UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended: March 31, 2010
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 May 13,
2010: 5,843,362
STERLING
BANKS, INC.
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2010
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.
|
Reserved
|
|
Item
5.
|
Other
Information
|
|
Item
6.
|
Exhibits
|
|
|
|
|
SIGNATURES
|
|
EXHIBITS
Exhibit
31.1
|
|
Exhibit
31.2
|
|
Exhibit
32
|
|
3
Part
I. Financial Information
Item 1. Financial
Statements
STERLING
BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
MARCH
31, 2010 AND DECEMBER 31, 2009
|
|
March
31,
2010
(unaudited)
|
|
|
December
31,
2009
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash due from banks
|
|
$
|
10,347,000
|
|
|
$
|
10,765,000
|
|
Federal
funds sold
|
|
|
16,101,000
|
|
|
|
4,545,000
|
|
Cash
and cash equivalents
|
|
|
26,448,000
|
|
|
|
15,310,000
|
|
|
|
|
|
|
|
|
|
|
Investment
securities held-to-maturity, at cost (fair value of
$7,681,000
at
March 31, 2010 and $9,462,000 at December 31, 2009)
|
|
|
7,401,000
|
|
|
|
9,198,000
|
|
Investment
securities available-for-sale, at fair value
|
|
|
28,651,000
|
|
|
|
34,098,000
|
|
Total
investment securities
|
|
|
36,052,000
|
|
|
|
43,296,000
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock, at cost
|
|
|
1,730,000
|
|
|
|
1,866,000
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
296,086,000
|
|
|
|
300,499,000
|
|
Less:
allowance for loan losses
|
|
|
(9,235,000
|
)
|
|
|
(9,915,000
|
)
|
Total
net loans
|
|
|
286,851,000
|
|
|
|
290,584,000
|
|
|
|
|
|
|
|
|
|
|
Core
deposit intangible asset, net
|
|
|
1,879,000
|
|
|
|
1,978,000
|
|
Bank
premises and equipment, net
|
|
|
7,986,000
|
|
|
|
8,164,000
|
|
Branch
Property Held for Sale
|
|
|
505,000
|
|
|
|
505,000
|
|
Accrued
interest receivable and other assets
|
|
|
7,707,000
|
|
|
|
8,098,000
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
369,158,000
|
|
|
$
|
369,801,000
|
|
See
Notes to Consolidated Financial Statements
4
STERLING
BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
MARCH
31, 2010 AND DECEMBER 31, 2009
|
|
March
31,
2010
(unaudited)
|
|
|
December
31,
2009
|
|
LIABILITIES
Deposits
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
34,251,000
|
|
|
$
|
30,864,000
|
|
Interest-bearing
|
|
|
296,598,000
|
|
|
|
299,862,000
|
|
Total
deposits
|
|
|
330,849,000
|
|
|
|
330,726,000
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
|
14,250,000
|
|
|
|
14,250,000
|
|
Subordinated
debentures
|
|
|
6,186,000
|
|
|
|
6,186,000
|
|
Accrued
interest payable and other accrued liabilities
|
|
|
1,794,000
|
|
|
|
1,653,000
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
353,079,000
|
|
|
|
352,815,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2010 and December 31, 2009
|
|
|
11,687,000
|
|
|
|
11,687,000
|
|
Additional
paid-in capital
|
|
|
29,860,000
|
|
|
|
29,841,000
|
|
Accumulated
deficit
|
|
|
(25,679,000
|
)
|
|
|
(24,633,000
|
)
|
Accumulated
other comprehensive income
|
|
|
211,000
|
|
|
|
91,000
|
|
Total
shareholders' equity
|
|
|
16,079,000
|
|
|
|
16,986,000
|
|
Total liabilities and
shareholders' equity
|
|
$
|
369,158,000
|
|
|
$
|
369,801,000
|
|
See
Notes to Consolidated Financial Statements
5
STERLING
BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
THREE
MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
|
|
2010
|
|
|
2009
|
|
INTEREST
INCOME
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
4,087,000
|
|
|
$
|
4,211,000
|
|
Interest
and dividends on securities
|
|
|
382,000
|
|
|
|
494,000
|
|
Interest
on due from banks and federal funds sold
|
|
|
3,000
|
|
|
|
6,000
|
|
Total
interest and dividend income
|
|
|
4,472,000
|
|
|
|
4,711,000
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,210,000
|
|
|
|
1,952,000
|
|
Interest
on Federal Home Loan Bank advances and overnight
borrowings
|
|
|
144,000
|
|
|
|
160,000
|
|
Interest
on subordinated debentures
|
|
|
110,000
|
|
|
|
104,000
|
|
Total
interest expense
|
|
|
1,464,000
|
|
|
|
2,216,000
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
3,008,000
|
|
|
|
2,495,000
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
550,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
|
2,458,000
|
|
|
|
2,495,000
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
INCOME
|
|
|
|
|
|
|
|
|
Service
charges
|
|
|
59,000
|
|
|
|
66,000
|
|
Gains
on sales of available-for-sale securities
|
|
|
10,000
|
|
|
|
-
|
|
Miscellaneous
fees and other
|
|
|
103,000
|
|
|
|
153,000
|
|
Total
noninterest income
|
|
|
172,000
|
|
|
|
219,000
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
EXPENSES
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
1,596,000
|
|
|
|
1,646,000
|
|
Occupancy,
equipment and data processing
|
|
|
862,000
|
|
|
|
946,000
|
|
Professional
services
|
|
|
366,000
|
|
|
|
239,000
|
|
FDIC
insurance
|
|
|
266,000
|
|
|
|
96,000
|
|
Losses
on sales and impairment of repossessed property
|
|
|
131,000
|
|
|
|
12,000
|
|
Marketing
and business development
|
|
|
109,000
|
|
|
|
130,000
|
|
Amortization
of core deposit intangible asset
|
|
|
99,000
|
|
|
|
99,000
|
|
Other
operating expenses
|
|
|
247,000
|
|
|
|
259,000
|
|
Total
noninterest expenses
|
|
|
3,676,000
|
|
|
|
3,427,000
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAX BENEFIT
|
|
|
(1,046,000
|
)
|
|
|
(713,000
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT
|
|
|
-
|
|
|
|
(264,000
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,046,000
|
)
|
|
$
|
(449,000
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
5,843,362
|
|
|
|
5,843,362
|
|
See
Notes to Consolidated Financial Statements
6
STERLING
BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE
MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(449,000
|
)
|
|
|
-
|
|
|
|
(449,000
|
)
|
Change
in net unrealized gain (loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available-for-sale, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
tax effects, if any
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
275,000
|
|
|
|
(275,000
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174,000
|
)
|
Stock
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
19,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
5,843,362
|
|
|
$
|
11,687,000
|
|
|
$
|
29,786,000
|
|
|
$
|
(14,728,000
|
)
|
|
$
|
221,000
|
|
|
$
|
26,966,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
5,843,362
|
|
|
$
|
11,687,000
|
|
|
$
|
29,841,000
|
|
|
$
|
(24,633,000
|
)
|
|
$
|
91,000
|
|
|
$
|
16,986,000
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss – 2010
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,046,000
|
)
|
|
|
-
|
|
|
|
(1,046,000
|
)
|
Change
in net unrealized gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
securities available-for-sale,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
tax effects, if any
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
120,000
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(926,000
|
)
|
Stock
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
19,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
|
5,843,362
|
|
|
$
|
11,687,000
|
|
|
$
|
29,860,000
|
|
|
$
|
(25,679,000
|
)
|
|
$
|
211,000
|
|
|
$
|
16,079,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
7
STERLING
BANKS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
THREE
MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,046,000
|
)
|
|
$
|
(449,000
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of premises and equipment
|
|
|
221,000
|
|
|
|
286,000
|
|
Provision
for loan losses
|
|
|
550,000
|
|
|
|
-
|
|
Net
amortization of purchase premium on securities
|
|
|
64,000
|
|
|
|
70,000
|
|
Net
amortization of core deposit intangible
|
|
|
99,000
|
|
|
|
99,000
|
|
Stock
compensation
|
|
|
19,000
|
|
|
|
19,000
|
|
Realized
loss on sales or write down of repossessed property
|
|
|
131,000
|
|
|
|
12,000
|
|
Realized
gain on sales of securities available-for-sale
|
|
|
(10,000
|
)
|
|
|
-
|
|
Proceeds
from sale of loans held for sale
|
|
|
-
|
|
|
|
2,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(Increase) in accrued interest receivable and other assets
|
|
|
115,000
|
|
|
|
(856,000
|
)
|
Increase
in accrued interest payable and other accrued liabilities
|
|
|
141,000
|
|
|
|
230,000
|
|
Net
cash provided by (used in) operating activities
|
|
|
284,000
|
|
|
|
(587,000
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of securities available-for-sale
|
|
|
-
|
|
|
|
(9,665,000
|
)
|
Proceeds
from sales of securities available-for- sale
|
|
|
4,316,000
|
|
|
|
-
|
|
Proceeds
from maturities of securities available-for-sale
|
|
|
-
|
|
|
|
1,000,000
|
|
Proceeds
from maturities of securities held-to-maturity
|
|
|
-
|
|
|
|
169,000
|
|
Proceeds
from principal payments on mortgage-backed securities
available-for-sale
|
|
|
1,310,000
|
|
|
|
1,320,000
|
|
Proceeds
from principal payments on mortgage-backed securities
held-to-maturity
|
|
|
1,764,000
|
|
|
|
1,861,000
|
|
Proceeds
from sale of restricted stock
|
|
|
136,000
|
|
|
|
-
|
|
Net
decrease in loans
|
|
|
2,813,000
|
|
|
|
2,814,000
|
|
Proceeds
from sales of other real estate owned
|
|
|
435,000
|
|
|
|
253,000
|
|
Purchases
of premises and equipment
|
|
|
(43,000
|
)
|
|
|
(151,000
|
)
|
Net
cash provided by investing activities
|
|
|
10,731,000
|
|
|
|
(2,399,000
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in noninterest-bearing deposits
|
|
|
3,387,000
|
|
|
|
(1,853,000
|
)
|
Net
(decrease) increase in interest-bearing deposits
|
|
|
(3,264,000
|
)
|
|
|
16,165,000
|
|
Net
cash provided by financing activities
|
|
|
123,000
|
|
|
|
14,312,000
|
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
11,138,000
|
|
|
|
11,326,000
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, JANUARY 1,
|
|
|
15,310,000
|
|
|
|
13,526,000
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, MARCH 31,
|
|
$
|
26,448,000
|
|
|
$
|
24,852,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Interest
on deposits and borrowed funds
|
|
$
|
1,361,000
|
|
|
$
|
2,198,000
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
Transfer
of loans to other real estate owned
|
|
$
|
370,000
|
|
|
$
|
705,000
|
|
See
Notes to Consolidated Financial Statements
8
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.
On March
18, 2010, the Company announced that the Board of Directors approved an
Agreement and Plan of Merger providing for the Company to merge with and into a
subsidiary of Roma Financial (“Roma”) in exchange for a cash
payment. Under the terms of the merger agreement, which has been
approved by the boards of directors of both companies, Roma will acquire all of
the outstanding shares of the Company for a total purchase price of
approximately $14.7 million in cash, or $2.52 per share (subject to adjustment)
for each share of common stock outstanding. It is expected that the
merger will be consummated in the third quarter of 2010.
The
transaction is subject to certain conditions, including requisite regulatory
approval, the approval of the Company’s stockholders, and the Company
maintaining its financial condition through the closing such that the Company’s
nonperforming assets, inclusive of troubled debt restructurings, do not exceed
$30.0 million for the period from January 1, 2010 through the closing date of
the merger, and the Company’s tangible common equity capital being not less than
$9.9 million on the closing date of the merger. At March 31, 2010,
the Company’s tangible common equity capital was $14.2 million, and its
non-performing assets, inclusive of troubled debt restructurings, were $25.1
million.
In the
event that the Company is unsuccessful in completing the merger with Roma, the
Company may pursue other opportunities including seeking a new acquirer, raising
capital externally, such as through a public offering or private placement,
and/or raising capital internally, such as the selling of assets and/or cutting
costs in an effort to increase earnings.
NOTE
2. 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, 2009, 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, 2009. 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 months ended March 31,
2010 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2010.
9
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
(continued)
The
Company has evaluated subsequent events for potential recognition and/or
disclosure through the date the consolidated financial statements included in
this Quarterly Report on Form 10-Q were issued and has determined that, other
than that which has been reported in Note 13 to the consolidated financial
statements, no other events warranted inclusion or disclosure.
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.
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. M
aterial 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.
10
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
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.
11
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
(continued)
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. No impairments occurred during the three months ended March
31, 2010 and 2009.
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.
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.
12
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent
Accounting Pronouncements
FASB ASC
Topic 820,
Fair Value
Measurements and Disclosures
(Accounting Standards Update No.
2010-6)
New
authoritative accounting guidance (Accounting Standards Update No. 2010-6)
provides amendments to ASC Topic 820 that require new disclosures as
follows:
1) A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers.
2) In the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number).
The new
authoritative guidance also clarifies existing disclosures as
follows:
1) A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets
or liabilities within a line item in the statement of financial
position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities.
2) A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3.
These new
disclosures and clarifications of existing disclosures were effective for the
Company’s financial statements for fiscal years beginning after December 15,
2009, and did not have a significant impact on the Company’s financial
statements (except for the disclosures about the purchases, sales, issuances,
and settlements in the roll forward activity of Level 3 fair value measurements,
which is effective for fiscal years beginning after December 15,
2010).
FASB ASC
Topic 860,
Transfers and
Servicing
This
authoritative accounting guidance under amends prior accounting guidance to
enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure risks related to
transferred financial assets. The new authoritative accounting
guidance eliminates the concept of a “qualifying special-purpose entity” and
changes the requirements for derecognizing financial assets. This new
authoritative accounting guidance was effective January 1, 2010 and did not have
a significant impact on the Company’s financial statements.
13
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3. INVESTMENT SECURITIES
The
following is a summary of the Company's investment in available-for-sale and
held-to-maturity securities as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
8,089,000
|
|
|
$
|
124,000
|
|
|
$
|
-
|
|
|
$
|
8,213,000
|
|
Residential
mortgage-backed securities
|
|
|
20,210,000
|
|
|
|
353,000
|
|
|
|
(125,000
|
)
|
|
|
20,438,000
|
|
Total
securities available-for-sale
|
|
$
|
28,299,000
|
|
|
$
|
477,000
|
|
|
$
|
(125,000
|
)
|
|
$
|
28,651,000
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Residential
mortgage-backed securities
|
|
|
7,301,000
|
|
|
|
280,000
|
|
|
|
-
|
|
|
|
7,581,000
|
|
Total
securities held-to-maturity
|
|
$
|
7,401,000
|
|
|
$
|
280,000
|
|
|
$
|
-
|
|
|
$
|
7,681,000
|
|
The
Company’s investment securities as of December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
8,092,000
|
|
|
$
|
61,000
|
|
|
$
|
(46,000
|
)
|
|
$
|
8,107,000
|
|
Residential
mortgage-backed securities
|
|
|
21,549,000
|
|
|
|
286,000
|
|
|
|
(222,000
|
)
|
|
|
21,613,000
|
|
Municipal
securities
|
|
|
4,305,000
|
|
|
|
73,000
|
|
|
|
-
|
|
|
|
4,378,000
|
|
Total
securities available-for-sale
|
|
$
|
33,946,000
|
|
|
$
|
420,000
|
|
|
$
|
(268,000
|
)
|
|
$
|
34,098,000
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Residential
mortgage-backed securities
|
|
|
9,098,000
|
|
|
|
264,000
|
|
|
|
-
|
|
|
|
9,362,000
|
|
Total
securities held-to-maturity
|
|
$
|
9,198,000
|
|
|
$
|
264,000
|
|
|
$
|
-
|
|
|
$
|
9,462,000
|
|
14
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. INVESTMENT
SECURITIES
(continued)
The
amortized cost and estimated fair value of debt securities classified as
available-for-sale and held-to-maturity at March 31, 2010 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.
|
|
March
31, 2010
|
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Maturing
after five years, but within ten years
|
|
|
8,089,000
|
|
|
|
8,213,000
|
|
|
|
-
|
|
|
|
-
|
|
Maturing
after ten years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential
mortgage-backed securities
|
|
|
20,210,000
|
|
|
|
20,438,000
|
|
|
|
7,301,000
|
|
|
|
7,581,000
|
|
Total
securities
|
|
$
|
28,299,000
|
|
|
$
|
28,651,000
|
|
|
$
|
7,401,000
|
|
|
$
|
7,681,000
|
|
The
following tables show 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 March 31, 2010 and December 31, 2009:
|
|
Continuous
Unrealized Losses
|
|
|
Continuous
Unrealized Losses
|
|
|
|
Existing
for Less Than 12 Months
|
|
|
Existing
for 12 Months or More
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
At
March 31, 2010
|
|
Fair
Value
|
|
|
Losses
|
|
|
Fair
Value
|
|
|
Losses
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Residential
mortgage-backed securities
|
|
|
7,725,000
|
|
|
|
(125,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
7,725,000
|
|
|
|
(125,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
temporarily impaired securities
|
|
$
|
7,725,000
|
|
|
$
|
(125,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
15
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. INVESTMENT
SECURITIES
(continued)
|
|
Continuous
Unrealized Losses
|
|
|
Continuous
Unrealized Losses
|
|
|
|
Existing
for Less Than 12 Months
|
|
|
Existing
for More Than 12 Months
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
At
December 31, 2009
|
|
Fair
Value
|
|
|
Losses
|
|
|
Fair
Value
|
|
|
Losses
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
3,954,000
|
|
|
$
|
(46,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Mortgage-backed
securities
|
|
|
10,360,000
|
|
|
|
(222,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
14,314,000
|
|
|
|
(268,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
temporarily impaired securities
|
|
$
|
14,314,000
|
|
|
$
|
(268,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government and Agency
Obligations.
At December 31, 2009, 2 U.S. Government agencies
and corporations were in an unrealized loss position. 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 December 31, 2009.
Residential Federal Agency
Mortgage-Backed Securities.
There were 4 and 6 mortgage-backed
securities were in an unrealized loss position at March 31, 2010 and December
31, 2009, respectively. 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 March 31, 2010 or December
31, 2009.
NOTE
4. 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 three months ended March 31, 2010 and 2009 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 months ended March 31, 2010 and
2009, as their inclusion would be anti-dilutive.
16
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5. 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 three months ended March 31, 2010 and 2009, the Company did not issue any
options. Compensation cost charged to operations for the
three months ended March 31, 2010 and 2009 was $19,000,
respectively.
As of
March 31, 2010, there was approximately $539,000 of total unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted average period of 7.8 years. Of the
255,390 unvested options at December 31, 2009, 3,655 options vested in 2010,
7,100 options expired and 244,635 options remain unvested at March 31,
2010.
NOTE
6. COMMON STOCK
During
the three months of 2010 and 2009, no stock options were exercised.
During
the three months of 2010 and 2009, no cash dividends were declared or
paid.
NOTE
7. 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.
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 March
31, 2010, 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 March 31, 2010, 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.
17
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. CAPITAL RATIOS
(continued)
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 March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk-Weighted Assets)
|
$23,739
|
8.44%
|
≥
$22,492
|
≥8.0%
|
≥$28,114
|
≥10.0%
|
Tier
I Capital (to Risk-Weighted Assets)
|
$20,153
|
7.17%
|
≥$11,246
|
≥4.0%
|
≥$16,869
|
≥ 6.0%
|
Tier
I Capital (to Average Assets)
|
$20,153
|
5.47%
|
≥$14,740
|
≥4.0%
|
≥$18,425
|
≥ 5.0%
|
|
|
|
|
|
|
|
|
|
For
Capital
|
To
Be Well
|
|
Actual
|
Adequacy
Purposes
|
Capitalized
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
As
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk-Weighted Assets)
|
$24,553
|
8.64%
|
≥$22,733
|
≥8.0%
|
≥$28,416
|
≥10.0%
|
Tier
I Capital (to Risk-Weighted Assets)
|
$20,922
|
7.36%
|
≥$11,367
|
≥4.0%
|
≥$17,050
|
≥ 6.0%
|
Tier
I Capital (to Average Assets)
|
$20,922
|
5.52%
|
≥$15,149
|
≥4.0%
|
≥$18,937
|
≥ 5.0%
|
NOTE
8. FAIR VALUE
FASB ASC Topic 820 defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. In determining fair value, the
Company uses various methods including market, income and cost
approaches. Based on these approaches, the Company often utilizes
certain assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and/or the risks inherent in the
inputs to the valuation technique. These inputs can be readily
observable, market corroborated, or generally unobservable. The
Company utilizes techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on the observability
of the inputs used in valuation techniques the Company is required to provide
the following information according to the fair value hierarchy. The
fair value hierarchy ranks the quality and reliability of the information used
to determine fair values.
Financial
assets and liabilities carried at fair value will be classified and disclosed as
follows:
Level
1 Inputs
|
·
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities.
|
|
·
|
Generally,
this includes debt and equity securities traded in an active exchange
market (i.e. New York Stock Exchange), as well as certain US Treasury and
US Government and agency mortgage-backed securities that are highly liquid
and are actively traded in over-the-counter
markets.
|
18
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. FAIR VALUE
(continued)
Level 2 Inputs
|
·
|
Quoted
prices for similar assets or liabilities in active
markets.
|
|
·
|
Quoted
prices for identical or similar assets or liabilities in markets that are
not active.
|
|
·
|
Inputs
other than quoted prices that are observable, either directly or
indirectly, for the term of the asset or liability (e.g., interest rates,
yield curves, credit risks, prepayment speeds or volatilities) or “market
corroborated inputs.”
|
|
·
|
Generally,
this includes US Government and agency mortgage-backed securities,
corporate debt securities, and loans held for
sale.
|
Level
3 Inputs
|
·
|
Prices
or valuation techniques that require inputs that are both unobservable
(i.e. supported by little or no market activity) and that are significant
to the fair value of the assets or
liabilities.
|
|
·
|
These
assets and liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, or
similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or
estimation.
|
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.
March
31, 2010
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and
corporations
|
|
$
|
-
|
|
|
$
|
8,213,000
|
|
|
$
|
-
|
|
|
$
|
8,213,000
|
|
Mortgage-backed
securities
|
|
$
|
-
|
|
|
$
|
20,438,000
|
|
|
$
|
-
|
|
|
$
|
20,438,000
|
|
December
31, 2009
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and
Corporations
|
|
$
|
-
|
|
|
$
|
8,107,000
|
|
|
$
|
-
|
|
|
$
|
8,107,000
|
|
Mortgage-backed
securities
|
|
$
|
-
|
|
|
$
|
21,613,000
|
|
|
$
|
-
|
|
|
$
|
21,613,000
|
|
Municipal
securities
|
|
$
|
-
|
|
|
$
|
4,378,000
|
|
|
$
|
-
|
|
|
$
|
4,378,000
|
|
Securities
Portfolio
The fair
value of securities is the market value based on quoted market prices, when
available, or market prices provided by recognized broker dealers (level
1). When listed prices or quotes are not available, fair value is
based upon quoted market prices for similar or identical assets or other
observable inputs (level 2) or significant management judgment or estimation
based upon unobservable inputs due to limited or no market activity of the
instrument (level 3).
19
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. FAIR VALUE
(continued)
As of
March 31, 2010, the fair value of the Bank's available-for-sale securities
portfolio was $28,651,000. Over 71 percent of the portfolio was made up of
residential mortgage-backed securities, which had a fair value of $20,438,000 at
March 31, 2010. All the residential mortgage-backed securities were
issued or are guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home
Loan Mortgage Corporation ("FHLMC"). The underlying loans for these
securities are residential mortgages that are geographically dispersed
throughout the United States. All available-for-sale securities were
classified as Level 2 assets at March 31, 2010. The valuation of
available-for-sale securities using Level 2 inputs was primarily determined
using the market approach, which uses quoted prices for similar instruments and
all relevant information.
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.
March
31, 2010
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,948,000
|
|
|
$
|
30,948,000
|
|
December
31, 2009
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,725,000
|
|
|
$
|
26,725,000
|
|
March
31, 2010
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Non-Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
796,000
|
|
|
$
|
796,000
|
|
Branch
held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
505,000
|
|
|
$
|
505,000
|
|
December
31, 2009
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Non-Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,100,000
|
|
|
$
|
1,100,000
|
|
Branch
held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
505,000
|
|
|
$
|
505,000
|
|
Impaired
Loans
The
carrying value of impaired loans is derived in accordance with FASB ASC Topic
310,
“Receivables”
. Fair
value is determined based on the loan’s observable market price or the fair
value of the collateral if the loan is collateral
dependent. Appraised and reported values may be discounted based on
management’s historical knowledge and changes in market conditions from the time
of valuation. The valuation allowance for impaired loans is included
in the allowance for loan losses in the balance sheets. The valuation allowance
for impaired loans at March 31, 2010 was $580,000. During the three
months ended March 31, 2010, the valuation allowance for impaired loans
decreased $104,000 from $684,000 at December 31, 2009 as a result of loans being
collected or charged off in full or in part.
20
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. FAIR VALUE
(continued)
Other
Real Estate Owned and Branch Held for Sale
Other
real estate owned and branch held for sale are carried at fair value, less
estimated costs to sell. The fair value was determined using
appraisals or other sources of market value. Discounts are based on
management’s review and changes in market conditions (Level 3
inputs).
Fair Value of Financial
Instruments (FASB ASC Topic 825 Disclosure)
FASB ASC
Topic 825,
Disclosures About
Fair Value of Financial Instruments
, requires the disclosure of the
estimated fair value of financial instruments, including those financial
instruments for which the Company did not elect the fair value
option. The methodology for estimating the fair value of financial
assets and liabilities that are measured on a recurring or nonrecurring basis
are discussed above.
The
following methods and assumptions were used to estimate the fair value under
FASB ASC Topic 825 of each class of financial instruments.
Cash and Cash
Equivalents
: The carrying amounts of cash and due from banks
and federal funds sold approximate fair value.
Investment Securities
Held-to-Maturity
: The fair value of securities
held-to-maturity is based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. These
financial instruments are not carried at fair value on a recurring
basis.
Restricted
Stock:
The carrying value of restricted stock approximates
fair value based on redemption provisions.
Loans (except collateral
dependent impaired loans)
: Fair values are estimated for
portfolios of loans with similar financial characteristics. Loans are
segregated by type such as commercial, residential mortgage and other
consumer. Each loan category is further segmented into groups by
fixed and adjustable rate interest terms and by performing and non-performing
categories.
The fair
value of performing loans is typically calculated by discounting scheduled cash
flows through their estimated maturity, using estimated market discount rates
that reflect the credit and interest rate risk inherent in each group of
loans. The estimate of maturity is based on contractual maturities
for loans within each group, or on the Company’s historical experience with
repayments for each loan classification, modified as required by an estimate of
the effect of current economic conditions.
Fair
value for nonperforming loans that are not collateral dependent is based on the
discounted value of expected future cash flows, discounted using a rate
commensurate with the risk associated with the likelihood of repayment and/or
the fair value of collateral (if repayment of the loan is collateral
dependent).
For all
loans, assumptions regarding the characteristics and segregation of loans,
maturities, credit risk, cash flows, and discount rates are judgmentally
determined using specific borrower and other available information.
The
carrying amounts reported for loans held for sale, if any, approximates fair
value.
21
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. FAIR VALUE
(continued)
Accrued Interest Receivable
and Payable
: The fair value of interest receivable and payable
is estimated to approximate the carrying amounts.
Deposits
: In
accordance with the FASB ASC Topic 825, the fair value of deposits with no
stated maturity, such as noninterest-bearing demand deposits, savings, NOW and
money market accounts, is equal to the amount payable on demand. The
fair value of time deposits is based on the discounted value of contractual cash
flows, where the discount rate is estimated using the market rates currently
offered for deposits of similar remaining maturities.
Borrowed
Funds
: The fair value of borrowings is calculated by
discounting scheduled cash flows through the estimated maturity date using
current market rates.
Estimated Fair
Values:
The estimated fair values of the Company’s material
financial instruments as of March 31, 2010 are as follows:
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Financial
Assets:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
10,347,000
|
|
|
$
|
10,347,000
|
|
Federal
funds sold
|
|
$
|
16,101,000
|
|
|
$
|
16,101,000
|
|
Investment
securities, held-to-maturity
|
|
$
|
7,401,000
|
|
|
$
|
7,681,000
|
|
Investment
securities, available-for-sale
|
|
$
|
28,651,000
|
|
|
$
|
28,651,000
|
|
Restricted
stock
|
|
$
|
1,730,000
|
|
|
$
|
1,730,000
|
|
Loans,
net of allowance for loan losses
|
|
$
|
286,851,000
|
|
|
$
|
284,546,000
|
|
Accrued
interest receivable
|
|
$
|
1,368,000
|
|
|
$
|
1,368,000
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
$
|
34,251,000
|
|
|
$
|
34,251,000
|
|
Interest-bearing
deposits
|
|
$
|
296,598,000
|
|
|
$
|
290,365,000
|
|
Borrowed
funds
|
|
$
|
20,436,000
|
|
|
$
|
18,537,000
|
|
Accrued
interest payable
|
|
$
|
715,000
|
|
|
$
|
715,000
|
|
22
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. FAIR VALUE
(continued)
The
estimated fair values of the Company’s material financial instruments as of
December 31, 2009 are as follows:
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Financial
Assets:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
10,765,000
|
|
|
$
|
10,765,000
|
|
Federal
funds sold
|
|
$
|
4,545,000
|
|
|
$
|
4,545,000
|
|
Investment
securities, held-to-maturity
|
|
$
|
9,198,000
|
|
|
$
|
9,462,000
|
|
Investment
securities, available-for-sale
|
|
$
|
34,098,000
|
|
|
$
|
34,098,000
|
|
Restricted
stock
|
|
$
|
1,886,000
|
|
|
$
|
1,886,000
|
|
Loans,
net of allowance for loan losses
|
|
$
|
290,584,000
|
|
|
$
|
288,668,000
|
|
Accrued
interest receivable
|
|
$
|
1,290,000
|
|
|
$
|
1,290,000
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
$
|
30,864,000
|
|
|
$
|
30,864,000
|
|
Interest-bearing
deposits
|
|
$
|
299,862,000
|
|
|
$
|
293,361,000
|
|
Borrowed
funds
|
|
$
|
20,436,000
|
|
|
$
|
17,988,000
|
|
Accrued
interest payable
|
|
$
|
612,000
|
|
|
$
|
612,000
|
|
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.
23
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
9. LOANS
The
composition of net loans as of March 31, 2010 and December 31, 2009 are as
follows:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Commercial,
Financial and Agricultural
|
|
$
|
31,082,000
|
|
|
$
|
30,371,000
|
|
Real
Estate - Construction
|
|
|
38,278,000
|
|
|
|
41,558,000
|
|
Real
Estate – Mortgage
|
|
|
171,945,000
|
|
|
|
171,465,000
|
|
Installment
loans to individuals
|
|
|
48,883,000
|
|
|
|
50,453,000
|
|
Lease
Financing
|
|
|
6,531,000
|
|
|
|
7,291,000
|
|
Unrealized
Loan Fees
|
|
|
(633,000
|
)
|
|
|
(639,000
|
)
|
Total
loans
|
|
|
296,086,000
|
|
|
|
300,499,000
|
|
Less: allowance
for loan losses
|
|
|
(9,235,000
|
)
|
|
|
(9,915,000
|
)
|
Net
loans
|
|
$
|
286,851,000
|
|
|
$
|
290,584,000
|
|
Summaries
of information pertaining to impaired and nonaccrual loans are as
follows:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Impaired
loans without a valuation allowance
|
|
$
|
26,864,000
|
|
|
$
|
24,091,000
|
|
Impaired
loans with a valuation allowance
|
|
|
4,084,000
|
|
|
|
2,634,000
|
|
Total
impaired loans including troubled debt restructurings
|
|
|
30,948,000
|
|
|
|
26,725,000
|
|
Valuation
allowance related to impaired loans
|
|
|
580,000
|
|
|
|
684,000
|
|
Average
investment in impaired loans
|
|
|
28,148,000
|
|
|
|
23,215,000
|
|
Total
non-accrual loans (included in impaired loans)
|
|
|
16,508,000
|
|
|
|
16,437,000
|
|
Impaired loans without a valuation
allowance increased $2.8 million since December 31, 2009 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 $1.2 million during the three months ended
March 31, 2010, based upon current appraisals obtained by the Company or,
serving as a proxy, a 40% reduction in appraised value on older
appraisals.
NOTE
10. 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, 2009, the amount of the specific reserve was $684,000 which was
included in the total allowance for loan losses of $9,915,000. During
the three months ended March 31, 2010, the Company charged off loans or portions
of loans totaling $1,230,000 from the allowance for loan losses and made a
provision of $550,000, including changes in qualitative factors, resulting in an
allowance for loan losses balance of $9,235,000.
24
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. 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 March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Balance
at beginning of period
|
|
$
|
9,915,000
|
|
|
$
|
8,531,000
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial,
Financial, Agricultural
|
|
|
-
|
|
|
|
(68,000
|
)
|
Real
Estate – Construction
|
|
|
(452,000
|
)
|
|
|
(84,000
|
)
|
Real
Estate – Mortgage
|
|
|
(771,000
|
)
|
|
|
-
|
|
Consumer
Installment loans
|
|
|
(7,000
|
)
|
|
|
(2,000
|
)
|
Lease
Financing
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(1,230,000
|
)
|
|
|
(154,000
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial,
Financial, Agricultural
|
|
|
-
|
|
|
|
-
|
|
Real
Estate – Construction
|
|
|
-
|
|
|
|
-
|
|
Real
Estate – Mortgage
|
|
|
-
|
|
|
|
-
|
|
Consumer
Installment loans
|
|
|
-
|
|
|
|
3,000
|
|
Lease
Financing
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
3,000
|
|
Net
charge-offs
|
|
|
(1,230,000
|
)
|
|
|
(151,000
|
)
|
Provision
for loan loss
|
|
|
550,000
|
|
|
|
-
|
|
Balance
at end of period
|
|
$
|
9,235,000
|
|
|
$
|
8,380,000
|
|
|
|
|
|
|
|
|
|
|
Average
loans outstanding (1)
|
|
$
|
298,278,000
|
|
|
$
|
303,699,000
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs as a percentage of average loans (2)
|
|
|
1.67
|
%
|
|
|
0.20
|
%
|
|
|
|
|
|
|
|
|
|
(1)
Includes loans held for sale and non-accruing loans
|
|
|
|
|
|
|
|
|
(2)
Annualized
|
|
|
|
|
|
|
|
|
The
charge offs as of March 31, 2010, 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
11. 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.
25
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. OTHER
COMPREHENSIVE INCOME (LOSS)
(continued)
The
components of other comprehensive income and related tax effects for the three
months ended March 31, 2010 and 2009 are as follows:
|
|
March
31, 2010
|
|
|
March
31, 2009
|
|
Unrealized
holding gains on available-for-sale securities
|
|
$
|
210,000
|
|
|
$
|
458,000
|
|
Reclassification
adjustment for gains realized in income
|
|
|
(10,000
|
)
|
|
|
-
|
|
Net
unrealized gains
|
|
|
200,000
|
|
|
|
458,000
|
|
Tax
effect
|
|
|
80,000
|
|
|
|
183,000
|
|
Net-of-tax
amount
|
|
$
|
120,000
|
|
|
$
|
275,000
|
|
NOTE
12. 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.
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.
26
STERLING
BANKS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
13. SUBSEQUENT EVENT
As previously reported, as a result of
the Federal Reserve Bank of Philadelphia (the “FRB”) examination report dated
November 30, 2009, the Company was required to increase its allowance for loan
losses by $5 million as of June 30, 2009. As a result, the Company
amended its Quarterly Reports on Form 10-Q for the periods ended June 30 and
September 30, 2009, and restated its consolidated financial statements for such
periods. Recently, the staff of the SEC advised the Company that it
had initiated an informal inquiry and asked the Company to preserve documents
related to the Company provisions and allowances for reserves for the fiscal
years 2007 through 2009. The Company has not received any requests
for documentation at this time and cannot predict what actions, if any, the SEC
will take in connection with its informal inquiry or whether it will ultimately
lead to a formal investigation or action.
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 likelihood of the Company consummating the merger
with Roma and the Company’s ability to pursue alternative strategies if it does
not; 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
examination by the FRB; any effects from an inquiry or possible investigation
from the SEC; 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.
27
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, 2009, 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.
Consolidated
Results of Operations
Three
Months Ended March 31, 2010 and 2009
(Unaudited)
The
following discussion compares the results of operations for the three months
ended March 31, 2010 (unaudited) to the results of operations for the three
months ended March 31, 2009 (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 March 31, 2010, the net loss totaled $1,046,000, compared to net
loss of $449,000 for the three months ended March 31, 2009. Decreased
earnings for the three months ended March 31, 2010 were attributable primarily
to a recording of a tax benefit of $264,000 in 2009 and none in 2010 and an
increase in noninterest expenses of $249,000. Basic and diluted loss
per share for the three months ended March 31, 2010 and 2009 totaled $0.18 and
$0.08, respectively.
Net Interest Income.
Net
interest income for the three months ended March 31, 2010 totaled $3,008,000, an
increase of $513,000, or 20.6%, from $2,495,000 for the three months ended March
31, 2009. This increase is primarily as a result of an increase in
the net interest margin, from 2.86% for the three months ended March 31, 2009 to
3.63% for the three months ended March 31, 2010.
Interest
income decreased by $239,000 for the three months ended March 31, 2010 from the
same period in 2009, attributable to a decrease in average interest earning
assets of $18.2 million. Average interest earning loans outstanding
decreased by $11.3 million and average investment securities decreased $6.5
million. The decrease in average interest earning loans outstanding
is attributable primarily to an increase in average nonaccrual loans of $6.0
million and normal monthly payments and/or payoffs, while the decrease in
average investment securities was attributable to management’s efforts to
decrease the Bank’s general level of risk on the balance
sheet. Interest expense decreased $752,000 from the same time period
in 2009, primarily as a result of an 88 basis point decline in the rate on
average interest-bearing liabilities from 2.74% in 2009 to 1.86% in
2010.
Provision for Loan Losses.
Provision for loan losses was $550,000 and $0 for the three months ended
March 31, 2010 and 2009.
Noninterest
Income
. Noninterest income decreased $47,000, or 21.5%, for
the three months ended March 31, 2010 to $172,000 compared to $219,000 for the
same period of 2009, primarily as a result of decreased prepayment penalties for
early loan payoffs of $35,000 and a decrease in late charges of $17,000,
partially offset by a $10,000 gain in sales of securities
available-for-sale.
28
Noninterest
Expenses
. For the three months ended March 31, 2010,
noninterest expenses increased by $249,000, or 7.3%, to $3,676,000, compared to
$3,427,000 for the same period of 2009, primarily as a result of an increase in
FDIC insurance of $170,000, an increase in losses on repossessed property of
$119,000, an increase in legal expense for loan workouts of $114,000, partially
offset by a decrease in occupancy, equipment and data processing expense of
$84,000 and a decrease in personnel cost of $50,000. The decrease in
occupancy, equipment and data processing expense was primarily attributable to a
decrease in amortization on our core processing system as it is fully
depreciated and the decline in personnel expense was primarily attributable to a
decline in general staffing and the discontinuance of our 401k
match.
Income Taxes
. No
tax expense or benefit was recorded during the three months ended March 31, 2010
as a result of management’s determination that there was a need for a valuation
allowance on the Company’s deferred tax assets generated from the
benefit. During the three months ended March 31, 2009, we recorded an
income tax benefit of $264,000 on loss before taxes of $713,000, resulting in an
effective tax rate of 37.0% for the 2009 period.
Consolidated
Financial Condition
At
March 31, 2010 and December 31, 2009
(Unaudited)
The
following discussion compares the financial condition at March 31, 2010
(unaudited) to the financial condition at December 31, 2009. 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
decreased $0.6 million, or 0.2%, to $369.2 million at March 31, 2010, compared
to $369.8 million at December 31, 2009.
Loans.
Loans outstanding
decreased $4.4 million, or 1.5%. The decrease in loans was due
primarily to $1.2 million in loan charge offs and normal contractual loan
payments and/or payoffs in the loan portfolio.
Allowance for Loan
Lo
sses. The allowance for loan losses was $9.2 million at
March 31, 2010 as compared to $9.9 million at December 31, 2009. This
decline was due primarily to the charging off of $1.2 million in loans that were
impaired, partially offset by a $0.5 million provision for loan
losses. The ratio of the allowance for loan losses to total loans was
3.1% and 3.3% at March 31, 2010 and December 31, 2009,
respectively. 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 loan losses and
will make future additions or reductions in light of the level of loans in its
portfolio and as economic conditions dictate.
29
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.
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Restructured
loans:
|
|
|
|
|
|
|
Commercial,
Financial and Agricultural
|
|
$
|
39,000
|
|
|
$
|
39,000
|
|
Real
Estate – Construction
|
|
|
750,000
|
|
|
|
1,189,000
|
|
Real
Estate – Mortgage
|
|
|
4,641,000
|
|
|
|
4,907,000
|
|
Installment
loans to individuals
|
|
|
101,000
|
|
|
|
101,000
|
|
Total
restructured loans
|
|
|
5,531,000
|
|
|
|
6,236,000
|
|
Loans
accruing, but past due 90 days or more:
|
|
|
|
|
|
|
|
|
Commercial,
Financial and Agricultural
|
|
|
-
|
|
|
|
85,000
|
|
Real
Estate – Construction
|
|
|
823,000
|
|
|
|
-
|
|
Real
Estate – Mortgage
|
|
|
1,419,000
|
|
|
|
523,000
|
|
Installment
loans to individuals
|
|
|
28,000
|
|
|
|
26,000
|
|
Total
loans accruing, but past due 90 days or more
|
|
|
2,270,000
|
|
|
|
634,000
|
|
Nonaccrual
Loans:
|
|
|
|
|
|
|
|
|
Commercial,
Financial and Agricultural
|
|
|
3,000
|
|
|
|
3,000
|
|
Real
Estate – Construction
|
|
|
13,493,000
|
|
|
|
14,274,000
|
|
Real
Estate – Mortgage
|
|
|
3,012,000
|
|
|
|
2,160,000
|
|
Total
nonaccrual loans
|
|
|
16,508,000
|
|
|
|
16,437,000
|
|
Total
nonperforming loans
|
|
|
24,309,000
|
|
|
|
23,307,000
|
|
Other
Real Estate Owned
|
|
|
796,000
|
|
|
|
1,100,000
|
|
Total
nonperforming assets
|
|
$
|
25,105,000
|
|
|
$
|
24,407,000
|
|
Non-performing
loans/Total loans
|
|
|
8.21
|
%
|
|
|
7.76
|
%
|
Non-performing
assets/Total assets
|
|
|
6.80
|
%
|
|
|
6.60
|
%
|
Allowance
for loan losses/Total non-performing loans
|
|
|
37.99
|
%
|
|
|
42.54
|
%
|
During
2010, 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
|
|
$
|
2,642,000
|
|
|
$
|
452,000
|
|
|
$
|
2,190,000
|
|
|
|
17.11
|
%
|
Mortgage
|
|
|
1,659,000
|
|
|
|
771,000
|
|
|
|
888,000
|
|
|
|
46.47
|
|
|
|
$
|
4,301,000
|
|
|
$
|
1,223,000
|
|
|
$
|
3,078,000
|
|
|
|
28.44
|
%
|
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.
30
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 $16.5 million and $16.4 million, respectively, in loans on
nonaccrual status at March 31, 2010 and December 31, 2009. This
increase is the result of three loans that the Company placed on nonaccrual
status during the first three months of 2010, less one that was transferred to
other real estate owned, less one that was paid in full. The three
loans that were placed on nonaccrual status during the first three months of
2010 were deemed impaired as of March 31, 2010, and no additional valuation
reserve was needed for these loans during the first three months of
2010. Impaired loans increased by $4.2 million, or 16%, between
December 31, 2009 and March 31, 2010; however, as a result of the charge offs or
partial charge offs, the valuation reserve decreased by $104,000, or
15%.
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 $6.3 million, or 6%, between
December 31, 2009 and March 31, 2010 due to payments and payoffs 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 7% 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 three months of 2010, management concluded that a provision for
loan losses of $550,000 was needed.
Deposits.
Deposits
totaled $330.8 million at March 31, 2010, increasing $0.1 million, or 0.4%, from
the December 31, 2009 balance of $330.7 million.
Federal Home Loan Bank Advances and
Other Borrowings.
Federal Home Loan Bank advances and other borrowings
totaled $20.4 million at March 31, 2010 and December 31, 2009,
respectively.
Shareholders’
Equity.
Shareholders’ equity decreased by $0.9 million, or
5.3%, mainly as a result of our net loss, partially offset by an increase in
other comprehensive loss.
31
Comparative
Average Balances, Interest and Yields:
|
|
Three Months Ended
|
|
|
|
March 30, 2010
|
|
|
March 31, 2009
|
|
|
|
Average
Balance
|
|
|
Interest
Income/Expense
|
|
|
Annual
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
Income/Expense
|
|
|
Annual
Yield/Cost
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net (1)
|
|
$
|
281,637,000
|
|
|
$
|
4,087,000
|
|
|
|
5.89
|
%
|
|
$
|
292,959,000
|
|
|
$
|
4,211,000
|
|
|
|
5.83
|
%
|
Investment
securities (2)
|
|
|
39,758,000
|
|
|
|
382,000
|
|
|
|
3.89
|
|
|
|
46,291,000
|
|
|
|
494,000
|
|
|
|
4.33
|
|
Due
from banks and Federal funds sold
|
|
|
14,270,000
|
|
|
|
3,000
|
|
|
|
0.09
|
|
|
|
14,574,000
|
|
|
|
6,000
|
|
|
|
0.15
|
|
Total
interest-earning assets
|
|
|
335,665,000
|
|
|
|
4,472,000
|
|
|
|
5.40
|
|
|
|
353,824,000
|
|
|
|
4,711,000
|
|
|
|
5.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(9,914,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,461,000
|
)
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
45,044,000
|
|
|
|
|
|
|
|
|
|
|
|
44,294,000
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
370,795,000
|
|
|
|
|
|
|
|
|
|
|
$
|
389,657,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
$
|
195,682,000
|
|
|
$
|
1,054,000
|
|
|
|
2.18
|
%
|
|
$
|
199,286,000
|
|
|
$
|
1,694,000
|
|
|
|
3.45
|
%
|
NOW/MMDA/savings
accounts
|
|
|
102,229,000
|
|
|
|
156,000
|
|
|
|
0.62
|
|
|
|
105,763,000
|
|
|
|
258,000
|
|
|
|
0.99
|
|
Borrowed
funds
|
|
|
20,436,000
|
|
|
|
254,000
|
|
|
|
5.04
|
|
|
|
22,342,000
|
|
|
|
264,000
|
|
|
|
4.80
|
|
Total
interest-bearing liabilities
|
|
|
318,347,000
|
|
|
|
1,464,000
|
|
|
|
1.86
|
|
|
|
327,391,000
|
|
|
|
2,216,000
|
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
33,823,000
|
|
|
|
|
|
|
|
|
|
|
|
33,886,000
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
1,834,000
|
|
|
|
|
|
|
|
|
|
|
|
1,442,000
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
16,791,000
|
|
|
|
|
|
|
|
|
|
|
|
26,938,000
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
370,795,000
|
|
|
|
|
|
|
|
|
|
|
$
|
389,657,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
3,008,000
|
|
|
|
|
|
|
|
|
|
|
$
|
3,343,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread (3)
|
|
|
|
|
|
|
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
2.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
2.86
|
%
|
________________________________
(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 89.5% and
90.9% at March 31, 2010 and December 31, 2009, 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 March 31, 2010, the Company maintained
lines of credit with correspondent banks of $38.1 million. Longer
term funding requirements can be satisfied through advances from the Federal
Home Loan Bank.
As of
March 31, 2010, the Company’s investment securities portfolio included $27.5
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.
32
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 March
31, 2010, 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, third and fourth quarters of 2009 and the
first quarter of 2010, 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
March 31, 2010, commitments to extend credit and unused lines of credit amounted
to approximately $32.8 million and standby letters of credit were approximately
$4.1 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, 2009 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
As of
March 31, 2010, management of the Company, under the supervision and with the
participation the Company’s principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as contemplated by Rule 13a-15
under the Securities Exchange Act of 1934 (the “Exchange Act”). Based
on that evaluation, the principal executive officer and principal financial
officer concluded that the Company’s disclosure controls and procedures were
effective as of March 31, 2010, in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the required time
periods.
Changes
in Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. During the period covered
by this Quarterly Report, there was no change in the Company’s internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial
reporting.
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.
ITEM
3. Defaults Upon Senior Securities.
ITEM
4. Reserved.
ITEM
5. Other Information.
The
following are filed as exhibits to this report:
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|
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31.1
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31.2
|
|
32.1
|
|
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.
|
|
|
|
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Date:
May 17, 2010
|
By:
/s/ Robert H.
King
|
|
Robert
H. King
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
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Date:
May 17, 2010
|
By:
/s/ R. Scott
Horner
|
|
R.
Scott Horner
|
|
Executive
Vice President and Chief
|
|
Financial
Officer
|
Sterling Banks (MM) (NASDAQ:STBK)
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