | (579,000 | ) | $ | 79,000 | $ | (10,718,000 | ) | $ | (405,000 | ) | |||||
NET
INCOME (LOSS) PER COMMON SHARE
|
||||||||||||||||
Basic
and Diluted
|
$ | (0.09 | ) | $ | 0.01 | $ | (1.83 | ) | $ | (0.07 | ) | |||||
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||||||||||
Basic
|
5,843,362 | 5,843,362 | 5,843,362 | 5,843,362 | ||||||||||||
Diluted
|
5,843,362 | 5,849,335 | 5,843,362 | 5,843,362 |
See
Notes to Consolidated Financial Statements
9
STERLING BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
Retained
|
Accumulated
|
|||||||||||||||||||||||
Additional
|
Earnings
|
Other
|
Total
|
|||||||||||||||||||||
Common
Stock
|
Paid-In
|
(Accumulated
|
Comprehensive
|
Shareholders'
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit)
|
Income
(Loss)
|
Equity
|
|||||||||||||||||||
December
31, 2007
|
5,843,362 | $ | 11,687,000 | $ | 29,708,000 | $ | 1,949,000 | $ | (36,000 | ) | $ | 43,308,000 | ||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss – 2008
|
- | - | - | (405,000 | ) | - | (405,000 | ) | ||||||||||||||||
Change
in net unrealized loss on
|
||||||||||||||||||||||||
securities
available-for-sale, net
|
||||||||||||||||||||||||
of
reclassification adjustment
|
||||||||||||||||||||||||
and
tax effects
|
- | - | - | - | (80,000 | ) | (80,000 | ) | ||||||||||||||||
Total
comprehensive loss
|
(485,000 | ) | ||||||||||||||||||||||
Stock
compensation
|
- | - | 40,000 | - | - | 40,000 | ||||||||||||||||||
September
30, 2008
|
5,843,362 | $ | 11,687,000 | $ | 29,748,000 | $ | 1,544,000 | $ | (116,000 | ) | $ | 42,863,000 | ||||||||||||
December
31, 2008
|
5,843,362 | $ | 11,687,000 | $ | 29,767,000 | $ | (14,279,000 | ) | $ | (54,000 | ) | $ | 27,121,000 | |||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss – 2009 (Restated – See Note 2)
|
- | - | - | (10,718,000 | ) | - | (10,718,000 | ) | ||||||||||||||||
Change
in net unrealized gain (loss)
|
||||||||||||||||||||||||
on
securities available-for-sale,
|
||||||||||||||||||||||||
net
of reclassification adjustment
|
||||||||||||||||||||||||
and
tax effects
|
- | - | - | - | 383,000 | 383,000 | ||||||||||||||||||
Total
comprehensive loss
|
(10,335,000 | ) | ||||||||||||||||||||||
Stock
compensation
|
- | - | 56,000 | - | - | 56,000 | ||||||||||||||||||
September
30, 2009 (Restated – See Note 2)
|
5,843,362 | $ | 11,687,000 | $ | 29,823,000 | $ | (24,997,000 | ) | $ | 329,000 | $ | 16,842,000 | ||||||||||||
See
Notes to Consolidated Financial Statements
10
STERLING BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
2009
|
2008
|
|||||||
(Restated)
|
||||||||
(See
Note 2)
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (10,718,000 | ) | $ | (405,000 | ) | ||
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
||||||||
Depreciation
and amortization of premises and equipment
|
770,000 | 809,000 | ||||||
Provision
for loan losses
|
5,390,000 | 505,000 | ||||||
Net
amortization of purchase premium on securities
|
288,000 | 27,000 | ||||||
Net
amortization of core deposit intangible
|
297,000 | 261,000 | ||||||
Stock
compensation
|
56,000 | 40,000 | ||||||
Realized
loss (gain) on sales, write down or retirement of buildings and
equipment
|
84,000 | (5,000 | ) | |||||
Realized
loss on sales or write down of repossessed property
|
77,000 | - | ||||||
Realized
gain on sales of securities available-for-sale
|
(5,000 | ) | (95,000 | ) | ||||
Realized
gain on sales of loans held for sale
|
- | (12,000 | ) | |||||
Proceeds
from sale of loans held for sale
|
2,000 | 1,058,000 | ||||||
Originations
of loans held for sale
|
- | (1,020,000 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Decrease
in accrued interest receivable and other assets
|
1,613,000 | 135,000 | ||||||
Increase
(Decrease) in accrued interest payable and other accrued
liabilities
|
403,000 | (198,000 | ) | |||||
Net
cash (used in) provided by operating activities
|
(1,743,000 | ) | 1,100,000 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of securities available-for-sale
|
(19,826,000 | ) | (3,995,000 | ) | ||||
Purchases
of securities held-to-maturity
|
- | (15,322,000 | ) | |||||
Proceeds
from sales of securities available-for- sale
|
- | 5,470,000 | ||||||
Proceeds
from maturities of securities available-for-sale
|
4,005,000 | 25,900,000 | ||||||
Proceeds
from maturities of securities held-to-maturity
|
169,000 | - | ||||||
Proceeds
from principal payments on mortgage-backed securities
available-for-sale
|
5,118,000 | 2,090,000 | ||||||
Proceeds
from principal payments on mortgage-backed securities
held-to-maturity
|
7,728,000 | 1,550,000 | ||||||
Purchases
of restricted stock
|
(219,000 | ) | (2,465,000 | ) | ||||
Proceeds
from sale of restricted stock
|
653,000 | 2,246,000 | ||||||
Net
decrease in loans
|
5,398,000 | 9,833,000 | ||||||
Proceeds
from sales of other real estate owned
|
435,000 | - | ||||||
Proceeds
from sales of equipment
|
- | 46,000 | ||||||
Purchases
of premises and equipment
|
(534,000 | ) | (392,000 | ) | ||||
Cash
paid for acquisition
|
- | (25,000 | ) | |||||
Net
cash provided by investing activities
|
2,927,000 | 24,936,000 | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Net
(decrease) increase in noninterest-bearing deposits
|
(4,506,000 | ) | 1,553,000 | |||||
Net
increase (decrease) in interest-bearing deposits
|
19,115,000 | (29,028,000 | ) | |||||
Proceeds
from Federal Home Loan Advances
|
- | 5,500,000 | ||||||
Repayments
of Federal Home Loan Advances
|
(750,000 | ) | - | |||||
Net
cash provided by (used in) financing activities
|
13,859,000 | (21,975,000 | ) | |||||
INCREASE
IN CASH AND CASH EQUIVALENTS
|
15,043,000 | 4,061,000 | ||||||
CASH
AND CASH EQUIVALENTS, JANUARY 1,
|
13,526,000 | 11,788,000 | ||||||
CASH
AND CASH EQUIVALENTS, SEPTEMBER 30,
|
$ | 28,569,000 | $ | 15,849,000 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash:
|
||||||||
Interest
on deposits and borrowed funds
|
$ | 6,121,000 | $ | 7,604,000 | ||||
Income
taxes
|
$ | - | $ | 1,000 | ||||
Noncash
investing activities:
|
||||||||
Transfer
of loans to other real estate owned
|
$ | 1,374,000 | $ | - |
See
Notes to Consolidated Financial Statements
11
STERLING BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. DESCRIPTION OF BUSINESS
Sterling
Banks, Inc. (the “Company”) is a bank holding company headquartered in Mount
Laurel, NJ. Through its subsidiary, Sterling Bank (the “Bank”), the
Company provides individuals, businesses and institutions with commercial and
retail banking services, principally in loans and deposits. Sterling
Banks, Inc. was incorporated under the laws of the State of New Jersey on
February 28, 2006 for the sole purpose of becoming the holding company of the
Bank.
The Bank
is a commercial bank, which was incorporated on September 1, 1989, and commenced
operations on December 7, 1990. The Bank is chartered by the New
Jersey Department of Banking and Insurance and is a member of the Federal
Reserve System and the Federal Deposit Insurance Corporation. The
Bank maintains its principal office at 3100 Route 38 in Mount Laurel, New Jersey
and has nine other full service branches. The Bank’s primary deposit
products are checking, savings and term certificate accounts, and its primary
loan products are consumer, residential mortgage and commercial
loans.
NOTE
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The
Company has restated the accompanying unaudited condensed consolidated financial
statements as of and for the three and nine months ended September 30,
2009. The allowance for loan losses was increased and provision for
loan losses was decreased from amounts previously reported to reflect a
correction of the qualitative reserve factors used to determine the general
reserves and impairment amounts for specific reserves that the Bank utilized in
calculating its allowance for loan losses as of June 30, 2009. The
adjustment in the qualitative reserve factors reflected second quarter trends in
delinquent, classified and non-performing loans in the Bank’s loan portfolio,
which were raised as part of the Bank’s regulatory examination by the FRB for
the period ending June 30, 2009. As a result, the Company concluded
that the allowance for loan losses as of June 30, 2009 should be increased by
$5,000,000 and determined to establish a valuation allowance for deferred tax
assets of $5.6 million. The correction was recorded in the
three-month and six-month periods ended June 30, 2009 based upon the significant
increase in the number of charge-offs experienced by the Company during the
period, deterioration noted in the commercial real estate market, and changes in
the various loss estimates on the Company’s nonperforming loan
portfolio. This correction also affected the amounts recorded as of
and for the three and nine months ended September 30, 2009, including the
valuation allowance for deferred tax assets that was initially reported during
this period.
The
effect of the restatement is as follows:
Consolidated
Balance Sheets as of September 30, 2009
As Reported
|
Adjustment
|
Restated
|
||||||||||
Allowance
for loan losses
|
$ | (6,682,000 | ) | $ | (3,925,000 | ) | $ | (10,607,000 | ) | |||
Total
net loans
|
$ | 290,232,000 | $ | (3,925,000 | ) | $ | 286,307,000 | |||||
Accrued
interest receivable and other assets
|
$ | 9,064,000 | $ | (888,000 | ) | $ | 8,176,000 | |||||
Total
assets
|
$ | 387,900,000 | $ | (4,813,000 | ) | $ | 383,087,000 | |||||
Accumulated
deficit
|
$ | (20,184,000 | ) | $ | (4,813,000 | ) | $ | (24,997,000 | ) | |||
Total
shareholders’ equity
|
$ | 21,655,000 | $ | (4,813,000 | ) | $ | 16,842,000 |
12
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)
Consolidated
Statements of Operations
For
the three months ended September 30, 2009
|
For
the nine months ended September 30, 2009
|
|||||||||||||||||||||||
As Reported
|
Adjustment
|
Restated
|
As Reported
|
Adjustment
|
Restated
|
|||||||||||||||||||
Provision
for loan losses
|
$ | 1,075,000 | $ | (1,075,000 | ) | $ | - | $ | 1,465,000 | $ | 3,925,000 | $ | 5,390,000 | |||||||||||
Net
interest income
after
provision for
loan
losses
|
$ | 1,787,000 | $ | 1,075,000 | $ | 2,862,000 | $ | 6,559,000 | $ | (3,925,000 | ) | $ | 2,634,000 | |||||||||||
Loss
before income tax
expense
(benefit)
|
$ | (1,654,000 | ) | $ | 1,075,000 | $ | (579,000 | ) | $ | (3,882,000 | ) | $ | (3,925,000 | ) | $ | (7,807,000 | ) | |||||||
Income
tax expense
(benefit)
|
$ | 2,856,000 | $ | (2,856,000 | ) | $ | - | $ | 2,023,000 | $ | 888,000 | $ | 2,911,000 | |||||||||||
Net
loss
|
$ | (4,510,000 | ) | $ | 3,931,000 | $ | (579,000 | ) | $ | (5,905,000 | ) | $ | (4,813,000 | ) | $ | (10,718,000 | ) | |||||||
Net
loss per common
share
|
||||||||||||||||||||||||
Basic
and Diluted
|
$ | (0.77 | ) | $ | 0.68 | $ | (0.09 | ) | $ | (1.01 | ) | $ | (0.82 | ) | $ | (1.83 | ) |
Consolidated
Statements of Cash Flows
For
the nine months ended September 30, 2009
|
||||||||||||
As Reported
|
Adjustment
|
Restated
|
||||||||||
Net
loss
|
$ | (5,905,000 | ) | $ | (4,813,000 | ) | $ | (10,718,000 | ) | |||
Provision
for loan losses
|
$ | 1,465,000 | $ | 3,925,000 | $ | 5,390,000 | ||||||
Decrease
in accrued interest receivable and other assets
|
$ | 725,000 | $ | 888,000 | $ | 1,613,000 |
Certain
amounts were also restated and additional disclosures are provided in the
footnotes primarily in “Note 3 – Summary of Significant Accounting Policies,
Income Taxes”, “Note 8 – Capital Ratios”, “Note 9 – Fair Value”, “Note 10 –
Loans”, and “Note 11 – Allowance for Loan Losses.”
NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial
Statements and Basis of Presentation
The
financial statements included herein have not been audited, except for the
balance sheet at December 31, 2008, which was derived from the audited financial
statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted; therefore, these financial
statements should be read in conjunction with the audited financial statements
and the notes thereto for the year ended December 31, 2008. The
accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to present a fair statement of the results for
the interim periods presented. Such adjustments are of a normal
recurring nature. The results for the three and nine months ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009.
The
financial statements include the accounts of Sterling Banks, Inc. and its
wholly-owned subsidiary, Sterling Bank. Sterling Banks Capital Trust
I is a wholly-owned subsidiary but is not consolidated because it does not meet
the requirements. All significant inter-company balances and
transactions have been eliminated.
13
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
Use
of Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from such
estimates. Material estimates that are
particularly susceptible to significant change in the near term are the
determination of the allowance for loan losses, the valuation of deferred tax
assets, the valuation of intangible assets and the fair value of financial
instruments.
Accounting
Standards Codification
The
Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) became effective on July 1, 2009. At that date,
the ASC became FASB’s officially recognized source of authoritative U.S.
generally accepted accounting principles (“GAAP”) applicable to all public and
non-public non-governmental entities, superseding existing FASB, American
Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force
(“EITF”) and related literature. Rules and interpretive releases of
the Securities and Exchange Commission (“SEC”) under the authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies
refer to GAAP in financial statements and accounting policies. Citing
particular content in the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure.
Commitments
In the
normal course of business, there are various outstanding commitments to extend
credit, such as letters of credit and unadvanced loan commitments, which are not
reflected in the accompanying financial statements. Management does
not anticipate any material losses as a result of these
commitments.
Contingencies
The
Company, from time to time, is a party to routine litigation that arises in the
normal course of business. Management does not believe the resolution
of this litigation, if any, would have a material adverse effect on the
Company’s financial condition or results of operations. However, the
ultimate outcome of any such matter, as with litigation generally, is inherently
uncertain and it is possible that some of these matters may be resolved
adversely to the Company.
Investments
The
Company has identified investment securities that it has the intent and ability
to hold to maturity considering all reasonably foreseeable events or
conditions. The securities are classified as
“held-to-maturity.” The Company has also identified investment
securities that will be held for indefinite periods of time, including
securities that will be used as part of the Company’s asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments and similar factors. These securities are classified as
“available-for-sale” and are carried at fair value, with any temporary
unrealized gains or losses reported as other comprehensive income, net of the
related income tax effect, a separate component of shareholders’
equity.
14
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance
for Losses on Loans
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance. The allowance is an amount that management believes will
be adequate to absorb estimated losses relating to specifically identified
loans, as well as probable credit losses in the balance of the loan portfolio,
based on an evaluation of the collectibility of existing loans and prior loss
experience.
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectability of loans in light
of changes in the nature and volume of the loan portfolio, overall portfolio
quality and historical experience, review of specific problem loans, adverse
situations which may affect borrowers’ ability to repay, estimated value of any
underlying collateral, prevailing economic conditions, and other factors which
may warrant current recognition. Such periodic assessments may, in
management’s judgment, require the Company to recognize additions or reductions
to the allowance.
Various
regulatory agencies periodically review the adequacy of the Company’s allowance
for loan losses as an integral part of their examination
process. Such agencies may require the Company to recognize additions
or reductions to the allowance based on their judgments of information available
to them at the time of their examination. This evaluation is
inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan by loan basis for commercial
and construction loans by either the present value of expected future cash flows
discounted at the loan’s effective rate, the loan’s obtainable market price or
the fair value of the collateral if the loan is collateral
dependent.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify
individual residential mortgage and consumer loans for impairment
disclosures.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, including property and equipment and definite
lived intangibles, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying
amount. Impairment, if any, is assessed using discounted cash
flows. During the nine months ended September 30, 2009, impairment
was identified on our former Gaither Road location that is held for sale and a
write down of $82,000 was recorded. No impairments occurred during
the nine months ended September 30, 2008.
15
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
Core
Deposit Intangible
Core
deposit intangibles arise from purchase business combinations. On
March 16, 2007, we completed our merger with the former Farnsworth Bancorp,
Inc. We were deemed to be the purchaser for accounting purposes and
thus recognized a core deposit intangible asset in connection with the
merger. The establishment and subsequent amortization of this
intangible asset requires several assumptions including, among other things, the
estimated cost to service deposits acquired, discount rates, estimated attrition
rates and useful lives. If the value of the core deposit intangible
or the customer relationship intangible is determined to be less than the
carrying value in future periods, a write down would be taken through a charge
to our earnings. The most significant element in evaluation of these
intangibles is the attrition rate of the acquired deposits. If such
attrition rate accelerates from that which we expected, the intangible is
reduced by a charge to earnings. The attrition rate related to
deposit flows is influenced by many factors, the most significant of which are
alternative yields for deposits available to customers and the level of
competition from other financial institutions and financial services
companies. In connection with our annual impairment testing in the
fourth quarter of 2008, we reassessed the carrying value of the core deposit
intangible, determined that the value of the core deposit relationship had
declined below its carrying value, and charged earnings for $475,000 in the
fourth quarter of 2008. We further reassessed the estimated useful
life and determined that with changes in the marketplace, a remaining useful
life of six years would be more appropriate.
Income
Taxes
Deferred
income taxes arise principally from the difference between the income tax basis
of an asset or liability and its reported amount in the financial statements, at
the statutory income tax rates expected to be in effect when the taxes are
actually paid or recovered. Deferred income tax assets are reduced by
a valuation allowance when, based on the weight of evidence available, it is
more likely than not that all or some portion of the net deferred tax assets may
not be realized.
When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that ultimately would be sustained. The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more-likely-than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. The evaluation of a tax
position taken is considered by itself and not offset or aggregated with other
positions. Tax positions that meet the more-likely-than not
recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of benefits associated with
tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the balance sheet
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination. It is the Company’s policy to
recognize interest and penalties related to the unrecognized tax liabilities
within income tax expense in the statements of operations.
16
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
As of the
second quarter, on a restated basis, the Company updated its analysis of whether
a valuation allowance should be recorded against its deferred tax
assets. Accounting literature states that a deferred tax asset should
be reduced by a valuation allowance if, based on the weight of all available
evidence, it is more likely than not (a likelihood of more than 50%) that some
portion or the entire deferred tax asset will not be realized. The
determination of whether a deferred tax asset is realizable is based on
weighting all available evidence, including both positive and negative
evidence. In making such judgments, significant weight is given to
evidence that can be objectively verified. The impact of the
correction of the allowance for loan loss and continued near-term losses
represent significant negative evidence that caused the Company to conclude that
a $5.6 million deferred tax valuation allowance was required at June 30, 2009
because the Company has determined it can no longer meet the more likely than
not threshold for recognizing this asset. Of this amount,
approximately $2.9 million represents previously recognized deferred tax
benefits where the Company has determined they can no longer meet the more
likely than not threshold for recognizing this asset.
During
the third quarter 2009, the Company recorded no income tax expense (benefit) as
the increase in deferred tax assets was offset by a corresponding increase to
the valuation allowance. To the extent that the Company generates
taxable income in a given quarter, the valuation allowance may be reduced to
fully or partially offset the corresponding income tax expense. Any
remaining deferred tax asset valuation allowance will ultimately reverse through
income tax expense when the Company can demonstrate a sustainable return to
profitability that would lead management to conclude that it is more likely than
not that the deferred tax asset will be utilized during the carryforward
period.
The
Worker, Homeownership, and Business Assistance Act of 2009 was passed during the
fourth quarter of 2009 and will allow the Company to carry back its fiscal 2009
taxable loss up to five years. This recently enacted legislation will
enable the Company to record a federal income tax receivable of approximately
$750,000 at December 31, 2009 and reduce its’ recorded valuation
allowance by the same amount in the fourth quarter 2009.
Recent
Accounting Pronouncements
FASB ASC
Topic 260, Earnings Per
Share
On
January 1, 2009, FASB ASC Topic 260, Earnings Per
Share became effective, which provides that unvested share
based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents are considered participating securities and should be
included in the computation of basic Earnings per share using the two class
method. At September 30, 2009 the Company did not have any shares
which were considered participating securities.
17
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
FASB ASC
Topic 820, Fair Value
Measurements and Disclosures (Accounting Standards Update No.
2009-5)
FASB ASC
Topic 820 (Accounting Standards Update No. 2009-5) provides additional guidance
on: a) determining when the volume and level of activity for the asset or
liability has significantly decreased; b) identifying circumstances in which a
transaction is not orderly; and c) understanding the fair value measurement
implications of both (a) and (b). This new guidance requires several
new disclosures, including the inputs and valuation techniques used to measure
fair value and a discussion of changes in valuation techniques and related
inputs, if any, in both interim and annual periods. The Company
adopted this new guidance on April 1, 2009. Adoption of this new
guidance did not have a significant impact on the Company’s financial position
or results of operations.
FASB ASC
Topic 320, Investments - Debt
and Equity Securities
FASB ASC
Topic 320 provides new guidance on the recognition and presentation of an
other-than-temporary impairment (“OTTI”) and requires additional
disclosures. The recognition provisions within this new guidance
apply only to our debt securities classified as available-for-sale and
held-to-maturity, while the presentation and disclosure requirements within this
new guidance apply to both our debt and equity securities. An
impaired debt security will be considered other-than-temporarily impaired if we
have the intent to sell or it more likely than not we will be required to sell
prior to recovery of the amortized cost. In these situations the OTTI
recognized in net income (loss) is equal to difference between amortized cost
and fair value. If we do not expect recovery of the entire cost
basis, even if we have no intention to sell the security, it will be considered
an OTTI as well. In this situation the new guidance requires we
recognize OTTI by separating the loss between the amount representing the credit
loss and the amount relating to other factors. Credit losses will be
recognized in net income and losses relating to other factors will be recognized
in other comprehensive income (“OCI”). FASB ASC Topic 320 is
effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. FASB ASC Topic 320 requires a cumulative effect adjustment to
the opening balance of retained earnings in the period of adoption with a
corresponding adjustment to accumulated OCI for that portion representing losses
related to factors other than credit quality. We adopted FASB ASC
Topic 320 effective April 1, 2009. The change in accounting principle
had no impact on the recorded amounts in the consolidated financial
statements. The adoption disclosure effects of this new guidance are
depicted in Note 4 – Investment
Securities.
FASB ASC
Topic 825, Financial
Instruments
FASB ASC
Topic 825 requires disclosures about the fair value of financial instruments for
interim periods of publicly traded companies as well as in annual financial
statements. Fair value information along with the significant
assumptions used to estimate fair value must be disclosed. The
adoption effects of this new guidance are depicted in Note 9 – Fair Value.
FASB ASC
Topic 855, Subsequent
Events
New
authoritative guidance under FASB ASC Topic 855, establishes general standards
of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available to be
issued (i.e., complete in a form and format that complies with GAAP and approved
for issuance). However, FASB ASC Topic 855 does not apply to subsequent
events or transactions that are within the scope of other applicable GAAP that
provide different guidance on the accounting treatment for subsequent events or
transactions.
18
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
There are
two types of subsequent events to be evaluated under this
Statement:
Recognized
subsequent events - An entity must recognize in the financial statements the
effects of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing financial
statements.
Non-recognized
subsequent events - An entity must not recognize subsequent events that provide
evidence about conditions that did not exist at the date of the balance sheet
but that arose after the balance sheet date but before financial statements are
issued or are available to be issued. Some non-recognized subsequent
events may be of such a nature that they must be disclosed to keep the financial
statements from being misleading. For such events, an entity must disclose
the nature of the event and an estimate of its financial effect or a statement
that such an estimate cannot be made.
FASB ASC
Topic 855 also requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date - that is, whether that
date represents the date the financial statements were issued or were available
to be issued.
This
guidance applies to both interim financial statements and annual financial
statements. FASB ASC Topic 855 is effective for interim and annual periods
ending after June 15, 2009, and should be applied
prospectively.
Accordingly,
management has evaluated subsequent events through the date of the Original
Filing on November 25, 2009 and the date this amended interim financial
information was issued and has determined that, other than those which have been
reported in Note 2 and Note 11 to the consolidated financial statements, no
other recognized or non-recognized subsequent events warranted inclusion or
disclosure in the interim financial statements as of September 30,
2009.
NOTE
4. INVESTMENT SECURITIES
The
following is a summary of the Company's investment in available-for-sale and
held-to-maturity securities as of September 30, 2009:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Available-for-sale
|
||||||||||||||||
U.S.
Government agencies and corporations
|
$ | 8,094,000 | $ | 138,000 | $ | (12,000 | ) | $ | 8,220,000 | |||||||
Residential
mortgage-backed securities
|
21,756,000 | 384,000 | (58,000 | ) | 22,082,000 | |||||||||||
Municipal
securities
|
4,941,000 | 97,000 | - | 5,038,000 | ||||||||||||
Total
securities available-for-sale
|
$ | 34,791,000 | $ | 619,000 | $ | (70,000 | ) | $ | 35,340,000 | |||||||
Held-to-maturity
|
||||||||||||||||
U.S.
Government agencies and corporations
|
$ | 100,000 | $ | - | $ | - | $ | 100,000 | ||||||||
Residential
mortgage-backed securities
|
11,702,000 | 372,000 | - | 12,074,000 | ||||||||||||
Total
securities held-to-maturity
|
$ | 11,802,000 | $ | 372,000 | $ | - | $ | 12,174,000 |
19
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. INVESTMENT
SECURITIES (continued)
The
Company’s investment securities as of December 31, 2008 were as
follows:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Available-for-sale
|
||||||||||||||||
U.S.
Government agencies and corporations
|
$ | 3,995,000 | $ | 33,000 | $ | - | $ | 4,028,000 | ||||||||
Residential
mortgage-backed securities
|
15,250,000 | 76,000 | (29,000 | ) | 15,297,000 | |||||||||||
Municipal
securities
|
4,941,000 | - | (169,000 | ) | 4,772,000 | |||||||||||
Total
securities available-for-sale
|
$ | 24,186,000 | $ | 109,000 | $ | (198,000 | ) | $ | 24,097,000 | |||||||
Held-to-maturity
|
||||||||||||||||
U.S.
Government agencies and corporations
|
$ | 100,000 | $ | - | $ | - | $ | 100,000 | ||||||||
Residential
mortgage-backed securities
|
19,784,000 | 129,000 | (21,000 | ) | 19,892,000 | |||||||||||
Total
securities held-to-maturity
|
$ | 19,884,000 | $ | 129,000 | $ | (21,000 | ) | $ | 19,992,000 |
The
amortized cost and estimated market value of debt securities classified as
available-for-sale and held-to-maturity at September 30, 2009 by
contractual maturities are shown below. Expected maturities may
differ from contractual maturities for mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid without any
penalties; therefore, these securities are not included in the maturity
categories in the following maturity schedule.
September
30, 2009
|
||||||||||||||||
Available-for-sale
|
Held-to-maturity
|
|||||||||||||||
Amortized
|
Estimated
|
Amortized
|
Estimated
|
|||||||||||||
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
|||||||||||||
Maturing
within one year
|
$ | - | $ | - | $ | 100,000 | $ | 100,000 | ||||||||
Maturing
after one year, but within five years
|
637,000 | 645,000 | - | - | ||||||||||||
Maturing
after five years, but within ten years
|
9,489,000 | 9,621,000 | - | - | ||||||||||||
Maturing
after ten years
|
2,909,000 | 2,992,000 | - | - | ||||||||||||
Residential
mortgage-backed securities
|
21,756,000 | 22,082,000 | 11,702,000 | 12,074,000 | ||||||||||||
Total
securities
|
$ | 34,791,000 | $ | 35,340,000 | $ | 11,802,000 | $ | 12,174,000 |
20
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. INVESTMENT
SECURITIES (continued)
The
following table shows the gross unrealized losses and fair value of Company's
investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at September 30, 2009:
Continuous
Unrealized Losses
|
Continuous
Unrealized Losses
|
|||||||||||||||
Existing
for Less Than 12 Months
|
Existing
for 12 Months or More
|
|||||||||||||||
Unrealized
|
Unrealized
|
|||||||||||||||
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|||||||||||||
Available-for-sale:
|
||||||||||||||||
U.S.
Government agencies and corporations
|
$ | 1,988,000 | $ | (12,000 | ) | $ | - | $ | - | |||||||
Residential
mortgage-backed securities
|
3,921,000 | (58,000 | ) | - | - | |||||||||||
Municipal
securities
|
- | - | - | - | ||||||||||||
5,909,000 | (70,000 | ) | - | - | ||||||||||||
Held-to-maturity:
|
||||||||||||||||
Residential
mortgage-backed securities
|
- | - | - | - | ||||||||||||
Total
temporarily impaired securities
|
$ | 5,909,000 | $ | (70,000 | ) | $ | - | $ | - |
U.S. Government and Agency
Obligations. The unrealized losses on the Company’s
investments in U.S. Treasury obligations and direct obligations of U.S.
government agencies were caused by interest rate increases. The
contractual terms of those investments do not permit the issuer to settle the
securities at a price less than the amortized cost bases of the
investments. Because the Company does not intend to sell the
investments and it is not more likely than not that the Company will be required
to sell the investments before recovery of their amortized cost bases, which may
be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at September 30, 2009.
Residential Federal Agency
Mortgage-Backed Securities. The unrealized losses on the
Company’s investment in federal agency mortgage-backed securities were caused by
interest rate increases. The Company purchased those investments at a
discount relative to their face amount, and the contractual cash flows of those
investments are guaranteed by an agency of the U.S.
government. Accordingly, it is expected that the securities would not
be settled at a price less than the amortized cost bases of the Company’s
investments. Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company does
not intend to sell the investments and it is not more likely than not that the
Company will be required to sell the investments before recovery of their
amortized cost bases, which may be maturity, the Company does not consider those
investments to be other-than-temporarily impaired at September 30,
2009.
21
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5. EARNINGS PER SHARE
Basic
earnings per common share are computed by dividing net income by the weighted
average number of common shares outstanding. Shares issued during the
period are weighted for the portion of the period that they were outstanding
during the year. The weighted average number of common shares
outstanding for the nine months ended September 30, 2009 and 2008 were
5,843,362, respectively. Diluted earnings per common share consider
common share equivalents (when dilutive) outstanding during each
year. Shares issuable upon the exercise of stock options were not
considered in the calculation of net loss per share for the three and nine
months ended September 30, 2009 and the nine months ended September 30, 2008, as
their inclusion would be anti-dilutive. The effect for the three
months ended September 30, 2008 was an additional 5,973 shares for
dilution.
NOTE
6. STOCK-BASED EMPLOYEE COMPENSATION
The
Company has a stock-based employee compensation plan. The Company
records compensation expense equal to the fair value of all equity-based
compensation over the vesting period of each award. The Company uses
the Black-Scholes option pricing model to estimate the fair value of stock-based
awards.
During
the nine months ended September 30, 2009, the Company did not issue any
options. During the nine months ended September 30, 2008, the Company
issued 175,200 options with an exercise price range of $3.80 to $4.05, to
employees and directors that vest in equal annual installments over ten
years. The Company uses the Black-Scholes option pricing model to
estimate the fair value of stock-based awards. For options issued in
2008, the weighted average estimated value per option was $1.60. The
fair value of options granted in 2008 was estimated at the date of the grant
based on the following assumptions: risk free interest rate of 4.1%, volatility
of 22-23%, expected life of 8-10 years and no expected dividend
yield. Compensation cost charged to operations for the nine months
ended September 30, 2009 and 2008 was $56,000 and $40,000,
respectively.
As of
September 30, 2009, there was approximately $577,000 of total unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted average period of 8.3 years. Of the
296,984 unvested options at December 31, 2008, 20,331 options vested in 2009,
8,856 options expired and 267,797 options remain unvested at September 30,
2009.
NOTE
7. COMMON STOCK
During
the nine months of 2009 and 2008, no stock options were exercised.
During
the nine months of 2009 and 2008, no cash dividends were declared or
paid.
NOTE
8. CAPITAL RATIOS
The Bank
is subject to various regulatory capital requirements administered by state and
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank’s assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank’s
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
22
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. CAPITAL RATIOS
(continued)
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the following table) of
Total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital to average assets (as defined).
At
September 30, 2009, management believes that the Bank is “adequately
capitalized,” as defined by regulatory banking agencies. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank’s capital levels do not allow the Bank to accept brokered
deposits without prior approval from regulators. As of September 30,
2009, the Bank did not have any brokered deposits. Further, the Bank
is subject to certain interest rate restrictions that can be paid for its
deposits without prior approval from regulators.
The
Bank’s actual capital amounts and ratios are presented in the following tables
(amounts in thousands, except percentages):
For
Capital
|
To
Be Well
|
|||||
Actual
|
Adequacy
Purposes
|
Capitalized
|
||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
As
of September 30, 2009 (Restated):
|
||||||
Total
Capital (to Risk-Weighted Assets)
|
$23,928
|
8.41%
|
>$22,768
|
>8.0%
|
>$28,460
|
>10.0%
|
Tier
I Capital (to Risk-Weighted Assets)
|
$20,283
|
7.13%
|
>$11,384
|
>4.0%
|
>$17,076
|
> 6.0%
|
Tier
I Capital (to Average Assets)
|
$20,283
|
5.37%
|
>$15,113
|
>4.0%
|
>$18,891
|
> 5.0%
|
For
Capital
|
To
Be Well
|
|||||
Actual
|
Adequacy
Purposes
|
Capitalized
|
||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
As
of December 31, 2008:
|
||||||
Total
Capital (to Risk-Weighted Assets)
|
$32,134
|
10.52%
|
>$24,428
|
>8.0%
|
>$30,535
|
>10.0%
|
Tier
I Capital (to Risk-Weighted Assets)
|
$28,258
|
9.25%
|
>$12,214
|
>4.0%
|
>$18,321
|
> 6.0%
|
Tier
I Capital (to Average Assets)
|
$28,258
|
7.21%
|
>$15,675
|
>4.0%
|
>$19,594
|
> 5.0%
|
NOTE
9. FAIR VALUE
Effective January 1, 2008, the Company
adopted FASB ASC Topic 820, Fair Value Measurement, which
provides a framework for measuring fair value under generally accepted
accounting principles. FASB ASC Topic 820 applies to all financial
instruments that are being measured and reported on a fair value
basis. Nonfinancial assets and nonfinancial liabilities that are
recognized and disclosed at fair value on a nonrecurring basis under FASB ASC
Topic 820 were delayed to fiscal years beginning after November 15,
2008. Accordingly, effective January 1, 2009, the Company began
disclosing the fair value of Other Real Estate Owned (OREO) previously deferred
under the provisions of this guidance.
23
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. FAIR VALUE
(continued)
FASB ASC
Topic 820 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. In determining fair
value, the Company uses various methods including market, income and cost
approaches. Based on these approaches, the Company often utilizes
certain assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and or the risks inherent in the
inputs to the valuation technique. These inputs can be readily
observable, market corroborated, or generally unobservable. The
Company utilizes techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on the observability
of the inputs used in valuation techniques the Company is required to provide
the following information according to the fair value hierarchy. The
fair value hierarchy ranks the quality and reliability of the information used
to determine fair values.
Financial
assets and liabilities carried at fair value will be classified and disclosed as
follows:
Level
1 Inputs
|
·
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities.
|
|
·
|
Generally,
this includes debt and equity securities and derivative contracts that are
traded in an active exchange market (e.g. New York Stock Exchange), as
well as certain US Treasury and US Government and agency mortgage-backed
securities that are highly liquid and are actively traded in
over-the-counter markets.
|
Level
2 Inputs
|
·
|
Quoted
prices for similar assets or liabilities in active
markets.
|
|
·
|
Quoted
prices for identical or similar assets or liabilities in markets that are
not active.
|
|
·
|
Inputs
other than quoted prices that are observable, either directly or
indirectly, for the term of the asset or liability (e.g., interest rates,
yield curves, credit risks, prepayment speeds or volatilities) or “market
corroborated inputs.”
|
|
·
|
Generally,
this includes US Government and agency mortgage-backed securities,
corporate debt securities, derivative contracts and loans held for
sale.
|
Level
3 Inputs
|
·
|
Prices
or valuation techniques that require inputs that are both unobservable
(i.e. supported by little or no market activity) and that are significant
to the fair value of the assets or
liabilities.
|
|
·
|
These
assets and liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, or
similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or
estimation.
|
24
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. FAIR VALUE
(continued)
Fair Value on a Recurring
Basis
Certain
assets and liabilities are measured at fair value on a recurring
basis. The following table presents the assets and liabilities
carried on the balance sheet by caption and by level within the FASB ASC Topic
820 hierarchy (as described above) as of the dates listed.
September
30, 2009
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
Financial
Assets
|
||||||||||||||||
Investment
securities available-for-sale
|
||||||||||||||||
U.S.
Government agencies and
corporations
|
$ | - | $ | 8,220,000 | $ | - | $ | 8,220,000 | ||||||||
Mortgage-backed
securities
|
$ | - | $ | 22,082,000 | $ | - | $ | 22,082,000 | ||||||||
Municipal
securities
|
$ | - | $ | 5,038,000 | $ | - | $ | 5,038,000 |
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
Financial
Assets
|
||||||||||||||||
Investment
securities available-for-sale
|
||||||||||||||||
U.S.
Government agencies and
Corporations
|
$ | - | $ | 4,028,000 | $ | - | $ | 4,028,000 | ||||||||
Mortgage-backed
securities
|
$ | - | $ | 15,297,000 | $ | - | $ | 15,297,000 | ||||||||
Municipal
securities
|
$ | - | $ | 4,772,000 | $ | - | $ | 4,772,000 |
Securities
Portfolio
The fair
value of securities is the market value based on quoted market prices, when
available, or market prices provided by recognized broker
dealers. The fair value of securities is the market value based on
quoted market prices, when available, or market prices provided by recognized
broker dealers (Level 1). When listed prices or quotes are not
available, fair value is based upon quoted market prices for similar or
identical assets or other observable inputs (Level 2) or significant management
judgment or estimation based upon unobservable inputs due to limited or no
market activity of the instrument (Level 3).
Fair Value on a Nonrecurring
Basis
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the instruments are not measured on an ongoing basis but are subject to fair
value adjustments in certain circumstances (for example, when there is
impairment). The following table presents the assets and liabilities
carried on the balance sheet by caption and by level within the FASB ASC Topic
820 hierarchy (as described above) as of the dates listed.
September
30, 2009
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
Financial
Assets
|
||||||||||||||||
Impaired
loans (Restated)
|
$ | - | $ | - | $ | 27,192,000 | $ | 27,192,000 |
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
Financial
Assets
|
||||||||||||||||
Impaired
loans
|
$ | - | $ | - | $ | 14,892,000 | $ | 14,892,000 |
25
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. FAIR VALUE
(continued)
September
30, 2009
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
Non-Financial
Assets
|
||||||||||||||||
Other
real estate owned
|
$ | - | $ | - | $ | 1,786,000 | $ | 1,786,000 |
Impaired
Loans
The fair
value of impaired loans is based on the loan’s fair value of the collateral for
collateral dependent loans. The valuation allowance for impaired
loans is included in the allowance for loan losses in the consolidated balance
sheets. The valuation allowance for impaired loans at September 30,
2009 was $1,231,000. During the nine months ended September 30, 2009,
the valuation allowance for impaired loans decreased $1,571,000 from $2,802,000
at December 31, 2008 as a result of loans being collected or charged off in full
or in part.
Other
Real Estate Owned
Other
real estate owned (OREO) fair value was determined using appraisals which may be
discounted based on management’s review and changes in market conditions (Level
3).
Fair Value of Financial
Instruments (FASB ASC Topic 825 Disclosure)
FASB ASC
Topic 825, Disclosures About
Fair Value of Financial Instruments, requires the disclosure of the
estimated fair value of financial instruments, including those financial
instruments for which the Company did not elect the fair value
option. The methodology for estimating the fair value of financial
assets and liabilities that are measured on a recurring or nonrecurring basis
are discussed above.
The
following methods and assumptions were used to estimate the fair value under
FASB ASC Topic 825 of each class of financial instruments not previously
discussed.
Cash and Cash
Equivalents: The carrying amounts of cash and due from banks
and federal funds sold approximate fair value.
Investment Securities
Held-to-Maturity: The fair value of securities
held-to-maturity is based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. These
financial instruments are not carried at fair value.
Restricted
Stock: The carrying value of restricted stock approximates
fair value based on redemption provisions.
Loans (except collateral
dependent impaired loans): Fair values are estimated for
portfolios of loans with similar financial characteristics. Loans are
segregated by type such as commercial, residential mortgage and other
consumer. Each loan category is further segmented into groups by
fixed and adjustable rate interest terms and by performing and non-performing
categories.
The fair
value of performing loans is typically calculated by discounting scheduled cash
flows through their estimated maturity, using estimated market discount rates
that reflect the credit and interest rate risk inherent in each group of
loans. The estimate of maturity is based on contractual maturities
for loans within each group, or on the Company’s historical experience with
repayments for each loan classification, modified as required by an estimate of
the effect of current economic conditions.
26
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. FAIR VALUE
(continued)
Fair
value for nonperforming loans that are not collateral dependent is based on the
discounted value of expected future cash flows, discounted using a rate
commensurate with the risk associated with the likelihood of
repayment.
For all
loans, assumptions regarding the characteristics and segregation of loans,
maturities, credit risk, cash flows, and discount rates are judgmentally
determined using specific borrower and other available information.
The
carrying amounts reported for loans held for sale approximates fair
value.
Accrued Interest Receivable
and Payable: The fair value of interest receivable and payable
is estimated to approximate the carrying amounts.
Deposits: The
fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW and money market accounts, is equal to the amount
payable on demand. The fair value of time deposits is based on the
discounted value of contractual cash flows, where the discount rate is estimated
using the market rates currently offered for deposits of similar remaining
maturities.
Borrowed
Funds: The fair value of borrowings is calculated by
discounting scheduled cash flows through the estimated maturity date using
current market rates.
Estimated Fair
Values: The estimated fair values of the Company’s material
financial instruments as of September 30, 2009 are as follows:
Carrying
Value
|
Fair
Value
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Financial
Assets:
|
||||||||
Cash
and due from banks
|
$ | 9,071,000 | $ | 9,071,000 | ||||
Federal
funds sold
|
$ | 19,498,000 | $ | 19,498,000 | ||||
Investment
securities, held-to-maturity
|
$ | 11,802,000 | $ | 12,174,000 | ||||
Investment
securities, available-for-sale
|
$ | 35,340,000 | $ | 35,340,000 | ||||
Restricted
stock
|
$ | 2,014,000 | $ | 2,014,000 | ||||
Loans,
net of allowance for loan losses
|
$ | 286,307,000 | $ | 285,794,000 | ||||
Accrued
interest receivable
|
$ | 1,379,000 | $ | 1,379,000 | ||||
Financial
Liabilities:
|
||||||||
Noninterest-bearing
demand deposits
|
$ | 31,367,000 | $ | 31,367,000 | ||||
Interest-bearing
deposits
|
$ | 311,836,000 | $ | 306,102,000 | ||||
Borrowed
funds
|
$ | 21,436,000 | $ | 18,434,000 | ||||
Accrued
interest payable
|
$ | 547,000 | $ | 547,000 |
27
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. FAIR VALUE
(continued)
The
estimated fair values of the Company’s material financial instruments as of
December 31, 2008 are as follows:
Carrying
Value
|
Fair
Value
|
|||||||
Financial
Assets:
|
||||||||
Cash
and due from banks
|
$ | 13,054,000 | $ | 13,054,000 | ||||
Federal
funds sold
|
$ | 472,000 | $ | 472,000 | ||||
Investment
securities, held-to-maturity
|
$ | 19,884,000 | $ | 19,992,000 | ||||
Investment
securities, available-for-sale
|
$ | 24,097,000 | $ | 24,097,000 | ||||
Restricted
stock
|
$ | 2,448,000 | $ | 2,448,000 | ||||
Loans
held for sale
|
$ | 2,000 | $ | 2,000 | ||||
Loans,
net of allowance for loan losses
|
$ | 297,095,000 | $ | 299,648,000 | ||||
Accrued
interest receivable
|
$ | 1,740,000 | $ | 1,740,000 | ||||
Financial
Liabilities:
|
||||||||
Noninterest-bearing
demand deposits
|
$ | 35,873,000 | $ | 35,873,000 | ||||
Interest-bearing
deposits
|
$ | 292,721,000 | $ | 288,303,000 | ||||
Borrowed
funds
|
$ | 22,186,000 | $ | 19,340,000 | ||||
Accrued
interest payable
|
$ | 427,000 | $ | 427,000 |
The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, and, as the fair value for these
financial instruments is not material, these disclosures are not included
above.
Limitations: Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instruments. These
estimates do not reflect any premium or discount which could result from
offering for sale at one time the Company’s entire holdings of a particular
financial instrument. Because no market exists for a significant
portion of the Company’s financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair
value estimates are provided for existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to
the realization of unrealized gains and losses can have a significant effect on
fair value estimates, and have generally not been considered in the Company’s
estimates.
28
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10. LOANS
The
composition of net loans as of September 30, 2009 and December 31, 2008 are as
follows:
September
30, 2009
|
December
31, 2008
|
|||||||
Commercial,
Financial and Agricultural
|
$ | 30,496,000 | $ | 32,115,000 | ||||
Real
Estate - Construction
|
46,499,000 | 68,278,000 | ||||||
Real
Estate – Mortgage
|
165,049,000 | 147,435,000 | ||||||
Installment
loans to individuals
|
49,865,000 | 53,827,000 | ||||||
Lease
Financing
|
5,641,000 | 4,636,000 | ||||||
Unrealized
Loan Fees
|
(636,000 | ) | (665,000 | ) | ||||
Total
loans
|
296,914,000 | 305,626,000 | ||||||
Less: allowance
for loan losses
|
(10,607,000 | ) | (8,531,000 | ) | ||||
Net
loans
|
$ | 286,307,000 | $ | 297,095,000 |
Summaries
of information pertaining to impaired and nonaccrual loans are as
follows:
September
30, 2009
|
December
31, 2008
|
|||||||
Impaired
loans without a valuation allowance
|
$ | 24,536,000 | $ | 5,813,000 | ||||
Impaired
loans with a valuation allowance
|
2,656,000 | 11,881,000 | ||||||
Total
impaired loans including troubled debt restructurings
|
27,192,000 | 17,694,000 | ||||||
Valuation
allowance related to impaired loans
|
1,231,000 | 2,802,000 | ||||||
Average
investment in impaired loans
|
22,727,000 | 10,348,000 | ||||||
Total
non-accrual loans (included in impaired loans)
|
14,056,000 | 9,898,000 |
NOTE
11. ALLOWANCE FOR LOAN LOSSES
The
allowance for loan losses is calculated under FASB ASC Topic 310, Receivables and FASB ASC
Topic 450, Contingencies. Nonperforming
and impaired loans are evaluated under FASB ASC Topic 310 using either the fair
value of collateral or present value of future cash flow methods. The
Company evaluates all nonperforming and impaired loans using the fair value of
collateral method since all non-performing and impaired loans are collateralized
by real estate. When a loan is evaluated using this method, a new
appraisal of the primary and or secondary collateral is obtained and compared to
the outstanding balance of the loans. A specific reserve is added to
the allowance for loan losses if a collateral shortfall exists. On
December 31, 2008, the amount of the specific reserve was $2,802,000 which was
included in the total allowance for loan losses of $8,531,000. During
the nine months ended September 30, 2009, the Company charged off loans or
portions of loans totaling $3,439,000 from the allowance for loan losses, made a
provision of $5,390,000, including changes in qualitative factors, and had
recoveries of $125,000, resulting in an allowance for loan losses balance of
$10,607,000.
29
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. ALLOWANCE FOR
LOAN LOSSES (continued)
The
following table shows changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off by loan
category and additions to the allowance that have been charged to expenses for
the periods presented.
For
the three months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Balance
at beginning of period
|
$ | 12,041,000 | $ | 2,974,000 | ||||
Charge-offs:
|
||||||||
Commercial,
Financial, Agricultural
|
- | - | ||||||
Real
Estate – Construction
|
(1,504,000 | ) | - | |||||
Real
Estate – Mortgage
|
(32,000 | ) | (17,000 | ) | ||||
Consumer
Installment loans
|
(19,000 | ) | (48,000 | ) | ||||
Lease
Financing
|
- | - | ||||||
(1,555,000 | ) | (65,000 | ) | |||||
Recoveries:
|
||||||||
Commercial,
Financial, Agricultural
|
60,000 | - | ||||||
Real
Estate – Construction
|
36,000 | - | ||||||
Real
Estate – Mortgage
|
- | 1,000 | ||||||
Consumer
Installment loans
|
25,000 | - | ||||||
Lease
Financing
|
- | - | ||||||
|
121,000 | 1,000 | ||||||
Net
recoveries (charge-offs)
|
(1,434,000 | ) | (64,000 | ) | ||||
Provision
for loan loss
|
- | 105,000 | ||||||
Balance
at end of period
|
$ | 10,607,000 | $ | 3,015,000 | ||||
Average
loans outstanding (1)
|
$ | 296,464,000 | $ | 301,035,000 | ||||
Net
charge-offs as a percentage of average loans (2)
|
1.92 | % | 0.08 | % | ||||
(1)
Includes loans held for sale and non-accruing loans
|
||||||||
(2)
Annualized
|
30
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. ALLOWANCE FOR
LOAN LOSSES (continued)
For
the nine months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Balance
at beginning of period
|
$ | 8,531,000 | $ | 2,891,000 | ||||
Charge-offs:
|
||||||||
Commercial,
Financial, Agricultural
|
(238,000 | ) | (32,000 | ) | ||||
Real
Estate – Construction
|
(2,939,000 | ) | - | |||||
Real
Estate – Mortgage
|
(182,000 | ) | (238,000 | ) | ||||
Consumer
Installment loans
|
(80,000 | ) | (124,000 | ) | ||||
Lease
Financing
|
- | - | ||||||
(3,439,000 | ) | (394,000 | ) | |||||
Recoveries:
|
||||||||
Commercial,
Financial, Agricultural
|
61,000 | 2,000 | ||||||
Real
Estate – Construction
|
36,000 | - | ||||||
Real
Estate – Mortgage
|
1,000 | 3,000 | ||||||
Consumer
Installment loans
|
27,000 | 8,000 | ||||||
Lease
Financing
|
- | - | ||||||
|
125,000 | 13,000 | ||||||
Net
charge-offs
|
(3,314,000 | ) | (381,000 | ) | ||||
Provision
for loan loss
|
5,390,000 | 505,000 | ||||||
Balance
at end of period
|
$ | 10,607,000 | $ | 3,015,000 | ||||
Average
loans outstanding (1)
|
$ | 302,571,000 | $ | 308,421,000 | ||||
Net
charge-offs as a percentage of average loans (2)
|
1.46 | % | 0.17 | % | ||||
(1)
Includes loans held for sale and non-accruing loans
|
||||||||
(2)
Annualized
|
The
charge offs as of September 30, 2009, were a result of the Company analyzing its
impaired loans with collateral deficiencies and charging off portions of loans
not covered by the Company’s collateral as a result of new real estate
appraisals obtained. Even though a portion of individual loans were
charged off, management will continue to obtain and convert the collateral and
pursue the borrower(s) for full collection of the entire loan, including the
partial charge off amount.
NOTE
12. OTHER COMPREHENSIVE INCOME (LOSS)
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. However, certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities are reported as a separate component of the equity section of the
balance sheet. Such items, along with net income, are components of
comprehensive income.
31
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. OTHER
COMPREHENSIVE INCOME (LOSS) (continued)
The
components of other comprehensive income (loss) and related tax effects for the
nine months ended September 30, 2009 and 2008 are as follows:
For
the three months ended September 30,
2009
|
For
the three months ended September 30,
2008
|
For
the nine months ended September 30,
2009
|
For
the nine months ended September 30,
2008
|
|||||||||||||
Unrealized
holding gains (losses)
on
available-for-sale securities
|
$ | 550,000 | $ | (85,000 | ) | $ | 643,000 | $ | (38,000 | ) | ||||||
Reclassification
adjustment for
gains
realized in income
|
- | - | (5,000 | ) | (95,000 | ) | ||||||||||
Net
unrealized gains (losses)
|
550,000 | (85,000 | ) | 638,000 | (133,000 | ) | ||||||||||
Tax
effect
|
(220,000 | ) | 34,000 | (255,000 | ) | 53,000 | ||||||||||
Net-of-tax
amount
|
$ | 330,000 | $ | (51,000 | ) | $ | 383,000 | $ | (80,000 | ) |
NOTE
13. WRITTEN AGREEMENT
On July
28, 2009, the Company and the Bank entered into a Written Agreement (the
“Agreement”) with the Federal Reserve Bank of Philadelphia and the New Jersey
Department of Banking and Insurance (collectively, the
“Regulators”). The Agreement is based on findings of the Regulators
identified in an examination of the Bank that commenced on January 5,
2009.
Under the
terms of the Agreement, the Bank agreed, among other things, to engage, within
30 days of the Agreement, an independent consultant acceptable to the Regulators
to assess the Bank’s staffing needs and the qualifications and performance of
all senior executive officers of the Bank and to prepare a written report.
Within 45 days of receipt of such report, the Bank agreed to submit to the
Regulators a written management plan addressing the findings of the
report. In addition, within 60 days of the Agreement, the Bank will
submit to the Regulators written plans to: strengthen board oversight of the
management and operation of the Bank; strengthen the Bank’s management of
commercial real estate; strengthen lending and credit administration, which
includes a prohibition on the capitalization of interest; improve the periodic
review and grading of the Bank’s loan portfolio; improve the Bank’s position
regarding past due loans, problem loans, adversely classified loans; improve the
Bank’s internal audit program; maintain sufficient capital at the Bank; improve
the Bank’s earnings; improve management of the Bank’s liquidity position; and
correct criticisms detailed in the Regulators’ examination report of the Bank’s
compliance with all federal laws relating to anti-money laundering. The Bank has
also agreed to maintain an adequate allowance for loan and lease losses;
charge-off or collect assets classified as “loss” in the Regulators’ examination
report that have not been previously collected or charged off, and not to extend
or renew any credit to or for the benefit of any borrower who is obligated to
the Bank on an extension of credit that has been charged off or classified as
“loss” in the Regulators’ examination report. Under the Agreement,
neither the Company nor Bank is permitted to declare or pay any
dividends. The Company has also agreed not to distribute any
interest, principal or other sums on trust preferred securities; issue, increase
or guarantee any debt; nor purchase or redeem any shares of the Company’s
stock.
32
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13. WRITTEN AGREEMENT
(continued)
The Board
of Directors of the Company and the Bank are also required to appoint a joint
Compliance Committee to monitor and coordinate the Company’s and the Bank’s
compliance with the provisions of the Agreement, obtain prior approval for the
appointment of new directors, the hiring or change in responsibilities of senior
executive officers, and to comply with restrictions on severance payments and
indemnification payments to institution affiliated parties. Failure to comply
with the provisions of the Agreement could subject the Company and/or the Bank
to additional enforcement actions. We believe that the Company and or the Bank
have already implemented or are acting in accordance with most of the
requirements of the Agreement, and we intend to take such actions as may be
necessary to enable the Company and or the Bank to comply with the remaining
requirements of the Agreement. However, there can be no assurance
that the Company and or the Bank will be able to comply fully with the
provisions of the Agreement, or that efforts to comply with the Agreement will
not have adverse effects on the operations and financial condition of the
Company or the Bank.
The
Agreement does not affect the Bank’s ability to continue to conduct its banking
business with customers in a normal fashion. The Bank’s deposits will
remain insured by the FDIC to the maximum limits allowed by law. The
Agreement will remain effective and enforceable until stayed, modified,
terminated or suspended in writing by the Regulators.
33
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
Company may from time to time make written or oral “forward-looking statements”,
including statements contained in the Company’s filings with the Securities and
Exchange Commission (including this Quarterly Report on Form 10-Q), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the “safe harbor” provisions of
the Private Securities Litigation Reform Act of 1995.
These
forward-looking statements involve risks and uncertainties, such as statements
of the Company's plans, objectives, expectations, estimates and intentions,
which are subject to change based on various important factors (some of which
are beyond the Company’s control). The following factors, among
others, could cause the Company's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; the effect that maintaining regulatory capital
requirements could have on the growth of the Company; inflation; changes in
prevailing short term and long term interest rates; national and global
liquidity of the banking system; changes in loan portfolio quality; adequacy of
loan loss reserves; changes in the rate of deposit withdrawals; changes in the
volume of loan refinancings; the timely development of and acceptance of new
products and services of the Company and the perceived overall value of these
products and services by users, including the features, pricing and quality
compared to competitors' products and services; the impact of changes in
financial services laws and regulations (including laws concerning taxes,
banking, securities and insurance), including the increase in the cost of FDIC
insurance; technological changes; changes in consumer spending and saving
habits; findings of the Bank’s examinations by the FRB; changes in the local
competitive landscape, including the acquisition of local and regional banks in
the Company’s geographic marketplace; possible impairment of intangible assets,
specifically core deposit premium from the Company’s acquisition of Farnsworth;
the ability of our borrowers to repay their loans; the uncertain credit
environment in which the Company operates; the ability of the Company to manage
the risk in its loan and investment portfolios; the ability of the Company to
reduce noninterest expenses and increase net interest income, its growth,
results of possible collateral collections and subsequent sales; and the success
of the Company at managing the risks resulting from these factors.
The
Company cautions that the above-listed factors are not exclusive. The
Company does not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of the Bank.
Readers
should carefully review the risk factors described in other reports the Company
files from time to time with the Securities and Exchange Commission, including
the Company’s Form 10-K for the year ended December 31, 2008, and its subsequent
quarterly reports on Form 10-Q and current reports on Form 8-K.
General
Our
principal source of revenue is net interest income, which is the difference
between the interest income from our earning assets and the interest expense of
our deposits and borrowings. Interest-earning assets consist
principally of loans, investment securities and federal funds sold, while our
interest-bearing liabilities consist primarily of deposits and
borrowings. Our net income is also affected by our provision for loan
losses, noninterest income and noninterest expenses, which include salaries,
benefits, occupancy costs and charges relating to non-performing and other
classified assets.
34
Consolidated
Results of Operations
Three
Months Ended September 30, 2009 and 2008
(Unaudited)
The
following discussion compares the results of operations for the three months
ended September 30, 2009 (unaudited) to the results of operations for the three
months ended September 30, 2008 (unaudited). This discussion should
be read in conjunction with the accompanying financial statements (unaudited)
and related notes, as well as statistical information included in this Form
10-Q.
Net Loss. For the three
months ended September 30, 2009, the net loss totaled $579,000, compared to net
income of $79,000 for the three months ended September 30,
2008. Decreased earnings for the three months ended September 30,
2009 were attributable primarily to a decrease in net interest income after
provision for loan losses of $376,000, a decrease in noninterest income of
$106,000 and an increase in noninterest expenses of $236,000. Basic
and diluted income (loss) per share for the three months ended September 30,
2009 and 2008 totaled ($0.09) and $0.01, respectively.
Net Interest Income. Net
interest income for the three months ended September 30, 2009 totaled
$2,862,000, a decrease of 14.4% from $3,343,000 for the three months ended
September 30, 2008. This decrease is primarily as a result of a
decrease in the net interest margin, from 4.00% for the three months ended
September 30, 2008 to 3.24% for the three months ended September 30, 2009, or
$626,000, including lost interest income on nonaccrual loans of approximately
$152,000, partially offset by an increase in interest earning assets of $145,000
in 2009.
Interest
income decreased by $700,000 for the three months ended September 30, 2009 from
the same period in 2008, attributable to a 122 basis point decrease in the yield
on average earning assets from 6.61% in 2008 to 5.39% in 2009, partially offset
by an increase in average interest earning assets of $17.8
million. Average interest earning loans outstanding decreased by
$12.8 million while average investment securities increased $20.0 million and
due from banks and federal funds sold increased $10.6 million. The
decrease in average interest earning loans outstanding is attributable primarily
to an increase in average nonaccrual loans of $7.5 million, an increase in
repossessed property of $1.6 million and normal monthly payments and/or payoffs,
while the increase in average investment securities and federal funds sold was
attributable to management’s efforts to decrease the Bank’s general level of
risk on the balance sheet. Interest expense decreased by $219,000
from the same time period in 2008. Average interest-bearing
liabilities increased by $35.4 million, which was attributable to an increase in
borrowed funds of $12.3 million in an effort to increase the Bank’s net interest
income by borrowing at a lower cost and investing in higher yielding assets and
an increase in interest bearing deposits. The average rate paid on
interest-bearing liabilities decreased to 2.28% for the three months ended
September 30, 2009 from 2.85% for the same period of 2008.
Provision for Loan
Losses. No provision for loan losses was made during the three
months ended September 30, 2009. Provision for loan losses was
$105,000 for the three months ended September 30, 2009 and 2008. As a
result of an analysis of the loan portfolio, management concluded that the
amount of the allowance for loan losses was sufficient and no provision was
necessary in the third quarter of 2009.
Noninterest
Income. Noninterest income decreased $106,000, or 37.5%, for
the three months ended September 30, 2009 to $177,000 compared to $283,000 for
the same period of 2008, primarily as a result of decreased prepayment penalties
for early loan payoffs of $61,000, a decrease in late charges of $16,000, and a
decrease in miscellaneous fees of $10,000.
Noninterest
Expenses. For the three months ended September 30, 2009,
noninterest expenses increased by $236,000, or 7.0%, to $3,618,000, compared to
$3,382,000 for the same period of 2008, primarily as a result of an increase in
FDIC insurance of $281,000 and an increase in loan workout and repossessed
property expenses of $128,000, which were partially offset by decreases in
personnel costs of $139,000, reflecting the effect of staff and benefit
reductions, including as a result of the closure of one of our branch locations
in November 2008.
35
Income
Taxes. During the second quarter of 2009, management
determined that there was a need for a valuation allowance on the Company’s
deferred tax assets. Based on forecasts of the Company’s future
profitability, management concluded full recognition of these tax assets was
unlikely because it is more likely than not that this portion of the deferred
tax assets will not be realized as a result of cumulative tax losses and
uncertainties of future taxable income. As a result, the Company
recorded a tax
benefit during the third quarter of 2009, but it was fully reserved
through an increase in the valuation allowance. During the
three months ended September 30, 2008, we recorded income tax expense of $60,000
on income before taxes of $139,000, resulting in an effective tax rate of
43.2%.
Consolidated
Results of Operations
Nine
Months Ended September 30, 2009 and 2008
(Unaudited)
The
following discussion compares the results of operations for the nine months
ended September 30, 2009 (unaudited) to the results of operations for the nine
months ended September 30, 2008 (unaudited). This discussion should
be read in conjunction with the accompanying financial statements (unaudited)
and related notes, as well as statistical information included in this Form
10-Q.
Net Loss. For the nine months
ended September 30, 2009, the net loss totaled $10,718,000, compared to net loss
of $405,000 for the nine months ended September 30, 2008. Decreased
earnings for the nine months ended September 30, 2009 were attributable
primarily to a decrease in net interest income after provision for loan losses
of $6,537,000, management’s determination that there was a need for a valuation
allowance of the Company’s deferred tax assets resulting in an increase in tax
expense of $3,128,000, a decrease in noninterest income of $213,000 and an
increase in noninterest expenses of $435,000. Basic and diluted loss
per share for the nine months ended September 30, 2009 and 2008 totaled $1.83
and $0.07, respectively.
Net Interest Income. Net
interest income for the nine months ended September 30, 2009 totaled $8,024,000,
a decrease of 17.1% from $9,676,000 for the nine months ended September 30,
2008. This decrease is primarily as a result of a decrease in the net
interest margin, from 3.74% for the nine months ended September 30, 2008 to
3.04% for the nine months ended September 30, 2009, or $1,837,000, including
lost interest income on nonaccrual loans of approximately $457,000, partially
offset by an increase in interest earning assets of $185,000 in
2009.
Interest
income decreased by $2,827,000 for the nine months ended September 30, 2009 from
the same period in 2008, attributable to a 122 basis point decrease in the yield
on average earning assets from 6.62% in 2008 to 5.40% in 2009, partially offset
by an increase in average interest earning assets of $8.1
million. Average interest earning loans outstanding decreased by
$13.0 million while average investment securities increased $14.5 million and
due from banks and federal funds sold increased $6.6 million. The
decrease in average interest earning loans outstanding is attributable primarily
to an increase in average nonaccrual loans of $7.1 million, an increase in
repossessed property of $1.5 million and normal monthly payments and/or payoffs,
while the increase in average investment securities and federal funds sold was
attributable to management’s efforts to decrease the Bank’s general level of
risk on the balance sheet. Interest expense decreased by $1.2 million
from the same time period in 2008. Average interest-bearing
liabilities increased by $23.7 million, which was attributable to an increase in
borrowed funds in an effort to increase the Bank’s net interest income by
borrowing at a lower cost and investing in higher yielding assets and an
increase in interest bearing deposits. The average rate paid on
interest-bearing liabilities decreased to 2.52% for the nine months ended
September 30, 2009 from 3.22% for the same period of 2008.
Provision for Loan Losses.
Provision for loan losses was $5,390,000 and $505,000 for the nine months
ended September 30, 2009 and 2008.
Noninterest
Income. Noninterest income decreased $213,000, or 26.8%, for
the nine months ended September 30, 2009 to $582,000 compared to $795,000 for
the same period of 2008, primarily as a result of a decrease in gains on sales
of available-for-sale securities and fixed assets of $95,000, a decrease in
prepayment penalties on early loan payoffs of $27,000, a decrease in mortgage
origination revenue of $13,000, a decrease in late charges of $11,000 in 2009,
and a one time fee of $30,000 for the sale of branch rights in
2008.
36
Noninterest
Expenses. For the nine months ended September 30, 2009,
noninterest expenses increased by $435,000, or 4.1%, to $11,023,000, compared to
$10,588,000 for the same period of 2008. Increases in FDIC insurance
of $587,000, including a one time special assessment of $183,000, in loan
workout and repossessed property expenses of $431,000, a partial write down on
the Company’s former Gaither Road office of $82,000 and losses on sales of or
partial write downs on repossessed property of $77,000, were partially offset by
decreases in personnel costs of $736,000, reflecting bonuses expensed in 2008
and the effect of staff and benefit reductions, including as a result of the
closure of one our branch locations in November 2008.
Income Taxes. We
recorded income tax expense of $2,911,000 on loss before taxes of $7,807,000 for
the nine months ended September 30, 2009. During the second quarter
of 2009, management determined that there was a need for a valuation allowance
on the Company’s deferred tax assets. Based on forecasts of the
Company’s future profitability, management concluded full recognition of these
tax assets was unlikely because it is more likely than not that this portion of
the deferred tax assets will not be realized as a result of cumulative tax
losses and uncertainties of future taxable income. During the nine
months ended September 30, 2008, we recorded an income tax benefit of $217,000
on loss before taxes of $622,000, resulting in an effective tax rate of 34.9%
for the 2008 period.
Consolidated
Financial Condition
At
September 30, 2009 and December 31, 2008
(Unaudited)
The
following discussion compares the financial condition at September 30, 2009
(unaudited) to the financial condition at December 31, 2008. This
discussion should be read in conjunction with the accompanying financial
statements (unaudited) and related notes as well as statistical information
included in this Form 10-Q.
Total Assets. Total assets
increased $4.0 million, or 1.1%, to $383.1 million at September 30, 2009,
compared to $379.1 million at December 31, 2008. This was due to
management’s efforts to increase the Bank’s net interest margin and
liquidity.
Loans. Loans outstanding
decreased $8.7 million, or 2.9%. The decrease in loans was due
primarily to normal contractual loan payments and/or payoffs in the loan
portfolio and a decrease in originations of residential mortgage construction
loans.
Allowance for Loan
Losses. The allowance for loan losses was $10.6 million at
September 30, 2009 as compared to $8.5 million at December 31,
2008. This increase was primarily due to a provision of $5.4 million
and partially offset the charging off of certain loans that were
impaired. The ratio of the allowance for loan losses to total loans
was 3.6% and 2.8% at September 30, 2009 and December 31, 2008,
respectively. The allowance for loan losses was increased and
provision for loan losses was decreased from amounts previously reported to
reflect adjustments of the qualitative factors in the allowance general reserves
and impairment amounts within the allowance specific reserves that the Company’s
wholly owned subsidiary, Sterling Bank, utilized in calculating the allowance
for loan losses as of June 30, 2009. The adjustment in qualitative factors
reflected third quarter adverse trends in delinquent, classified and
non-performing loans in the Bank’s portfolio, which were raised as part of the
Bank’s regulatory examinations by the FRB. As a result of subsequent
discussions with the FRB, the Company concluded that the allowance for loan
losses as of June 30, 2009 should be increased by $5.0 million. This
adjustment also impacted reported amounts in the Original Filing. The
Company’s management has considered nonperforming assets and other assets of
concern in establishing the allowance for loan losses. The Company
continues to monitor its allowance for possible loan losses and will make future
additions or reductions in light of the level of loans in its portfolio and as
economic conditions dictate.
37
The table
below recaps loans accruing but past due 90 days or more, non-accrual loans,
OREO (Other Real Estate Owned), and troubled debt restructurings as of the dates
listed.
September
30, 2009
|
December
31, 2008
|
|||||||
(Restated)
|
||||||||
Restructured
loans:
|
||||||||
Real
Estate – Construction
|
$ | 1,012,000 | $ | 642,000 | ||||
Real
Estate – Mortgage
|
4,039,000 | - | ||||||
Total
restructured loans
|
5,051,000 | 642,000 | ||||||
Loans
accruing, but past due 90 days or more:
|
||||||||
Commercial,
Financial and Agricultural
|
75,000 | 92,000 | ||||||
Real
Estate – Construction
|
2,006,000 | 2,360,000 | ||||||
Real
Estate – Mortgage
|
454,000 | 178,000 | ||||||
Consumer
Installment loans
|
41,000 | 77,000 | ||||||
Total
loans accruing, but past due 90 days or more
|
2,576,000 | 2,707,000 | ||||||
Nonaccrual
Loans:
|
||||||||
Commercial,
Financial and Agricultural
|
245,000 | - | ||||||
Real
Estate – Construction
|
12,523,000 | 9,840,000 | ||||||
Real
Estate – Mortgage
|
1,288,000 | 55,000 | ||||||
Total
nonaccrual loans
|
14,056,000 | 9,895,000 | ||||||
Total
nonperforming loans
|
21,683,000 | 13,244,000 | ||||||
Other
Real Estate Owned
|
1,786,000 | 923,000 | ||||||
Total
nonperforming assets
|
$ | 23,469,000 | $ | 14,167,000 | ||||
Non-performing
loans/Total loans (1)
|
7.30 | % | 4.33 | % | ||||
Non-performing
assets/Total assets
|
6.13 | % | 3.74 | % | ||||
Allowance
for loan losses/Total non-performing loans
|
48.92 | % | 64.41 | % |
(1)
Includes loans held for sale.
During
2009, to conform to bank regulatory reporting requirements and general practices
within the banking industry for impaired collateral dependent loans where
repayment is expected solely from the underlying collateral, we reduced the
carrying value through a partial charge-off of certain loans as shown in the
table below:
Real
Estate:
|
Loan
Balance
|
Direct
charge-off
|
Adjusted
Loan Balance
|
%
Charged-off
|
||||||||||||
Construction
|
$ | 14,748,000 | $ | 2,941,000 | $ | 11,807,000 | 19.94 | % | ||||||||
Mortgage
|
182,000 | 182,000 | - | 100.00 | ||||||||||||
|
$ | 14,930,000 | $ | 3,123,000 | $ | 11,807,000 | 20.92 | % |
The
current level of the allowance for loan losses is the result of management’s
assessment of the risks within the portfolio based on the information revealed
in credit monitoring processes. The Company utilizes a risk-rating
system on all commercial, business, agricultural, construction and multi-family
and commercial real estate loans, including purchased loans. A
quarterly risk analysis is performed on all types of loans to establish the
necessary reserve based on the estimated risk within the
portfolio. This assessment of risk takes into account the composition
of the loan portfolio, historical loss experience for each loan category,
previous loan experience, concentrations of credit, current economic conditions
and other factors that in management’s judgment deserve
consideration.
38
Although
management believes that it uses the best information available to determine the
allowance, unforeseen market conditions could result in adjustments and net
earnings could be significantly affected if circumstances differ substantially
from the assumptions used in making the final determinations. Future
additions to the Company’s allowance may result from periodic loan, property and
collateral reviews and thus cannot be predicted in advance.
The
allowance for loan losses is calculated under FASB ASC Topic 310 and FASB ASC
Topic 450. Non-performing and impaired loans are evaluated under FASB
ASC Topic 310, using either the fair value of collateral or present value of
future cash flows method. In our case, all non-performing and
impaired loans are evaluated using the fair value of collateral method since all
the non-performing and impaired loans are collateralized by real
estate. When a loan is evaluated using this method, a new
appraisal(s) of the primary and secondary collateral is obtained and compared to
the outstanding balance of the loan. A specific reserve is added to
the allowance for loan losses, if a collateral shortfall exists.
The
Company had $14.1 million and $9.9 million, respectively, in loans on nonaccrual
status at September 30, 2009 and December 31, 2008. This increase is
the result of 30 loans that the Company placed on nonaccrual status during the
first nine months of 2009, less 4 that were transferred to other real estate
owned, less 2 that were paid in full, less 1 that was sold. Of the 30
loans that were placed on nonaccrual status during the first nine months of
2009, 15 were deemed impaired as of December 31, 2008 and no additional
valuation reserve was needed for these loans during the first nine months of
2009. The remaining 15 were classified impaired and put on nonaccrual
status during the first nine months of 2009, and required $45,000 in valuation
reserves. Impaired loans increased by $9.5 million, or 54%, between
December 31, 2008 and September 30, 2009; however, as a result of the charge
offs or partial charge offs, the valuation reserve decreased by $1,571,000, or
56%. Impaired loans without a valuation allowance increased $18.7
million since December 31, 2008 as a result of the Company designating new loans
as impaired where the current appraisal supports the full amount of the loan and
existing impaired loans, where the Company charged off or partially charged off
$3.4 million during the nine months ended September 30, 2009, based upon current
appraisals obtained by the Company or, serving as a proxy, a 40% reduction in
appraised value on older appraisals.
Restructured
loans increased $4.5 million, from $0.6 million as of December 31, 2008 to $5.3
million as of September 30, 2009, primarily as a result of the Company’s
implementation of a term principal amortization plan for certain residential
spot lot construction loans. The process of modifying these
construction loans to principal amortizing loans is completed in order for the
Company to begin receiving principal reductions on these loans. As a
result of certain changes in terms under which these loans were modified, seven
of these loans are considered troubled debt restructurings and included within
impaired loans.
The
Company utilizes a risk rating system on all unimpaired loans which takes into
account loans with similar characteristics and historical loss experience
related to each group. In addition, qualitative adjustments are made
for levels and trends in delinquencies and nonaccruals, downturns in specific
industries, changes in credit policy, experience and ability of staff, national
and local economic conditions, and concentrations of credit within the
portfolio. The total loans outstanding in each group of loans with
similar characteristics is multiplied by the sum of the historical loss factors
and the qualitative factors (for that group), to produce the allowance for the
unimpaired loan loss balance required.
Unimpaired
commercial real estate loans analyzed decreased $28.3 million, or 21%, between
December 31, 2008 and September 30, 2009 due to payments, payoffs, loans
converted to mini-perms and loans characterized as
impaired. Unimpaired spot lot construction loans, a component type
within the real estate - construction portfolio, had their qualitative
adjustment factors increased an average of 91% due to the risk present in this
portfolio segment and the increasing historical charge off qualitative
factor. As a result of the above mentioned activity during the first
nine months of 2009, management concluded that a provision for loan losses of
$5,390,000 was needed during the first nine months of 2009.
Deposits. Deposits
totaled $343.2 million at September 30, 2009, increasing $14.6 million, or 4.4%,
from the December 31, 2008 balance of $328.6 million. The increase in
deposits resulted primarily from management’s efforts to increase the bank’s net
interest margin and liquidity.
39
Federal Home Loan Bank Advances and
Other Borrowings. Federal Home Loan Bank advances and other borrowings
totaled $21.4 and $22.2 million at September 30, 2009 and December 31, 2008,
respectively.
Shareholders’
Equity. Shareholders’ equity decreased by $10.3 million, or
37.9%, mainly as a result of our net loss, partially offset by a decrease in
other comprehensive loss.
Comparative
Average Balances, Interest and Yields:
Three Months Ended
|
||||||||||||||||||||||||
September 30, 2009
|
September 30, 2008
|
|||||||||||||||||||||||
(Restated)
|
||||||||||||||||||||||||
Average
Balance
|
Interest
Income/Expense
|
Annual
Yield/Cost
|
Average
Balance
|
Interest
Income/Expense
|
Annual
Yield/Cost
|
|||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Loans,
net (1)
|
$ | 285,952,000 | $ | 4,294,000 | 5.96 | % | $ | 298,773,000 | $ | 5,125,000 | 6.90 | % | ||||||||||||
Investment
securities (2)
|
49,003,000 | 465,000 | 3.77 | 28,955,000 | 318,000 | 4.41 | ||||||||||||||||||
Due
from banks and Federal funds sold
|
15,435,000 | 5,000 | 0.12 | 4,852,000 | 21,000 | 1.72 | ||||||||||||||||||
Total
interest-earning assets
|
350,390,000 | 4,764,000 | 5.39 | 332,580,000 | 5,464,000 | 6.61 | ||||||||||||||||||
Allowance
for loan losses
|
(12,025,000 | ) | (3,006,000 | ) | ||||||||||||||||||||
Other
assets
|
44,879,000 | 48,636,000 | ||||||||||||||||||||||
Total
assets
|
$ | 383,244,000 | $ | 378,210,000 | ||||||||||||||||||||
Liabilities
and shareholders’ equity
|
||||||||||||||||||||||||
Time
deposits
|
$ | 200,451,000 | $ | 1,407,000 | 2.79 | % | $ | 181,059,000 | 1,636,000 | 3.59 | % | |||||||||||||
NOW/MMDA/savings
accounts
|
108,937,000 | 225,000 | 0.64 | 105,213,000 | 349,000 | 1.32 | ||||||||||||||||||
Borrowed
funds
|
22,121,000 | 270,000 | 4.83 | 9,821,000 | 136,000 | 5.48 | ||||||||||||||||||
Total
interest-bearing liabilities
|
331,509,000 | 1,902,000 | 2.28 | 296,093,000 | 2,121,000 | 2.85 | ||||||||||||||||||
Noninterest-bearing
demand deposits
|
33,175,000 | 37,971,000 | ||||||||||||||||||||||
Other
liabilities
|
1,591,000 | 1,430,000 | ||||||||||||||||||||||
Shareholders’
equity
|
16,969,000 | 42,716,000 | ||||||||||||||||||||||
Total
liabilities and shareholders’ equity
|
$ | 383,244,000 | $ | 378,210,000 | ||||||||||||||||||||
Net
interest income
|
$ | 2,862,000 | $ | 3,343,000 | ||||||||||||||||||||
Interest
rate spread (3)
|
3.11 | % | 3.76 | % | ||||||||||||||||||||
Net
interest margin (4)
|
3.24 | % | 4.00 | % |
40
Nine Months Ended
|
||||||||||||||||||||||||
September 30, 2009
|
September 30, 2008
|
|||||||||||||||||||||||
(Restated)
|
||||||||||||||||||||||||
Average
Balance
|
Interest
Income/Expense
|
Annual
Yield/Cost
|
Average
Balance
|
Interest
Income/Expense
|
Annual
Yield/Cost
|
|||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Loans,
net (1)
|
$ | 288,230,000 | $ | 12,799,000 | 5.94 | % | $ | 301,245,000 | $ | 15,839,000 | 7.02 | % | ||||||||||||
Investment
securities (2)
|
48,930,000 | 1,450,000 | 4.47 | 34,412,000 | 1,093,000 | 4.24 | ||||||||||||||||||
Due
from banks and Federal funds sold
|
16,122,000 | 17,000 | 0.14 | 9,479,000 | 161,000 | 2.27 | ||||||||||||||||||
Total
interest-earning assets
|
353,282,000 | 14,266,000 | 5.40 | 345,136,000 | 17,093,000 | 6.62 | ||||||||||||||||||
Allowance
for loan losses
|
(9,650,000 | ) | (2,866,000 | ) | ||||||||||||||||||||
Other
assets
|
44,703,000 | 48,393,000 | ||||||||||||||||||||||
Total
assets
|
$ | 388,335,000 | $ | 390,663,000 | ||||||||||||||||||||
Liabilities
and shareholders’ equity
|
||||||||||||||||||||||||
Time
deposits
|
$ | 201,309,000 | $ | 4,743,000 | 3.15 | % | $ | 194,283,000 | 5,926,000 | 4.07 | % | |||||||||||||
NOW/MMDA/savings
accounts
|
107,584,000 | 699,000 | 0.87 | 103,211,000 | 1,068,000 | 1.38 | ||||||||||||||||||
Borrowed
funds
|
22,215,000 | 800,000 | 4.81 | 9,882,000 | 423,000 | 5.72 | ||||||||||||||||||
Total
interest-bearing liabilities
|
331,108,000 | 6,242,000 | 2.52 | 307,376,000 | 7,417,000 | 3.22 | ||||||||||||||||||
Noninterest-bearing
demand deposits
|
33,333,000 | 38,422,000 | ||||||||||||||||||||||
Other
liabilities
|
498,000 | 1,856,000 | ||||||||||||||||||||||
Shareholders’
equity
|
23,396,000 | 43,009,000 | ||||||||||||||||||||||
Total
liabilities and shareholders’ equity
|
$ | 388,335,000 | $ | 390,663,000 | ||||||||||||||||||||
Net
interest income
|
$ | 8,024,000 | $ | 9,676,000 | ||||||||||||||||||||
Interest
rate spread (3)
|
2.88 | % | 3.40 | % | ||||||||||||||||||||
Net
interest margin (4)
|
3.04 | % | 3.74 | % |
________________________________
(1)
|
Includes loans
held for sale. Also includes loan fees, which are not
material. Does not include loans on
nonaccrual.
|
(2)
|
Yields
are not on a tax-equivalent basis.
|
(3)
|
Interest
rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
|
(4)
Net interest margin represents net interest income as a percentage
of average interest-earning assets.
|
Liquidity
Liquidity describes our ability to meet
the financial obligations that arise out of the ordinary course of
business. Liquidity addresses the Company’s ability to meet deposit
withdrawals on demand or at contractual maturity, to repay borrowings as they
mature, and to fund current and planned expenditures. Liquidity is
derived from loan and investment securities repayments and income from
interest-earning assets. Our loan to deposit ratio was 86.5% and
93.0% at September 30, 2009 and December 31, 2008, respectively.
The
Company seeks to rely primarily on core deposits from customers to provide
stable and cost-effective sources of funding to support growth. The
Company also seeks to augment such deposits with longer term and higher yielding
certificates of deposit. To the extent that retail deposits are not
adequate to fund customer loan demand, liquidity needs can be met in the
short-term funds market. As of September 30, 2009, the Company
maintained lines of credit with correspondent banks of $39.2
million. Longer term funding requirements can be satisfied through
advances from the Federal Home Loan Bank.
As of
September 30, 2009, the Company’s investment securities portfolio included $33.5
million of mortgage-backed securities that provide significant cash flow each
month. The majority of the investment portfolio is classified as
available-for-sale, is readily marketable, and is available to meet liquidity
needs. The Company’s residential real estate portfolio includes
loans, which are underwritten to secondary market criteria, and provide an
additional source of liquidity.
41
Capital
Resources
The Company is subject to various
regulatory capital requirements. Regulatory capital is defined in
terms of Tier I capital (shareholders’ equity adjusted for unrealized gains or
losses on available-for-sale securities), Tier II capital (which includes a
portion of the allowance for loan losses) and Total capital (Tier I plus Tier
II). Risk-based capital ratios are expressed as a percentage of
risk-weighted assets. Risk-weighted assets are determined by
assigning various weights to all assets and off-balance sheet associated
risk. Regulators have also adopted minimum Tier I leverage ratio
standards, which measure the ratio of Tier I capital to average
assets.
At
September 30, 2009, management believes that the Bank is “adequately
capitalized,” as defined by regulatory banking agencies. The
Company’s long term goal is to ensure that the Bank is “well capitalized” under
the applicable regulatory standards. To assist in this goal, the
Company issued $6.0 million of trust preferred securities (the “Securities”) on
May 1, 2007. The Securities bear interest at 6.744% for the first
five years. Subsequently, the interest rate will be adjusted
quarterly based on a three month LIBOR rate plus 1.70%. The
Securities are callable by the Company after five years with a final maturity of
May 1, 2037. The Company contributed $4.5 million of the proceeds of
the Securities to the capital of the Bank as Tier I capital. If the
Company determines that there is a need to preserve capital or improve
liquidity, the ability exists to defer interest payments for a maximum of five
years. During the second and third quarters of 2009, the Company
elected to defer the interest payments due. Further, pursuant to the
terms of the Agreement with the Regulators, the Company will not make any
interest payments in the future without prior approval from the
Regulators.
Off-Balance
Sheet Arrangements
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, including unused portions of lines of credit and standby letters of
credit. The Company has also entered into long-term lease obligations
for some of its premises and equipment, the terms of which generally include
options to renew. The above instruments and obligations involve, to
varying degrees, elements of off-balance sheet risk in excess of the amount
recognized in the balance sheets. None of these instruments or
obligations have or are reasonably likely to have a current or future effect on
the Company's financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
As of
September 30, 2009, commitments to extend credit and unused lines of credit
amounted to approximately $35.8 million and standby letters of credit were
approximately $4.2 million. See Note 8 to the Notes to Financial
Statements included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 for additional information regarding the Bank’s
long-term lease obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not
Applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Our Chief
Executive Officer and Chief Financial Officer previously concluded that our
disclosure controls and procedures were effective as of September 30, 2009 and
management reported that there was no change in our internal control over
financial reporting that occurred during the quarter ended September 30, 2009
that materially affected, or was reasonably likely to materially affect, our
internal control over financial reporting.
42
As a
result of the restatement of our financial statements as discussed in Note 2 to
the accompanying unaudited condensed consolidated financial statements a
re-evaluation was performed as of September 30, 2009, under the supervision and
with the participation of the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based
upon this evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were not
effective as of September 30, 2009, to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act
are recorded, processed, summarized and reported as and when required due to a
material weakness in our internal control over financial reporting.
Our
conclusion was primarily related to our review and reassessment of management’s
policies and procedures for the monitoring and timely evaluation of and revision
to management’s approach for assessing credit risk inherent in the loan
portfolio to reflect changes in the economic environment in the allowance for
loan losses.
The
Company has restated its condensed consolidated financial statements as of and
for the three and nine months ended September 30, 2009 in this Form 10Q/A as
discussed in Note 2 to the accompanying financial statements. The
Company has taken certain other remedial actions as of the date of filing of
this Form−10Q/A and believes that the consolidated financial statements included
in this Form−10Q/A present fairly, in all material respects, the Company’s
financial position, results of operations, and cash flows for the periods
presented.
Changes
in Internal Control over Financial Reporting
The
Company has identified a material weakness as described above. There
were no other changes in the Company’s internal control over financial reporting
(as defined in Rules 13a−15(f) and 15d−15(f) under the Exchange Act) during the
fiscal quarter ended September 30, 2009, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Remediation
Steps to Address Material Weakness
As of the
date of this amended filing, the Company is in the process of establishing new
policies and procedures with respect to how the allowance for loan losses are
established and disclosed. Additionally, in order to ensure that
adequacy and accuracy in these determinations are consistently present, a
procedure of external review of management’s assessments of the allowance for
loan losses will be completed on a timely basis each quarter.
PART
II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Not
Applicable.
ITEM 1A. Risk Factors.
Not
Applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Not
Applicable.
43
ITEM 3. Defaults Upon Senior Securities.
|
None.
|
ITEM 4. Submission of Matters to a Vote of Security
Holders.
None.
ITEM 5. Other Information.
|
None.
|
ITEM 6. Exhibits.
|
The
following are filed as exhibits to this
report:
|
15
|
|
31.1
|
|
31.2
|
|
32
|
44
In accordance with the requirements of
the Securities Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
STERLING
BANKS, INC.
|
||
Date:
March 8, 2010
|
By:
|
/s/ Robert H. King
|
Robert
H. King
|
||
President
and Chief Executive Officer
|
||
Date:
March 8, 2010
|
By:
|
/s/ R. Scott Horner
|
R.
Scott Horner
|
||
Executive
Vice President and Chief
|
||
Financial
Officer
|
45